Kennametal Inc. (KMT) Q1 2015 Earnings Report, Transcript and Summary

Good morning. I would like to welcome, everyone to Kennametal's First Quarter Fiscal Year 2015 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 First Quarter Fiscal 2015 results. We issued a 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 November 30, 2014. I'm Quynh McGuire, Director of Investor Relations for Kennametal. Joining me for our call today are Chairman, President and CEO, Carlos Cardoso; Vice President and CFO, Frank Simpkins; Vice President, Finance and Corporate Controller, Marty Fusco. 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'd like to direct your attention to our forward-looking disclosure statement. The discussion we'll have today convinced comments that may constitute forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Such for 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. During the September quarter, global industry production indicated ongoing strength in certain areas. In general, the U.S. economy has performed better than expected, although business conditions in the Eurozone weakened to some extent. In other regions, China's government recently announced a new round of stimulus to support growth and India's economy is beginning to experience a rebound in manufacturing and construction activities. For Kennametal, September quarter results reflect somewhat mixed trends related to customer demand. Those growth was largely driven by the demands in industrial markets such as transportation and general engineering. However, sales related to the infrastructure markets were lower than the prior year. This was due to weakness in underground mining and road construction, partially offset by increased drilling in the oil and gas sector. Due to a more modest growth environment, we are taking some cost reduction actions for the current fiscal year. For example, those measures include hiring freezes, as well as limiting certain expenses. We continue to be committed to delivering double-digit operating margin and free operating cash flow that represents 80% to 90% conversion from net income for fiscal year 2015. Our Industrial segment, which typically has a strong correlation with the rate of industrial production, reported 5% organic sales growth in the September quarter, driven by an increase of 8% in our distribution channels. For the period, IHS estimated global IPI was 2.4%. Our Industrial segment again outperformed that index by more than 2x, and the ratio is expected to increase as demand further improves. When IHS adjusts its estimate to heightened average -- to the weighted average that specifically reflects Kennametal market and geographic mix, it indicated 2.2% growth from prior year. However, this projection is likely to be revised downward due to recent global developments such as the effects of lower oil prices and geopolitical conflicts. Kennametal's consolidated sales growth of 1% organically in September quarter reflects some of the recent activities, unfavorable impact to the infrastructure segments. We are pleased to have made significant progress to the integrating of the tungsten material business or TMB, remaining well ahead of schedule. For the past 12 months, we have been working hard on this integration to maximize the benefits of our combined business. The projected savings run rate in relation to the TMB purchase price equates to approximately 6.5x the 12-month trailing EBITDA. This valuation is well within our historical range of 6 to 8x. We continue to streamline our manufacturing footprint, which we have reduced by 4 facilities to date. We also made headwinds in our SAP conversions, with a plan to implement the next phase by 2014 December. As part of our ongoing restructuring activities, we expect to reduce the number of manufacturing facilities in North America and Europe. As an update, we now expect to record related pretax cash charges in the range of $55 million to $60 million during this time frame. Currently, we anticipate realizing permanent savings in the range of $50 million to $55 million annually. Those measures will position Kennametal for improved profitability. As always, we'll continue to evaluate our portfolio and footprint in order to optimize our business. Now I'd like to give you an overview of the trends we are seeing in our marketplace. In general engineering, we typically serve customers who are distributors, who are small to medium-job shops that manufacture industrial equipment, machinery and fabricated metal products. The trend towards capacity utilization continues to be favorable and should lead to higher demand for capital investment in machinery. In turn, machine to consumption typically sees an increase within 12 months. Accordingly, the most recent Gartner capital equipment survey, industries that are likely to benefit are job shops, automotive, pumps and valves, and aerospace. Overall, industrial production for machinery is forecasted to grow approximately 5% annually in calendar years 2014 and '15. An example of this trend