Quynh McGuire - Director of Investor Relations Carlos M. Cardoso - Chairman, Chief Executive Officer and President Frank P.

Simpkins - Chief Financial Officer and Vice President

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division Adam William Uhlman - Cleveland Research Company Ann P.

Duignan - JP Morgan Chase & Co, Research Division Julian Mitchell - Crédit Suisse AG, Research Division Andrew Obin - BofA Merrill Lynch, Research Division Andrew M. Casey - Wells Fargo Securities, LLC, Research Division Joel G.

Tiss - The Buckingham Research Group Incorporated Brian Michael Rayle - Northcoast Research Daniel Khoshaba Eli S. Lustgarten - Longbow Research LLC Walter S.

Liptak - Barrington Research Associates, Inc., Research Division Henry Kirn - UBS Investment Bank, Research Division Samuel H. Eisner - William Blair & Company L.L.C., Research Division Holden Lewis - BB&T Capital Markets, Research Division

Thank you, Regina. Welcome, everyone.

Thank you for joining us today to review Kennametal's Third Quarter of Fiscal 2012 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 in on 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 May 25, 2012. 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, Martha 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'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 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. Good morning, everyone.

Thank you for joining us today. I'm pleased to report that for the March quarter of fiscal 2012, Kennametal, again, delivered strong performance.

For the period, organic sales grew by 8% year-over-year. This growth rate reflects ongoing customer demand on top of the strong comparisons of 25% from the prior year quarter.

We believe that our results were due to our global team's successful implementation of our proven strategies to continue outperforming industrial productions and gain market share. For the March quarter, global investor production increased by 2.7%, indicating that expansion is still occurring in all end markets.

In addition to favorable economic environment, Kennametal benefited from our own growth strategies, management discipline and execution capabilities. For the 9-month period ending March 31, industrial production growth was 2.2%, while Kennametal realized 13% organic sales growth for the same time frame.

Kennametal's served geographies continue to reflect increased demand year-over-year. In our industrial segment, both the Americas and Europe show strong growths.

In our Infrastructure segment, all major regions demonstrated high demand, with Asia reporting the strongest growth. Currently, Kennametal's rest of the world markets represented 25% of sales in the March quarter.

Customer demand in the industrial markets remain strong, particularly in aerospace and general engineering. Infrastructure markets continue to show growth in both our Earthworks and Energy business.

However, we expect that some sectors may be impacted in the near term by lower production activities. Overall, Kennametal's diverse and market mix lessens our exposure to any single market.

As a result, we have reduced cyclicality in our business. Therefore, we believe that we can continue to grow throughout the entire economic cycle.

During the March quarter, we continue to implement our channel strategy through the WIDIA brands. We continue to gain market share.

For the first 9 months of fiscal 2012, WIDIA product sales increased 20% year-over-year, indicating the success of our strategy and the momentum of this brand. Let's now discuss end market trends.

In aerospace, Airbus and Boeing, together, received more than 2,200 net orders in calendar year 2011, which was twice the prior year level and significantly higher than 1,011 jets that were delivered. Currently, the 2 companies have combined backlogs that are equivalent to approximately 7 years of outputs.

Production increases are under way for both Airbus and Boeing, and the growth cycle is expected to continue. In transportation, global demand is forecasted to continue, with some unevenness in Western Europe due to the ongoing recession in the eurozone.

In the Americas, annual North America light vehicle production increased to 13.5 million units in February, representing the highest level in 3 years, with further production increases expected. In China, while there was a weak start for auto sales in January and February, passenger car sales increased 4.5% in March.

According to the China Association of Automobile Manufacturers, deliveries of passenger automobiles, combined, climbed to 1.4 million units last month. In Latin America, Brazilian automakers are reporting that export demand and growth had been strong.

In the general engineering markets, U.S. new orders in industrial machinery are approximately 7% higher than the same period last year, with production expected to moderate over the next couple of quarters.

U.S. annual exports are at high levels and expected to further expand.

The Association of Manufacturing Technology reported that order showed an increase of approximately 9% from the prior months and grew 35% year-over-year. Globally, metalworking machining production is at a significantly higher level currently and more growth is expected.

This is driven by a modest re-acceleration in the worldwide economy. In the underground coal mining, the market is expected to be challenging for the remainder of calendar year 2012.

Weaker growth in demand for electricity generation and coal plant retirement are offsetting ongoing increasing exports. Therefore, coal production is expected to remain relatively flat, and it is projected that supply will drop further than demand, resulting in another year of contracting inventories.

In road construction, highway funding is generally expected to decline in 2012 compared with the prior year. In Europe, the sovereign debt crisis and ongoing economic slowdown will result in lower construction activities.

