Kennametal Inc. (KMT) Q4 2014 Earnings Report, Transcript and Summary

Good morning, I would like to welcome everyone to Kennametal's Fourth Quarter Fiscal Year 2014 Earnings Call [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Quynh McGuire, Director of Investor Relations.

Thank you, Denise. Welcome, everyone. Thank you for joining us to review Kennametal's fourth quarter and fiscal year 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's also being broadcast live on our website and a recording of this call will be available on our site for replay through September 2, 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 which is currently available on our website. And 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 the non-GAAP 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. Thank you for joining us today. During the June quarter, we saw accelerated growth and ongoing strength in our served industrial markets, however, certain sectors remained challenging. While transportation and general engineering benefited from higher volumes in both direct and distribution channels, underground mining activity declined further as additional U.S. mines closed. Road construction projects also got a slow start this season with the weather conditions, but have increased in recent months. On a more encouraging note relative to our infrastructure business, the energy sector showed further improvement in demand. Our June quarter sales for the total company increased 15% from prior year, with organic growth of 5%. By comparison, when IHS adjusts its estimate to the weighted average specific to Kennametal's market and geographic mix, it shows relatively little growth from the prior year. This points to mixed conditions in our infrastructure markets with further weakening in underground mining, but improving demand trends in road construction and energy. On an overall basis, that indicates our business outpaced IPI, validating Kennametal's ability to deliver growth at 2 to 3x the IPI over the economic cycle. From a macro perspective, IHS estimates that global IPI increased by 3.6% for the June quarter. Our Industrial segment, which typically has a strong correlation with the index, reported total sales increase of 15% year-over-year, with an 8% organic growth in the quarter. So our Industrial business outperformed the index as well by more than 2x. We expect to build on that trend as the demand cycle improves. In addition, we continue to leverage our indirect channel strategy through both Kennametal and WIDIA brands. This strength is reflected in our distribution sales growth of 9% for the June quarter and 8% for fiscal 2014. Clearly, we are increasing our presence in industrial distribution channels and reinforcing our market-leading technology capabilities. For fiscal year 2014, we remain sharply focused on maximizing our sales, margins and cash flows, while investing selectively to develop our business. Even though we haven't yet realized the full potential of our operating leverage, we protected our profitability and on an adjusted basis delivered double-digit operating margin again this year. Also, we generated free operating cash flow of $156 million and continue to actively manage our balance sheet. Profitable growth is a priority for Kennametal and acquisitions have been an important part of our strategy. We have made substantial progress in the integration of TMB, our Tungsten Materials business. We continue to consolidate and combine the best of both business, including our product portfolio, facilities and headcount. We are pleased with the progress. Our integration plan is ahead of schedule. As part of our portfolio initiatives, we divested Garryson brand products in June to ATA Group, a longtime Kennametal supplier. The sale included non-core products that were part of TMB's Stellram business and a plant located in Ibstock, U.K. The divestiture allows us to focus on our core competencies and allocate resources that leverage value-added, high-tech strength. Regarding our previously announced restructuring initiatives, we still expect to deliver annualized saves -- savings in the range of $35 million to $45 million when completed. Additionally, innovation has always been a key competitive strength for Kennametal. During the quarter, we received industry recognition for our innovative culture. We were named for the second consecutive year to CIO magazine's CIO 100 Awards. Kennametal was honored as one of the top innovative companies that effectively used IT to create business value. We achieved this ranking due to the launch of our knowledge database named NOVO. This is a world-class technology solution unique in our industry and designed to accelerate productivity for our customers in their manufacturing process. Now I would like to give an overview of the trends we are seeing in our marketplace. In general engineering, customers are typically distributors or job shops involved in the manufacturing of machinery, industrial equipment and fabricated metal products. Capital equipment spending is projected to grow above 5% annually in 2014 and '15. In addition, more distributors are implementing e-commerce platforms to allow for similar buying cycles. As each channel presence in B2B capabilities continues to grow, Kennametal's NOVO knowledge solutions will provide increased options and productivity for customers. In the transportation market, automakers in the U.S. are planning fewer shutdowns and, in some cases, eliminating shutdowns this summer due to strong sales. Currently, 2014 light vehicle production is estimated to be 5% higher than the prior year. The key drivers of growth include the record age of the fleet, which is averaging about 11.4 years, low interest rates and a relatively stable fuel prices. Looking ahead, fuel economy and emission regulations are fostering industry investment in downsizing of engines, enhancing automatic transmissions, lightweighting of vehicle structures and producing alternative powertrains. In addition, the market for commercial trucks should continue to grow over the next 12 to 18 months. In aerospace, commercial aircraft should continue to expand in the coming months. Airbus and Boeing are both planning increased production of respective A350, A380 and 787 aircraft. At the Farnborough Airshow earlier this month, orders and commitments reached a show record of $201 billion, a positive sign for commercial aerospace globally. By contrast, the defense sector is expected to be lackluster since current estimates of military spending by NATO and the EU countries indicate an increase of less than 1% for 2014. In earthworks market, while the Energy Information Administration report -- reported that U.S. gold production grew slightly, more than half of that production came from the west. Coal stockpiles have decreased due to extremely cold winter weather and production should increase by approximately 3% for 2014. However, the Central Appalachian mines are forecast to remain weak and decline as much as 8% for the calendar year. In road construction, the current year season started slow due to unfavorable weather conditions. Road activity has been increasing sequentially as various state governments were proactive in funding, repair and maintenance work. In the months ahead, certain states may delay longer-term projects if funding for the federal Highway Trust Fund is not in place before Congress goes on recess. In the energy sector, U.S. rig counts are expected to be positive in 2014, but Spears & Associates is forecasting a reduction for 2015. On the other hand, international drilling of new wells is projected to increase 4% for 2014 from a year ago according to Spears. We view this as an encourage leading indicator for Kennametal since our business has a higher correlation to drilling activity for oil and gas wells. Separately, IHS predicts that the recent price strength of natural gas will likely renew the interest of gas-focused investment such as pipeline development. While there is technically ample natural gas resources, challenges remain with adequate infrastructure delivery resources to the end markets. New gas processing and interstate pipeline projects should help relieve supply bottlenecks in last winter. Overall, the global environment reflects a gradual acceleration in economic activity. Of course, the pace and scope of recovery has been tempered by persistent uncertainties in the geopolitical and financial climate. As a result, we expect that customers will continue to be cautious in their spending. At Kennametal, we are dedicated to serving our customers. And our business is well positioned for that. We will remain -- we'll maintain our focus and continue to mark -- make smart choices to manage risk and capitalize on opportunities. To that end, we have made the necessary investments in sales and other customer-facing functions in the past year. Know that we will execute the plans that we have outlined and tightly manage the cost structure to deliver our margin commitments. Now I'll turn the call over to Frank, who will discuss our financial results in greater detail. Frank?