was reflected at the recent International Manufacturing and Technology Show, or IMTS. This event was held in Chicago in September, where we showcased innovative new products for both Kennametal and WIDIA brands. Registration for the show was the largest 6-day show ever, with more than 114,000 participants from 112 countries. The attendance level represent an increase of 14% compared with the 2012 IMTS show. In addition, machine tool builders reported seeing a strong level of customer interest. We believe those factors are encouraging indicators of longer-term sentiment. Regarding the transportation market, key drivers of growth include the record age of the light vehicle fleet, which has been at 11 years in the U.S. for the past 12 months, as well as the continued low interest rates and falling fuel prices. For calendar year 2014, the forecast for global light vehicle production calls for approximately 3% growth from prior year, with the ramp-up to about 6% growth in the December quarter due to production for new model year. In aerospace, commercial aircraft production has expanded at strong rates during the past few years, and the trend is expected to continue, although at a slower pace in calendar year 2015. As reported by IHS, airlines are proceeding cautiously due to economic uncertainties, but they are purchasing new fuel-efficient planes that will provide cost savings in the longer term. In the military sector, capital spending is forecasted to remain weak over the next several years. In earthworks, there continues to be an oversupply of coal as stockpiles remain high, and customer demand has been weakened. Demand for electricity has not yet rebounded to the pre-2008 levels. The central Appalachian region gold spot prices are in the mid-50s range of dollars per short ton currently and dropping to new lows. This is putting further pressure on the expensive geology in this area. Consequently, mining operations have reported additional closures in Central Appalachia. In China, coal suppliers are becoming more concerned about limited funding for the industry and a recent announcement ban on coal imports. In the energy sector, gas-directed rig counts are showing a rebound as producers are responding to more favorable market pricing levels. After declining to near 300 units in July, the rig count increased to 340 units in September. Equally important, the oil and gas drilling industrial production index is indicating an improved trend. Wet gas production related to shale oil remains robust. New well-to-market investments are expected to reduce bottlenecks and maintain Henry Hub prices near $4 per MMBtu over the next 12 months. Also, IHS is forecasting higher gas-focused project in 2015, which should lead to a more capital-spending-related drilling, platforms, pumps, pipeline and processing facilities. Overall, the global environment has seen large movements in recent months in key exchange rates and also in prices of commodities, specialty oil. People's Bank of China just announced more stimulus to support economic growth. Additionally, the declining oil prices over the past month could drive increased consumer spending if it is sustained. IHS's September forecast reflects an improved U.S. outlook, offset by slight downward revisions to other regions, with monetary stimulus and lower oil prices providing support for worldwide growth. Our global team remains dedicated to serving our customers and our business is well positioned. We'll now turn the call 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 metrics. So, in general, the first quarter was in line with our expectations, despite a lower-than-forecasted top line. We continue to see strong organic growth in our Industrial business, led again by increased demand in the general engineering and transportation markets. However, we experienced slower-than-expected growth in the energy market, and the mining sector continues to struggle globally. Despite mixed market conditions, we delivered adjusted earnings per share of $0.56, which was on target. By comparison, last year's adjusted earnings per share was $0.49. As Carlos noted, another positive was the Tungsten Materials Business acquisition. It is running ahead of schedule for our integration plans and related restructuring actions. TMB contributed $0.07 per share in the quarter and we have accelerated our restructuring actions where possible. We also are implementing further restructuring actions to reduce costs and improve efficiencies. Total expected restructuring benefits now range from $50 million to $55 million and total charges are expected to range from $55 million to $60 million. Now I'll walk through the key items in the income statement. Sales for the quarter were $695 million and this compares with $620 million in the same quarter last year. Sales increased 12%, reflecting a 10% increase from TMB, 1% from organic growth and a 1% favorable impact from exchange. The Industrial segment sales of $378 million increased by 12% from the prior-year quarter, due to increases of 6% related to