Good morning. I would like to welcome everyone to Kennametal's second quarter fiscal year 2010 earnings 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). Thank you. I will now turn the conference over to Quynh McGuire, Director of Investor Relations.

Thank you, Tina. Welcome, everyone, and thank you for joining us to review Kennametal's second quarter fiscal 2010 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 is also being broadcast live on our website and a recording of this call will be available on our site for replay through February 28, 2010. I am Quynh McGuire, Director of Investor Relations for Kennametal. Joining me for our call today are Chairman, President and Chief Executive Officer, Carlos Cardoso, Vice President and Chief Financial Officer, Frank Simpkins, and Vice President, Finance and Corporate Controller, Marty Bailey. Carlos and Frank will provide details on the quarter's financial performance. After their remarks, we'll be happy to answer your questions. At this time, I would like to direct your attention to our forward-looking disclosure statement. The discussion we will 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 the 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, Quinn. Hello, everyone. Thank you for joining us. I am pleased to report that sales levels are making steady progress and positive trends in our order rates are continuing. For the December quarter, our sales increased sequentially by 8% from the September quarter. The sequential improvement for the past two quarters was driven by several factors. First, we are continuing to see signs of a slow but steady global economic recovery. Industrial production activity is higher in most geographical regions with emerging markets leading the way and mature markets beginning to recover. Certain end markets, such as the transportation, durable goods and aerospace are now showing sequential growth. Given our market leadership position, customers continue to recognize the value position of Kennametal products. In addition, customers are gradually beginning to replenish inventories, although, they remain cautious about the environment. Adjusted earnings per share of $0.14 for the December quarter reflects a sequential improvement of $0.18 from the September quarter. The sequential improvement in EPS was driven by higher sales volume, as well as further benefits from previously implemented restructuring programs. We have now achieved a run rate of approximately $125 million in permanent cost savings on an annual basis. In addition, we continue to generate solid cash flow, as shown by free operating cash flow of $36 million to date this fiscal year. The December quarter results are encouraging considering the depth and the duration of the economic downturn. Over the past several quarters, we have implemented a number of cost reduction initiatives. Since the announcement in our initial restructuring in April of 2008, we have reduced our manufacturing footprint by closing nine facilities; divested seven facilities related to non-core business and lowered headcount, while consistently focusing on our lean values and our disciplined management operating system. As…

Thank you, Carlos. I will provide further comments on our performance for the December quarter and then I will move on to the outlook for the remainder of our fiscal year. Some of my comments will exclude special items, so please refer to the reconciliation schedules that are provided in our earnings release and related Form 8-K. To summarize the December quarter, our sales were down year-over-year by 23% on an organic basis and came in right in the middle of our sales guidance of negative 20 to negative 25. We also began to see some improvement in sales as the quarter progressed. Furthermore, our sales improved sequentially by 8% compared to the September quarter. Our adjusted earnings per share for the December quarter was $0.14 a share and was ahead of our expectations, driven in part by better than anticipated sales, higher permanent savings from our restructuring programs and ongoing cost discipline. We also have solid free operating cash flow for the first half of $36 million, driven by our operating performance and continued focus on our working capital and balance sheet. And lastly, we also announced additional restructuring actions to further reduce our manufacturing costs and improve the efficiencies in our operations. I will cover that in a little more detail later. Now, I'll walk through the key items in our income statement. Sales for the quarter were $443 million compared with $546 million in the December quarter last year. The change in sales represents a 19% year-over-year decrease and was driven by a 23% organic decline, partly offset by a 4% increase from favorable foreign currency effects. As I previously mentioned, sales for the December quarter were up sequentially from the September quarter by $33 million, or 8%. We continued to see a gradual increase in sales…

Thank you, Frank. We are pleased that Kennametal has weathered the worst of the economic downturn, while still investing in our business and strengthening our balance sheet. Looking to the future, we are reasonably optimistic, but remain vigilant. We recognize that there is still uncertainty regarding the gradual recovery underway. However, we are seeing encouraging signs that mature markets are beginning to recover with emerging markets showing the most strength. We do expect our business in the second half of fiscal 2010 to benefit from the modest current recovery. In the meantime, we'll continue to run our business as diligently as ever and aggressively take advantage of the operating leverage that will come from our permanent cost savings. We will maximize every opportunity to realize strong incremental margins and grow our profitability. Meanwhile, we will continue focusing on efficient use of working capital, maximizing liquidity and positioning our business for growth. In summary, our long-term strategies remain the same at Kennametal. We continue to balance our geographic presence, business mix and served end markets. We have a solid foundation and we continue to have a reputation of bringing technology and innovation to our customers. Kennametal's significant strengths provide us with the confidence to say that we are capable of achieving our milestone -- our next milestone of 15% EBIT margin and delivering superior value to our shareholders. Thank you for your time and your interest in Kennametal. We will now take questions.

