Good morning. I would like to welcome everyone to Kennametal's Second Quarter Fiscal Year 2013 Earnings Call. [Operator Instructions] I would now like to turn the call over to Quyhn McGuire, Director of Investor Relations. Please go ahead.

Thank you, Brad. Welcome, everyone. Thank you for joining us to review Kennametal's Second Quarter Fiscal 2013 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 will be available on our site for replay through February 25, 2013. I'm Quynh McGuire, Director of Investor Relations for Kennametal. Joining me for our call today are our Chairman, President and Chief Executive Officer, Carlos Cardoso; Vice President and Chief Financial Officer, Frank Simpkins; and Vice President, Finance and Corporate Controller, Martie Bailey. Carlos and Frank will provide further explanation 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'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 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'll now turn the call over to Carlos.

Thank you, Quyhn. Hello, everyone. Thanks for joining us today. In the December quarter, we continue to experience challenges similar to those of the prior quarter, which included lower sales volumes as demand slowed globally. Political and economic uncertainties led to spending deferrals and inventory destocking by customers. Those conditions resulted in a weaker-than-expected global investor production across certain end markets and geographies. In addition, our sales were unfavorably impacted as a number of customers who extended shutdowns year end holidays. This trend was more severe in Europe but it occurred in North America as well. Accordingly, we made further adjustments in our business as we expected those challenging conditions to continue for the near term. Even so, we still expect to realize sequential quarter-to-quarter improvement in the second half of our fiscal year. Although economic projections call for global industrial production to expand, it is likely to grow at a more modest rate than previously forecasted. What positioned Kennametal well is that we serve a diversified mix of end-market and geographies, which helps to lessen volatility over economic cycles. We remain highly focused on further growing and balancing our global presence to generate revenues in equal parts from North America, Western Europe and the Rest of the World's markets. In line with our geographic expansion strategy, we announced earlier in December quarter that we plan to invest in an advanced carbide recycling facility in U.S., while expanding tungsten cobalt blended partner operation in our China facility to serve the Asia-Pacific region. Both projects focus on strengthening our tungsten sourcing for both technology and cost perspectives, while increasing our access to raw materials. We remain encouraged by the long-term growth opportunities in our served end markets. On a global basis, demand for energy, power generation, vehicles, commercial development, new materials…

All right, thank you, Carlos. I'll provide some comments on our performance for the December quarter and then I'll move to the revised outlook for the remainder of fiscal 2013. The December quarter was more challenging than we originally anticipated as most of our served end markets experienced weaker-than-expected demand. This panel was evident in our monthly order rates that we provided during the quarter. Continued soft demand in destocking plagued our General Engineering market, transportation was particularly slow in Europe due to extended plant shutdowns in December at automotive manufacturers, and customers further delayed their projects in the energy market. Our previous expectation assumed that activity would begin a rebound at the beginning of calendar year 2013. It now appears that the recovery has been deferred for at least 1, maybe 2 quarters. That said, I'll point out that we're managing that business very well, the factors we can control, and near-term headwinds do not overshadow strong future growth opportunities and the execution of our strategies. Further, despite the sales challenge in the near term, we again delivered double-digit operating margin, we also demonstrated exceptional cost control throughout the company and managed to reduce our finished goods and WIP inventory by approximately $17 million from September, despite a demand environment that was much softer than we had anticipated. Lastly, we enhanced our liquidity and strengthened our financial position by issuing $400 million of 2.65% bonds, due in 2019. Note that our proactive cost reduction measures, as well as our more efficient organization structure helped deliver double-digit adjusted operating margin of 10.7% for our base business despite the market challenges of the quarter, and our inventory reduction efforts. We have cost containment actions in place at all functions and are managing our business to market conditions while staying focused on…

Thank you, Frank. As we advance into the second half of fiscal 2013, we'll continue to respond quickly to changing economic conditions. We will continue to follow our demonstrated playbook by maintaining and streamlining cost structure, adjusting manufacturing operations as needed and implementing ongoing contingency planning. As always, we'll weather the challenges to protect the profitability and deliver double-digit margin performance. In the meantime, we'll continue to execute our proven strategies that are consistent with the company's long-term growth goals of diversifying our business mix, expanding our addressable market and balancing growth around the world. As we have consistently demonstrated, Kennametal has generated steady cash flows throughout the economic cycle. We'll continue to leverage our strong balance sheet and remain disciplined with [ph] capital allocation process to build on our strong financial position. Thank you for your interest in Kennametal. And we'll now take questions.

