Kennametal Inc. (KMT) Q4 2008 Earnings Report, Transcript and Summary

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to Kennametal's Fourth Quarter Fiscal Year 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to Quynh McGuire, Director of Investor Relations. Ms. McGuire, you may now begin your conference.

Thank you, Regina. Welcome everyone and thank you for joining us to review Kennametal's fourth quarter and fiscal 2008 year-end results. We issued our quarterly earnings press release earlier today. You may access this announcement via our website at www.kennametal.com. Consistent with our practice in prior quarterly conference calls, we've invited various members of the media to listen to this call. It's also being broadcast live on our website, and a recording of this call will be available on our site for replay through August 23rd, 2008. I am Quynh McGuire, Director of Investor Relations for Kennametal. Joining me today for our call are Chairman, President, and Chief Executive Officer Carlos Cardoso; Vice President, Chief Financial Officer, Frank Simpkins; and Vice President - Finance and Corporate Controller, Wayne Moser. Carlos and Frank will provide details on the fiscal 2008 fourth quarter and full-year financial performance, as well as our outlook for fiscal 2009. After their remarks, we'll be happy to answer your questions. At this time, I'd like to direct your attention to our forward-looking disclosure statement. The discussions we'll have today contains comments that may constitute forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of assumptions, risks, and uncertainties that could cause the company's actual results, performance, or achievements to differ materially from those expressed in or implied by such forward-looking statements. Additional information regarding these risk factors and uncertainties is detailed in Kennametal's filings with the Securities and Exchange Commission. In addition, Kennametal has provided the SEC with a Form 8-K, a copy of which is currently available on our website. This enables us to discuss non-GAAP financial measures during this call in accordance with SEC Regulation G. This 8-K presents GAAP financial measures that we believe are most directly comparable to those non-GAAP financial measures, and it provides a reconciliation of those measures, as well. I will now turn the call over to Carlos.

Thank you, Quynh and good morning, everyone. Thank you for joining us. During the June quarter, we continued to execute our strategies, which led us to another record performance for the quarter as well as for the 2008 fiscal year. Our financial results demonstrates that our strategies are working well even in a challenging environment. Raising raw material costs, higher transportation costs, record fuel prices and a soft economy in North America provided considerably head wins for both Kennametal and some of our Serbian markets. Kennametal delivered strong financial performance for the June quarter on an adjusted basis, despite those challenges. We achieved 4% organic growth on a year-over-year basis and set a new sales record. This represents our 18th consecutive quarter of year-over-year organic growth. SG&A as a percentage of sales, one measure of the success of our cost saving initiatives declined 10 basis points from the prior year. In addition, in adjusted basis we set new records for earnings per share and return on invested capital. Those results serve as validation of our vision for our business as well as evidence of the continued dedication of our global team in successfully implementing our strategies using the Kennametal Value Business System, or KVBS. As always, KVBS is our guide in making decisions related to strategic planning, product development, sales growth, talent development, portfolio management, and lean initiatives. At Kennametal, we have always believed that the best time to prepare for a downturn is on the upturn. When all geographies were growing, we prepared ourselves by making the appropriate investments in our business. For the past five years, we have built an increasingly balanced enterprise, which is clearly reflected in the diversity of our business portfolio to geographic regions we serve and our numerous end markets. This balance has provided Kennametal with the resilience necessary for us to deliver strong performance even in tough market conditions. As a score card of our progress 53% of Kennametal's revenues in fiscal 2008 were generated outside North America, including 35% in Western Europe and 18% in the rest of the world market. This is a considerable shift towards more global balance and five years ago when we generated 44% of our revenues outside of North America, including 31% in Western Europe and 13% in the rest of the world. We believe that this serves as a clear demonstration of the success of our strategy to achieve a better balance of our business across the global marketplace. Our goal is to establish an evenly balanced geographic presence across all three regions. And, we are well in our way towards achieving that. During fiscal year 2008, we also continued to balance our business segments between the metal working business, which represents 66% of sales and our advanced materials business, which represents 34% of sales. This is a significant shift in balance compared with five years ago when AMSG generated 17% of our revenues. Our long-term goal is to have each business represent 50% of sales. Another key component of our strategy is to continue diversifying our portfolio in Serbian markets. This greater balance has helped to lessen the impact of economic downturns in any one specific geographic region or industry sector. During the fiscal fourth quarter, we experienced growth in many key industries in various parts of the world such as aerospace and defense, durable goods, mining and road construction, machine tools and general engineering. Another important part of our success is that we continued to introduce innovative new products at a market leading pace. New products provide opportunities for further margin expansion. In fiscal 2008, 47% of our sales came from new product introductions. In addition, our channel branding strategy of selling Kennametal products to both direct and distribution provides a key driver of organic growth globally and facilitates a more efficient cost structure. In fiscal 2008, 48% of metal working sales was through direct and indirect channels compared to approximately 30% of metal working sales five years ago. As you can see, our balanced business has evolved through a disciplined focus on diversifying Kennametal in away that enables our company to grow and expand wherever the opportunities exists across the globe and the many market sectors that we serve. I'll now turn the call over to Frank, so he can discuss our financial results in greater detail. Frank?