(Operator Instructions). Our first question will come from the line of Eli Lustgarten with Longbow Securities.

Nice quarter. A couple of questions. One is, tax rate, obviously it reported at a big number to the low profitability. Is that because of the non-deductibility of the charges and what's the tax rate going forward?

Eli, that's correct. That is predominantly a driver. And then, the only difference is the second quarter and I think you asked that question last quarter, excluding special charges, it was a little bit better, but our tax rate, we still expect 25% for the second half of the fiscal year.

Okay. And the corporate expenses of $21 million, is that the new run rate at this point or?

Yes, I would say that is the main number there, Eli, in the difference. And I think you asked that question last quarter. We thought, we would be about $15 million, $16 million rate. And the main driver from the previous guidance was the incentive compensation that we booked in the current quarter and that is the reason that the corporate number will be at that $21 million, $22 million that you mentioned there for the rest of the fiscal year.

Okay. Then a couple of other questions. One, your sales guidance for the third quarter of plus 5 to plus 10, did that include currency or is that before currency?

No, that is organic. So on the currency, I would say, Eli, I don't know, 3% to 4% with the biggest driver being the euro. And the euro is kind of at the low 1.40 range right there. So, organic is the 5% to 10%.

Operator, we can take the next question please.

Our next question will come from Ann Duignan with JPMorgan.

Hi, good morning. It's Ann Duignan.

Hi Ann.

Hi. Just on the lines of increases in salaries and the variable comp, I think, you had mentioned that you had increased salaries or reinstated salaries in certain regions. I'm just curious what regions, and if one region is headquarters? I'm joking, of course, when I say that. But just curious what regions and what the thought process was around the salary increases?

Yeah, Ann, we started with Asia-Pacific and India because they started to have positive growth earlier on. And then, the last one to be reinstated was North America. And Europe is not -- has not been reinstated yet because they are still lagging from the growth perspective.

So, what kind of growth would you have to see in Europe for you to reinstate the European portion and then adjusting EPS again going into fourth quarter?

The growth is, we are reinstating based on us getting to certain milestones there, not just sales, but it's also profitability. So, we anticipate, based on our current forecast that we would reinstate them as of July 1st at this point. But again, if we do better then that will change.

Okay. That's helpful, just from a modeling standpoint. And then, two quick questions on just where you are seeing the growth and where you are not. Latin America for you guys is down and I'm just curious, most other companies that have reported or commented on the region have seen very strong demand in Latin America. What are you seeing there or what specifically, is it just tough comps or is there an end market specifically that is not improving?

Well, what we said is that they still have a year-over-year decline but sequentially they are improving.

Ann, they improved sequentially double-digit. But we had a couple good orders last year in the second quarter, so the comp was a little bit of a challenge. But we expect, given some more of the orders that have been coming in for that to accelerate in the second half.

So, we are not seeing anything different than anybody else.

Okay, good. That's good to hear. And then, one final one. Just on, Eaton, on their conference call noted that in their hydraulics business orders were up big time in December. Just wondering if you -- did you see any traces of big time orders in any specific -- from any specific customers or end markets, as you went through December or into January?

Nothing abnormal, Ann. Our business, we always see during the quarter some big orders, and they are not always the same. But we don't see really anything unusual.

Okay. And finally, any pricing pressure out there from your competitors now that volume is out there to compete for?

As I always say, there is always pricing pressure in the marketplace. But I think our competitors, I think that the market is staying pretty reasonable. Again, we -- is not one of our concerns at this point.

Okay. I'll take the rest of my detailed questions offline. Thanks, guys. Appreciate it.

Thank you.

Our next question will come from the line of Henry Kirn with UBS.

Wondering if you could chat about the legs that you see to inventory restocking, how much longer do you think the restocking phase could go?

Henry, this is Carlos. That is a tough question to answer. We believe that this industrial led recovery, I think that a portion of that is actually -- in some areas is rebuilding some or restocking. And I think in the markets that are still lagging, I think, there is still further destocking. It varies from geography. So, we really don't have a good answer to that question.