However, highway funding in the U.S. is expected to benefit from the recent passing of certain stopgap legislation in Congress and should be at similar level as prior year.

In the energy market, natural gas inventories in North America are expected to reach record levels by the end of calendar year 2012. Currently, natural gas prices are low, and gas-directed rig counts are below 700 units.

According to IHS global insight, production levels are expected to decline in the coming months. In the near term, residential and commercial consumption of natural gas is expected to be lower due to unseasonably warmer weather.

While production is expected to reflect slowing for now, the longer-term infrastructure building continues. Natural gas is expected to be the preferred fuel of the future, which has been reinforced by domestic regulations creating new restrictions on carbon dioxide footprint on any new plant.

In the U.S., there are 2 coal plants being retrofitted for natural gas and 12 plants are slated for future construction. Regarding our cost-reduction measures, we continue to retain savings from our restructuring initiatives, realizing $107 million reduction of annualized expenses and have been permanently removed from our cost structure.

Also other actions to streamline our business have both strengthened our foundation and improve our operating excellence. As a result, we continue to expect that Kennametal can support at least $3 billion in sales without significant capital investment.

Kennametal's margins performance during the March quarter reflected our continued recovery of raw materials' cost inflation, specifically, tungsten. We will continue to maintain our disciplined approach related to pricing actions.

I would also like to mention that Kennametal received an important recognition during the quarter. We were named among the world's most ethical companies.

The Ethisphere Institute, a leading international think tank dedicated to best practices in business ethics, corporate social responsibility, anti-corruption and sustainability, selected Kennametal for exhibiting leadership in promoting ethical business standards through our global operations and for introducing better business practices. The recognition helps to support Kennametal as an employer of choice, which enabled us to attract the best talent in our industry.

In addition, it helps make Kennametal a supplier of choice for our customers worldwide. As always, Kennametal's global team continues to execute our growth strategies to further increase our addressable market.

We continue to maximize our enterprise structure to drive organic growth, as well as to evaluate potential acquisitions. For example, the recent announced Deloro Stellite transaction, reinforced our strategy to acquire technologies that strengthen our core business.

We'll continue to expand our presence in the rest of the world markets and growing sales in distribution channels through our WIDIA brand strategy. In addition, we continue to improve our customers' productivity through new product introductions and by showcasing our technology and innovation.

As a result, we are further expanding our reach to penetrate new markets and continually grow market share. I'll now turn the call over to Frank, who will discuss our financial results for the quarter in greater detail.

Frank?

Thank you, Carlos. I'll provide some comments on our performance for the March quarter, and I'll move on to our outlook for the remainder of fiscal year 2012.

Some of my comments are non-GAAP, so please refer to the reconciliation schedules that we provide in our earnings release and related Form 8-K. So let me start off.

I'd say the March quarter was very active. Results were as expected operationally with below-the-line benefits related to interest and taxes.

We continue to deliver on our goal of achieving 15% EBIT and 15% return on invested capital one year ahead of schedule. Our March quarter highlights included: organic sales growth was 8%, which was essentially in line with our expectations; earnings per share were $0.93 a share, which was a March quarter record.

Our reported earnings per share included transaction-related costs of $0.05 from the Stellite acquisition and was consistent with our integration plan. The $0.05 per share is primarily transaction-related costs, which are OpEx and some purchase accounting step-up costs for inventory and cost of goods sold and a minimal amount of net income contribution.

Our operating margin was 14.8% and adjusting for the Stellite acquisition, our operating margin reached 16%. We also issued new $300 million 10-year, 3.875 public notes in February to refinance our existing term notes that mature in June, and we closed the acquisition of Stellite on March 1, which allows us to strengthen our business.

And our adjusted return on invested capital of 16.9% was a March quarter record. Now I'll walk through some of the key items in the income statements.

Sales for the quarter increased $82 million or 13% to $696 million compared to $615 million in the March quarter last year. The increase in sales is due to our organic growth that I mentioned of 8%, the impact of the Stellite acquisition contributed 4%, more business days added 3% and this was partly offset by unfavorable foreign currency effects of 2%.

Similar to Carlos, I'd like to point out that our organic growth of 8% was achieved on top of stronger comparisons to double-digit organic growth of 25% in the prior year quarter, and this represents the ninth consecutive quarter of year-over-year organic sales growth. Turning to the business segment sales performance.

Industrial segment sales of $419 million increased 7% from the prior year quarter. This was driven by organic growth of 5% and the impact of more business days of 4%, partly offset by 2% unfavorable foreign currency effects.

