Quynh McGuire - Director of IR Carlos M. Cardoso - Chairman, President and CEO Frank P. Simpkins - VP and Chief Financial Officer

Adam Uhlman - Cleveland Research Company Julian Mitchell - Credit Suisse Eli S. Lustgarten - Longbow Research LLC Andrew M. Casey - Wells Fargo Securities, LLC Walter S. Liptak - Global Hunter Securities, LLC Ross Gilardi - Bank of America-Merrill Lynch Joel Gifford Tiss - BMO Capital Markets

Good morning, and welcome, everyone, to Kennametal's Third Quarter Fiscal Year 2014 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) Please note this event is being recorded. It is my pleasure to turn the call over to Quynh McGuire, Director of Investor Relations.

Thank you, Denise. Welcome, everyone. Thank you for joining us to review Kennametal's third quarter fiscal 2014 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 June 2nd, 2014. I'm 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 Fusco. Carlos and Frank will provide further explanation on the quarter's financial performance. After the 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 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 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'll now turn the call over to Carlos.

Thank you, Quynh. Hello, everyone. Thanks for joining us today. I'm pleased to report that we delivered on our commitment in the March 2014 quarter. Although extreme weather conditions in North America hindered our topline growth to some extent, we delivered solid financial performance. As always, we'll stay focused on further improving margins and cash flows. During the recent quarter, we achieved higher volumes in both direct and distribution channels in sectors such as Transportation and General Engineering. Sequentially, March quarter sales showed 5% organic growth from the December quarter, in line with our typical season patterns. Our Industrial segment reported total sales were up 13% year-over-year with 5% organic growth in the March quarter. Generally, our Industrial business has a high correlation with the rate of global industrial production. For this quarter, IHS Global has estimated global IPI up 3.5%. In a slow to recover economy, where we're still early in the cycle, our Industrial segment performed that mix by about 1.5 times. We expect to further increase that ratio as demand cycle continues to expand. Furthermore, when IHS adjusts the estimates to the weighted average that specifically reflects Kennametal's market mix, it shows a relatively flat rate for growth from prior year. That accounts for mix conditions in our Infrastructure segment, with additional weaknesses in underground mining, but better conditions in energy and road construction markets. Even this environment is encouraging that March quarter total sales increased 15% from prior year, with organic growth of 3% on a consolidated basis. This suggests that Kennametal remains in a position to outperform IPI by two to three times over the economic cycle. Kennametal's solid results during the quarter showed the resumption of growth in certain end markets, as well as the realization of greater cost efficiencies. This underscores our ongoing…

All right. Thank you, Carlos. As with prior discussions, I'll start by making some overall comments, and then I'll review our third quarter results in more detail. So my comments are related to non-GAAP metrics, as well. So, to start off, summarize the March quarter, we delivered solid profitability and met our expectations. We continued integrating our acquisition of the Tungsten Material Business and implementing restructuring actions. When taking to account acquisition growth, we achieved an all-time quarterly sales record with sales of $755 million. Some additional noteworthy points for the quarter. The trend of year-over-year sales growth which began in the month of September continued during the March quarter. As a result, we realized organic growth for the second consecutive quarter. Organic growth was led by improving demand in our Transportation and General Engineering businesses, which tend to be early cycle. Our Industrial segment achieved 5% organic growth in the quarter. Turning to Infrastructure, our mining business continues to be a challenge with weaker demand globally, while our highway construction business was flat, due to weather impacts. In our energy business, order activity has been increasing and showing signs of further growth. We continue to generate strong operating cash flows and we delivered an adjusted earnings per share of $0.74. Now, I'll walk through the key items in the income statements. Sales for the quarter were $755 million compared with $655 million in the same quarter last year. Sales increased by 15%, reflecting a 12% increase from the TMB acquisition, a 3% organic increase, and a 1% increase from more business days, partly offset by a 1% decrease from an unfavorable currency exchange. As I mentioned earlier, the March quarter is the second consecutive quarter in which Kennametal realized organic sales growth, and we're seeing improved demand from our…