All right. Thank you, Carlos. As with prior discussions, some of my comments are related to non-GAAP measures. So let me start by saying that the June quarter did not turn out as we had anticipated. There are a number of factors that led to the difference in our results versus our previous guidance, and I'd like to discuss those items before we go into greater details of the quarter. But first, on the positive side, we saw strong organic growth as expected in our Industrial business, and that was driven by increased demand in transportation and general engineering. Also, the indirect channel continues to show high levels of activity, and we delivered 3 consecutive quarters of solid growth in the Industrial segment. The 2 acquisitions we made in fiscal '14 are on track to deliver significant savings over the next couple of years. For the June quarter, the TMB acquisition that we started last year contributed earnings of $0.03 per share. Also, we accelerated restructuring actions and divested a non-core business for $10 million in net proceeds. This reduced our manufacturing footprint by another location. Our Infrastructure business, as Carlos mentioned, continue to be challenging, primarily due to lower-than-expected growth in the mining sector. Slowing conditions globally and additional U.S. mine closures resulted in further declines from the prior year, as well as sequentially from the March quarter. The visibility on cluster demand going forward remains limited. In road construction, activity in the U.S. trended below our forecast due to a later start in availability of funding from certain states. However, there was a sequential pickup from the March quarter. Therefore, lower sales volumes and related product mix in the Infrastructure segment had an unfavorable impact on the segment margin compared to our expectations. In addition, we felt it appropriate to lower production activities and reduce finished goods inventory given the demand trends in the quarter. This led to an unanticipated year end LIFO adjustment and also negatively affected margin performance compared to our prior forecast. And lastly, operating expenses increased in the June quarter compared with the prior year due to our higher employment costs, as well as expenses related to prior investments in sales and customer-facing functions. Regarding the acquisition of our Tungsten Materials business, we are generally ahead of schedule on our integration plans. We also accelerated restructuring actions during the June quarter, which I will get into more detail later. And as I've previously discussed, we divested a non-core business that was previously part of the TMB acquisition for cash proceeds of approximately $10 million. When taking into account acquisition growth, we achieved sales of $772 million. The trend of the year-over-year sales growth, which began in the month of September, continued during the June quarter. A result, we realized organic growth for the third consecutive quarter. Our organic growth was led by strong demand in transportation and general engineering businesses, which tend to be early-cycle markets. Our Industrial segment delivered 8% organic growth in the quarter. And then the Infrastructure segment, our mining business remains challenging and highway construction activity is lower than expected. However, order activity for the energy business continues to improve and showed signs of further growth. June quarter adjusted earnings per share were $0.75. Now I'll walk you through the key items in the income statement followed by our outlook. Our sales for the quarter, as I said, were $772 million, and this compares with $671 million in the same quarter last year. Our sales grew 15%, reflecting an 11% increase from TMB and a 5% organic growth, partly offset by a 1% decrease from fewer business days. Turning to the sales performance by segment. Our Industrial segment had sales of $416 million, an increase by 15% from the prior year quarter due to a 7% growth related to the TMB acquisition, 8% organic growth and 1% increase due to fewer FX exchange issues, partly offset by a 1% decrease from fewer business days. If you exclude TMB, our sales increased by 11% in transportation, 9% in general engineering, partly offset by a 1% decline in aerospace and defense. The transportation market benefited from increased demand in light vehicle markets worldwide and general engineering increased due to continued demand from distribution channels and sales increase in all geographies. On a regional basis and also excluding the acquisition, industrial sales increased 15% in Asia, 6% in the Americas and 4% in Europe. Our Infrastructure sales came in at $357 million in the June quarter, and that was up 16% from the prior year. And that was driven by 15% growth related to the TMB acquisition and 1% organic growth. Excluding TMB, our sales increased by 10% in the energy markets, largely offset by a decrease of 9% in earthworks. Energy sales continued to improve year-over-year, reflecting improving demand from oil and gas drilling activity, coupled with continued gains in process and wear applications. Earthworks sales decreased due to persistently weak underground coal and surface mining markets globally, as well as lower road construction activity. On a regional basis and excluding the acquisition, infrastructure sales grew 2% in Europe and held relatively