TMB, 5% organic growth and 1% increase due to favorable currency exchange. Sales increased by 9% in general engineering and 7% in transportation, but decreased slightly 1% in the aerospace and defense business. General engineering increased due to improvements in production and overall demand from machinery, while this transportation market increased due to improved -- improvements in the light-vehicle market. And on a regional basis, excluding the TMB business, Industrial sales increased 8% in Asia, 7% in the Americas and 1% in Europe. And I'll point out this was the fourth consecutive quarter of organic growth for the Industrial segment. Turning to the infrastructure segment. Sales there were $317 million in the September quarter and grew by 13% from the prior year, driven by 16% increase related to the TMB acquisition, partly offset by a 3% organic decline. Sales increased by 2% in energy and decreased 6% in earthworks. Energy sales improved modestly due to increased drilling activity in oil and gas in North America. However, earthworks sales decrease due to persistently weak underground coal-mining markets, globally, as well as lower highway construction activity. And on a regional basis there, excluding TMB, Infrastructure sales decreased 10% in Europe, 7% in Asia, partly offset by a 2% increase in the Americas. Turning to our operating performance, our gross margin -- gross profit margin was $31.4 million, which included restructuring and related items of $7 million. Excluding the impact of these items, our adjusted gross profit margin was $31.9 million, which was relatively similar to the prior year. Gross margin benefited from industrial organic sales growth, partly offset by lower sales and an unfavorable mix in our Infrastructure segment, as well as higher employment costs. The prior year gross profit margin benefited from higher production levels offset by a $6 million nonrecurring physical inventory charge. On OpEx. Our OpEx increased $14 million year-over-year. Excluding restructuring and related, our operating expense was $13 million higher year-over-year, primarily related to the TMB acquisition, and higher overall employment costs such as incentive compensation and merit. Operating expense as a percent of sales was 21.4%. Excluding restructuring and related charges, our operating expense as a percent of sales was 21.1% compared with 21.5% in the prior year. Typically, operating expense runs at a higher percentage of sales in the first half of our fiscal year, and we are taking certain cost reduction actions for the remainder of this fiscal year. This will align our cost structure with a more modest growth environment. As part of our ongoing cost discipline, we remain focused on keeping our operating expenses at 20% of the sales for all of fiscal '15. Operating income of $61 million compared with $59 million in the same quarter last year. If you exclude the restructuring-related charges, our adjusted operating income of $68 million reflects increases due to the TMB acquisition and industrial organic sales growth, partly offset by lower organic sales and an unfavorable mix in infrastructure and higher employment cost. Prior year operating income included the $6 million nonrecurring inventory charge and $1 million of acquisition expenses. Adjusted operating margin was 9.9% in the current year quarter compared with an adjusted operating margin of 9.7% in the prior year. Looking at the performance by segments. The industrial segment's operating income was $44 million compared with $40 million in the prior year period. Excluding restructuring and related items, adjusted operating income of $49 million benefited primarily from the TMB acquisition and organic growth in the current quarter, partly offset by higher employment cost. Industrial adjusted operating margin increased 130 basis points to 13.1% compared with 11.8% in the prior year. The infrastructure's operating income was $19 million compared to $22 million last year. Excluding restructuring and related charges, adjusted operating income was $21 million. Operating income and margin were impacted by lower organic sales, unfavorable mix and higher employment cost, partly offset by the TMB acquisition. Prior year operating income included the $6 million nonrecurring inventory charges. And adjusted operating margin was 6.7% compared with 7.7% in the prior year. Our interest expense was up $1 million year-over-year, in the September quarter, to $8 million. The increase was due to the higher year-over-year borrowings related to acquisitions. Our liquidity remains strong. We had $214 million outstanding on our $600 million revolver at September 30, 2014, and our nearest debt maturity is in April of 2018. The reported effective tax rate was 26.5% compared with 24.6% in the prior-year quarter. And that's primarily driven by losses in certain jurisdictions that do not provide a tax benefit, as well as the effect of certain provisions of the Internal Revenue code that expired after fiscal 2014, including the credit for RD&E activities and