Jan 27, 2011
Operator
Good morning. My name is Regina and I will be your conference Operator today.
At this time, I would like to welcome everyone to Kennametal’s Second Quarter Fiscal Year 2011 Earnings Call. All lines have been placed on mute to prevent any background noise.
After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.
I would now like to turn the call over to Quynh McGuire, Director of Investor Relations. Please go ahead.
Quynh McGuire
Thank you, Regina. Welcome everyone.
Thank you for joining us to review Kennametal’s second quarter fiscal 2011 results. We issued our quarterly earnings press release earlier today.
You may access this announcement via our website at www.kennametal.com. Consistent with our practice in prior quarterly conference calls, we’ve invited various members of the media to listen to this call.
It is also being broadcast live on our website, and a recording of this call will be available on our site for replay through February 28, 2010. I am Quynh McGuire, Director of Investor Relations for Kennametal.
Joining me for our call today are Chairman, President, and Chief Executive Officer, Carlos Cardoso; Vice President and Chief Financial Officer, Frank Simpkins, and Vice President, Finance and Corporate Controller, Marty Bailey. Carlos and Frank will provide further explanation on the quarter’s financial performance.
After their remarks, we’ll be happy to answer your questions. At this time, I would like to direct your attention to our forward-looking disclosure statement.
The discussion we’ll have today contains comments that may constitute forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of assumptions, risks, and uncertainties that could cause the company’s actual results, performance, or achievements to differ materially from those expressed in or implied by such forward-looking statements.
Additional information regarding these risk factors and uncertainties is detailed in Kennametal’s filings with the Securities and Exchange Commission. In addition, Kennametal 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 and accordance with SEC Regulation G. This 8-K represents 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 will now turn the call over to Carlos.
Carlos Cardoso
Thank you, Quynh. Good morning everyone.
Thank you for joining us today. I am pleased to report that the second quarter of fiscal 2011 was yet another period of strong performance for Kennametal.
We continued to deliver top line growth and realized strong operating leverage. We remained focused on executing our strategies effectively and improving our operating efficiencies.
The considered efforts of our global team resulted in our organic sales growth of 31% compared with prior year quarter. Our adjusted earnings per share were $0.57 compared to $0.14 in the prior year period.
The year-over-year improvement in EPS was driven by increased sales volume and higher incremental margin. It’s worth noting that we realized 11.8% adjusted operating margin for this past quarter.
This is another historical high for any first or second quarter. In fact the December quarter represents the third consecutive quarter that Kennametal has achieved record levels of adjusted operating margin performance.
In addition, our adjusted return on invested capital was 10.9% as of December 31, 2010. Overall, the December quarter represents an all-time-record performance for Kennametal.
Our second quarter results benefited from a strengthening global economy which reflected growth in many of our geographies and end market serves. Industrial production continued to increase and Kennametal experienced higher customer demands.
Emerging markets such as, China, India and Brazil remained strong. Our geographic profile continues to be more balanced.
For the December quarter we generated 56% of sales outside of North America with 28% coming from the rest of the world regions. And indicator of ongoing favorable customer sentiments was reflected as (inaudible) which I attended last month and industry page show held in Japan, representing Asian manufacturers.
At this event Kennametal generated two to three times the number of leads than that of the prior trade show. This favorable trend is consistent with what we experienced in September at IMPS or International Manufacturing Technology Show.
Also certain end markets such as general engineering and transportation again showed the most sprints. Current forecast shows that global manufacturing activity is expected to continue to grow.
In general engineering, production activities continued to grow and represents ongoing rebound in the manufacturing sector. As the economic recovery continues increased demand to replace older equipment and a growing need to upgrade productive capacity and increase resource suppliers will produce the next buying cycle.
The transportation production volumes for North America remained strong. This trend is expected to persist in 2011, and Kennametal will continue to benefit from increased sold rate.
In Europe, the majority of the demand is driven by exports. The outwork is for slight growth in light vehicles.
However, we expect and expansion in heavy truck market. We are continued to see growth in the mass transit market with new opportunities from all regions, as aided new, railroad infrastructure is built or expanded maintenance.
In aerospace, the commercial market is experiencing a resurgence of waters, this is an encouraging indicator that industry is rebounding. This is expected to be a growth driver for Kennametal in the intermediates for longer-term when key program increase production.