steady in the Americas and Asia. Now a recap of our operating performance. Our gross profit margin was 32.7%, which included the TMB operating results and nonrecurring charges. Excluding the impact of these items, our adjusted gross profit margin was 34%, which was relatively similar to the prior year. The gross margin benefited from the organic sales growth, but this was offset by lower fixed cost absorption, inventory reductions and the mix in our Infrastructure segment, as well as higher employment cost. Our operating expenses increased $22 million year-over-year. Excluding the acquisition of TMB, our results -- and nonrecurring charges, our operating expense was $9 million higher year-over-year, primarily driven by higher employment cost. Our operating expense as a percent of sales was 20%. And excluding TMB, our operating expense as a percent of sales was 20.3% compared with 19.8% in the prior year quarter. The additional spending represents strategic investments we made earlier in the year related to headcount, productivity and growth. Operating income was $78 million compared with $91 million in the same quarter last year. Excluding nonrecurring charges and the results of TMB, adjusted operating income of $90 million was relatively flat to the prior year as the organic sales growth was offset by lower fixed cost absorption and mix in the infrastructure, as well as higher employment cost overall. Our operating margin was 10.1% compared with an operating margin of 13.5% in the prior year. And adjusted, our margin was actually 12.9% in the current year quarter. Operating income performance by business segment now. The Industrial segment's operating income was $53 million compared with $62 million in the prior year period. Excluding nonrecurring charges and the results of TMB, adjusted operating income of $64 million benefited from organic growth, but was largely offset by higher employment cost, primarily in market-facing areas. Industrial's adjusted operating margin was 16.5% compared with 17% in the prior year. The Infrastructure segment's operating income was $27 million compared with $30 million in the same quarter of the prior year. Excluding nonrecurring charges and the results of TMB, the adjusted operating income was also $27 million. Operating income and margin were impacted by lower fixed cost absorption and mix. The Infrastructure adjusted operating margin was 8.8% compared with 9.7% in the prior year. Our interest expense actually increased $1 million year-over-year in the June quarter to $8 million. The increase was due to higher year-over-year borrowings related to acquisitions. Our liquidity remains strong. We had $287 million outstanding on our $600 million revolver as of June 30, 2014, and our nearest debt maturity is April of '18. The reported effective tax rate was a little higher than typical at 30.5%, and this compares with 23.9% in the prior year quarter, primarily driven by the TMB restructuring charges in tax jurisdictions where a tax benefit is not permitted for these charges. Excluding TMB and the nonrecurring charges, the effective tax rate for the Kennametal base business was 25.4%. As we highlighted in the table in the press release, our reported earnings were $0.57, and this includes the TMB base operating income contribution of $0.06 per share, $0.03 charge related to the TMB depreciation amortization step up for purchase accounting, acquisition-related charges of $0.02, restructuring and related charges of $0.17 and the loss on the divestiture of the business that we sold of $0.02, representing the adjusted earnings per share of $0.75. Turning to cash flow. Year-to-date cash flow from operating activities was $272 million compared with $284 million in the prior year. Our net capital expenditures were $116 million compared with $80 million in the prior year and free operating cash flow for the year was $156 million compared with $204 million in the prior year. Free operating cash flow was impacted by higher working capital needs related to the TMB acquisition. We remain diligent in our focus on generating strong cash flows and are committed to our capital structure principles. Our balance sheet remains in very good shape. At June 30, 2014, we had $80 million in short-term borrowing and total debt was approximately $1 billion and our cash was $178 million, with the majority presiding overseas. Net debt was $884 million at June 30, compared with $371 million in the prior year, and the increase primarily driven by the Tungsten Materials business acquisition. Our debt-to-cap ratio at June 30 was 35.1%, compared with 29.2% at June 30, 2013. As an update on our acquisition of the Tungsten Materials business, the integration has been progressing very well overall. Effective July 1, the entire TMB organization has been operationally integrated within the Kennametal structure. The integration team continues to successfully drive critical work streams to ensure a smooth transition and is currently progressing ahead of schedule. In May, the first phase of SAP implementation was completed and went well globally. The next phase of SAP will occur in August. And we expect to be fully done with the systems implementation by December of 2014. We believe that our combined organizational structure and our go-to-market strategy will drive future value to the enterprise. The impact of the TMB ongoing operations in