provisions concerning U.S. taxation of foreign earnings. And as highlighted in the press release, reported earnings per share were $0.49, which includes restructuring and related charges of $0.07. On an adjusted basis, this is $0.56; and TMB contributed $0.07 in the quarter. Year-to-date, cash flow from operating activities was $43 million compared with $44 million in the prior year, and net capital expenditures were $30 million compared with $25 million in the prior year. Free operating cash flow was $12 million compared with $20 million last year, and free operating cash flow was impacted by higher working capital related to the TMB acquisition. We remain diligent in our focus related to strong cash flow generation and are committed to our capital structure principles. Turning to the balance sheet. Our balance sheet's in good shape but strong. At September 30, 2014, we had $107 million in short-term debt; and total debt was approximately $1 billion. Our cash balance was $156 million, with the majority presently residing overseas. And our debt-to-capital ratio at September 30, 2014 was 34.2% compared with 35.1% at June 30, 2014. Well, I'll give you a quick update now on the Tungsten Materials Business. The integration team continues to successfully drive critical work streams to ensure a smooth transition. TMB was fully integrated into our operating structure on July 1, and full SAP implementation is on track for completion in the December quarter. We accelerated restructuring actions during the quarter and plan to be essentially finished by the end of fiscal 2016, as originally communicated. TMB contributed $0.07 in the quarter. Regarding our restructuring program, a majority of the initiatives relate to the TMB integration plan, as originally announced. However, the plan also includes actions related to our base business, where appropriate. In the September quarter, we incurred restructuring and related charges of $7 million pretax, or $0.07 per share, and pretax savings were approximately $5 million in the same period. As I mentioned, we accelerated our restructuring actions, which includes another facility reduction in our plan, and on a combined basis, these measures are estimated to deliver $5 million to $10 million in higher benefits. For this fiscal year, we currently expect to realize $20 million to $25 million of savings. And as a result, we now expect annual ongoing pretax permanent savings to be approximately $50 million to $55 million in fiscal '16. And we expect to recognize total pretax charges related to these initiatives of approximately $55 million to $60 million. And as a reminder, these restructuring initiatives 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 and procurement, and streamlining manufacturing and distribution. To date, we have eliminated 4 facilities out of our manufacturing footprint as a result of closures and divestitures. And going forward, we will continue to identify opportunities to further streamline our cost structure, which also includes an assessment of our business and our product portfolio. For fiscal 2015, we have updated our outlook due to weaker economic conditions for the remainder of fiscal 2015. The key drivers include softer customer demand in the Eurozone, which impacts our Industrial segment more significantly. Regarding Infrastructure, we have seen a deceleration in the energy market, with lower drilling activity in the oil and gas markets, which is affected by lower commodity outlook and the continued weak conditions in underground mining in both the U.S, as well as China. Accordingly, we now expect fiscal '15 sales growth in the range of 2% to 4% and organic sales growth ranging from 1% to 3%. Previously, we had projected total sales growth ranging 5% to 7% and organic sales growth of 3% to 5%. Approximately 40% of the estimated restructuring savings of $20 million to $25 million are expected to be realized in the first half, with the remainder in the second half of fiscal '15. Based on the revised forecast, we are reducing our EPS guidance for fiscal '15 to the range of $2.80 to $3 versus the previous expectations of $2.90 to $3.20. And on cash flow, we expect to generate from operating activities ranging from $280 million to $310 million of fiscal '15 versus the previous expectation of $290 million to $320 million. Revised cash flow from operations range is based on anticipated capital expenditures of $110 million to $120 million, and the company now expects to generate between $170 million and $190 million of free operating cash flow for the full fiscal year. This level of free operating cash represents approximately 80% to 90% of net income, working towards 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 with, in the near-term, market headwinds as needed. We are focused on protecting our profitability, as well as maximizing our cash flows, as well as returns. In addition, we remain focused on growth opportunities and the consistent execution of our strategies. At this time, I'll turn it back to Carlos for a few closing comments.