In energy, U.S and Canadian rig counts were up year-over-year by 46% and 16% respectably. International rig count was 10% higher than prior year.
Natural gas and storage was 9% above the five-year average, which is more favorable than a year ago. In earthworks, recent flooding in Australia is restricting coking coal suppliers leading to higher prices.
As a result, this creates an opportunity for U.S coking coal producers to supply demands from overseas. According to global insights, major commodity prices are forecasted to increase another 5% to 10% from the current levels in 2011.
High commodity prices support further investment in mining assets and mine capacity expansion, which increases the addressable market for Kennametal products and services. During the December quarter, we continue to focus successfully on the value selling approach of our product portfolio.
Our products continue to bring high value to our customers and represent a critical part of their manufacturing processes. Although, raw material costs have increased, specifically tungsten, we believe those costs will ultimately recovered as we continue to informant price increases.
In general, we increased prices October 1, for North America and January 1 for Europe. As well as some income price increases in selected markets in November and December timeframe Through those price actions we planned to recover 100% of the raw material cost increases in the second half of our fiscal year.
We are on track for faster raw material cost recovery than in the past and continued to be discipline and maintaining margin performance. In addition, we continued to implement the remainder of our restructure initiatives, which are lining down, production activities FCs has full plans later for closure and the process is expected to be finished by March 2011 quarter.
When restructuring actions are completed at the end of the fiscal year, we’ll have reduced our manufacturing footprint by a total of 20 facilities including divestitures. As a result of the restructuring programs, we are on track to realize approximately $165 million in permanent saving on an annual basis.
At the same time, we have retained much of operating capacity by using (inaudible) production through existing plans As we announced previously, Kennametal express former enterprise to be a more customer centric organization. This is part of building a breakaway company that is competitive and profitable throughout the economic cycle.
With the recent system upgrade to SAP 6.0, effective on January 3, 2011, we marked the final milestone of this process. I would like to congratulate our entire team across the globe on this monumental achievement.
Of course, this is not the end of our transformation, but the beginning of a new chapter. And we’ll continue to focus on continuous improvements.
Our enterprise approach benefits are business by streamlining our cost structure and retaining our permanent savings. At the same time, it provides opportunities for additional top line growth by improving our customers’ experience with the company.
In summary, Kennametal has successfully incremented our near-term strategy to resize the company. And significantly lower our fixed costs.
This enabled us to be profitable at below $2 billion in sales. Our business, however, is scalable to $3 billion without significant additional capital investment.
Kennametal has achieved higher incremental margins during the current cycle due to our actions to aggressively lower our cost fraction. We remain committed to our goal to realize 40% incremental margins over the cycle.
We are disciplined in our capital allocation strategies. We continue to be prudent in evaluating uses of cash, which included reinvestment in the business, acquisitions, share buyback and dividends.
As always, we remain committed to further balancing our mix in end-market service, geographic profile, and portfolio of business. We will continue to grow our presence in fast growing channels with our good year brands where appropriate.
We’ll continue to introduce new products at the market leading phase. We have strengthened our foundation position Kennametal to benefit during an economic upturn and our place company on the past to become a breakaway company.
I’ll now turn the call over to Frank, so he can discuss our financial results for the quarter in greater details. Frank?
Frank Simpkins
Hey. Thank you, Carlos.
I’ll provide some comments on our performance for the December quarter and then, I’ll move on to our updated outlook for the remainder of our fiscal 2011 period. As usual some of my comments exclude special items so please refer to the reconciliation schedules provided in our earnings release and related Form 8-K.
Let me start off by summarizing the December quarter in kind of tea key takeaways as we saw them. Our first global business environment continues to improve as Carlos pointed out.
We’re beginning to leverage our operational structure. We again demonstrated strong operating results, free operating cash flow.
And we further strengthen our financial position. We have some headwinds around raw materials but we have been proactively addressing them.
And we again increased our outlook due our December quarter performance, improved visibility in a global recovery. Our adjusted operating income that with the December quarter records, coming in at 11.8%.
In addition, as Carlos mentioned previously, we performed a major upgrade of our ERP system SAP this quarter, with the cut-off date of January 3rd. And this was a significant undertaking by the entire organization.