the June quarter, as I said earlier, was $0.03 accretive. And that consisted of a $0.06 per share base operating income and a $0.03 impact related to the depreciation and amortization step up related to purchase accounting. As I also mentioned, we did complete the sale of a small non-core business that we acquired as part of the TMB acquisition, and the cash proceeds of the divestiture were approximately $10 million, with a pretax loss and related charges of $1 million or $0.02 per share. Also, as we previously outlined, restructuring actions that we expect to complete by the end of fiscal year 2016, we have estimated pretax restructuring charges of approximately $50 million for all of these initiatives. During the June quarter, we incurred $14 million of restructuring charges or $0.17 per share and realized approximately $3 million benefits year-to-date. To date, through these restructuring initiatives, we have reduced our footprint by 4 locations with 3 facility closures and 1 divestiture. And as we previously stated, we expect to generate annual savings of approximately $35 million to $45 million once these initiatives are fully implemented. And as a reminder, they consist of concentrating our footprint by consolidating operations and driving productivity improvements with standard processes, reducing administrative overhead and leveraging our global supply chain, including raw material cost, procurement and streamlined manufacturing and distribution. For fiscal '15, fiscal 2015, our outlook remains ongoing market uncertainties, as well as limited visibility related to customer demand trends. Our current assumptions include expectations of continued macroeconomic improvement, driven primarily by our industrial end markets. While underground coal mining activity will likely remain at relatively low levels globally, we believe manufacturing activity is projected to grow over the next 12 months. Given these factors, we expect our organic sales growth to range from 3% to 5% and total sales to grow between 5% and 7%. Our fiscal 2015 outlook is based in addition on the following assumptions: We're projecting 3% to 5% organic growth. This forecast is based on expectations that demand momentum will continue in our industrial end markets, while infrastructure markets remain mixed. We are committed to maintaining our operating expenses at 20% of sales and demonstrate our ongoing cost discipline. We have already made investments in the prior year to expand our sales force and customer-facing functions. In fiscal '15, we're focused on attaining the full potential from the resources that we added previously. I also need to point out that our guidance includes approximately $15 million to $20 million of higher incentive compensation than the prior fiscal 2014. And this assumes that incentive compensation to be fully restored to levels in fiscal '15. Restructuring benefits from the combined businesses, including TMB, are estimated to be approximately $20 million in fiscal '15, with approximately 40% of savings expected in the first half and the remainder in the second half of the fiscal year. Our effective tax rate for 2015 is forecasted to be between 26% and 27%. And additionally, we're expecting the September quarter will actually have a higher tax rate than the full year. The year-over-year increase in the tax rate is partly driven by a more unfavorable geographic mix in fiscal '15. It's also partly due to certain favorable IRS provisions that expired such as the RD&E tax credit, as well as other items related to the taxation of international income. If these are extended, these benefits would lower our effective tax rate, but are not currently factored into our guidance. We will continue to look for ways to balance our geographic presence and minimize our tax rate. Earnings are expected to be somewhat lower than historical season patterns, with approximately 35% to 40% of earnings in the first half and 60% to 65% in the second half of the fiscal year. And note that the second half of the fiscal year is expected to benefit from the increased restructuring savings. And consistent with our capital allocation principles, we plan to reinvest back in the business between $110 million to $120 million of capital spending. And this is in line with our historical trends of spending 3% to 4% of sales on capital expenditures. Based on these highlighted factors, we expect EPS to range from $2.90 to $3.20 in fiscal '15, and this guidance includes a contribution from TMB. Turning to cash flow. We expect to generate from operating activities anywhere ranging from $290 million to $320 million in fiscal '15. Based on our anticipated capital expenditures of $110 million to $120 million, the company expects to generate between $180 million and $200 million of free operating cash flow for the fiscal year. This level of free operating cash flow represents 70% to 90% of net income, working toward our long-term objective of realizing 100% conversion of net income. We will continue to manage our business for the factors we can control to deal within the near term, as well as market headwinds as needed. We are focused on protecting our profitability, as well as maximizing our cash flows and returns and will remain focused on many growth opportunities and our consistent execution of our strategies. Now I'll turn it back to Carlos for a few closing comments.