Thank you, Frank. Going forward, our team will continue execute strategies that will strengthen our business and create value. We will maintain our focus on profitable growth. Also, we will fully integrate the Tungsten Materials Business, streamline our cost structure and achieve planned savings. I truly believe that today, Kennametal is well-positioned to emerge as an even stronger company. Our team continues to be committed to serving our customers, and our business is increasingly capable of doing so in a way that makes Kennametal the supplier of choice. On a personal note, I would like to close by saying that it has been an honor to serve Kennametal for the last 12 years. Please note that I sincerely appreciate your continued support of Kennametal. Thank you. We will now take questions.

[Operator Instructions] We'll move on to the next question from Eli Lustgarten of Longbow Securities.

Can we talk a little bit about the revised guidance? I mean, you took the organic growth down. And can you give us some color of how you -- the reduction, how it splits out between Industrial and Infrastructure? And obviously the quarterly pattern that might -- is affected by these changes. Give us some idea of how you're looking at it now.

Eli, I'll start and then I'll let Frank address some of it. I want to point out that the decrease is mainly driven by the weakening of the European area, especially Germany. So I would say that we see some strength in the U.S., but we see a very relatively weakness to continue in Europe, and primarily in Germany.

Yes, and I think that's right, I mean, to plan. I think when you look at the industrial side, Eli, it's clearly it's Europe. We're seeing some signs of weakening demand, as Carlos pointed out, primarily Germany. Then as far as the Infrastructure, given some of the softness we're seeing with some of the commodity prices and feedback we're getting from our sales force as well as customers, we expect that to be a little bit softer than we had anticipated. So I would say -- of the downturn, I would probably say it's a little over half for Infrastructure and the remaining on the Industrial side and then coupled with a little bit of headwind on foreign exchange, with the currency moving the other way.

Yes. So, I mean, is it fair to say that at this point you expect almost negative infrastructure growth on an organic basis we saw in the first quarter, and then just somewhat lower on the industrial side?

Yes.

That's fair. Can we talk a little bit about profitability levels? I mean, industrial profitability levels. I mean, in my position -- I mean, you've cleaned up that business. It generates good profitability. You can't predict the volume, but profitability is strong. But obviously the profitability of Infrastructure remains somewhat disappointing. Can you give us some idea of what to expect as we look out for the rest of the year in both segments?

Well, let me start, Eli, by saying that one of the drivers for profitability is capacity. So the earthworks is in the 60-plus percent capacity, where Industrial is a higher level. So the whole company is about 70%. So that's one of the drivers for the difference in the business.

Yes. So, when we look at it, Eli, I think the additional restructuring we talked about, as well as we're going to continue to identify additional opportunities and also assess the portfolio. And from the Infrastructure standpoint, obviously, we're not pleased with the performance but this is no different than what we had to deal with, if you go back in time, with the Industrial business, where we had to take out a number of facilities. We had to integrate it. So if you go back to the early 2000s through the mid-2000s, it's exactly the situation we did there. So we're going to be looking at the cause very hard to get that business back to where it needs to be.

Yes, I guess that we're looking at low-teens profitability, low to mid-teens in the Industrial sector, depending on where volume comes out. Are we going to be lingering in the mid- to high-single digits all year for Infrastructure is probably the best way to ask the question at this point.

That's probably most likely.

And can you talk about -- you're spending $55 million to $60 million of restructuring. How is that going to be? How much this year? How much into next year or is it all this year? And how does it break out by quarter?

Yes, I think, Eli, we did $4.8 million, call it $5 million in the first quarter. It'll be maybe a little bit better in the second quarter and then you can do the 40/60 split. From a cost perspective, it'll probably 35 this year, 25 in benefits and the remaining piece in fiscal '16. So we feel fairly good about that. And as a rough approximation, the way it looks like it's coming in now, subject to any other future modifications, is about 75% to 80% of it is being driven by the TMB acquisition. So we're pleased at the performance of that acquisition.

And just one final question. You talk a little bit about pricing across the business and the distribution business is holding up well. So about pricing and distribution, at the same time.

We're not really seeing much. I think there's maybe a slight amount in Industrial, and Infrastructure's actually doing a decent job of holding the ground there. So I'd call it kind of -- when you put it all together, it's about neutral.

The next question will come from Samuel Eisner of Goldman Sachs.

So just looking at your inventories, inventory's up about 1% sequentially. I think it's up usually around 5%, 6%, 7%, something in that range. So can you talk a bit in relation to the comments that you just made about utilization rates? Can you talk a bit about how you were able to manage inventory this quarter? I believe last quarter you were cutting production, at least on infrastructure side. So how do you think about that in the quarter and then the expectations going forward?