And I would also like to thank all our employees for their time and efforts spent on this implementation. So now, let me walk you through the key items in the income statements.
First sales. Our sales for the quarter increased 28% to $566 million.
This compares to $443 million in the December quarter last year. Increase in sales was driven by 31% organic growth, partly offset by 2% unfavorable impact on foreign currency effects and 1% unfavorable impact on fewer business days.
This represented the fourth consecutive quarter of year-over-year organic sales growth. We also continued to make progress with a better balancing of our business as Carlos touched on.
Again at the end of the December quarter, 56% of our sales were generated outside of North America and both rest of the world and Western Europe grew to 28% of sales. This is the highest percentage of sales we have reached in the rest of the world to impart a stronger growth and our focus in these geographies primarily China and India.
And we also had sales from new products introduced in the last five years remain at the 40% threshold. Turning to the business segment sales performance, industrial had another good quarter.
The industrial segment sales increased 33% from the prior year quarter. This was driven by organic growth of 37% partly offset by unfavorable foreign currency effect of 2% and the 2% on favorable impact due to fewer businesses.
On an organic basis sales increased in most served market sectors, led by growth in general engineering and transportation with the increases of 49% and 36% respectively. And regionally, sales increased by approximately 48% in Asia, 34% in Europe and 31% in the Americas.
The transportation and general engineering market sales increased sequentially from the September quarter while only the aerospace in that sense declined slightly. Our Infrastructure segment sales increased 19% from the prior year quarter, all driven by organic growth.
The organic increase was driven by 22% of higher sales of the energy and related products as well as 17% increase in demand for our earthwork products. Regionally, organic sales increased 24% percent in Asia, 21% in the Americas and 12% Europe.
The December quarter is typically the slowest period of our infrastructure segments that’s due impart of seasonality of our mining and road construction businesses. Now, I will recap of our operating performance.
Our reported gross profit margin came in at 35.4%, significantly above the 31.6% reported in the prior year period. Improvement in our gross profit margin was the direct result of the higher sales and related increased capacity utilization, higher restructuring benefits and ongoing cost discipline.
Again the business continued to lever well in the quarter. Raw material costs, particularly tungsten did have an unfavorable impact on our margin and leverage performance during the quarter.
And this was due to a faster than anticipated increase in input cost. However, as Carlos pointed out, we are managing this challenge affectively the price increases to offset these costs.
At the second half our fiscal year we expect to recover 100% of the anticipated raw material cost increases but the impact will still have a dilutive impact on margins. In addition and as a reminder, the prior year quarter did benefit from temporary cost measures such as salary cuts and suspension of the 401(k) match.
And we have previously advised that the total impact from salary reductions was approximately 7 million per quarter and the 401(k) match impact was in addition of 2 million for a total of $9 million. Our operating expenses increased year-over-year by 12% or $12 million to $132 million.
Much below the organic sales growth of 31. So we continue to watch that relationship, the primary drivers of the increase in the operating expenses were employment costs due to the reinstatement of salaries in 401(k) match and merit increases, which occurred October 1 of this fiscal year.
And also incentive compensation due to better operating performance. That was partly offset by favorable foreign currency impacts.
And our operating expense as a percent of sales was 23.3% for the quarter, down 330 basis points from the prior year percentage of 26.6%. Our operating income increased to 62 million compared to on 50 million in the prior year.
Absent restructuring and related charges in both periods our operating income was $67 million compared with 20 million in the prior year period. We levered well, again this quarter with the strong incremental margin of 38.4%.
Our adjusted operating margin reached 11.8% despite increased incentive compensation, employee’s salary merit increases and the restoration of salary and other employment related costs that had been temporarily reduced in the prior year. Looking at the business segment’s operating performance.
The industrial segment operating income of 42 million compared with 6 million for the same period last year. Absent charges in both periods, industrial’s operating income was 46 million compared to 9 million in the prior year quarter.
The primary drivers of the increase in operating income were the higher sales volumes, improved capacity utilization, a better product mixed in incremental restructuring benefits that was offset by the respiration of temporary cost reductions in higher raw material cost. Industrials operating margin increased substantially from the prior year quarter to 12.4% from 3.1% in the prior year.