Thank you, Frank. As we go forward, we'll continue to leverage digital technology such as our NOVO platform to better serve customers and drive growth. We will execute strategies that are consistent with our long-term growth goals, while maintaining a sharp focus on profitability. We will seek to maximize growth in top line, earnings and cash flows. At the same time, we will further balance our global presence to generate revenues in equal terms from North America, Western Europe and rest of the world regions. We will also diversify our served end markets and business mix to lessen volatility throughout the economic cycle. As always, we will seek to protect our profitability and elevate our base performance. In addition, we'll streamline our cost structure and balance our global manufacturing footprint to better serve shifting demand patterns. Along those lines, we will continue to integrate the Tungsten Materials business and implement restructuring initiatives to deliver promised cost savings. We'll continue to manage our business and control what factors we can. As we enter fiscal 2015, we believe that Kennametal is well positioned, and we are cautiously optimistic that the global economy will continue to improve. In the meantime, Kennametal has an excellent business model and a management team that is committed to disciplined operating principles. Thank you for your continued support. We'll now take questions. Thank you.

[Operator Instructions] And our first question will come from Samuel Eisner of Goldman Sachs.

So maybe you can talk a little bit about the cadence of particularly industrial growth throughout the quarter. Curious how that moved particularly in June? And then also, what are the early looks that you're seeing on July?

Well, let me start and Frank will pipe in. I mean, I think, as we said earlier, we are being consistent growing 2 to 3x the IPI. The IPI, when we look at the IPI forecasted is consistent. And again, the thing that makes us excited about the industrial growth is the fact that we see some really positive numbers out of the distribution, which is typically a leading indicator for us. So it really is showing us that the industrial -- the strength is going to continue forward.

Yes, Sam, I'll add. I think it got progressively better throughout the quarter, April, May and June. June, obviously, is a key month for us, and that came out as expected. I think there's 2 factors. I think there was probably some pent-up demand from the prior quarter, but our own internal initiatives by focusing on the fill rates and, as Carlos mentioned, on the indirect channel. Indirect channel was up 9% again, which is very strong. And I think there's a nice correlation now in the industrial side with the fill rates for our high movers, the As, the Bs and the first choice program that I think our distributor and our customers are more comfortable now. So we like that trend. And I think on the industrial side, that's carrying through into July.

Understood. And then you mentioned that, I guess, you guys did your own kind of destocking this quarter. I guess what were production rates on the infrastructure side throughout the course of the quarter? And how do you see that playing out through both the first and second half of next year?

If I had a -- looks like a tale of 2 segments, right, where we have probably high-70s, close to 80 on the industrial with much lower ones on the infrastructure side. We took $10 million of finished goods out, as well as some raw materials and that had about a couple million dollar impact just on the reduction of inventory in Q4.

And then just lastly, in terms of restructuring, I believe if you're going to spend about $50 million in total. I believe you're about $30 million remaining through fiscal '16. Is that all expected to go in '15? How do you see that playing out over the next few years?