Thank you, Carlos. I'll provide further insight on our performance for the June quarter and now I'll move on to our outlook for fiscal 2009. We continue to face challenges related to certain North American markets and higher raw material costs during the June quarter. However, we delivered a record June quarter for sales, adjusted with EPS, adjusted ROIC, despite these headwinds. These results come on top of the record quarter we reported in March. We also, once again, generated strong cash flow for the quarter and for the fiscal year supported by the initiatives in the June quarter to reduce our inventory levels. At the same time, we continued to invest in our business at robust levels, while we also further strengthened our balance sheet. As previously announced, we began implementing certain restructuring actions to reduce costs, improve efficiencies in our operations. During the June quarter, we recognized pre-tax charges related to those initiatives of $8 million, or about $0.08 per share. Including these charges, we still expect to recognize a total of $40 million to $50 million of pre-tax charges associated with the restructuring actions. The remaining charges are expected to be incurred over the next nine to fifteen months. And approximately 90% of those charges are expected to be cash expenditures. Annual ongoing benefits of these actions, once fully implemented, are expected to be in the range of $20 million to $25 million. We are on track with the initiative plans. As part of our continuing efforts to shape our portfolio during the June quarter we also divested two non-core businesses with our Metalworking segment and recognized a combined pre-tax loss on divestitures of $600,000. Cash proceeds received were $20 million. And these two businesses had combined annual sales of $26 million and an annual operating loss of $900,000. And we also reduced our inventory in the quarter by $34 million of which $10 million related to the divestitures. Now, I'll walk you through the key items in the income statement and some of the comments I'll make will exclude the effects of the restructuring actions taken in the June quarter. As you saw today, sales for the quarter was $753 million, this compares with $657 million in the same quarter last year. Sales grew 15% year-over-year and included 4% organic growth, 1% from acquisitions, and 7% from foreign exchange effects and the current quarter had more workdays than the prior year quarter, which increased the overall sales growth by 3%. Our organic growth was driven by strong sales in certain geographies such as Europe, Asia Pacific, and India. We experienced continued growth in many industry and market sectors on a global basis. Organic sales growth was slightly higher than our guidance of 2% to 3%, despite the continued softness in North America. This growth reflects strength and diversity of our business. Due course sales also benefit from somewhat improved realization of price increases and for many [ph] throughout fiscal 2008. The June quarter represents the second consecutive quarter in which more than half of our revenue came from outside of North America. Our higher growth in international markets as well as our improving global balance in our business slightly demonstrated by the fact that 55% of our June quarter sales came from markets outside of North America as compared to 49% for all of fiscal 2007. This is additional evidence of our ability to execute our strategy to further geographically diversify our operations. Gross profit margin of 33.5% was 230 basis points lower as compared to the prior year quarter, absent the restructuring and related charges of $1.4 million, gross profit margin was 33.7% or 210 basis points lower than for the prior quarter. The decline in gross margin year-over-year was primarily driven by higher raw material cost and lower manufacturing volumes related to the actions we took during the quarter to reduce inventory levels. And to a lesser extent, lower performance in our Extrude Hone's Surface Finishing machines business also contributed to the year-over-year decline in gross profit. In regards to raw materials, we are seeing a positive development in terms of our price recovery. Pricing actions that we initiated during the fiscal year have led to our price recovery doubling from the levels we had in the first half of our fiscal year. However, this is one area where we believe we could have done a better job. Actions are being initiated to do just that. Furthermore, we are also still experiencing some cost increases while we believe that the price of certain of our key raw materials may have peaked last quarter. In our performance at Extrude Hone did improve from the levels achieved in the previous quarters of fiscal year. Our new management team at Extrude Hone is aggressively implementing a comprehensive plan to further restore the performance of this business. We were also encouraged by an improvement in our energy and related products business during the quarter, which provided a more favorable mix effect in our gross profit margin as compared to the previous quarters of the fiscal year. Our operating expenses increased year-over-year by 14%, or $19 million to $162 million. Absent the restructuring charges of $2 million, operating expenses of $160 million increased 12% compared to the prior year quarter. The increase is mainly attributable to unfavorable foreign currency exchange rate fluctuations and employment cost. We also incurred approximately $1 million of divestiture related cost that we recorded in our operating expenses in the current quarter. On an adjusted basis, operating expense as a percentage of sales decreased 20 basis points to 21.4 and 21.6 in the prior year quarter. The June quarter represents the tenth consecutive quarter in which we have made year-over-year reduction in operating expenses, as a percent of sales. We also recognized restructuring charges of $5 million related to the actions mentioned earlier and as previously mentioned, we also recognized a pre-tax loss of 600,000 on the divestitures of two non-core businesses. Our amortization expense for the June quarter was consistent with the prior year quarter at $3.8 million. Operating income of $81 million for the quarter. This represents a decrease of $8 million, or 9% from $89 million in the prior year quarter. Absent the impact of the restructuring related charges, operating income increased $1 million to $90 million in the prior year. Our operating margin decreased a 160 basis points as compared to the prior, on an adjustment basis. Interest expense of $7 million was flat compared to last year's comparable quarter. The impact of an increase in average domestic borrowings of $98 million was mostly offset by lower average interest rates on domestic borrowings of 5.6% compared to 6.9% last year. Our total debt at June 30, 2008 of $328 million was down $39 million, or 11% from a year ago. Other income decreased $3 million from the prior year, primarily due to higher foreign currency transaction losses due to the rapid rise in the euro and this was partly offset by higher interest income. Our effective tax rate for the current quarter was 20.1% compared to 27% in the prior year quarter. The prior year quarter rate included a provision for a tax uncertainty. In addition, the current quarter rate benefited from the effective divestitures and a tax benefit associated with the dividend reinvestment plan in China. And lastly, reported fiscal 2008 fourth [ph] quarter diluted earnings per share was $0.77 compared to $0.79 in the prior year quarter. And absent the restructuring and related charges of $0.08 per share. Adjusted EPS of $0.85 exceeded the high end of our guidance and increased 8% compared with the prior year quarter adjusted, reported EPS. So as I mentioned at the outset of my comments, our balance sheet remains strong and we continued to generate strong cash flows from operations, the support [ph] of the ongoing flexibility and opportunity to invest in and reposition our business like acquisition and repurchase our shares. Adjusted return on invested capital is 12.3% that was up a 100 basis points from 11.3% in the prior year quarter. Our cash and cash equivalents were $68 million at quarter end that was up $18 million from June 30, 2007. And as I said earlier, in the June quarter we reduced our inventory by $34 million, or 7% of which $10 million related to divestitures as compared to the March quarter. Our primary working capital ended the quarter at $785 million, that's an increase of a $104 million from $681 million at the end of last year. More than half of the increase in primary working capitals due to the effect of stronger foreign currencies. The remaining increase was primarily attributable to higher inventory due to increased raw material prices and strategic raw material purchases as well as our initiatives to enhance service levels. We will continue to focus on initiatives to improve our inventory turns going forward. Our debt-to-cap ratio decreased 330 basis points, or 16.3% as compared to 19.6% in the prior year and cash flow from operating activities was $280 million in the full fiscal year compared with $199 million in the prior year. Adjusted free operating cash flow for the current year was $124 million compared to $197 million in the prior year. The change in adjusted free operating cash flow was primarily driven by a $71 million increase in capital expenditures for enhanced manufacturing capabilities in geographic expansion as well as some changes in working capital. We purchased 1.7 million shares during 2008 at a total cost of $65 million. We have 4 million shares remaining to be repurchased under this program. In addition, as announced today our Board of Directors declared the regular quarterly dividend of $0.12 per share. Now, I am going to turn to our business units. MSSG delivered topline growth in the June quarter, driven primarily by organic sales gains as well as favorable foreign currency effects. Industrial activity remained positive in most industry and markets sectors on a global basis. Areas of particular strength included aerospace, machine tools, and general engineering. And on a regional basis, continued growth in Europe as well as ongoing strength in developing economies, particularly Asia-Pac and India more than offset continued weakness in the North American market. MSSG sales grew 13% as a result of 2% organic growth, 8% favorable foreign currency effects, 1% from acquisitions, and 2% from days. Asia-Pac and India, organic sales increased 13% and 18%, respectively. In Europe and Latin America, organic sales increased 4% and 6%, respectively. North America organic sales declined to 5%. MSSG's operating income decreased 3% and the operating margin decreased 230 basis points from the same period last year. During the June quarter, MSSG recognized restructuring and related charges of $5 million. Absent these charges, MSSG operating income increased 4% and operating margin decreased to 130 basis points. The primary drivers of decline in the operating margin were lower manufacturing production to reduced inventory and divestiture-related charges, offset somewhat by current quarter benefits for organic growth and FX. AMSG's sales increased 17%, now was driven by 8% organic growth, 5% from FX, 2% from acquisitions and 2% from days. Organic sales increased on stronger construction and mining sales and higher energy-related sales, offset somewhat by lower engineered product sales. For the second sequential quarter, we experienced improvement in our energy and related businesses. AMSG operating income was down 13% and the operating margin was down 430 basis points from the prior year quarter. AMSG recognized restructuring and related charges of $3 million. Absent these charges, the operating margin income decreased 6% and the operating margin decreased 320 basis points. The decline in operating margin was due to higher raw material costs and lower performance in the surface finishing machines and services business. And corporate operating loss of $19 million was flat compared to the prior year quarter. Now I'll review our outlook for 2009. The Global market indicators support our expectation for continued, but more moderate topline growth during fiscal 2009. We believe, the North American economy will remain challenging for at least the next six to nine months. We also believe that the European market will continue to grow, but at a slower pace. Growth in India is expected to also moderate while other developing economies should continue to show resilience. While there are some inherent and changing uncertainties and risk with the current macro-economic environment, it appears that fundamental drivers will continue to provide a platform for moderate growth on a global demand. We expect total sales growth of 5% to 7% for fiscal 2009, of that 2% to 4% will come from organic growth with the reminder from the effective stronger foreign currencies, offset by 1% reduction in sales related to our recent divestitures. We expect fiscal 2009 EPS to be in the range of $3.00 to $3.15, excluding charges that occur relating to the previously announced restructuring actions. And consistent with our historical patterns, we expect approximately 65% of the forecasted EPS to be realized in our second half of our fiscal year. And in the first quarter, we expect sales growth to be in the range of 7% to 8%, of that 2% to 3% will come from organic growth, but the remainder from foreign currency is offset by a 1% reduction related to divestitures. We look for EPS to be in the range of $0.50 to $0.55, excluding charges that occur relative to the previously announced restructuring actions. And we anticipate cash flow from operating activities to be $310 million to $330 million for fiscal 2009 and based on anticipated CapEx of a $155 million, we expect to generate between $155 million and $175 million of free operating cash flow for fiscal 2009. At this time, I would like to turn it back to Carlos for some closing comments.