Infrastructure segment operating income was 22 million this compares with 18 million in the same quarter of the prior year. And then absent restructuring and related charges on both periods, infrastructures operating income was $23 million in the current quarter compared with 20 million in the prior year period.
Operating income improved due to improved sales, increased capacity utilization and incremental restructuring benefits also offset in part by higher raw material costs and the respiration of temporary reductions. Infrastructures operating margin remains relative flat at 11.8% compared to the prior year quarter.
Turning to our tax rate, our effective tax rate for the quarter was 21% and this was slightly better than anticipated and the driver there was due to the tax impact of the RD&E credit expansion of the tax with the effect of 2010 and this included a desecrate benefit for us of $1 million in the quarter. Also driving it was a higher mix of income in lower tax jurisdictions and a cumulative catch-up adjustment due to the change in the annualized tax rate, which now we see around 24% for the full fiscal year.
Regarding our overall bottom line performance, our second quarter fiscal 2011 diluted earnings per share was $0.52, compared to the prior year diluted earnings per share of $0.07 and adjusted EPS, $0.57 compared to a prior year adjusted earnings of just $0.14. Turning to the balance sheet quick.
Our cash position increased nicely to 147 million and we remained focused in diligent on receivable collection, we further reduced our DSOs by two days during the quarter to 54 and by 11 days versus the prior year quarter. And our inventory turns improved to 3.5 and that’s up the half of turn in last year at the same time.
We did increase our inventory due to the addition of some strategic raw materials and finished with the inventory to support sales growth and the impropriation of the system cutover which occurred on January 3rd. On the CapEx front, our year-to-date capital expenditures are 21 million, that’s slightly higher than what we spent last year of 19 million in the prior year.
And capital expenditures net of disposals represented about 2% of sales. And at December 31, our total debt was 360 million down $21 million from June 30, our debt-to-capital ratio at December 31 was 17.6% compared to 20.2 at June 30, 2010.
Furthermore, our U.S. defined pension plan remains over 100% funded and as Carlos mentioned our adjusted return on invested capital grew to 10.9%, up 2010 basis point from 8.8% from the September quarter.
Now I’ll just touch on a couple of factors in our current outlook. As Carlos touched on, we expect economic conditions, including global industrial production to continue to improve.
And as result of the strong first half performance, coupled with better visibility we expect our annual organic sales growth to be around 21% to 24%, which is better than our previous times by two to 300 basis points. And this is in line with our goal of growing at least two times the rate of the global industrial production.
Currency is still going to remain to drag on a year-over-year basis and we expect the euro to average in the low 130 range versus $1.40 that we fully realized last fiscal year. We still anticipate sales volumes and related capacity utilization as well as further incremental restructuring benefits, we yield strong incremental margins to more than offset the year-over-year cost increases for the salary, restoration, merit, and pension, and incentive compensation.
Just some last factors as we touched briefly on raw material costs have increased faster than anticipated. However, we have initiated price increases to realize most of these by the end of the fiscal year.
Our restructuring benefits remain in line to reach the 165 million in annual savings. And finally, seasonality patterns appear to be in line with our historical ranges and we still expect approximately 40% of our earnings in the first half and 60% in the remainder of the second half of our fiscal year.
So, factoring these assumptions, we expect our earnings per share for fiscal 2011 to be in the range of $2.50 to $2.65 per share excluding charges related to the previous announced restructuring programs. Our fiscal 2011 financial performance will reach levels of profitability never before achieved by our company, the eclipse in our record setting year in 2008.
And I would add that we achieved in the records on much lower scales than in fiscal 2008. We also anticipated cash flow from operating activities to be approximately 260 million to 280 million for the fiscal year.
And based on anticipated capital expenditures of 180 million, we expect to generate between 180 million to 200 million of free operating cash flow for the full fiscal year. Now, I’ll turn it back to Carlos for a few closing comments.
Carlos Cardoso
Thank you, Frank. Going forward, Kennametal is now even better positioned to benefit from a stronger sales environment and realized substantial margin expansion.
We have weathered the challenging environment of global economic downturn and emerged as a much stronger company. Our new enterprise structure offers additional growth opportunities.
We are committed to continue our tasks to becoming a breakaway company, when that can be profitable throughout the economic cycle. We continued to implement strategies their focus on the customers in their respective end markets.