On an organic basis, sales growth was led by Aerospace and Defense growth of 14% and General Engineering growth of 7%, while Transportation end market sales remain at a relatively similar level to the prior year. Regionally, sales including workdays, increased by approximately 12% in the Americas, 11% in Europe, and were relatively flat in Asia due to the strong comparisons for the prior year.

This trend is consistent with the December quarter. As you know, the growth we experienced in the prior year March quarter was also strong across all regions, especially the emerging markets.

For comparison purposes, last year, Asia was up 32%, Europe was up 29%, and the Americas was up 23% last year. Before I cover the Infrastructure segment, I want to remind everybody that the acquisition of Stellite results are now included in the Infrastructure segment.

Please keep this in mind for comparative purposes. Infrastructure segment sales of $278 million increased 25% from the prior year quarter, driven by organic growth of 13%.

And the acquisition of Stellite contributed 10% of the growth. Business days were also favorably impacted sales by 3%, partly offset by 1% unfavorable foreign currency.

The organic increase was driven by 12% higher sales of Energy and related products and 12% increase in demand for Earthwork products. Regionally, sales including the workdays increased 24% in Asia, 16% in Europe and 13% in the Americas.

By geography, our Infrastructure business also had very strong prior year sales growth of 20% in the Americas, 15% in Asia and 11% in Europe. Now a recap of our operating performance.

Our gross profit margin was 35.4%. Our gross margin also included one month of operating results from the Stellite acquisition, which was dilutive to Kennametal's gross margins.

Excluding Stellite, our margins would have been similar with the December quarter. Gross margin percent declined year-over-year, as a result of higher raw material costs consumed in the March quarter, while pricing levels remained unchanged.

This had a dilutive impact on the margin percent. Margin was also impacted by lower productivity due to our inventory reduction initiative.

Operating expense remained relatively flat year-over-year. Overall, lower employments and related costs and favorable foreign currency exchange effects were offset by acquisition and related costs.

We remained focused on controlling G&A costs and making select investments in our selling-related costs. And we continue to focus on controlling our G&A to fund our selling expenses.

Operating expense as a percent of sales was 19.9% for the quarter, down approximately 300 basis points from the prior year of 22.5%. Note also that Stellite's operating expenses as a percent of sales are lower than Kennametal's and overall accretive to the percentage.

Our operating income increased to $103 million compared to $88 million in the prior year quarter. Absent restructuring and related charges, operating income is $93 million in the prior year quarter.

Our leverage was solid on a reported basis of 19 on both an actual and constant currency basis and was impacted by higher raw material costs and lower productivity than the prior year. Operating margin for the March quarter was 14.8%, and adjusting for the Stellite acquisition, our operating margin reached 16%.

Turning to the business segment operating performance. The Industrial segment operating income was $71 million compared with $54 million in the same quarter last year.

Industrial operating income included $2 million of restructuring and related charges last year. Industrial operating margin increased 320 basis points to 17% the prior year quarter.

The primary drivers of the increase on operating income were higher sales volume, price realization, partly offset by higher raw material costs. The Infrastructure segment, operating income was $34 million compared with $36 million in the same quarter of last year.

Infrastructure's operating income included $6 million of acquisition-related costs. Infrastructure's operating income also included restructuring-related benefits of $1 million in the prior year.

Infrastructure's operating margin was 12.3% compared to 16% in the prior year, and operating margin excluding the impact of the Stellite acquisition was 15.1% for the March quarter. Our operating income benefited from higher sales volume, including price realization.

But this was offset by raw material costs and the acquisition-related costs. The effective tax rate was 20.4% compared to 19.1% in the prior year quarter.

And I'll comment that the primary difference from our previously provided effective tax rate guidance of 22% was a benefit related to a valuation allowance adjustments, which was a discrete benefit in the quarter. And regarding our EPS, we reported March quarter diluted earnings per share of $0.93 compared to the prior year diluted earnings per share of $0.77.

And the current year earnings per share included the impact of Stellite acquisition charges of $0.05, while the prior year EPS included restructuring and related charges of $0.06. Turning to cash flow.

Our cash flow from operating activities were $164 million compared to $125 million in the prior year. Our capital expenditures were $56 million year-to-date compared to $25 million in the prior year period.

And our free operating cash flow for the 9 months ended March 31 was $108 million compared to $100 million in the prior year period. The balance sheet continues to remain strong.

Our cash position was $126 million, and we remained focused on improving our working capital. And DSO and ITO were at relatively similar levels in the March quarter compared to December.

However, we made further progress with our days payable, which increased 3 days from December to March. We also initiated actions to better balance our inventory levels, as we discussed last quarter, and expect to make further progress in the upcoming quarters.