Thank you, Frank. As we are heading to fiscal 2009, we continue to expect challenges related to higher raw material costs. Our market leadership position and our ability to provide value added products and service allow us to continue to address raw material cost increases by implementing strategic pricing actions and maintaining margin disciplines. From my perspective, Kennametal has a solid business model and a strong balance sheet that provides us with financial flexibility. With those tools [ph], our management team has the ability to face challenges and overcome them. We have demonstrated repeatedly that we are capable of managing through tough times while continue to deliver value to shareholders. The strategies that got us here today are the same ones that will take us to our next milestone of 15% EBIT margins. We are convinced that by staying on course and continue to execute our strategies will enable us to overcome today's challenges and those in the future. In summary, we have tremendous opportunities ahead and we will seek to maximize them in a number of ways. We will continue to allocate capital to achieve high returns by investing in our business, through portfolio management, capital expenditures and restructuring actions. We will continue to diversify our business, increase our globalization, reduce our cost, and grow our profitability. We have confidence that we'll be successful for three reasons. First, we have a well-understood and proven strategy. Second, we have the knowledge and the experience to stay the course. Finally, we have the right team in place to help us to reach our goals, is that simple. Thank you for joining us on this call today, and we'll be happy to take your questions now. Question and Answer

[Operator Instructions] Your first question will come from the line of Andy Casey of Wachovia Securities.

Thank you. Good morning everybody.

Hi Andy, how are you?

I am doing fine. How are you doing?

Good.