And grow our top line by serving demand, getting market share and developing new products. Based on ongoing improvements in the economic environment and our ability to maintain strong operating leverage, we have again increased our guidance for fiscal year 2011.
Our updated sales guidance of 21% to 24% for the year reflects that we are outperforming the forecasted industrial production rate at a very strong pace. Our revised EPS guidance in the range of $2.50 to $2.65 per share, compared with the previous range of $2.25 to $2.45 per share represents an increase of about 10% at the midpoint.
This increased guidance reflects record operating margin performance, even on sales volumes that has not yet reached to the prior sequel peak level. During the current cycle, we expect to achieve higher incremental margins than in the past periods.
We strongly believe that we can realize 40% incremental margins over the cycle. Our long-term strategies remained consistent.
We continue to balance our served end-markets, business mix, and geographic presence. We continue on our path to premier which is defined by customer needs and driven by the power of our organization.
The Kennametal global team is highly focused on achieving our next milestone targets of 15% EBIT margin and 115% return on invested capital by no later than fiscal year 2013. We’ve successfully managed through an unprecedented market crisis and a repositioned company for improved margins and returns.
We refocused our strategic direction with a new operating structure and enterprise approach. We aggressively manage our portfolio to increase profitability and returns.
We strengthened our financial position and enhanced our liquidity. We expect to continue generating strong cash flows.
We will leverage our strong financial position to meet our next milestone targets and deliver continue shareholder value. Thank you for your time and your interest in Kennametal.
We’ll now take your questions. Thank you.
Operator
(Operator Instructions) Your first question comes from the line of Eli Lustgarten with Longbow
Eli Lustgarten
Good morning, everyone.
Unidentified Company Representative
Hi, Eli.
Frank Simpkins
Hi, Eli. How are you doing?
Eli Lustgarten
Not too bad. First question just on the corporate charges where $2 million or so in the segment data is that anything going on there and what’s the run rate for the second half of the year?
Frank Simpkins
Yeah. It’s probably a little lower, obviously, with focusing on costs and the cutover for the system allocation was probably a little bit lighter.
So Eli, it is probably going to be in between that number what we have in the first quarter going forward.
Eli Lustgarten
Okay. But this did have additional need for that is nothing?
Frank Simpkins
No. There’s nothing unusual when (inaudible).
Eli Lustgarten
Yeah. And when we look at the rest of the year, I mean, can you talk a little bit about what kind of profitability in margin do you expect generally at this point, when you go out, the margins in the first half are a little bit sloppy because of raw material costs and the question is that are we going to get back to mid-teen margins across the board by the second of the year?
Frank Simpkins
Yeah. I will start off.
I would not call them sloppy. I think they’re actually pretty good through all-time records for the company.
Unidentified Participant
You’re up to a new – you are now up to the gold standard, come on.
Carlos Cardoso
Well. Yeah, yeah, I think we’re going to get back to that, infrastructure we had a little from our seasonality there.
But I think it is the one issue we know, we know what it is on the raw material side. We’ve been proactively addressing the raw material costs vis-à-vis the price increases.
And that was the one that probably accelerated faster than we anticipated and we thought it was going to go up, but it really took a jump in November, December, we acted accordingly. So, we think we’re going to get back to our numbers and that’s probably took up the guidance and we’ll the get the benefits of our leverage in the second half just through the type of volumes that we typically benefit from – with the capacity in our second half.
And the restructuring benefits continued to remain on track and hopefully we’ll deliver the better on that front as well.
Unidentified Participant
So, at this point, you’re expecting easy margin comparisons versus last year, I suspect?
Carlos Cardoso
Well, again, the fourth quarter from an EBIT perspective was an all-time record for the company at 14.1% and I’ll remind you the operating income leverage last year, we did over 80% in the third quarter as well as over 50 in the fourth quarter. So the comps were tough, but we think we’re driving towards right profitability metrics.
Unidentified Participant
Okay.
Frank Simpkins
Yeah, I’ll add, I mean again, 11.8% EBIT margin. This company historically has never gone over 12% and 18.8 in the first half in particular is exceptional.
Unidentified Participant
All right, Frank. Thank you.
Operator
Our next question comes from the line of Chase Baker with Credit Suisse.
Chase Baker
Hi, good morning.