That's fair enough. It's worth a shot. As far as the input costs, could you talk a little bit about what you are seeing for input costs today versus maybe what you were a quarter ago or a year ago?

I would say for the most input costs, they are kind of going sideways. What I would say that the one cost that was going up and I think a lot of people are seeing is some of the input costs on the steel side are slightly increasing. But pretty much for the other input costs, they're offsetting each other, so nothing unusual at this point.

Okay. And one final one, you mentioned the $3 billion of capacity in your footprint today. Are there any mix issues or bottlenecks by product types, recognizing that this would be a nice problem to have today?

Yeah, I mean, we continue to introduce new products, so there is always a challenge of new products and the capacity for those new products. But overall, we feel very comfortable that there is no major investments that we need to make to get to the $3 billion. I think, we have a pretty -- as we reduced these 20 facilities, we actually looked at having the ability and the capacity of making the same products in multiple geographies.

Our next question will come from the line of Chuck Murphy with Sidoti & Company. Chuck Murphy - Sidoti & Company: Just a couple quick questions. First, could you talk little bit about this new restructuring plan? Is it more metalworking or advanced materials and what exactly will it entail?

I'll start it off and I'll let Frank add some color to that. It entails, as we said, we're going to close an additional four facilities and obviously some headcount associated with that. And I would say, it is probably about two-thirds metalworking and one-third AMSG.

Chuck, I would say from a total savings, when it is all said and done, I think Carlos's percent is about 65% or two-thirds for the metalworking and the rest. You know, the additional actions here will affect some additional facilities on the advanced materials side. I think there was Bloomberg picked up some of the announcements, particularly in Europe. So, it may have a couple more waiting short-term on the advanced materials side, but we get all said and done, its all going to be the two-third on the metalworking side and the remaining split, I would call it, 75% AMSG and then corporate having a smaller piece, just given the headcounts.

Again, I will continue to remind everyone that this plant closures, we are not taking capacity out so much as we are taking these smaller plants' production into plants that have the capability, the capacity to take on that production volume going forward. So, this is strictly a fixed cost reduction, which leaves us with the ability to continue to feel good about being able to bring the business to a $3 billion sales volume without major investments. Chuck Murphy - Sidoti & Company: Got you. And just out of curiosity, why now? Why weren't you doing this before? Did something change?

Well, we've always said that we have a plan. But since April, as I said earlier, we have now closed 20 plants in basically less than two years. There is only so many plants we can close at a time. And as you know, we can't announce plant closures unless we are ready for it and we have announced it at the plant, because it causes a disruption, obviously. So, I think, it is pretty impressive that we as a company have been able to close 16 and now announced this actual 4 going forward. We can only do so many in a year.

And Chuck, we think, we are going to try to have this all wrapped up by the end of the fiscal year, so when we get into fiscal '11, we have a pretty clean year going forward.

Our next question will come from the line of Walt Liptak with Barrington Research.

Hi, thanks. Good morning, guys.

How are you doing Walt?

Good. I'll start by saying congratulations on making it through a really tough time over the last 12 plus months. And I just have a couple of cleanup questions. One, is there a plant in Europe or a plant in the U.S. where most of the consolidation has happened? I mean, where the plants have been shut down and a plant where that capacity has gone into?

The plants that we have closed down the capacity has pretty much gone where the core competencies are. I mean, if the core competency of a plant that we shut down exists in Europe in another plant, we'll move it to Europe. I don't have the breakdown and I would be sort of reluctant to talk about that level of detail. But I would say that we have moved this capacity that we have to plants that both in the U.S., Europe and in Asia-Pacific as well.

Okay. And then on the $3 billion sales mix, what margin would you see that run rate at?

It is really hard to calculate that at this point. We are still, as you see, we are still looking at taking further cost going forward here in the next six months of our year. But we expect the incremental margin to be significant going forward.

Okay. You used to have a target of 15% operating margin. Is that something that is still doable?

Yeah. We believe in that even more strongly today than we did ever. So, a 15% EBIT margin is our next objective.

Okay. And then, just one last one. The declines last year were surprisingly massive. And I guess when I see the numbers coming through even now, I am surprised that we are not seeing some kind of an inventory rebuild or pickup from this super low level. Is there something that has changed fundamentally with the metalworking market specifically that they've dropped so far and don't seem to be coming back yet?