Good. A few questions here, on the inventory reduction, excluding the $10 million related to divestitures at $24 million, what drove that was that market or was that distribution channel change or can you explain that a little bit?

Andy, our strategy beginning the year was to actually increase our inventory to drive service levels higher and to then once we achieve those services level to start working our inventory reduction truly and efficiency in the factor force [ph]. So the reduction during this quarter is for our strategy of once achieved the service levels then we'll then go back and continue to work on efficiencies in the shop floor and our equipment is in place, the new equipment… the investment that we have made that was... actually focused towards the first half of the year is beginning to pay off now in the fourth quarter and will continue through 2009.

Okay, thanks, Carlos. And then on the MSSG margin in the quarter, it went down sequentially from Q3 if I ex-out the divestiture charge, it was about a 150 basis point sequential decline. Is it correct to assume that the $34 million had an impact of about 50 basis points on that margin sequentially?

Yes Andy, this is Frank. The combination as you point out the divestiture surcharge of $600,000 and we have another $1 million in OpEx related to some systems work to get it ready and then overall on the $24 million probably had about a 75 basis point impact on the corporation.

Okay. And then the rest of it I guess would be around 75 basis points for that?

It's 75 basis points for the entire corporation, which would have a bigger effect.

Oh, I see okay.

On MSSG, that's the primary drivers there.

Okay. Okay. And the tax rate for the year, you had a very successful result for the Pan-European, Asian strategy, is there are more to come there or we had a steady state?

Yeah. I would say we are anticipating the tax rate to be about 23% at this point because we did have a couple of one-time items in our guided 22% to 22.5% in the fourth quarter. We are actually able to get the China dividend re-investment and we've had actually a slight packed benefit associated with the divestitures. They actually offset the expenses between operating expenses and the other line. But I think we are comfortable at this low level here as we continue to incur some charges, that's why we think the below 23 range would be okay, but I think longer-term we still have some room but it's just little premature at this time.

Okay, thanks. And then lastly on Europe, a lot of conversation about what's going on over there from different areas of what you would supply into. Can you talk about what areas you are seeing are continuing to see strong growth and then any that are sequentially dropping off a little bit more than you would have thought?

Yeah. Andy, this is Carlos. We continue to see Germany as being strong at this point. The two areas that we have seen some weakness, one is in Spain and the other one is in Italy. Spain is a relatively small market for us. Again I remind everyone the biggest market is Germany and the Germany... we have an advantage because we played primary or a large [ph] into their export market. So, their export market continues to be strong and Italy although the economic environment is challenging, we in the last... in the last year have been gaining some market share, so we've been able to... to curve some of the economic effect on the European... in Italian market. So, those are really the... the areas.

Okay. Thank you, very much.

Thank you, Andy.

Your next question will come from the line of Joe [inaudible] of Buckingham Research.

How are you doing guys?

How are you doing, Joe?

All right. I wondered if you could just remind us a little bit on the focus of the restructuring action for 2009, whether... what areas do you think you can really make some changes in?

Again, one of the things, Joe we talked about was obviously the manufacturing footprints, which we think we can make some pretty good head wins there and it sounds between both MSSG and AMSG, but the primary drivers combination of footprint reduction and some back office functions that we are looking on a global basis. So we still expect to do the $40 million to $50 million that we talked about of which $8 million occurred in the fourth quarter. So we have the remaining $43 million ish to be incurred for the remaining fiscal or 9 to 12 months. So, that... we will be ramping up right there and we will have some divestiture related impacts that will dog tail [ph] in there as well. So when we take a step back, it is a combination of plant rationalizations, geographic footprints, moves that we need to make going forward.

And were those non-core businesses that were divested, were they profitable?

No. As I said on the call... we had about $26 million in revenues and on a combined basis the loss was $900,000. We continued to look at the commodity type business and really kind of proving that to portfolio and we think this is kind of steps in the right way as suppose incurring in some case, some restructuring you could sell the business, in that case we actually dig $20 million of cash with both the combined business.

Okay. And then can you give us any character... characterization of what you're hearing about the inventory levels of the distributors?

Yes, no change, Joe. I mean, our distributors don't carry that much inventory from Kennametal. I mean, we shipped all this kind of product within 24 hours of [inaudible]. So, they take advantage of our performance.

And there are still more penetration to be made on switching from the direct sales model into distribution?

Absolutely, absolutely. And we made a lot of progress as you heard me in the call earlier on and we are focusing right now on Europe and rest of the world.

Alright. Thank you very much.

Thank you, Joe.

The next question will come from the line of Eli Lustgarten of Longbow Securities.

Good morning.

How are you doing, Eli?

A couple of questions, one clarification, I think you said that the inventory reduction cost you 75 basis points in a quarter of profitability?

Correct.

Because that's something in the visibility of $0.05, $0.06 a share, is that fair?

That's correct.

And are you taking inventory down in the first quarter or first half?

Yes, a little bit, nothing significant.

Similar magnitude or is it less than this?

It's less. It's less Eli, we are going to take throughout the year more inventory out, but the first quarter is less than the fourth quarter.

So, it will be a few pennies impact from that. Secondly, I guess you made the comment here in these conference call that your pricing recovery is twice the first half, while the first half is only 20% that puts your pricing recovery by the end of the year at about mid-40, which is not much different from the third quarter. Can you tell us what's happening and what kind of pricing you're going to do and the recovery you expect in 2009 from that?

Yes, we'll break down each one of them. It did accelerate as you pointed out there Eli and [inaudible] we did do some additional actions in the fourth quarter. As you know, we don't realize it immediately and then as we go into fiscal 2009 we have much more aggressive pricing actions in our plans so we expect to get like a net 2% in our price in our fiscal 2009 guidance where we got less than one in 2008. So we are stepping that up quite significantly.

But to answer your question, we plan to recover the raw material price increase more than 100% in 2009.

And you expect to do that by mid-year or something like that?