At March 31, our total debt was $641 million, that's up $328 million from the June quarter due to the new bond issuance of $300 million and $29 million outstanding on a revolving bank credit facility. Our debt-to-cap ratio at March 31, 2012 was 26.9%, and this compares to 15.9% at June 30 last year.

As I mentioned earlier, we issued new $300 million, 10-year, 3.875 notes in February to refinance the existing like value and term notes that mature in June of this year. The proceeds from the new bond issue will be used to pay down the existing notes when they mature at June 15, 2012.

We're pleased with the favorable 1.875 credits spread we achieved. The transaction was well received and multiple times oversubscribed.

This refinancing measure, in combination with our October 2011 amendment extension and upsizing of the revolving credit facility to $600 million, significantly extends our debt maturity profile and further enhances liquidity. The all-in rate for the new bond is approximately 4.7%, including the impact from our forward starting swaps, and Kennametal realized annual interest savings with the new bonds compared to the all-in rate of 5.5% expiring notes, including the amortization of gain from the 2009 swap termination.

Our U.S. pension plans continue to remain 100% funded.

And as I mentioned earlier, our return on invested capital on an adjusted basis was 16.9%, up significantly from 14.8% in June. Now I'll just give you a quick update on our acquisition of Stellite.

Overall, the Stellite acquisition is progressing well and in line with our integration plan. We completed the acquisition on March 1 at a cost of $383 million, net of cash acquired.

We've established a full-time integration team that has been assigned and is working with the Stellite team to drive critical work streams to ensure a smooth transition. Our day one activities were initiated across the organization to welcome the Stellite team and introduce them to the Kennametal culture.

We also launched their new enterprise brand, Kennametal Stellite. The initial focus on the integration has been on the financial processes, purchase accounting, compliance programs and safety.

We have also begun the investments necessary to convert their ERP systems to SAP. The Kennametal and the Stellite growth teams have initiated synergy workshops to identify opportunities to further accelerate growth.

The impact of the Kennametal Stellite acquisition on the March quarter earnings per share was $0.05 a share and that was driven primarily by the transaction costs and purchase accounting effects I previously mentioned. And we have reaffirmed that the Kennametal Stellite acquisition is expected to be approximately $0.10 dilutive to our fiscal '12 reported earnings per share.

Now turning to the outlook included in our release, we have updated our fiscal 2012 organic sales growth guidance to a range of 10% to 11% from a range of 10% to 12%. We also increased the total sales growth guidance to a range of 16% to 17% from our previous estimate of 10% to 12% due to the acquisition of Stellite.

Our earnings per share guidance for fiscal 2012 is now in the range of $3.80 to $3.90 per share, up from our previous range of $3.70 to $3.90 per share. We continue to expect global economic conditions and worldwide industrial production to reflect moderate expansion with manufacturing leading the recovery.

The increase to our prior guidance of 5% at the midpoint includes the following facts: first, we tightened our top line growth slightly due to expected softness in our Mining and Energy sectors and near-term slowing in China related to the Transportation sector; secondly, interest expense. Now that we have completed our bond refinancing, we expect interest expense to be lower than the prior guidance.

We estimate this will add $0.03 of earnings per share. Our effective tax rate, as a result of the March quarter discrete benefit, this will add $0.02 per share, and the full year tax rate guidance remains unchanged.

Foreign currency is not expected to have any significant impact in the fourth quarter, and our inventory reduction plans remain in place for the June quarter, but will be impacted by some market sectors slowing as reflected in our revised top line projections. The acquisition of Stellite is expected to impact earnings per share by approximately $0.10 in fiscal 2012 and that includes transaction-related costs, which occurred in the March quarter.

And this is consistent with our previously communicated guidance. The impact of Stellite has not been reflected in Kennametal's current EPS guidance.

Cash flow from operations is now expected to be in the range of $300 million to $310 million for fiscal 2012. Based on capital expenditures of approximately $100 million, the company expects to generate between $200 million to $210 million of free operating cash flow for the full fiscal year.

At this time, I'll turn it back to Carlos for some closing comment.

Thank you, Frank. As we move forward, we'll continue to execute our strategies in ways that help us achieve our goals.

We'll remain focused on our commitment to outperform industrial production, as has been consistently demonstrated by our results. We'll also further balance our served end markets, business mix and geographic presence.

As an example, the recent acquisition of Deloro Stellite will advance our strategies by further diversifying our business. In addition to those measures, we'll continue to maximize opportunities to expand our progress in distribution channels and gain market share.

We have already streamlined our cost structure, and we continue to be disciplined in our cost-reduction focus. Most importantly, we remain committed to being a customer-focused, market-facing enterprise.