[Operator Instructions] Your first question comes from the line of Ross Gilardi with Bank of America Merrill Lynch.

I just have a couple of questions. First, could you comment a little more on the pricing environment? Are you seeing intensifying price pressure in any of your weaker areas, in particular, if you could just comment on a few of the key end markets?

Obviously, there's always pricing pressure in this industry. However, we continue to stay strong with our pricing, and we are looking at strategic areas where we can actually still get some price and not give up any pricing or any other areas.

Overall, would you think this pricing going up or down?

I think -- will be flattish to slightly up.

Okay. And then on the free cash flow outlook, it seems like you reduced it by less than the earnings outlook. What's happening there?

Yes, Ross, primarily the second half, we typically -- if you go back, we always generate a lot more of our earnings in the second half, as well as the focus on the inventory reduction, particularly with the finished goods and WIP. And I'll comment with some additional focus on our working capital from both receivables, as well as payables. But the inventory is going to be the big driver in the second half.

And then just last one. In terms of cash flow prioritization so forth that you still got this 5-year objective of doubling sales. Does the slower outgrowth outlook mean that you've got to get more acquisitive to fulfill that objective?

When we look 5 years out, based on our presentation in New York a few months ago, I think we're still pretty consistent on -- we still feel that the balance between organic and acquisition is still the same. Majority of the growth is going to come from organic basis. But it's an opportunity to accelerate if we get the right timing.

Your next question comes from the line of Julian Mitchell with Crédit Suisse.

This is Charlie for Julian. I apologize if you've addressed this already, I've been between calls, but just a quick question. It seemed like the demand from Asia was weak in both segments, it has been weak. Some of the other companies we have been speaking with have seen a pickup in China. I'm just wondering why you guys haven't seen a pickup in China, or if anything's kind of changed in January?

So in generally -- so if you think about it in a sequential basis, we have seen an uptick in Asia. However, it's still, year-over-year, a negative growth. So I think it's consistent with what other companies are seeing. And we are -- we believe that Asia is going to generate a positive growth first before any other geography.

Yes. Charlie, the only thing I'd add is I think we're doing a little bit better in the Earthworks side of the business from some of the investments we made, both in Australia and China, particularly on the coal side and some opportunities with the construction, with the surface mining as well. So we did a little bit better there. And then we're starting to see a little bit of a pick up here in January, particularly with the domestic auto production because the aerospace will be fine. And then the general engineering will typically lag a little bit on the transportation. So if the transportation domestic stuff starts picking up, we'll see the pull forward as well, potentially with the general engineering.

Your next question comes from the line of Adam Uhlman with Cleveland Research.

Frank, can we go back to the inventory part? I believe you said it was $17 million reduction. That was 100 basis points of margin headwind in the quarter. When I look at the balance sheet, it's like $5 million of inventory that's lowered or something like -- an accounting difference there, but the big question is this $95 million, $100 million of inventory that's going to be coming out in the back half of the year. I'm wondering why that would be worth 100 basis points as well?

Well, it's underfinished. [ph] You don't have the currency or the raw material increase because raw materials are still up in the first half. They were up a lot more in, obviously, in the first quarter and they continue in the second half. So the $17 million -- the related upon inventory reduction impact on that in the quarter I said was about $5 million. And as we continue to go towards the $60 million in the second half, we're obviously going to have some additional impacts in the second half by pulling the inventory down coupled with the negative organic. So it makes it a little bit more challenging because overall, raw materials, I think, we're doing a better job of controlling that, but when your larger content material products in the Earthworks and energy had a slower point in the first half, we try to hit the brakes where we could on the raw materials. I think we've got a better handle on that for the second half and now it's really focusing on the finished goods and WIP inventory getting towards that goal of $60 million in addition to the $17 million that we had here on this last quarter.

Okay. So the $60 million starting point is from December?

Well, it's really from -- we said at the beginning of the year, we were going to reduce $60 million, it was flat in the first quarter, the finished good and WIP with the primary increase coming in the form of raw materials. Fast forward, we didn't come up with that goal, we took finished goods and WIP down to $17 million so we have the remaining what I'll call balance of that reduction initiative of 60-plus in the second half of the fiscal year. So it was really raw materials and we didn't get any progress in the first quarter.