Yes. I think as we end the first half, we'll be at that run rate.

Okay. And was it actually steel or what else went crazy in the fourth quarter that basically close your price recovery, I mean steel we know went crazy in the last quarter, but is that the biggest one that fell through or did anything else happen?

[inaudible] some of our contracts lag, so even though when prices come down immediately we don't get that benefit. So we knew we had to deal with that in the fourth quarter. So we use that as a catalyst to get additional price.

Okay. And your guidance when we look at it 2009, may I understand that relatively flattish first quarter versus last year's report. But you had 5%, 7% sales gain in which 2% to 4% organic and that organic probably includes a couple of return of pricing? Are we talking, that you are basically talking sales to be flat to slightly up in 2009, is that sort of the --

No, what I want you again... yes, on an organic basis should crack obviously prices in there. But we also anticipate to do some customer and some product rationalizations we will probably lose some topline volume. That's why... so that... and number two, to your plan on the flattish in the first quarter the reason that it's flat is as we implement the restructuring, particularly on our facility, we're going to have some destructions. So we anticipate $4 million to $6 million of destruction that's in our guidance that's why it is flat, had we not have the destructions it would have been up double-digit in the first quarter.

But, you're accounting that and continuing operations, right?

It's in operations, that's what we anticipate but it's really tough sometimes to quantify the exact destruction effect, once if we know that I think into the quarter, obviously we'll report that.

So you're taking... the nickel that you're implying in the first quarter is part of the 3 to 3.15? Wayne Moser - Vice President - Finance and Corporate Controller It's all right. You would net that out.

Correct. Exactly. And obviously we are going to do everything we can and we have a really good history of minimizing the disruption. But at this point, we need to plan on it and we are going to try to manage that, but the real...

And then from an acquisition stand point, balance sheet [inaudible] 15% debt, I mean is there anything on the horizon, you had very minimal impact in the acquisitions this year and actually there is more divestitures, more than acquisition at this point. Are we looking at any potential acquisitions in the first part of the year or is something coming or is the pipeline active or what's going on?

Yeah. Eli, we are very active and as I always say, the acquisitions are really hard to forecast and they come…the year before we had a very good year. This year we had a lousy year from an acquisition perspective. But right now, we probably will be able to make a couple of acquisitions in the first half if things work out the way…the way we see that at this point.

And one final question with the stocks that are getting beaten up and with your balance sheet, is there any thought of accelerating share a repurchase [inaudible] to buy and probably get some more... you will take a bargain price and then the question is why don't you sit there and take a more advantage of it?

The answer is yes. And I think that yes and yes and yes to the comments that you made. And the reason we didn't is because we are in block, we didn't do it in the fourth quarter, we are in the block out period so...

All right. Thank you very much.

Thank you.

Your next question will come from the line of Terry Darling of Goldman Sachs.

Thanks. A couple of follow-ups. First, I guess I am struggling to understand why you are confident at the price recovery in fiscal '09 is going to be stronger, I wonder if you can step through on strategies that are going to change or your…just more color around why we should believe that that's a likely case scenario given the continued weakness in end markets?

Well Terry, first of all the strength of the…part of the strength of 2009 recovery is because we took the actions in 2008 because the price increase in 2000…we had numerous price increases during 2009. And if you think that... 2008, if you think that it takes us about a year to recover and we have multiple prices increases throughout year, we are going to benefit in 2009 by the price increases that we made in 2008, number one. And we believe that the raw materials that we use are going to be flat, so that would give us an advantage. And the inflationary environment... economic environment is obviously, more right now than it's ever been to get price increases, I mean. So, we have a good process, but I will remind everyone in the call that a few years ago when our tungsten went up by 300% well we were able to recover 100% of that tungsten at that time as well. So, we have proven that we have the discipline, our challenging is timing, challenge is if we have one price increase we know that 12 months, by the end of 12 months we will recover it. The challenge is that if we have a raw material price increase per quarter like we did in 2008, is going to scale into 2009 before we recover. Any other thoughts Frank.

Yes, what I have there Terry is again, obviously the first half we didn't have these type of levels on raw material cost. So, in the third and fourth quarter, we know our cost, what they did and the two biggest tungsten, cobalt were the slider trending down. So, that we feel pretty good about, couple of callers said about the price increases, we have the headwinds in the first half and then we'll have some tailwinds we think in the second half of our fiscal year so that's kind of what we are looking at it from our perspective.

And Frank, you had mentioned customer rationalizations, is there a strategy to walk away from certain business, we are not able to get that price at this point, it's different going forward than what we had in '08?

It is. I mean, it's not that we are just going to walk away from all the customers if you know, is the fact that obviously a lot goes into that, if the customer... if the customer typically buys more commodity products he is not going to change, he is going to continue to be that way. As customer of a non-core business, we obviously have been and will continue to walk away from that business.

And then the pressures is in '09 at least as it looks today more so on the steel side and cobalt and tungsten side, at least that's the thing which your outlook commentary that just implied, is their something about the customers receptivity to steel prices related… the steel inflation related price increases versus tungsten and cobalt it should give us reason to believe that that's more likely or is it all kind of same to them?

Well, I think that is more likely because most of our customers are feeling the same thing that we are with steel so when we talk about fuel prices increases, they obviously understand that better. But, at the end of the today we have been very successful, we have good processes in pricing. We saw incomes from the fact that we are the number one or number two in our market and we provide value added products and services. So we've been very, very effective and we have a high level of confidence that we can recover the raw material price increase.

A question on your North America oil field related business in AMSG, would you characterize that business which was hit hard kind of lead in calendar '07 on North America in that gas weakness and related rig count weakness, which is... at least the rig counts responded here, gas price is still volatile, but wondering would you characterize that business in sort of back on trend or are we still over the next six to nine months, what are you likely to see a further uptick in that part of the business which is a very profitable segment for you?