We believe this positions Kennametal to identify new revenue opportunities and increase our levels of profitability. As always, we remain disciplined in our allocation of capital.

Our uses of cash include reinvesting in our business, making acquisition, purchasing shares and paying dividends. Our global team is highly focused on achieving our next milestone targets of 15% EBIT and 15% return on investment capital, one year earlier than planned.

We have a strong financial position, and we have repositioned the company for improved margins and returns. Kennametal will continue to deliver our promise to be a breakaway company and enterprise that is profitable throughout the economic cycle.

Thank you for your time and your interest in Kennametal. We'll now take your questions.

So I guess the -- my question is kind of on the guidance here. If I'm doing my math right, I think the 4Q implied organic growth rate is something in the 3% to 4% range, which is a pretty good step-down.

And I guess you've sort of mentioned Mining and Energy seeing a little bit of a deceleration. But is that really the explanation here?

And some of the other companies we follow have actually been sort of raising their domestic, general industrial kind of forecast. And I'm just wondering if we can kind of square that.

Yes, Stephen. First of all, our guidance does imply mid- to single-digit growth.

And there is some headwinds in the first half of calendar year on the Energy and Mining, and to a certain extent, in China. We also have to take in consideration that we come from very strong comps.

And thirdly, this has been our plan all along. So when we gave guidance 3 quarters ago, this was reflected in our guidance.

So not much has changed. I think we've seen strength in the Americas.

That is above where our expectations were. We've seen strength in Europe, which has been above our expectations.

And we've seen some weaknesses in China, and now energy and coal, which is below expectations. But overall, we're exactly where we thought and said we're going to be.

Okay. How much of your business should I think is mining and energy related?

Probably around 14% the most.

Yes. Again, roughly, Steve, if Infrastructure is 35% of the business, that's over 1/2 of it though.

It's a pretty big impact. So the change, when you break it down, what's really changed?

To Carlos' point, China was no big change from December to March. And that was being -- really be an offset by the impact of the Americas.

And Europe's been pretty much in there. But right now, I would say it's been a warmer weather and kind of the pullback on the Mining side and well as the Energy side.

And that's really why we changed the top line, particularly, for the softness in the Infrastructure side of the business.

Got it, that's helpful. And then, just on Infrastructure again versus my model, and this may just be my error, but even without the Stellite cost, the margin was a bit weaker than what I was looking for.

Would that be kind of the same drivers there? Is that pretty high margin kind of mix?

Yes. First of all, I like the progress.

Yes, I thought it would be a little bit better, to be honest with you. But I think part of it -- we probably had higher raw material costs consumed in the quarter from -- as our inventory turns there and we try to initiate the reduction that we've talked about last quarter.

That was the $0.10 I said we're going to give back because we're trying to balance our inventories. But despite that, we still made some sequential improvement.

And hopefully, going in to a stronger period here in the fourth quarter, it'll continue to pick up but not as much as we have initially hoped.

I guess a follow-up the guidance, can you -- I believe last quarter we were talking about $0.05 to $0.10 dilution from Deloro and now it's looking like $0.10 or so. Are there more one-time charges that are coming through in the fourth quarter?

Adam, the number is the same. We said, last quarter, it will be $0.05 to $0.10.

So we actually had $0.05 in the March quarter. So we're saying, "Hey, from a worst case, we'd have another $0.05 in the quarter."

So in the March quarter, we had a couple of things. It's transaction-related costs as we pay some of the bankers and a couple of things there.

And then we have a partial step-up in cost of goods sold related to the inventory step-up. So as we go into the fourth quarter, we'll have a bigger impact on the inventory step-up.

Now that'll be one-time in fiscal '12 because that will not repeat next year as we take that one time hit there. And then we're going to have some integration costs associated with SAP and some other back-office stuff in the fourth quarter, which will basically offset the contribution from an earnings perspective.

So as I said in the call, we reaffirm the $0.05 to $0.10 now that we have March quarter done. We're saying, "Hey, worst case in the last quarter, we're going to have another $0.05," which is exactly how we had anticipated it.

Okay. And then the follow-up on the Energy question.

I guess, what are you seeing in the order rates today? And should we expect the Energy and Mining business to be down year-over-year in the June quarter?

Or what -- maybe just put a little bit more color on the deterioration in the business that's passing there.

Yes. Near term, I would say, it's trending a little bit softer than we had anticipated.

The wildcard here is the way that the holidays fell with Easter. It hit right in the middle, and I think some of the mining companies and some of the -- they took extended vacation which is unusual.

So I don't want to try to read into early part of the month because I said the first part of the month was a little bit softer, and it seems to be coming back towards kind of where we had expected but still a little bit softer, particularly in the Infrastructure side.