Okay. And then on the guidance for the year, through the back half of the year, the organic revenue growth is expected to remain -- the decline is pretty similar to what we saw in the first half of the year, and you walk through some of the markets that you thought Europe and Asia might be getting better and orders are steady right now. I was just wondering if you could highlight the big pluses and minuses that keeps the decline at a similar pace to what we've seen recently.

Yes, going forward, I mean, to your point, we have a negative volume. And when you have -- you've got to factor in the mix there because our most profitable pieces of the company, the gen eng and energy were down the most. So you've got to count the double whammy, you got the regular decline and you got the mix coupled with the inventory reduction. So a lot of the stuff we believe is temporary. So I think we're moving in the right direction. But as we go forward, as I look at Earthworks, we're not anticipating anything significant on the undeground coal because you could look at Appalachia, but some of the international markets are doing well. We're seeing, as we anticipated, an uptick on the construction side, so we're starting to see some nice orders come in there and that's -- there's some housing-related effects here in the Americas and then we're well positioned on that in the international market. We feel the energy and the general engineering destocking. The good news, it does end. And based upon what happened in December, it looks like it got pushed because people shut down a little bit further. So we're anticipating a little bit of a pick up sequentially in the March quarter in general engineering, as well as energy. And we're watching the rig counts and with the cold weather that obviously will have some help there. And then by the fourth quarter, we think that this thing will pickup a little bit and we'll start seeing much stronger sequential growth and we're also trying to factor in the number of workdays with the Easter holiday being in here. Because the quarter, when you look at it with New Year's ending on a Tuesday, you kind of lost that first week. So it kind of spilled and pushed things a little bit to the right. And then with Easter towards the end of March, it's going to be a tight workday quarter and we think when business activity picks up in transportation in Europe and the couple other markets that I mentioned, I think we'll start seeing some nice growth or directionally, the growth in the fourth quarter compared to the March quarter.

Your next question comes from the line of Ann Duignan with JPMorgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: You noted that both in industrial and in infrastructure that you've experienced some unfavorable mix. Could you just talk about what the impact on mix was in each of those businesses? And then which -- should we expect any change in that mix going forward for seasonal reasons or anything like that?

Yes, if you look at the industrial, the real mix was the general engineering business. Because aerospace and defense, it's a good profitability and that's been relatively constant from a growth perspective. So yes, I don't anticipate anything. Transportation was okay in the Americas, a little bit softer in Europe and Asia, and I'll expect that to come back. But the real driver because, we're sown in to the small and medium accounts through distribution, we've done a good job on distribution, that continues to be the market in the industrial side that was down the most, you can look at the first quarter, the second quarter, the sequential change. And that's where the very profitable piece, as well as that goes down fast, that could come back just as quick. And I think we're trying to take a realistic assumption here looking at kind of our visibility. But as quick as the general engineering goes down, which is the most profitable piece, that can come back very strong in a relatively quick period. So we have the general engineering on the industrial side, which is the high-margin stuff. And conversely, if you look at the infrastructure side, the energy is the more profitable piece there compared to the underground coal mining and some of the IGT stuff that Stellite as that continues to come up, but we also feel that that's kind of temporary. So we haven't really experienced the energy and the general engineering piece of the company being down, both the same amount. But based upon the weather and the rig counts and some of the order book information that we're getting from our sales force, we think that, that energy should come back by the fourth quarter. So it's those 2 sectors.

I just want to add that the one that is affected the most was general engineering in the first half and followed by energy. And general engineering fell the quickest in the shortest period of time closer to the second quarter, we believe that general engineering is going to come back the fastest in the second half. And trailed by energy at its lower growth rates than general engineering. And those are the 2 areas that are most profitable for us. So that will be the mix change going to the second half. The real question is, how much of it is going to be in the third quarter, how much of it is going to be in the fourth quarter. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Yes, that make sense, Carlos. And in terms of activity drives demand and distribution. Carlos, just a follow-up on that really, with the flash PMIs coming in pretty gosh darn strong this morning, both in the U.S. and China, that would support your pieces of perhaps we get a swing back in demand in general engineering. Are you seeing anything like that? I know you're obssessed over your daily order rates, et cetera but are you guys seeing any signs of improvement in -- either in the U.S. or in China in terms of just industrial activity or is it too early to tell?