Frank Simpkins
Hey Chase. Hi, good morning.
Chase Baker
Question on the raw material cost, is there a way to handicap on the dollar basis the impact in the most recent quarter. And I’m just trying to extrapolate what incremental margins could have potentially been, if you didn’t have this short term hiccup?
Frank Simpkins
Yeah, for competitive purposes, we typically try not to provide that type of information, but Chase we would have been, we did 38.4%. But I’ll tell you this, we would have been over 40% in the quarter not have the anticipated raw material cost increases.
And just try to give you a flavor and I think I talked about this. Input cost, when you take into consideration, still remain around in the 30% of our cost of goods sold, that will give you a little of a flavor there.
So, it’s an impact, but it’s not a – not going to see be significant driver going forward.
Chase Baker
Okay, great. Thanks.
And then Carlos, I think you’ve mentioned earlier in your prepared remarks that this cycle you still like, you’re on pace for a faster recovery of these raw material cost. And is that just you’re being more proactive with pricing or what’s difference this cycle versus the last?
Carlos Cardoso
I think, that one is we have been more proactive, I mean we’ve been anticipating the raw materials to go up. And so number one.
Number two is, we are, because of the environment of growth and so forth, I think is a little bit easier for us to get price. And third, as we spoke, we do have a new system that has very good data that really help us do the strategic pricing that would not affect our top line.
Chase Baker
Okay. Great.
Thanks very much.
Carlos Cardoso
Through SAP system.
Chase Baker
Okay, thank you.
Operator
Our next question comes from the line of Ann Duignan with JPMorgan.
Ann Duignan
Hi. Good morning, guys.
Carlos Cardoso
Hi Ann. How are you?
Ann Duignan
Doing good, thanks. Just on the revenue outlook, could you just talk a little bit Carlos about, during the course of the quarter where have you seen the most incremental upside, by region and by market?
Carlos Cardoso
Yeah, by region leading – the leading was the rest of the world. So, think about Asia, China, India, and Brazil.
And by market was general engineering and transportation.
Ann Duignan
A bit more color on the general engineering in the transportation if you could please, what is included in general engineering?
Carlos Cardoso
Yeah, in our general engineering, I mean we have a lot of the small shops, with is things like valves and pumps, just general like medical. And, so we lump a little bit more into the general engineering because it’s hard to, some of the middle small job shops actually produce products for a number of industries from one week or one month to another.
Ann Duignan
Okay, so following kind of general industrial production, that’s the way to think about this?
Carlos Cardoso
Yeah. But I want to make a point that, we are considerably outpacing the IPI index, which we’re just not following the industrial growth, but the new organization with the focus on the customer and the new products that we worked on during the economic downturn are actually paying off for us in the top line.
Ann Duignan
Yeah, I can appreciate that. And then in that light, I am thinking about 165 million in net cost out.
At what points do you think that some of your CapEx spend is going to have to for a capacity expansion, I mean it looks like end markets coming back faster than you might have expected, should we be really thinking about that 165 million as a gross savings not really a net, because you are seeing incremental employment costs and 401(k) costs, and compensation costs come back in?
Carlos Cardoso
Yeah. We always talked about two cost buckets, the variable cost, which would be a worth $40 million, which – that’s where we talk about costs coming back the employment costs.
So, there was furloughs temporary at salary reduction, payments to 401(k) that we didn’t make and so forth. So that’s what you’re seeing coming back.
The 165 is comer, I mean we’ve changed the structure, twenty plants are gone, I mean the cost of those plants will never come back. Yeah we moved the capacity into existing plant.
So as we get as a top line back, that’s where we get a lot of leverage. And we always said that because we did move the capacity of those plants that we closed into existing plants.
We have the capacity to reach $3 billion in sales without significant investments in capital. So we plan to continue our capital acquisition at the depreciation, more or less depreciation level.
Frank Simpkins
Yeah. And the only thing I would add to that, in parts up to that is the SKU reduction that we’ve gone through over the cycle were taken out particularly in the industrial side, almost three to 400,000 SKU combinations, plus with the new product focus, we continue to marry those up and rationalize on top of the line.
And then I think with the branding both with the Widia umbrella as well as Kennametal to have that better structure and focus. We think we’re set for capacity for a while.