No, I don't think anything fundamentally changed. I think that the recession has lasted longer and like you said, was deeper. And the environment, six months ago or people were talking about a V-recovery. Unfortunately, the way we are seeing it and a lot of the other industrial companies are seeing this recovery, it is going to be a steady but slow recovery. And again, we are planning for a slow recovery, Walt, and if we get a pleasant surprise, that it is going to be more accelerated, then this company is going to be even better off.

Our next question will come from Mark Zepf with Goldman Sachs.

Thank you. Good morning. I was wondering, if you could walk through the drivers of the 8% to 10% organic decline guidance versus previous, I think, it was down 5% to 10%. What drove the higher end of that range to down 8% year-over-year?

You know, basically it's truing up the full year. And when we look at the comp and the run rates and kind of looking at our orders, we are able to come to a little bit, now that you have half the year finished, we feel pretty confident where we are heading there. And I've said the only really thing that would change, we probably were at the beginning of the year, we thought Europe would be a little bit stronger. So, I would say Europe was probably, particularly in the MSSG side, a little bit softer, given what's going on in the second half. And I think, I said this last time, we had anticipated a little bit of a stronger pickup in some of the energy. But while it is improving, it is probably not at the levels we had originally anticipated. So, taking all that factors into consideration that is how we came up with the guidance.

Our next question will come from the line of Steve Barger with KeyBanc Capital.

Thanks.

Hi Steve, how are you?

Good. In your MSSG commentary, it was clear that Asia and India are seeing a more robust recovery in demand than some of the Western economies. I just wanted to know, is there any material change to those trends, as we've gone through January? And what is your sales force signaling as they look forward into February?

I would say, everything is on track from what we saw. Typically, January is stronger than December, as people come back. But you know, the first part of it started off a little bit slow, particularly in Europe, but I would say Asia and India continue to do very well. And North America is starting to show some improvement. But Europe is still a little bit slower.

Okay. And you haven't seen anything in China relative to them raising reserve requirements and doing some of the actions they've taken?

No.

No, we have a relatively small market share in China, so the potential is great. I think, we continue to feel very good about the growth that we anticipate to have in China.

Okay. And just one more. I'm trying to understand the impact of reinstating some of the salaries and incentive comp going forward. So, can you talk about how you are thinking about future sequential increases in the actual SG&A spend versus what you expect for the sequential change in revenue growth? Is the SG&A spend going to be above the growth rate of revenue for the back half of the year?

No, I mean, Steve, here's how to think of the salary increases. We said a year ago that revenues, based upon where we are going or I should say the benefits we are going to get from the salary reductions were about $7 million a quarter.

Right.

And we said, once we reinstated some of these, obviously that would come back. But as I think I talked to Ann earlier, we said about half of them come back. So, on a run rate going forward, we feel that half the salary increases will be coming back. So, you can imagine both SG&A would go up slightly and then cost of sales. And then, the incentive comp that we talked about, that is in the base in the December quarter, and we reflect that in the corporate line, as Eli pointed out. So, all these factors are in our guidance, the $0.65 to $0.75. So, we absorbed these and still increased the guidance from the last time.

Got it, great. Thank you.

Thank you.

Our next question will come from the line of Andy Casey with Wells Fargo Securities.

Good morning, everyone.

How are you doing, Andy?

Doing better. How are you doing?

Good.

Good. A few detailed points. First, on that last question, the $4 million to $5 million increase in corporate expense, and then add somewhere around $3 million for the salaries, is that the way I should think about it, Frank?

Yes.

Okay. Then when you talk about the restocking in inventory and if you've talked about it already, I apologize, can you break out what region and/or markets you are seeing that occur in?

Well, we don't, again, don't have those level of details. But we are assuming that the markets that are growing and the regions that are growing, obviously, they are not de-stocking anymore. We are seeing actually a restocking process, where I think that in Europe and in some of the end markets, we are still seeing some de-stocking. But it's really hard for us, I mean, we said this along, we serve over 4,000 customers a day. It's really hard for us to pin down the customer stocking and so forth.

Okay. And then, a little bit longer term for your 15% EBIT margin goal, when you are looking at the increased restructuring, was that always in the plan to get to the 15%, or is it just more to make you -- increase your comfort level to get there?

No, I think that was always in the plan, I mean, we've been talking about the fact that we believe this is a 15% EBIT margin business as the next step. Obviously, we think that we can do better than that, but now, let's just stay focused on the next step. And as I said, and Frank said earlier, I think that there is only so many facilities, this is an additional. Our original restructuring worked out very well, the timing was actually a little bit accelerated, so we had the capacity to do another four. And again, we wanted to make sure that getting out of this 2010 going into FY '11 that we had as clean a slate as we could.