Well, I'll tell you that so far this month, the orders are coming in per our revised guidance, and I can tell you that in a sequential basis, it's slightly positive. So it really is demonstrating and is being led by the general engineering as we spoke. I'll also give you a data point. I mean, we have data that was back 20 years that when the PMI hit 50 in this situation, which has hit about a few months ago and just recently, is about a 6-month lag before we see some really, really good growth. So historically, it validates -- so we see it and again, as we said, we think our second quarter came in at a 1 to 2 quarters delay. And so it's just a -- when is it going to come back within the third quarter or the fourth quarter and to the magnitude. If it comes back in the third quarter, then we'll have an even better fourth quarter. But that's... Ann P. Duignan - JP Morgan Chase & Co, Research Division: And the catalyst for that would be the general and industrial side, you think?

Yes, correct. Yes.

Your next question comes from the line of Andy Casey with Wells Fargo Securities.

I apologize if you already addressed this first point. Just a clarification, what tax rate do you expect for the year? And the gist of the question is weaker Europe so far, and then any impact from R&D?

Andy, last time I think we guided 25% because the first quarter was a little bit less than 21%, so we'd have a little bit higher about 26% for the remaining outquarters. Given the change, I think the tax rate is now going to be 24% versus the 25%. So we'll probably pick up 100 basis points. But the tax rate being a little bit softer or lower favorably in the third quarter and then a little bit higher in the fourth quarter. But we'll finish the year about 24%, I would expect it to be in the low 20s in the third quarter for the discrete catch up relative to the R&D credit and then a little bit higher in the fourth quarter just because of the jurisdictional mix even though we're going to get R&D credit, will be about 25% in the fourth.

Okay. And then if we could revisit a couple of things that have been touched on. The channel destocking in addition to the 100-basis-point gross margin headwind that you're expecting from the internal inventory initiatives, is there any way to quantify what that destocking is doing to your margins?

Well, I can try to help you in total because we don't -- to the point I made in the second quarter, the pure inventory reduction that we undertook to drive down the $17 million of finished goods and WIP, I said that was about $5 million, okay? Then I would say the related volume impact was about the same in the quarter. Combined, it was about a $10 million impact of the volume and the inventory reduction initiative at Kennametal.

And is there any way to look into the field and see what the destocking actually did?

No. I mean, we have -- I mean, we have point of sale and all stuff to the largest distributors. We're very, very much aligned with MSC and Fastenal and all that stuff. But then we have a lot of small distributors, it's really hard to tell. Because you'll have the Northeast from aerospace is doing well versus -- that depends on the sectors that they're serving. So it's just too hard to quantify.

Okay. And then, at some point the destock reverses, and I'm just trying to gauge if all of that comes back or if you're seeing any issues with any of your indirect distribution partners like market share erosion or something else that would limit a 1:1 return?

I would say that you guys can read that MSE script that was put out last week. I think our market share at MSE continues to increase. And so I think that will come back at least a 1:1, the distribution when they start stocking. And I just want to make a point of our strategy. Our WIDIA during this period, first half of the year, was slightly positive year-over-year. Which really -- and by the way, they've play primarily in the general industry, which was down almost 16%, they were slightly positive. Just shows you that our channel strategy is really working and again in -- when it comes back, we're going to have quite a bit of a tailwind.

Your next question comes from the line of Eli Lustgarten with Longbow Securities.

Let me just one clarification. We're still going to do $60 million of inventory reduction in the next 2 quarters, and how would that split between the 2 quarters?

Eli, so it would be $60 million for the full fiscal year, and $17 million out in the December quarter.

So we have $43 million to go?

Yes. That would be at minimum, $43 million, right. And if we can do a little bit better, we'll take advantage of it.

And it will evenly be split between the 2 quarters?

I would think it'd be a little bit stronger in the fourth quarter, but not much different.

Okay. And you're talking -- you had 60 -- 40-60 was the earnings for the year. Can you give us some idea of how you expect the third and fourth quarter split -- it looks like that's also going to split like 45-55 in the second half of the year, in the third and fourth quarter just on the basis of where your guidance is going.