Thank you, Frank. Moving ahead, we are committed to our long-standing mission of delivering productivity to customers. We will continue to execute our company-specific strategies to maintain our global leadership position. We will strive to double revenues, while remaining focus on profitability, earnings, and cash flows. In addition, we will fully integrate the Tungsten Materials Business to gain market share, streamline our cost structure and capture savings. We'll continue to balance our company in terms of business mix and serve the end markets. Additionally, we're making progress on our goal of generating revenues equally from North America, Western Europe, and the rest of the world markets. We'll continue to execute our strategies to further strengthen our business. In summary, we are confident that Kennametal is well-positioned. We see new growth opportunities in terms of our diversified mix of end markets and significant emerging market opportunities. We have a strong financial profile, cash generation capabilities, cost disciplines, and capital allocation principles. We have a commitment to solid operational standards and a proven track record. Thank you for your continued support. We will now take questions. Thank you.

(Operator Instructions) Our first question will come from Adam Uhlman of Cleveland Research. Please go ahead.

Hi, guys good morning.

Hello Adam.

Hi Adam.

I was wondering if you could start with a clarification on the TMB. The expense for the year in total of $0.36 to $0.44 for year last year, I think last one was $0.32 to $0.36 plus the base operation and the restructuring charges are the same, maybe what's changed there, what did I miss?

Nothing, we're trying to accelerate additional cost and structuring items so that we can be well-positioned as we get into fiscal 2015, but nothing unusual at this point.

Okay, got you. And then can you talk to the domestic oil and gas business? The highway business, it sounds like that could have some kind of demand for the June quarter? What have you been seeing in your monthly order trends for that business? And maybe help base our expectations for those segments for business?

Yes, if I start with the earth-cutting side of the house, the one thing I want to point out last year when we went to Q2 to Q3, actually the business was going down. Our underground mining business doing with headwinds has increased from Q2 versus Q1, Q3 versus Q2, so we're seeing sequential improvement, that's where we made some stabilization. Albeit there are going to some potential mine closures here. So, we like the trajectory there. The mining -- the construction business you're right was a little bit flatter and we think that is due to some pent-up demand or weather-related impacts getting off to a slow start. I don't know if we'll catch all that up in the quarter, it may slip into next year, but we'll watch the progress as it relates to that. If you think about the energy side for the house, Stellite had a good month -- good quarter I should say, so a little bit of a pick-up on some of the energy-related businesses and in our core, oil and gas which has drilling, flow and analysis and some in some of the angles that we make also had a good quarter and up about the same as it was last quarter, maybe a little bit better if you factor a couple of these things. So, the trajectory is working where we had anticipated.

But supports our current guidance.

In line.

Okay. Thank you.

Thank you, Adam.

The next question will come from Julian Mitchell of Credit Suisse. Please go ahead.

Hi, thanks. So, I just wanted to get some clarity on the kind of OpEx trends, you said they were up I think around $11 million year-on-year underlying in Q2, about $10 million in Q3. Is that a good run rate for several quarters, looking ahead now, or is there something exceptional going on in this fiscal year?

No, I do not think there's anything exceptional. As we talked at the beginning last July, we said we're going to make some additions relative to sales force additions, we've incurred expenses related to the NOVO projects, so they obviously being amortized as we go through. So, this quarter we came in at 20.4% and we said, hey it will at least 21%. I think we've corrected the first half was like 21.5% if you look at the first half. So, we'll get back down to 21%, so we have a little bit more control in the second half as we go into the next fiscal year. But nothing unusual Julian as it relates to one-timers plus or minus and then we'll see what we do with additional restructuring going forward.

Thanks. And then within the industrial business, General Engineering has had a couple of good quarters in a row year-on-year organic growth, I guess, Carlos your comments at the beginning sounded pretty upbeat on that. So, I guess you're saying even as comps get tougher, that business can hang onto that kind of growth rate?