So we shouldn’t have to bring back a lot of cost.
Ann Duignan
And I appreciate all of that. Carlos, then just finally my question on when could you achieve the $3 billion just looking at how quickly some of these end markets have recovered?
Carlos Cardoso
All our assumptions, we gave our top level assumptions over ‘15 by ‘15 by 2013. Our assumptions are that we would be at close to that level by 2013.
However, as you said, we have – our top line has grown at a faster rate, and but we haven’t really looked at, what we need to do, what’s – is that going to be different going forward, I mean we just implemented this SAP 6.0 and – system. And so we were very focused on finalizing or all our restructuring and all that.
And I think in the next couple of months we’re going to be looking at the economic environment and what does that mean to our previous anticipated projections.
Ann Duignan
Okay. So you all re going to take a re-look at that in the next couple of months, is that what I take away from it?
Carlos Cardoso
Yeah. I mean, we typically go through our annual plan during the end of the third quarter, beginning of the fourth quarter.
So I mean, I think that’s probably where we’re going to have a really good view of what’s – what does the environment look like and what is the (inaudible) for Kennametal?
Ann Duignan
Okay. Thanks.
I appreciate it. And I know there is a lot going on and good luck with the SAP.
Carlos Cardoso
We are done.
Ann Duignan
You are done. Good.
Carlos Cardoso
It’s done. 100% done, so –
Ann Duignan
Okay. I empathize.
Operator
Our next question comes from the line of Adam Uhlman with Cleveland Research.
Adam Uhlman
Hi, guys. Good morning.
Carlos Cardoso
Hey, Adam. How are you?
Adam Uhlman
Well, thanks. Just a couple of clarifications if I could, first of all within the new revenue growth outlook for the year, can you quantify how much of that is expected to be price realization?
Frank Simpkins
It’s probably a couple of points in there, Adam.
Adam Uhlman
Okay. And then, you had mentioned that we are still going to see some margin in delusion as the price is going to completely offset the higher raw material costs, could you like quantify how much margin delusion baked into the numbers.
Frank Simpkins
Again, I still think as Carlos pointed, we’re committed to get back to the 40 and for competitive purposes we don’t want it. But obviously, it’s a – it’s more than a couple of hundred basis points in any period.
But anything else, my point is just on the delusion affect, if you get dollar for dollar it just affects the overall percentage there. So from a cost perspective and then the (inaudible) anticipated.
So, raw materials continue to go up or down, we’ll adjust accordingly. But it’s tough to really give you a specific number at this time.
Adam Uhlman
Got it. Okay.
Just a last question on working capital to date, second half of the year, inventory look to be in really great shape relative to where sales are coming in and even with this material cost pressure, can you talk about how do you expect that to play out in the back half of the year and tighten with that, good companies are growing cash balance maybe you can talk about the acquisition environment or other uses of cash?
Unidentified Company Representative
We think we were pretty good from our balancing of the inventory, the right stuff that we need to have in the second half. I don’t think we are planning to grow inventory beyond this level.
I think with the system with better visibility. I think it will get better as we go through with the new SAP systems, kind of like some of things we are seeing here.
So expect that better velocity as we exit this fiscal year into next year. But I can’t see inventory going significantly up or down for the rest of the fiscal year.
The M&A environment is getting a little better. And we are and have been active in looking at properties and working some relationships in those properties, but M&A is a really difficult thing to forecast.
So I think that as we see from our balance sheet – I think we have a strong balance sheet that allows us to be flexible and we’re going to continue to look at it.
Adam Uhlman
Great. Thanks.
Operator
Our next question comes from the line of Henry Kirn with UBS.
Henry Kirn
Hey. Good morning, guys.
Frank Simpkins
Hey, Henry. Good morning.
Henry Kirn
As you are able to price this faster, could you talk a little bit about the price discipline in the market if you see the competitors, and maybe if you see yourselves today as price leader or if the markets generally responding faster than historically?
Frank Simpkins
Yeah. I mean, we are the price leader in North America and we are probably a follower in Europe.
And, sort of neutral developing economies. But the pricing environment, the competitor environment is being very good.
I think that our competitors had followed us, in most cases what we have gone, first. And we certainly have followed our competitors when they have gone elsewhere.