Yes. Again, that's why I'd tried to give you with the workdays. It will be much stronger in the fourth quarter because we're going to pick up 2 additional workdays. So we're going to have flat -- the workdays are going to work out to be about the same, specifically in the December quarter. So about in the low-60s, and then we'll pick it up in the fourth quarter. So I would imagine the improvement will be nice sequentially but it will be much stronger in the fourth quarter, and then I'll calculate that and get it to you here shortly.

Okay. And incremental margins, we look to the second half of the year, we're still talking about with the somewhat better volume, the 30% plus incremental margins and we're really talking about profitability, which is in the low double-digits getting back to maybe close to the mid-double digits in the second half of the year, is it still an attainable target?

You're talking sequentially, it's not year-over-year, right?

Yes, right. I'm just talking about -- your profitability is in a little over 10%. Currently, 11% and 12% in the different quarters. Are we talking -- can we get margins in the second half of the year in both divisions close to mid-teens, that was question.

I would say by the fourth quarter, that's a true statement.

And so it's really -- it's all leveraged into the fourth quarter at this point or so. And in case [ph] of the tax rate, can you quantify how big the R&D tax credit benefit will [indiscernible] you guys?

Right now, it's about $3.5 million.

Your next question comes from the line of Stephen Volkmann with Jefferies. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Just one quick cleanup question. You guys mentioned a couple of times in the presentation that you had done some business adjustments to get your cost under control and we didn't really quantify that, maybe it's just sort of the ongoing kind of stuff but I'm wondering in the spirit maybe of Andy's question, did some of that come back onto the cost structure as business starts to come back or what's the right way to think about that?

No. I mean, that's the regular stuff traveling and all discretionary. So yes, that portion of it will come back. The other part is the direct labor. I mean, obviously, we shed direct labor as our volume goes down and the direct labor will come back. But we'll expect high leverage with that, it's not a 1:1, right?

Have you done anything that is more permanent?

No. Our goal is we believe that the business is going to come back, and we are maintaining the capacity, which we've talked about, the $3 billion-plus capacity without Stellite. And that's where we really get the leverage as the business comes back.

Your next question comes from the line of Gregory Macosko with Lord Abbott. Gregory M. Macosko - Lord, Abbett & Co. LLC: Just one brief question regarding Stellite. What was the core growth that you talked about, the 20-plus percent? Give me some color on that core growth within that group.

The core group, Gregory, we didn't own the business until March of last year. So we don’t have -- it may divest [indiscernible] business on the year-over-year, but I'll tell you, sequentially, the sales growth was up a little bit from the first quarter, about 1%. But we're also starting to see some nice IGT orders, the industrial gas turbine, something we secured in the second quarter which are a little bit longer lead time. So we'll expect those to kick in earliest toward the end of the fourth quarter, and then beginning into fiscal '14. That's with the Alstoms, the Siemens. So we're starting to see some nice improvement with those areas there. And then we expect the fourth quarter, to give you an idea, we expect that, that will be up close to double-digit by the fourth quarter on a year-over-year base bid.

Our final question comes from the line of Walt Liptak with Barrington Research.

I wanted to ask about your thoughts on the return on invested capital, which we've had a pretty good drop in organic volumes and the returns are looking a lot better than they would have 4 or 5 years ago. And then kind of along those lines, I wondered, we're still seeing pretty big under absorption. And is there anything that you're doing on the factory floor to try and get more variable cost in there? Or try and reduce absorption when we get these sort of downdrafts in volumes?

Yes, I mean, I think, obviously, we continue to look at that. The balance that we have to make what, Walt, is the balance that one being prepared because we can see a very, very fast turned up, be prepared for us to have the ability to deliver and risk losing market share because we cannot deliver to the speed and the volume that is expected in the turnaround. So that's the balance we're trying to make.

Okay. Is there more that you can do to try and take cost out on the manufacturing floor, get more variable cost in?

Yes, yes. I mean, we continue to -- I mean, we have a lean program that takes on average 3% to 4% of cost out every year. So for every year that goes by, we continue to do this, and obviously, when we have low volume, it's a better opportunity for us to look at those things in a more focused way.

We have no further questions in the queue. I'd like to hand it back over for any closing remarks.

This is Quyhn McGuire. This concludes our discussion. Please contact me at (724) 539-6559 for any follow-up questions. Thank you for joining us.