Our next question will come from the line of Joel Tiss with Buckingham Research.

Good morning, how is it going?

How are you doing, Joel?

Alright. People asked about competitive pressures but can you just get right to it about the price increases for 2010 and anything that is changing at the margin on the cost side as well?

Joel, I would say from a pricing, it was neutral for the quarter, no unusual shifts one way or the other. As far as the metalworking competitors, everybody seems to be holding the line there. Advanced materials not seeing the same kind of situation there, nothing one way or the other. And then, like I said, input costs, if anything, they are flat to up on the steel side. And we don't expect anything significant for the rest of the year or any unusual moves by either any competition, whether it is an MSSG or AMSG.

Okay. And then, the oil and gas business, you mentioned was a little soft and other people have been talking about that as being a little stronger. Do you have a bigger mix of gas versus oil? Is that what is missing there?

Yes, that was it. And though orders were typically on the metalworking side, where we can turn things relatively quick, sometimes there is a little bit longer lead time on some of the energy related products. So, the orders are there and it is just a matter of getting them through the plants.

Okay. And then last, can you just give us a little bit of a sense of what you are seeing on the road paving and rehabilitation market, if there is any signs of life there?

No, but this is a tough time of the year for us to see much. This is sort of, the winter -- it is always soft at this time of the year.

The only thing I would say there, Joel, domestically, a little bit soft, definitely seeing some pickup in Asia-Pac and India, so as you would expect, a little bit more infrastructure there. And then, with the mature markets kind of being the seasonality and we will start to get a better indication here in a month.

Our next question will come from the line of Holden Lewis with BB&T. Holden Lewis - BB&T: Thank you. Good morning.

Good morning. How are you? Holden Lewis - BB&T: I am fine, thanks. I guess, a little bit of a sort of larger more strategic question. In terms of the restructuring, now that you've announced this additional one, I think, you said you've always had a plan, you always had intentions to ratchet down the size of the organization, if you will, in terms of footprint and such. Once this one gets completed six to nine months down the road and you are starting to get those annual savings in, is there still another sort of step to get you along your path? Or are you pretty much getting to the end of this process of taking charges and restructuring and all that?

We are pretty much at the end right now. Okay? So again, we wanted to do, we wanted to get as much as we could get done this year, and so that we can now move forward from FY '11 and get kind of clarity into our path to 15% bit EBIT. Holden Lewis - BB&T: Okay. So, once we get into fiscal year '11, the charges that we take every quarter, those things should begin to diminish?

Yes. Holden Lewis - BB&T: If it is again [ph] and not anticipating shutting any more facilities or anything like that at this point?

Not right now. Holden Lewis - BB&T: Okay. And then, in terms of the savings, how much did you recognize, actually realize in fiscal Q2? I think, you were at $30 million in fiscal Q1, is that right? What were you at fiscal Q2?

A little over that. Holden Lewis - BB&T: A little over that? Okay. And then, I may have missed some of the numbers and I just wanted to back check. The incremental savings realized in fiscal '09 was $30 million, fiscal '10, $80 million, then an additional $30 million, $35 million in fiscal '11. Were those the numbers you cited?

I said that we were going to, in this fiscal year, we got 50 last year in '09. Originally, we were going to get 75 incremental and now with the restructuring program, we said we were going to get 80. And then, we should get towards the 155 million, 160, which would be an incremental 25 to 30 in fiscal '11.

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

Just one follow-up. Could we talk about the step up in profitability at advanced materials? Was that -- is that considered a spike, is that a sustainable level going forward? How should we think of it and can we actually seeing improvement from what is it, 17.5% margin, ex the charges or 17.2% margin?

Eli, from my perspective, it is not a spike. It is all the actions that we put in place. And I think that, I believe that can be improved. And as you know, the cycles come and go, but this business traditionally has a 200 basis points premium margin over the metalworking and we anticipate that to continue, although, metalworking is down now, as they come up.

You know, the expectation that the second half of 2010 margin in advanced materials will be very similar to the second quarter?

Yes.

Thank you.

Our final question will come from the line of Chuck Murphy with Sidoti & Company. Chuck Murphy - Sidoti & Company: I was just going to ask if there was potential for more restructuring, but you answered that. Thanks.

Okay, very good. Thank you.

This concludes our discussion. Please contact me, Quynh McGuire, at 724-539-6559, if you have other follow-up questions. And thank you very much for joining us today.