I would say, Sam, what we're trying to do here, we're going to try to front load and get this thing done. I probably would say 2/3 of the cost will happen in the first half, with 1/3 in the second half. And I would say, we'd be about 95% done. There could be a small spillover the way we have it laid out now. But obviously, we're going to try to get it all wrapped up, the cost in this year as much as we can. So small carryover potentially into the following year.

The next question will come from Julian Mitchell of Crédit Suisse. Jonathan Shaffer - Crédit Suisse AG, Research Division: This is Jon Shaffer for Julian. I was just wondering if you could talk a little just kind of longer term as to when the balance sheet moves into a position where you begin to consider more buyback or acquisition. And if there is some kind of internal target, debt-to-cap at 30% or 35% that you guys are looking at.

I think our long-term goal is always to maintain. We go back to our capital structure principles, where we want to be maintaining our investment-grade rating. And that 30% to 35% is kind of probably in the sweet spot. And at times like we're at right now, we'll go a little bit higher. And as we continue to generate cash, we'll pay down debt. I think the near-term focus is on debt reduction. I think that needs to be front and center. And then as that comes back in line, we'll look at the performance, and then we'll evaluate the other options available to us from a balance sheet perspective. But that's the main focus right now is debt reduction, and then we'll evaluate as we continue to try to increase our cash flow to see what other opportunities we can do. Jonathan Shaffer - Crédit Suisse AG, Research Division: Sure. And then just as a quick follow-up. Kind of as cash flow come back up and the debt goes down, are there any -- if you were to pursue acquisitions as opposed to kind of buyback or increasing the dividend, are there any particular areas that you think you would continue to focus on?

Yes, I mean, our focus continues to be on the components business, investment castings and bolt-ons just like TMB, if we have an opportunity to get more. So the strategy is consistent to the strategy that we've been executing. And in the industrial space, there was a lot less available than -- there's been a lot of consolidation in the past decade in the industrial space. So the opportunities really lie more in the infrastructure side of the business at this point.

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

Can we talk a little bit about the 2 sectors separately as far as '14 and how you're looking at them in '15. In both cases, it looks like the contribution from TMB was less than I had expected versus that -- with 70 to 70 -- what $72 million, I guess, little lighter than I would [ph] expect. When we talk in the industrial sector what's going on and with a 3% to 5% organic growth rate for '15, I assume that the industrial sector you're projecting is in the 7% or 8% or some number like that for 2015? And will margins be similar in 2015 to '14? Or you're expecting an improvement in profitability in the industrial sector?

We're definitely expecting improvement in both businesses. And then, Eli, to the organic, yes, you're right. I mean, directionally, we expect industrial to be quicker and grow stronger based upon what we've seen. And then we expect the infrastructure to continue to lag given the underground mining application. And we're trying to make sure that we leverage the business in the surface opportunities in our international markets because we expect the U.S. to be flat for a while to down, and then eventually the international markets picking up a little bit, but offsetting other parts of the business. So without getting into the specific numbers, we expect industrial to be stronger than infrastructure. We expect profitability to be up. And I'm sure there was some impact on the TMB from a sales perspective. As far as we know, nothing unusual. The profitability of that base business, which is in the -- if you take out the D&A, has about 11.8% profitability. And as we continue to get some additional synergies related to the restructuring activities, we divest that underperforming business, we like the direction for the industrial business.

Eli, I would tell you that this is consistent with historical parts of the company. Our industrial business has high highs and low lows. And our infrastructure business doesn't moderate at high highs and low lows. So what we're seeing right now is very consistent -- the industrials come from a very low base and is going to grow and accelerate faster than the infrastructure.

Are you expecting positive organic growth in infrastructure in '15?

Yes, slightly.

Great, slightly. And so most of the growth is coming from industrial. You had respectable margins in industry, so you're doing better. Do think there will be enough positive trends to give you modestly better margins in infrastructure in the second half in 2015 or are we talking about very similar profitability? And will the volatility be more level or is it going to be all over the place again?

Again, that's tough to answer, all over the place. I mean the stuff that -- I think it's definitely going to be modestly better than what we have this year.

And what, I guess, the 12-month number for TMB was what, about 2 -- a little under $200 million? So I think that's what the 12 months, the numbers look like. I mean, how much do we expect to get for -- what kind of growth do you expect out of TMB for 2015 versus '14?

Yes, the number, I think, was 186-ish which was in there. It's tough. As I said in the update, we've integrated these 2 pieces into the respective business. So it's going to get tough to track and say, "Hey, we know that TMB sales were this." So if we're selling to Baker Hughes, was it a legacy Kennametal sale or was it a TMB sale? So it's going to be challenging. That's why we try to give it to you both organically. We're going to provide the synergies going forward. But when you're integrating the business, it becomes too hard to pull it out.