We still expect some growth but not at the same rates -- at a decelerating growth rate.

Okay. And then, Frank, just a clarification on the Infrastructure segment sales by geography, the -- each one of the regions were above the total organic growth of 13%.

Is that only the selling days that you plugged in to the geographic growth or...

Yes, that's exactly right. Because I don’t want to put the finance organization through.

When you're stuck at workdays by -- we have 60 different locations. That's the primary difference.

So as I said, at the top of the house, it was 3%. So you could use that as a guidance.

And I think I broke it down in there, but that's exactly right.

I just want to make sure I understand your guidance. You have included the revenue from Stellite and the EBIT from Stellite but not the integration cost, is that correct?

No, no. First, we've said, Ann, is it's all in there.

So the $0.10 that we provided includes some performance associated with the business, but offset by one-time purchase accounting effects and transaction-related costs in the quarter.

Okay. So there's no -- so we're not looking at apples and oranges, that's what I just want to make sure.

Right, we're apples and apples. So what I tried to do is the $0.10 is all Stellite.

So what we tried to do is to give you guys -- to take that out of the equation so you could still get the base business. The guidance that we provided in there with the midpoint of $3.85, that's kind of excludes the Stellite impact.

And then we're saying for 4 months, we're going to have $0.10 and it's really purchase accounting and some of the transaction costs offset by some improvement from the results. So it's apples to apples in the numbers.

Okay, that's helpful. I just wanted to make sure I wasn't misinterpreting that.

And then, can you talk a little bit -- just 2 quick follow-ups on Stellite, a little bit about when next year, you might anticipate that trading accretive. And then, secondly, are there any significant differences in mix or seasonality or anything else we should be aware of with Stellite, just from a modeling perspective also?

Yes, I'll start. It's going to be accretive, as far as the kind of unusual mixes are different.

I think it's a more stable business, where Kennametal is like a 40/60 as a rule-of-thumb guidance. I think they're a little bit more stable.

So as we get towards July and we do the guidance, we'll try to provide as much point whether seasonality in end markets, because a lot of the markets they serve are the power generation and that's more of a stable business, as opposed to some of the cyclicality effects that we have in other parts of our company.

Okay. And just finally a real quick follow-up, the Infrastructure business for Q4, is your guidance for organic growth to be negative?

No, no.

No. We don't...

And again, as I said earlier, we're going to continue to have positive growth in all areas. It's just at a decelerating growth.

I guess my first question would be on the issue of price cost and what that did to your margins. Because you mentioned that as a headwinds, raw materials in both Industrial and Infrastructure.

So I wonder if you could give some idea of how the magnitude of price cost for total Kennametal in Q3 or any color by segment. And also, I guess, to try to understand why that's happening.

I guess tungsten prices, for the most part, have been behaving themselves. So what exactly is going on?

And I guess, what are you doing with your pricing to try and mitigate the headwind in the next few months?

Yes. On the price raw materials, you're right on the margin percent.

A lot of this has to do with the -- how you calculate it. Our raw material cost went up because, as you know, we have contracts that typically lagged.

So we're not going out -- so to your point where APT dropped on the spot market last week. We don’t get that price immediately.

It takes a while. We have contracts and you could have quarters of a lag.

So that's why we saw the higher raw material costs come in, while pricing remained relatively constant. So with a little bit of a bump here on the cost and pricing remaining across the organization because we're very disciplined on that, it's dilutive to the margin percent.

And then compounding that is, as we talked last quarter, I wasn't crazy nor was Carlos about the inventory build we have in the first half. So we continue to try to ratchet that down.

And as I said earlier or I should say the last call, that we're going to take back $0.10 to try to reduce our inventories.

So the only thing I would add is, as I spoke earlier, we have on the upside, our suppliers can not raise prices to us for a period of 3 to 6 months. On the downside, in other words, when the raw material goes down, they get to keep 3 to 6 months, depending which contracts we have.

So it's as simple as that. And the reason we do that is because it benefits us on the upside of being able to buy some time for us to be able to get price increase and minimize the impact.

The price to cost will be fully recovered by the end of this year. Plus.

And we said that and we'll continue to talk about that. Our strategy is unchanged.

We've gone with price increases. We don't need anymore price increases, just the timing to catch up.

Okay. And then just a quick follow-up.

In the Industrial segment, your European business is still growing around 11%. So currently, it's a pretty similar run rates where you had year-on-year in the December quarter.

I guess sort of just any update around -- obviously the PMIs had been not good for 5 months plus. What are you expecting for Europe in Industrial, specifically, over the next kind of 6 months or so?