Yeah, I mean I think that they have had good growth last quarter and this quarter that we just stand at. And then as we look to some of our peers during the same group like MSC and some of the other customers of ours, it is very consistent and I think we haven’t seen any restocking whatsoever in that channel. So, we feel cautiously optimistic. It's just a timing issue.

And Julian I'd add to that, the General Engineering, there is a lot of indirect that goes to there. So, we were actually their indirect channel up 9% in the quarter. So, that kind of feels pretty much hand-in-glove there.

And the reason we say that there isn’t really been any stocking -- is been at the level, last quarter was 10%, this quarter is 9%. So, it really shows you that it's staying very close to demand. So, as the macro improves, we're going to see that accelerate, again, the question is the timing.

Thanks. And quickly, Frank, just one follow-up for you. Free -- operating cash flow I think it was what about $150 million year-to-date, you're guiding for $295 million or ever the midpoint for the year, so a big swing in Q4, maybe a little bit of color on that?

Yeah, if you go back historically, you get the Qs and Ks and back out; our fourth quarter is typically our strongest quarter by far. Last year alone, we did well in excess of over $100 million in free operating cash flow. Now, what will drive there by timing working capital? We typically in the quarter march with the high sales period. So, we'll collect a lot of receivables there. So, we typically have strong collections as well as managing our inventory. So, you'll see some working capital. And then the fourth quarter is typically our highest earnings period. And then we'll obviously keep a close eye on CapEx. So, we feel that we're going to be based upon history, we should be right in it sweet spot.

Great. Thank you.

Thank you, Julian.

The next question will come from Eli Lustgarten of Longbow Securities. Please go ahead.

Good morning everyone.

Hey Eli.

Good morning Eli.

Can we talk little bit about the Industrial results by the end market, both globally and subset. I mean I guess North America will be up 1%, can you give us -- I assume that was significantly affected by January -- February may be you can give some trends through the quarter with difference as March was. Aerospace was down which probably was a little bit of a surprise, it's a tough comp, what happened during the fourth quarter and as you look out. Cans you give us some color what's going on -- what you'd expect typically -- General Engineering did well, but machine tools shows in September that always stretches things out, can you give some sense of what's going on there?

Yeah, in the aerospace, Eli, we have good portion of our space as defense and as Frank said in the commentary, we did have a strong shipments a year ago for defense in this case. And the overall switch by Boeing and the Airbus from the old models to the new models, when you look at the numbers, the output is slightly lower. But you know we think that's temporary, at least from the commercial side of the house. The defense is going to be challenging. It's really hard for us to quantify the weather-related issues in North America. But certainly, there's some impact there. And I think that's again a timing issue. We're going to start seeing North Americas starting to come back and deliver higher growth.

Do you see any big change in March versus January and February, have you looked down at the monthly pattern, or was it just -- is probably getting better as you go through it?

Yeah -- again January was clearly the low point -- and I'm talking Industrial to your question. February was better and March was slightly better.

Not a big snap back yet?

From January from February, it was a little bit of a pick-up, but again compared if I look at March versus January, March did end up on a decent number for the tooling side.

And can you talk about -- I mean the most impressive thing I guess is just profitability with Industrial, you got to mid-teens, I mean I assume -- we're assuming that's sustainable and will probably improve in the fourth quarter as we go through it? Can you give us some idea what's behind that mix or--?

I mean it's primarily volume. As we always talked about the fact we have a fixed capacity because we're waiting for the growth, which in a way has penalized us last year and the beginning of this year is going to reward us going forward.

So, the volume is going up, so that we expect it to get a little bit better as we look?

Yes.

As we have seen in the past.

Our incremental EBIT margins are in line with our historical capabilities, yes.

And can you talk about when we go to a researcher we got back to a low double-digit margin, we sort of stuck in that area until we get some clarity and better mining and highway expenditures and stuff like that? So sort of stuck in the low double-digits that we will be an infrastructure for a while?