I think it's going to be consistent with the Kennametal base business.

Yes. I mean, this is a mini Kennametal when you really think of it.

Yes.

The next question will come from Adam Uhlman of Cleveland Research.

Could you talk to your price realization expectations, as well as material cost expectations for this coming year?

Yes, if we bifurcate the number, I would say in total, they'll be slightly positive with maybe around 1% in industrial and slightly negative in infrastructure. So I think that's the way it's playing out right now. And then as far as, I'll call it, raw materials, with with the biggest being the tungsten, that's been relatively stable to down slightly. So there could be, if it stays this way, maybe a little bit out -- a little bit of favorability potentially with some raw materials. But right now, it's looking like pretty good shape.

Yes, the raw materials will be consistent with the level of growth. If we grow at -- if the economy is going to grow at the projected rates that we have, we'll probably stay the same and/or slightly better. If all of a sudden, we see a higher demand, then that will change a little bit.

Okay. Got you. And then I was wondering if we could dig into the Industrial segment performance in Asia, like 15% growth is pretty strong. I'm wondering what your conviction is in maintaining, I guess, a decent level of growth going forward. Many markets in China starting to weaken quite a bit, maybe you could discuss that a bit.

Yes, I mean, I think if you go back 1 year, 1.5 years ago, the strength was coming from the infrastructure. In other words, the Chinese government was building out infrastructure because the rest of the world's industrial markets were weak. And they were trying to get more of a domestic consumption going. And I would anticipate that the infrastructure-related businesses will not -- will be -- the growth will not be as higher. However, the industrial, the manufacturing sector is going to grow. It looks it's going to grow in the double-digits area going forward.

The next question will come from Andy Casey of Wells Fargo Securities.

On the fiscal 2015 outlook, could you repeat, I couldn't scribble down fast enough. Is the $20 million restructuring, is that a cost headwind or is savings?

Savings. The restructuring benefits I said for the combined, those were approximately $20 million in our '15.

Okay. So when we look at 2015, that is largely being offset by higher incentive comp. And then outside of that, what are you including for TMB accretion?

You can obviously look to the fourth quarter and try to get a run rate off of that. As I said earlier, Andy, it's kind of integrated into both businesses, but we expect it to be pretty much in line with kind of our overall margin contribution for the total the company, so similar.

Okay. And then on the infrastructure, first, on the flattish outlook. You kind of mentioned some concern about road building, continued mining weakness. What are you kind of looking for in the other pieces of that business?

Well, we have surface mining, foundational trenching work and a couple of other areas. The construction business, the highway construction was up. It grew sequentially nice. It was down a little bit. But that should pick up here into the September quarter than we had in the prior. So that will offset, I think, a little bit of it. And then it's us really looking at other areas within the underground mining area, not just focused on underground mining, but getting it to more wear applications and coatings and a couple of other areas in the Stellite materials to help us offset some of that weakness.

Okay. And then if we can dig into the quarter a little bit, the infrastructure margin performance. Last quarter, you had what appeared to be a positive mix shift from energy. I'm wondering why that didn't carry through with the 10% that growth that you saw in Q4. And I think you mentioned the $10 million inventory reduction, was that revenue or EBIT? And was most of that in infrastructure or was it kind of equally split?

Yes, I mean, the $10 million, that was the finished goods inventory reduction that I talked about with about a $2 million impact. So again, I don't know the exact percent, but it's close to be 50-50 for that perspective. But the last quarter, to your point, the oil and gas was up double-digits. It was quite nice. We didn't see the same level of growth. I think Stellite had a great quarter last time on the top line. They grew as well this quarter, but not as much and there was some relatively easier comps on a year-over-year in the third quarter. And then we had some incentive comp and some investments that we made early to -- kind of cut across both businesses.

Okay. And then you mentioned a LIFO charge in the quarter. How much was that?

The LIFO was combined. We call it LIFO and E&O combined. It was a little less than $3 million. Now from a year-over-year basis, it's in there, but we did not anticipate that when we provided our prior outlook. So that was kind of -- I don't want to call it a nonrecurring. You typically do LIFO at the end of the year, and that kind of just -- there's a little bit of a surprise on that one.

Okay. And then lastly, the customer-facing headwinds year-over-year because of the investments. Is it fair to assume that's going to dissipate beginning fiscal Q2 or is it more a second half dissipation?