Yes. I think we've been at this. It really started last year, I mean, after the December quarter saw development. I think we got the fill rates in pretty decent shape from an Industrial standpoint. So we're managing that, obviously, much tighter. I think we've done the necessary investments in the business from a capital perspective. And to your point earlier the indirect channels have been holding up pretty well. That's -- as Carlos pointed out, it's been 8% for the quarter. And that's consistent with the last 2 quarters. So we're doing a much better job on the fill rates. We put the AAA product out. So I think we have a much better cadence as it relates to the industrial side, as well as the procurement. The challenge continues to be a little bit more on the Infrastructure side, but I think we've got a better handle on the forecasting than we had in the past. So it's much better, some of the tools that we're looking at, as well as some of the inputs.

Just a follow-up on that. Are you producing at current demand levels in both Industrial and Infrastructure? Or are you still underproducing de-stocking, if you will, within the Infrastructure segment?

We're definitely underproducing in the Infrastructure.

Great. And then just thinking about incremental margins, obviously, you guys have talked about, I think, 35%, 40% over a cycle. It seems like this is going to be much weaker now. So just curious how you think about incrementals, either broken out by segment or for the total company in 2015?

Yes, I think the incremental margins will improve as we go out. I think we'll continue to see the related benefits from the restructuring programs. They'll continue to kick in. From an overall corporate perspective, we have a fairly good lockdown on additional OpEx, all the temporary stuff you would imagine. Which we've started, really, towards the end of the fourth quarter. And as we as both, as Carlos and I said, we're going to continue to identify further opportunities to drive even more bottom-line profits.

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

On TMB, I know it's integrated. Is it possible to quantify whether revenue grew, relative to last year, in the quarter?

Again, relative to last year, we did divest in the fourth quarter the Garryson business, which was like about a $20 million-type business. So if I had to put it back altogether, if you take that out, it was maybe down 1% or 2%, mainly, probably, on the energy side.

Okay. And then if you covered this, I apologize. What drove the other income improvement relative to last year?

FX.

Okay. And then a couple of questions within the updated guidance. You've mentioned weaker oil and gas drilling activity. Are you seeing that in your orders or is that more perspective at this point?

No, we started to see a little bit here in the current quarter, and that's -- and we feel it's a little bit more pervasive in the second half. But given all the inputs we have, we think it was the right thing to do to make sure that we're aligned with customer inputs.

What we have heard, Andy, is that they're going to continue to produce oil and gas, but they're going to take it from the current wells versus doing more drilling. And what drives it the most is the drilling portion of it.

Okay. Okay, so just basically utilize the existing framework capacity?

Yes.

On Europe, did you see the deceleration in Q1? And if so, was that pretty close to the end of September and did that continue through October now that we're close to the end?

No, I think we saw it towards the end of Q4, a little bit, primarily in Germany. And that continued through the quarter, so nothing significant month-to-month, but trending in the wrong direction. So for us, as you know, Germany's a very big component of our European sales. And given the transportation and a couple of other end markets we serve there very well, we felt it was prudent to factor that in.

We actually have been doing better than average on Europe because, again, we kept on calling out that it was because our presence was in Germany. So as Germany economic environment got more challenged, obviously, they're going to affect us more now.

Okay. And then if I could touch on your upcoming transition, Carlos. Is there any timing update from the board that you can give us? And then post-December, is there a transition period where you would assist whoever the incoming person would be after December?

So the board is diligently working and everything is on schedule and per our press release. And all I can tell you about the transition is that the board will do what makes sense and what's in the best interest for the company and its stakeholders.

The next question will come from Julian Mitchell of Credit Suisse. Jonathan Shaffer - Crédit Suisse AG, Research Division: It's Jon Shaffer on for Julian. I was wondering if you could just maybe give a little additional color around what's going on in Asia in the Infrastructure segment.

Yes. For us, from Asia, the big issue there is China and Australia, from a mining perspective. While we're doing okay on some of the energy side over there, given everything that's going on with the underground coal mining, particularly in China, it's causing a lot of pressure and that's been consistent over the past couple of quarters. Now they did but some tariffs in there. So longer -- medium term that could be a positive. It may hurt what's going on in Australia, but it may also increase some coal production within China. Given our position there, that would be a little bit of a positive. From an industrial perspective, on that side, just to add a comment on there. I would say, overall, that's doing a little bit better, particularly if I go through October. They're continued to maintain some pretty decent numbers, both from a China perspective, as well as India. So we've got kind of 2 different stories going on, where a little bit better story on the Industrial in China, as well as India. And then when you come into Infrastructure, a little bit softer, given some of the energy and related stuff for coal in China and, to a lesser extent, Australia. Jonathan Shaffer - Crédit Suisse AG, Research Division: And then just on visibility in those businesses. I mean, is there a chance that they can kind of turn around rapidly or do you see this kind of being a prolonged and unforeseeable circumstance?