I wouldn't say that it's back on trend, I would say that it's improving in a monthly basis. So, I think that we will still have good potential upside in that business as we go further into our fiscal year 2009. And we've seen... we've seen moderate improvement in a month-to-month basis in the last quarter.

Yes.

Yes I think... I think, Terry, to your points both in the underground coal mine a similar situation in natural gas, and we had a clearly different environment that we did see a year ago at this time when we were talking. On the storage levels, we are in the high double-digit [inaudible] and then prices you can say what you want on the natural gas, but also on the underground coal, there are also quite heavy levels compared to where they were a year ago.

Hey and then lastly, just to make sure I'm square with your assumptions for steel, cobalt, tungsten in your FY '09 guidance? I guess understanding from your various comments that your assuming steel as kind of flattish from here, cobalt, I think you said, you think it backs off in the back part of your fiscal year, but you just squares up on steel, cobalt, and tungsten assumptions in the guidance, please?

Yes, we said overall our raw materials cost is going to be stable. We assume, we see tungsten and cobalt coming down slightly, we continue to see steel going up.

Thanks very much.

Okay, thank you.

Thank you, Terry.

The next question will come from the line of Walter Liptak of Barrington.

Good morning.

Good morning Walt. How are you?

Great. You talked about the organic price versus volume, 4% organic growth for the year and so that, you said less than 1% is price. I wonder if you can break it up for the quarter, what your price versus volume was?

I wan to clear... let me make sure I understood it because I think we broke up there. In '08 price was less than 1%, that's a correct statement, and as we said in fiscal '09, we expect to be around 2% price realization and that is going to overcome all the raw material cost increases. So again I didn't hear the question.

Yes. The question is, if you could break it out during the quarter, I want see if the pricing trend is significantly better than it was for the full year, in the quarter what was your price versus volume break out?

Well the organic was four and I would say there is less than 1% of pricing, now that's been up as Eli pointed the color [ph] was anemic in the first two quarters and here we got may be 0.5% in the third and fourth quarter and with some of the additional actions we have been doing as Carlo said through out the year plus fourth quarter actions, plus some stuff we have going on. We expect this store to accelerate.

Okay, great. And the…wonder if you could talk about the AMSG, the 8% organic how much was price, how much was volume?

I don't want to get into individual statement, but let say there was those more price in AMSG, actually it was pretty much the same, believe it or not. I would call AMSG accelerating.

Okay. And as markets continue to improve would you say that it’s on the coal side, the underground coal or is it the natural gas that's picking up faster?

Yes and yes. I mean I think they both are improving.

Okay. And then with regard to the charges you mentioned that you are going to be during some plant rationalization, my understanding was that it was going to be North American based, is that the case?

Okay. And when you break out charges during the year do you think there are going be…are we going to see charges every quarter through 2009?

Yes. I would say it is going to be heavier in the first half and then also start to decline and that's why when we talked early we'll have higher disruption in the first half that will decline then we will have some of the benefits, our corporate savings from the actions we initiated in the first half start kicking in the second half. So when you think about the second half versus the first you got the raw materials when we discuss with the price, you're going to have less disruption in the second half and then you're going to have on top of the less disruption you are going to have the benefits that we talked of the $20 million to $25 million kicking in pretty substantial by the end of the fourth quarter. So that's why it's probably little speed [ph] more towards the second half, but these are pretty much kind of known projects from our restructuring standpoint and what we feel we can do on the price.

Okay great. Okay, thank you.

Thank you Walt.

Your next question will come from the line of Mark Koznarek of Cleveland Research.

Hi, good morning.

Good morning Mark, how are you.

Pretty good. Hey, I apologize I got on the call little bit late and I have a question about these disruption related cost associated with the restructuring that we're talked about. In the answer to a prior question, I thought I heard that it was $5 million to $6 million expected in the first quarter. Did you comment or could you comment on what full year disruption related expense is likely to be that's going to be embedded in the P&L?

Yes Mark. What I said in the first quarter, which is... this is already in, in the guidance that's 50 to 55. I said $4 million to $6 million of disruption.

Okay?

And then for the full year it should be anywhere from $10 million to $13 million roughly.

Mark, Mark that's all we have in the plan, we are going to try to manage that obviously, we've been very successful in managing this core plant closings and we've done relatively well to the cost.

Okay. All right good. Then the question I had also I am sure if you covered this. So I apologize if you did, but with regard to the outlook, 2% to 4% core growth, could you separate that directionally between the two business segments and then any kind of geographic or market spin that you would care to further characterize the outlook?

Hi, this is Quynh McGuire. We typically do not provide guidance at the segment level, only at the total company level.

Okay. Then I will move on to my next one, which is the impact of the overall guidance. It looks like if you take approximately the mid-point, it results in about a 100 basis point margin improvement that gets you overall to roughly 12.5%. So still pretty far from that 15% long-term goal and so what I would like to ask about is whether there is a timetable…a new timetable put on that 15% and whether you expect to be anywhere close to that on a run rate basis as we exit '09?

Yes Mark. Looking at the current economic conditions, we think that the 15% is a more realistic target for 2011 although as we look at some of this portfolio management that we're talking about if we can do some of those things, that can help us move that…improve that timeline.

I am not sure, I understand that Carlos. There is some actions you are planning beyond the current restructuring program?

Not every… portfolio management... portfolio management that are not in the current guidance, yes. Just like we just sold the two… diversified two business, I mean we... I think that we have some opportunities there as well going forward.

So, Mark as you think going into '10, you got the $20 million to $25 million coming from the cost start initiatives, further portfolio management we got something we did this year, potentially more to come and then we expect to exit this fiscal year on a much stronger run rate from a pricing perspective. And then obviously we can't talk about acquisitions what they play, but we feel pretty good about that.

Okay.

But as we see it now, 2011 is very achievable but we as a management team we still believe that 15%, this business is a 15 plus percent, EBIT margin business and we are continuing to work hard to bring that time line inwards.