I would say -- I mean that's the safe play there Eli. I mean energy obviously is on the plus side. And then with some of the IGT stuff on Stellite, they are obviously spotty. Some of the orders there are some bigger stuff there. But I think we need a little bit of a pick-up there because the mining is better for us profitability-wise. And highway construction side, I expect we will be up with the mix being up as good as the past, but nothing significant. But I expect it to improve sequentially.

Again, the volume is going to help us there.

And the next question will come from Ross Gilardi of Bank of America. Please go ahead. Mr. Gilardi, Your line is open. And we move on to the next question from Andy Casey of Wells Fargo Securities.

Good morning everyone.

Hi Andy.

A follow-up question on Eli's just twofold, first, the infrastructure business if I look at the core ex-TMB, very good margin improving year-over-year 160 basis points with substantial incremental, is it fair to say was mix was the bigger driver or what else should I consider?

Yes mix in volume -- volume in a couple of areas. Because there's really some sectors in there we're not be into, but that's primarily the volume.

Okay. Thank you. And then similar to another question Eli asked about the industrial, could you kind of run through the trends that you saw within infrastructure, January, February and March?

Yeah, I think -- and I thought I gave that to Eli, but the in January--

He is asking about the infrastructure?

And -- the infrastructure or industrial?

Infrastructure Please.

Okay, infrastructure. Similar pattern, January we went that was a down month and I think you guys felt that when we did the rolling three months. So, that was pretty much a negative slight negative in January and both were positive in total the following two months. So, pretty much a similar type of improvement February as well as March.

Okay. And then at one point, I think we were waiting for drilling activity to pick up. It seems like that occurred; did you see that during the quarter?

Yeah.

Okay. Thank you very much.

Thank you, Andy.

The next question will come from Walter Liptak of Global Hunter. Please go ahead.

Hi, thanks. Good morning guys.

Hey Walter.

Hi Walter.

I want to ask a follow-on to the energy question, have you said what the growth rate was for the energy business?

Not by -- just what's in the press release.

Okay. I'm sorry. What's the growth rate? Was it mid-single-digit, double-digit?

Yeah, we spent infrastructure increased 9% and energy.

Okay, got it.

Excluding TMB.

Okay. And does this business have better operating leverage than other businesses? I think this is sort of a stand-alone operation, right?

Well, you got to bifurcate it. I would say the core drilling stuff is a little bit higher and then the IGT stuff is little bit less. But we've been doing some cost moves to try to get the IGT up to where it is. So, it's kind of -- right now it's little bit of a different -- on the Kennametal base business been a little bit higher in the acquired Stellite when we talked about when we made the acquisition to try to move that up towards the Kennametal level.

Okay, got it. And on the TMB acquisition, was the revenue where you were expecting it for the quarter? Is the revenue trend where you'd like to see it?

Well, I think it performed very similar to Kennametal. I mean I tell people I think about TMB is almost like a mini-Kennametal where the tooling side, the industrial was better in the infrastructure-related business. But we had factored that in and this is very consistent with what we had anticipated back in November when we provided guidance at $200 million to $220 million. So, we're pretty much in line there. Now, they would also have some weather effects that impacted their business because it's probably little bit more pronounced because as we pointed out, 75% of their business is in North America or the U.S. So, there would have been a little bit of -- probably a bigger impact on them on a standalone, but pretty much in line.

Okay, got it. So, when we look at the fourth quarter, they have a big fourth quarter as well too, right?

Yeah. They behave very similar to how we do.

Okay. And when you made this acquisition, we were looking at double-digit operating margin you expect to get there on a full-year basis?

I'd think it would be close, I mean you can see all of the charges that are in there. If you take the press release and you see the $77 million, $78 million of sales. If you exclude all of the purchase accounting, the ongoing -- just to give you an idea, it's at about a 9.5% pure base run rate right now without restructuring. So, that will kind of give you -- that's the March quarter to give you an idea where we think this business is going to go.