Well, I mean, we -- generally speaking, especially in Industrial, we ship 80% of the orders within the same month that we get them. So can it turn around quickly? Yes.

Infrastructure will be longer.

Infrastructure will be longer, but in the Industrial, yes.

The next question will come from Ross Gillardi of Bank of America.

Yes, I just had a few questions. So road construction was cited as a area of weakness again. Given the overall broader recovery we're seeing in nonresidential construction, do you see that turning around this year or is that sort of tied to the uncertainty around the highway bill and some of those things?

Yes, Ross, I think there's obviously a time with that. And as we go out, we're going into the slower quarter. Hopefully the snow holds off for a little bit. So any Northern Hemisphere states before they shut down. But for us, it was little bit soft. We assumed it was going to have a little bit of growth, not much. It was probably down 1.5% to 2% in the quarter. And this is a reminder, this is all the road resurfacing primarily. So ripping up the asphalt with the tools. So then it gets back from a funding perspective, from the states. And then now they're trading off or they're buying more rock salt for the winter. So it was a little bit more of a challenge than we had anticipated.

Yes, our construction doesn't get affected by housing, the housing market, directly. It's more about road rehabilitation.

Okay. And then just the weakness in underground mining in general. I mean, obviously the end market's very weak. But are you also some seeing some in-sourcing from customers at all?

No. No, I mean the stuff that we do, I mean, is our product. So it's our own product. So it's directly related to the market.

Okay. And then with respect to oil and gas, I mean, you talked about you're seeing a little bit of softness in drilling activity. Can you also comment on Stellite a bit and what the trends are there?

Well, the industrial gas turbine is still -- business is still weak. So we haven't seen, really, a recovery in that area. It's following the same, not that much of a change.

And our final question will come from Walter Liptak of Global Hunter.

I wanted to ask -- and maybe I missed this, but -- and you don't break it out, but what was Europe's organic volumes during the quarter?

We don't break out the -- we have it by -- in total, by segments, which is in the press release. But it was a little bit stronger on the industrial side. And I think, in the script, they were down, I think, 10% in Infrastructure. So the product works. Now Infrastructure's not a big player for us over there, but we have positive volumes but at a much lower rate than we had anticipated.

Okay. So it sounds like Europe is the problem, Europe is slowing, but the trajectory doesn't sound like it's accelerating at this point.

That's correct. Yes, that's correct.

Yes.

Okay. When you think about the second quarter, though, is second quarter -- because of just the deceleration, is this going to be a lower organic quarter than the first and would that also mean that EPS would be lower sequentially?

Well, I mean, again, the quarters 1 and 2, typically they're very similar. I wouldn't expect much more difference from an organic growth in the second quarter. We're taking more cost out. I think the quarter last year we had some challenges with the gross margin that we have since fixed, we have additional restructuring that we've implemented. Those plans continue to run well. So I think they're the headwinds -- or the tailwinds for us going forward and just a little bit softer in the second quarter. When we look at, right now, how October's trending and it's pretty much right in line with our forecast.

Okay, great. And you mentioned FX, I think, is neutral during the quarter. Is that right?

In the first quarter, it was plus 1. But as you -- last year I think we averaged -- maybe just take the euro, and that's the biggest component for us. This year, we average $1.34. Last year, I think it was $1.32. But as you go forward, if you look at the spot rate now, I don't know if it's $1.25 and change this morning, the $1.26 versus the $1.34 and depending, which direction, the stronger dollar will have a little bit of an impact on our European results and potentially our tax rate.

Okay. So you're using the current euro as your FX rate for the full year?

Yes, and we obviously try to -- we've hedged some of that but some of the translation is going to be impacted.

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

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

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