Okay. So, just to make sure I understand that the $20 million to $25 million benefit is solely actions under your control that have to do with these re-foot printing actions and then beyond that there are other portfolio management actions that could happen, you obviously need a... the counter party to agree, but that would be an additional positive, is that the right way to think about it?

You are right on.

Okay. Great. Thank you.

Thank you.

The next question comes from the line of Steve Barger with KeyBanc Capital

Good morning.

How are you doing Steve?

Pretty good. Question on AMSG margins. This is the second year in a row in which they are down on a year-over-year basis and the implied 1Q '09 margins are going to be down year-over-year, and I know there is a whole variety of reasons for that going back, but can you tell me why we should not start to assume that there are structural reasons as to why there is not a lot of upside to AMSG margins?

I think that the number one reason is realizing how much raw material prices have gone up and their content of raw materials is much, much higher than the content of metal working. I mean if you look at the products they are in, metal working are very small products. And so if you can look at the magnitude of raw material price increases that are taking place and they are not taking place one time, they have been taking place in a quarter-by-quarter basis, which makes it more challenging for us to recover. That's the number one reason. Frank, do you want to add anything to it

Yes, Steve what I would add to your point on the structural side I would say there was I think Extrude Hone did not perform what we had anticipated. So, we are doing some structural changes there. We saw the improvement from Q3 to Q4. We have a new leadership team in there that has been very aggressive. So, I think we will see some rebound there, but that would be one that I would point to secondarily to the raw materials.

Yes, but the raw material is really that number one driver. The raw material is... is 80% or more of the driver with it. We like the business, we are going to continue to invest in the business and we're going to make… continue to make acquisitions to add to that business and our strategy continues to be that we want that business to be 50% of our portfolio.

Okay. And to that 50% point, you sited the progress over a five-year period to today's 66-34 split, but again there wasn't that much progress from '07 to '08. So, what happens in '09 to get the mix moving in the right direction again?

Well I mean the first answer we talked about that is the fact that the energy and then the mining. So the mix is actually started... has started to come back and will come back in 2009 and the restructuring actions that we've put in Extrude Hone are going to help and... and I mean we have talked about the fact of the challenge that we had last year relative to raw materials.

Yes, I would say there is probably more acquisition type stuff potentially in AMSG and potential some portfolio management in MSSG to come into play.

Okay. We talked a lot about restructuring in the call and I think we are looking forward into that and I know it takes a while to physically accomplish, but thinking about your sales growth forecast relative to the new capacity you have in India and China how many plants could you theoretically close this year if that were really an instant process?

I mean we really don't... don't look at, I mean we have a list of the facilities that we would... that we can afford from a capacity perspective to close, but again I can't... I am not going to tell you the number of plants because the minute I tell you that then I have a productivity issue in this company. So...

I understand, but do you... is it reasonable to think that conceptually you could close more plants than you are actually going to based on the capacity you have from the new facilities?

I mean we will close all the plants that we can close during the year. We are being very aggressive and this is the reason why we took the charge versus [inaudible] as we’ve done in the past. So I would tell you that we are closing all the plants... we will close all the plants or facilities there that we could do in this year.

All right. And then one last one. Regarding your commentary in the press release about the North American economy being challenging for 69 months does that assume that you see a bottoming and then a upturn in your 4Q '09, or is that getting a little too granular in terms of your North American forecast?

I mean it's hard to see… to see that far but, you know, yes the guidance that we gave you implies that there is some moderate uptick in our fourth quarter of fiscal year '09.

Okay, thanks very much.

Thank you.

Your next question will come from the line of John Emerick with Iron Works.

Thank you. Just a question of clarification on the cash flow guidance, the 310 to 330 in cash flow from operations and a 155 is the mid-point for CapEx, is that right?

The 155... Yes, the 155 is CapEx, right.

And that doesn’t include though cash payments for restructuring?

Well, as I said, 90% of the charges are going to be cash.

And what is that amount?

Well, we said $40 million to $50 million. We had $8 million in the fourth quarter so we are going to have up to $43 million remaining, 90% of that will be cash.

And that 27 to 36 is or is not in the 155 CapEx guidance?

It is not.

It's not. Great. Thank you.

Your next question will come from the line of Dyna Walker of Cowmar Investment [ph].

Question about the fiscal '09 build up. If we would look at your operating profit numbers at the segment level and then at your corporate expense, should we think about corporate expense being flat, maybe you could talk more fluidly about how you expect to go from 276 into your range?

Yes, Dyna, the question is the corporate came in ADS [ph], we expect that to be closer to a 100 and it's really… when you break it down that's number one from IT investments we’re making, okay IT has rolled up into. And secondarily is given the performance of the corporation last year the variable component of compensation plan we basically restored in the plan. So, that's driving a portion of it as well. So it's IT, its some RDNE [ph] and kind of compensation plan so that's the increase from a build up.

At corporate?

At corporate.

Which would suggest that the segment operating profit would have to grow a reasonable amount?

Correct.

Your assumptions on interest expenses?

Very similar to the fourth quarter. The absolute dollar.

I presume it's around $30 million. Four times of that quarter level.

Yeah. That's maybe a little bit higher so I would expect us to have a little bit higher interest income from the cash balances, but you’re in a ballpark.

And remind us one more time your… on an adjusted basis, your tax rate for the most recent year was and you are expecting 23% in the out year?

Yes. I said 23% in the out year.

And the adjusted number for fiscal '08 ex-charges was?

Yes, it was like 21%.

But that was with the charges, that was not the invested [inaudible].

And some of these are following questions, is it okay, if I follow up with you after the call, just walk through with those items?

It most certainly is fine. Let me move on to a couple of other matters. You've started an investment process in new equipment. Can you talk about how… to what degree that new equipment is in place and how it will affect your cost of goods sold?