Well, I mean, we'll talk for the next 3 months, which is the next quarter. We anticipate that is to be about the same, going forward.

Again, somebody, I think Stephen asked the question and said some industrials are raising their outlook. I remind you that our quarter end is June.

And most industrials' quarter ends are the same as calendar year. Clearly, the IPI indicates that the second half of the calendar year 2012 is going to be strong.

And I'm talking about IPI. I'm not talking about -- it's too early for us to give guidance.

So I want to make sure that, as you think through and you're comparing us to somebody else, that you're comparing apples to apples.

Sure. But I guess your point is that European industrial in the June quarter could still be up around 10%, 11% year-on-year.

And Julian, just -- and I think our composition of businesses in Europe is pretty good. We've done some investments strategically, particularly in the Infrastructure side in Europe.

And then, over 1/2 of our European business on the Industrial side is in Germany. And Germany is still actually doing pretty decent.

So for the next quarter, I can't see any significant change. It may be down a little bit, but pretty much in line.

Yes. It'd still be in the high single to go around the double digit, yes.

Operator, we can't hear the question. [Technical Difficulty]

Yes. What is driving on the flat transportation growth in the quarter?

How much of this is de-stocking? Or how much is true end-market deceleration?

I'll start off. I would say it's flat, as we said, particularly coming out of Asia Pacific and in China because what we -- we have -- we did very well last year, particularly with the domestic manufacturers, the automotive manufacturers in China.

This would be like the DYDs of the world. And we have significant growth in those accounts last year.

So it's a combination primarily of the China situation there. Europe continues to be fairly well as the Americas, but the big -- the comps compared to year-over-year, particularly China, is what's suppressing some of the growth.

Yes. If you look at the production numbers in China, in January and February, as I said earlier, they are below their expectations.

However, March was already turning. And so we've had positive growth in Europe, positive growth in U.S., and flat to negative in Asia, specifically, China.

We expect that to change.

You guys are one of the few companies that have sort of highlighted it, but maybe things are turning in China just a little bit on the margins. Why are you guys seeing any inflection points?

Any color from what you guys are seeing in April in the region?

Well, I mean, I think what we've seen and I think this is one of the things that we've been working with this company in diversifying this company. I think in the last 6 months, we saw that because of the Industrial environment export in China, they put money to infrastructure.

So our Infrastructure has been extremely well, as you can see by our results, while our Industrial has suffered. What we're going to see going forward and it's a question of the timing, what is going to happen in the next couple of months or in the next 6 months, is that we're going to see an inversion of that.

We're going to see the infrastructure in China picking up at a higher pace and potentially the infrastructure moderating. And I think that the beauty of our business is that when you look overall in Asia, we'll still have the highest growth coming from Asia.

When you look at the Infrastructure, at this time, they are leading. If you looked at this same business about a year ago, would be completely the opposite.

So we hope that in the next -- for the rest of the year -- calendar year that we'll see the same thing and overall, Kennametal will grow.

But any color on April [indiscernible]? Or is it just too early to tell?

It's too early to tell.

Can you quantify the Stellite inventory impact in the quarter? I'm just trying to understand your progress in decreasing the core level.

And then if you said, I apologize, what was the driver of the reduced operating cash flow outlook?

Again, I don't want to get into breaking that out. In the core, most of the cost of the $0.05 were in the operating expenses.

There was a small impact in cost of goods sold related to the inventory step-up. And that -- Andy, that'll be much bigger.

If you just [indiscernible], which the business is a little bit, most of that will flush through in the fourth quarter.

Frank? I'm sorry I'm not asking about the P&L.

I'm asking about the balance sheet.

Oh, how much -- how much of the increase is related to Stellite?

Yes.

It's approximately $50 million.

Okay. And then, could you talk...

And as of the reduced cash flow, it is related to our inventory reduction plan. We didn't make as much progress as we would have liked in the, I should say, in the second half.

And that's primarily related to the deterioration.

And is that related to the Energy and Mining markets?

There's a small driver. There's a small driver.

Some impact. Some impact.

Just one more question, everyone asked everything else. Just -- can you talk a little bit about any implications from Amazon coming in to the distribution business, and what that might mean for margins and just how it impacts you guys?

None. I just think that Amazon plays at the products that are really not competition with us directly.

We really have not seen any impact of that. As a matter of fact, as I said, the brand that would probably be most be impacted by Amazon will be WIDIA.

We still grew, year-to-date, 20% versus an industrial growth of like 2.7% so...

And if you think about that, though, is that going to be helpful to control the industry inventories? Guys like that moving in, if the trend spreads.

Or -- and then do you have mechanisms in place that can help you make sure you control pricing no matter where the stuff is being sold?