Right exactly. So, for the full year, we would be double-digit?

It's going to be tough because when we -- obviously how it shapes out here. Remember we acquired this officially November 4th; we had the two weakest months of the year, particularly with the November with Thanksgiving and then kind of the Christmas period there. So, we'll see.

Okay, okay great. Thank you.

Our next question will come from Ross Gilardi of Bank of America-Merrill Lynch.

Yeah. Thanks so much guys, can you hear me now?

Yeah.

Yeah. How are you doing Ross?

Very well. Thank you. Sorry about that earlier. So, on Allegheny, I was wondering can you comment a little bit more on the customer reception to Allegheny now under the Kennametal banner and what the feedback has generally been.

Actually it's been very positive. First of all, all the assignable contracts, 100% of them were assigned to Kennametal, so 100%. Second of all, it has been very positive. As a matter of fact, in the long-term, I think there's some good sale synergies that will come as a result of the acquisition because the customers are excited about having that business being part of Kennametal. So, the customers are excited, we're excited about the business. And our people -- the TMB people are very excited to be a part of Kennametal as well.

And then can you talk a little bit more about Allegheny's inventory position. I mean you explained last quarter that it was more inventory than you anticipated, have you had to adjust production to deal with that or is the inventory position now more in line with where you want it to be?

We didn’t have to do anything, it was just -- there is more inventory when we acquired it. It was assignable at day one and a lot of stuff, as you remember, strategy; they have a lot of recycling. So, this is raw material scrap and this the type of stuff that doesn’t go bad, that it will feed into both customers once we run it through the recycling as well as use for internal consumption. So, it's not like there's a lot of fixed -- or finished goods inventory laying around. So, no issues whatsoever on that point.

Okay.

All we did is, our choice to goodwill was less by the amount that we increased the inventory. So, I mean I think that's good news. We can give money for the inventory, we're not going to be able to get money for goodwill.

And then just lastly guys on the balance sheet, could you just may be give a little bit more color on where you want the -- your debt levels to be before you might shift your prioritization back more towards returning to haulers and sort of how far away you think that we're from that?

Again, our arching famous, we want investment-grade rated company. We stay true to our priority uses of capital. Our goal immediate is to, obviously to pay down the debt, that's the main focus. Obviously, from where we finished the quarter, we want -- we finished at 37%, we want that to come down. We've always said we'd comfortable about 35% to 45% with the right acquisition and then we work it back down. And then once we get to a level that we're comfortable with, then we look at a standard stuff and the only other thing that would be unique would be share buyback, which we typically do to offset dilution. So, it remains debt pay down, CapEx into the business, putting it in, so we can accelerate the synergies across the organization, improve our customer bill rate and then secondarily, it will be the dividend increases and buybacks at this time. But on average, we like to be between 30% and 35%. So, that's kind of the comfort zone for us. And we're going to be -- at times we're going to be at a little higher than, at times we're going to be lower than that. But overall that's kind of where we look to be at.

Great. Thanks very much.

And our final question will come from Joel Tiss of BMO. Please go ahead.

Hi, last and least, how is it going?

Hey Joel.

Joel, we always keep the best for last, right?

Yeah, whatever. Can you just talk -- you haven’t talked at all about our pricing in the markets, I'm sure there's probably nothing going on? And then just on TMB; is that -- like if we think longer term over the next three to five years, is that a structurally lower margin or higher margin business than overall Kennametal?

Okay. First one on pricing, pricing -- a little pricing effective January, we put in for industrial, nothing really on the infrastructure side. And I think a lot of the competitors probably did the same thing in January. So, that's the first one. And then structurally, when you really think about the base business Joel, and when we rationalize a number of the facilities, I think this is above the Kennametal average longer term in my view. So, I think this accretive to the over Kennametal portfolio.

Okay, great. Thank you.

Thank you, Joel.

And ladies and gentlemen, this will conclude the question-and-answer session. I would like to turn conference back over to Quynh McGuire for closing remarks.

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

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