Well, the equipment is put in place throughout the quarter. This 2008 actually was more different to the first half then the second half. Majority…the majority of the reduction in the inventory came from being able to step that [ph] equipment in place to improve our service levels so… and we don't have, we don't give up the break down, but part of our improvement in the gross margin sort of business this coming year is as a result of the capital equipment that we put in place in 2008.

Carlos you mentioned earlier in the call how if you had fox your execution in one particular way, you felt that you were not aggressive enough on price. I’m a journalist, but there are lot of folks on this call who are specialists and they are covering companies that perhaps take in 10%, 15%, 20% pricing action in any given year, depending on what on what their [inaudible] at the end we are listening to 1% and 2% of as you described would you believe you can achieve help us with the disconnect between the more aggressive response to ROE [ph] versus Kennametal’s response.

I mean 2% is obviously realized price, okay versus… I mean we go out with price increases that higher than 2% and again it’s very difficult when we get multiple price increases, raw material [inaudible] it takes us a number of months before we can implement that. So what we are doing this year is we are actually going ahead of any input cost and that was a higher number, a higher increasing prices going forward. But typically we have been very, very successful when we have a one-time price increase that we recovered that within the 12 months. Any additional color on this? Frank.

I would say MSD is probably a little bit higher in the Metalworking business, given some of the more material heavy constant and obviously we give you blended rate there as Carlo said and we try to look at profitability’s on our new product as oppose to [inaudible] individual pricing, we try to ship it away from just the pure price play to obviously new technologies.

As your business has gone going increasingly indirect, does that help or hurt your ability to weigh the real pricing power?

We also because its easier to get pricing to this distribution and to direct, we don't have stock price [ph].

Your next question will come from the line of Eli Lustgarten of Longbow Securities.

Hi. Just two quick follow up question, one foreign currency outlook, you talked about having currency in your guidance, but the euro is the big currency move has got anniversary in the second half of your year. You have any currency build in the second half of next year, do you expect the dollar weaken more or how you thought about that?

Yes. We have that kind of a pattern build in, Elli.

The dollar weakening some more in the second half over the next year?

No. Still strengthening.

And you talked about customer rationalization as part of some of the things that will change in… can you talk about what you… how much impact you have built into your, either sales numbers or earnings numbers with some… with some to those aspects, you have the disruption, which is nickel in the quarter and probably $0.10 to $0.12 for the year. What those is a customer rationalization, is there an impact at top of your guidance from that?

There is some, but it's… I don't want to get into that level of detail, Eli.

Okay. So you assume that there is some impact that’s measurable from those actions?

Correct. Yes. Yes.

Okay. All right, thank you.

Thank you, Eli.

Your next question will come on the line of Henry Kun [ph] of UBS.

Hi, hello.

Hi, Henry.

Pricing has been beaten to death, but question about the market response to your pricing action, have you seen any degradation of demand from that or the switching cost is too high?

Well, I mean in lot of our businesses the switching cost is high and the balance of the businesses it’s not, we have... because we're a diversified business, it varies, but all I can tell you is that as gotten easier is never easy to get a price increase, it has gotten easier to get price increases as a result of the environment, I mean everyone is dealing with price increases and as it becomes... become more of an easier topic of conversation.

And is there any way to break down between difficult and easy... or easier areas to get pricing in?

I mean, I don't know how I'll do that, but all I can tell you is that the environment is getting better.

Okay. And I guess, as you look at the portfolio changes that you are considering, how do you evaluate that and find businesses, which should or shouldn't be in portfolio anymore?

I mean, there is a lot aspects going through there, I mean, we've determined what our core business, non-core-business obviously we keep to ourselves. And, then there is a.... we look at profitability of the business and we look at different contributions of the business, we look at what is the perspectives, what is the future of the business, I mean there is a number of elements, we use a matrix to evaluate those businesses and at the end of the day we will make decisions. Based on that and we've been successful doing so.

Is there any way to scope out how big those businesses are whether they are in a longer core?

No, I just, I mean... that information is information that I would hate to have in.. in the hands of our competitors.

Okay. Thanks a lot.

Thank you.

Your last question will come from the line of Andy Casey, of Wachovia Securities.

Hi, hello again.

How are you doing, Andy?

I am okay. Follow up on the base business outlook. I just wanted to understand that a little bit more for '09 and just in preparation with that if you look at the second half of fiscal '08 just for calendar days in pricing the base look like, it decelerated from around 5% in Q3 to about 1% in Q4, going forward it looks like it lose about 1% from the divestitures completed in the quarter and then if I take the response I think I heard to one of Eli’s earlier questions, it looks like... at the midpoint of the 3% for the year, an organic growth except the pricing it's... it's around flat to 1%. So implicit, if you look at the divestitures in that Q4 base there is a bit of acceleration going on and I know you said about something about North American recovery and you had good trends in your AMSG businesses there, any other thing going on there, that would support a modesty acceleration.

I mean, I think here we’ve covered the end market outlook as far as you know we expect aerospace in the second half of the fiscal year to be a little bit [inaudible] and some of the advance material business we have some obviously some new products, we are displaying some new products coming out of INCS [ph] in September, so we are not expecting any significant, but you know from a baseball term lot of singles help us score some runs.

Okay but no further deceleration that was... if I am right is between Q3 and Q4?

Yes.

Okay. Thank you.

All right. Thank you very much.

This concludes our discussion. Please connect me Quynh McGuire at 734-539- 6559 to any follow-up questions and thank you for joining us. The operator will announce the details of the replay.

Thank you for participating today in Kennametal's fourth quarter, fiscal year 2008 earning conference call. This call will be available for replay beginning at 1 o'clock PM Eastern Standard Time today through 11:59 PM Eastern Standard Time on August 22nd, 2008. The conference ID number for the replay is 53533542. Again the conference ID number for the replay is 53533542. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. This concludes today's conference. Thank you again for participating and you may now disconnect.