So I would say that the environment is – price increases are always difficult. But I would say, in a relative basis the environment is okay.
Henry Kirn
Can you possibly give an update on Widia for the quarter, maybe any metrics you could share?
Frank Simpkins
Sorry. I couldn’t hear you, Henry.
Henry Kirn
Is it possible to get an update on Widia for the quarter or any metrics if you could share there?
Frank Simpkins
Yeah, I mean, all I can tell you is that, all our distribution is growing at a good pace and we feel really good about Widia but we don’t have any specific metrics.
Henry Kirn
Thank you very much.
Frank Simpkins
Thank you.
Operator
Our next question comes from the line of Chuck Murphy with Sidoti & Company.
Chuck Murphy
Good morning, guys.
Carlos Cardoso
Hey, Chuck.
Frank Simpkins
Hey Chuck, how are you?
Chuck Murphy
Doing all right. I just wanted to talk about the infrastructure real quick, could you just talk a little bit about the sequential decline there.
I think you kind of mentioned seasonality before. Was that a particular end-market that stood out?
Frank Simpkins
Yes. It’s the highway and run construction, I mean that’s one of those things when the water comes they just shut and go away.
So it was a little bit earlier than we have seen traditionally in the past.
Chuck Murphy
Got you. Okay.
And did that also kind of hit the margins a little bit as well or – ?
Frank Simpkins
It’s a combination of that the seasonality coupled with some of the higher raw material costs.
Chuck Murphy
Got you. Okay, that’s all I had.
Thanks.
Operator
Our final question comes from the line of Walt Liptak with Barrington Research.
Walt Liptak
Hi. Thanks guys.
Good morning. I wanted to ask about, I don’t want to be dead horse on the raw material thing.
But I wondered about hedge positions, if you guys hold excess inventory or if you do something in the futures markets?
Frank Simpkins
Yeah. We don’t do anything in the futures market.
I mean, the tungsten is a very steadily traded commodity.
Walt Liptak
Right.
Frank Simpkins
And we do have inventory that we look at to help us through that. But as we said, we are a way ahead in our recovery than any one time that I have been with the company for sure.
And the fact that, we’re going to be able to recover 100% of the raw materials in the second half of the year, and it just shows you that again, I don’t see that as an impact for the year.
Walt Liptak
Okay.
Frank Simpkins
And next – and it’s actually got a position as well for next year because we typically don’t get price back.
Walt Liptak
Okay. Can you tell us what the – the overhang or the hit was from the rising raw material costs during the second quarter – in like millions of dollars?
Frank Simpkins
Yeah, well. We typically don’t provide that, obviously that’s competitive.
Walt Liptak
Okay. And what about gross margin.
I might have missed it. Did you provide gross margin guidance for the next quarter?
Frank Simpkins
No, we don’t. We typically just give the full year EPS guidance.
With the increased guidance from the midpoint last time was 235 to 238 midpoints, that obviously reflects some benefits in the second half with the capacity utilization in the volume, which we typically get that left on the gross margin lines. That’s been embedded in our EPS guidance.
Walt Liptak
Okay. And what tax rate are you using for next quarter?
Frank Simpkins
Again, it’s probably going to be about the same for the first half average, and the full year as said around 24%. And that’s pretty much where we see it, it could move couple of basis points here and there but nothing substantially.
So, given the mix of the business where we have forecasted it, factoring in the RD&E. We had a little bit higher in the first quarter, we threw it up in the second quarter.
So we thought we’d start the year at about 25. So probably going to maybe be around 24% for the remainder of the year.
And that’s basically the next two quarters.
Walt Liptak
Okay. All right.
Thank you.
Carlos Cardoso
Thank you, Walt.
Operator
This concludes our question-and-answer session for today. I’ll turn the conference back over Ms.
McGuire for closing remarks.
Quynh McGuire
This concludes our discussion. Please contact me Quynh McGuire at 724-539-6559 for any follow-up questions.
Thank you for joining us.
Operator
Today’s call will be available for replay beginning at 12 o’clock pm Eastern Time today and lasting through midnight on February 28, 2011. The conference ID number for the replay is 27874779.
The number to dial for the replay is 1-800-642-1687 or 706-645-9291. This concludes today’s discussion.
Thank you for your participation and you may now disconnect.