No, we don't have -- the cost is over, so there's no cost in 2015 so.

No, no, what I mean, Carlos, is the year-over-year headwind.

Okay. I think your latter comment is right, Andy.

The next question will come from Joel Tiss of BMO Capital Markets.

We've been hearing from a bunch of other companies that mining kind of flattening out and they're getting optimistic about the future. And I just wondered if you could give us a little sort of comparative about what you're hearing from the customers?

Right now, I mean, as we said earlier, I think that the Appalachian region is going to continue to decline in 2015. I think that when you look from a global perspective, the overall mining may be flattish to slightly down. I think that's -- and we're looking at it from a production point of view, Joel. So I think that we have to distinguish between production and equipment manufacturing. The equipment manufacturers may be thinking or seeing some growth in their area that eventually is a leading indicator for us that we can grow further down.

Joel, it wasn't like an accelerating decline like in '13 versus '14. So it's trying to find a base here. It's maybe a decelerating decline versus an accelerating decline, but at a relatively somewhat stable basis now.

And then is there any way for you to kind of clear away some of the noise for us and give us the core incremental margins for '14 and what you guys are thinking for 2015?

Say that again, Joel?

Just to clear away, like you take out the noise from the inventory reductions and the cost savings and you mentioned something about SAP also, just to give us what you think the core incremental margins were in the fourth quarter and what's implied for 2015? Are you still kind of on track? It seems a little bit light, that's all. That's why I'm asking.

Yes, it was a little bit light definitely in the fourth quarter, but I think it would have been double-digits if you adjust for those, not quite the 30% that we had in the past. But depending, we think the restructuring benefits and kind of the mix we've got going into the '15 plan that we think the all-in independent of that number, it should be in that 30% to 35% range going forward, depending on what you're starting in on. I'm using a base of -- the $2.50 and the $0.03 accretion. So from a $2.53 basis to kind of the -- in the midpoint, you're in the 30% incremental margins as we get into fiscal '15.

So Joel, it's consistent. The '15 is consistent with past experience and with the expectations.

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

I wanted to ask about the SAP and if you've been able to quantify either any of the organic volume opportunities or the cost out related to SAP because we should be pretty close to getting those benefits.

Yes, I think that's the synergies. We talked about the $35 million to $45 million. And the first wave basically in May that we did. You'll start seeing a step up in the first quarter as far as the restructuring. I think I said in the prepared remarks about 40% of the benefits will happen from the synergies in the first half and 60%. And it will continue to accelerate from where we finished for Q4. It will step up nicely. We are wrapping up, as we said, I think in the last call the closure of the Gland facility, where I believe with said that, that would be done by August. That's the biggest project. That's a combination of both facilities, as well as a lot of back-office. So we expect to have a lot of the back-office stuff completed hopefully by the end of the first quarter, maybe some of that spilling into the second half -- second quarter, sorry.

Okay. Great. And I wanted to ask about the annual -- is there an annualized incremental employment cost number? How much have we invested in new employees? And I guess the question is, why aren't we expecting that in 2015 we're going to get more organic growth out of those employees?

As far as a certain number, I think last year we said the investment that we were going to make was about $10 million. But we'll start seeing, as Carlos said, the benefits from the adds that we had, and then when we talked with Andy earlier. And then we should start to see -- we should start to get the productivity from the NOVO application for our sales force. So that should give them an added benefit or capacity to sell further. But given the visibility that we have in the marketplace, we feel that, yes, could we do better if the market gets a little bit stronger? Absolutely. But where we're at this time given the visibility in some of the mining side, this is kind of where we landed for the guidance.

Yes, and Walt, the current guidance, the sales guidance is consistent with historicals of us growing 2x the market. So as Frank said, to the extent that the market gets better, then we can do better. But at this point, I think our growth is where it should be. I mean, we've listened to some of our peers and what they are projecting for growth is very consistent.

The next question and final question will come from Steve Volkmann of Jefferies.

It's Chirag Patel stepping in for Steve here for a moment. Just wanted to kind of circle back to, I think, it was Andy's question. Frank, you were talking about the highway construction picking up into the September period. I just kind of wanted to get a sense if you're assuming something for the highway bill being approved or similar to that or could that potentially add a little upside as we look into fiscal '15?

I say that, that could add upside. We felt that there was some delays, weather-related and some seasonality factors that probably didn't get implemented or reflected in the June quarter. And I would agree, there could be a little bit upside into the next quarter and depending on how long the season goes relative to that bill.

And we did see an uptick in this quarter in the road construction.

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

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

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