Yes. I mean, we do.

It's really not -- the Amazon is really not applicable. We're not selling any product to Amazon.

I mean, if you are aware of that or not, I'm not sure.

Right, but it could end up there somehow.

Yes. I mean, I think it's going to be difficult.

I mean, we haven't seen one example of that so far.

Joel, we think we'll do much better with our -- with Fastenal relationship. These guys are doing it right.

They'll grow it. They know how to play.

They're going to have some people versus just taking an order over the phone. There's no technical application that Amazon is going to be able to add from a sale.

Most of my questions have been answered. One quick follow-up, now that you've kind of had Stellite under the umbrella for a little while here, any changes in what you think -- what you might be able to get from cost saves or integration margins for next year, compared to what you originally thought?

Yes. I mean, we're still in the process of looking at that.

All I can tell you is that we are very pleased so far with what we've seen and discovered. And so -- we're in the midst of the planning process right now and it's really too early for us to do that.

So we'll be very specific when we announce guidance for 2013.

Okay, can we interpret very pleased as sort of better than you originally thought?

No. I mean, I think that typically when you're going to a situation like this, you anticipate some negative surprises.

And we haven't seen any negative surprises. So that's my point of being positive.

Could you just -- I don't know if you already gave this out. But can you give us the financial impact of the 3 additional days, in terms of revenue and maybe operating profit?

I mean, I think you can calculate it. We gave the specific amounts there.

Outside the workdays, they were 3% so...

It had an impact of about 3% on sales.

Correct. And we don't provide that down on the -- on an earnings perspective.

It just gets -- it's too subjective.

Okay, all right. And then one last question.

With the recent decline in APT prices, and I know you said that there was a little bit of a lag, how does that affect your pricing that you have in the marketplace today? Presumably, because your raw material costs have gone up, right?

And a lot of your customers can see that carbide prices or APT prices have been falling. Does it make it more difficult?

Or do you expect to kind of get the pricing only to have it then -- at least in some cases, renegotiate prices lower because there has been this drop in raw material costs?

Yes. 90% of our price increases are not correlated with tungsten, okay?

So this is one of the reasons why it takes us longer to get price increase, which everybody gets upset about obviously. But this is the point that we do not tie 90%.

So historically, we haven't given price back, number one. Number two is, the decrease in raw material has been just in the last month -- last week.

Okay. It's too early for us to really declare victory.

I mean, there's a little bit of excitement and hope. But that's all we have at this point.

I mean, I think we need a couple of more months to understand sort of what that is, what's going on.

Well, my question was really -- I mean, is it a declare victory because if you -- a lot of your, let's say, your carbide inserts, much of your carbide insert business is sold through distributors. Some of them very much standard carbide inserts that get put into [indiscernible] and things like that.

Under those circumstances, the distributor -- the customers do follow the price of carbide, right? I mean, so they -- ultimately, they're going to say, "Well, look, we know carbide prices are falling.

We buy extra amounts of inserts from you guys monthly." I mean, there is a dynamic that goes in the other direction, right?

I'll tell you that, first of all, only 40% of our sales go through distribution. And I want to tell you -- assure you, that historical, we have not reduced our pricing as a result of a lower tungsten prices.

Okay. So your made your prices -- when tungsten prices are going up or when tungsten prices fall, you're under no pressure to compete on the downside.

Well, I agree with everything you said except the pressure part. We are always under pressure.

Our customer always wants reduction. But, again, historical, we do not give up pricing as a result of tungsten prices being lower.

We're always trying to put new products in the marketplace that have an advantage. So you have 40% of your products come from -- our sales come from products developed in the last 5 years.

We continue to push the productivity in a better advantage from the customer. That counteracts just raw material cost prices going up.

We still have to deliver value to the customer and we continue to sell on value.

I just have one clarification. Your $3.80 to $3.90 guidance assumes $0.98 in the third quarter.

Yes, that's excluding -- yes, that's why I try to give the numbers both ways, kind of the base business and then Stellite.

So the $3.80 to $3.90 guidance a year is $0.98 in the third quarter, excluding Stellite.

Right.

I just want to make sure. Can you talk a little bit what's going on with Fastenal at this point in time?

And we just don't hear very much about it and how sales -- what were sales -- kind of quarter, what kind of expectation we have?

Yes. We are not providing the sales publicly.

I mean because of their public company as well. But I want to tell you that although their sales are exceeding our expectations year-to-date, I would say that the opportunity is still tremendous.

And I think both companies are very excited about the opportunity. I remind everyone, I mean, this thing has been -- this relationship is 6 months old.

And they're starting in the middle working from 0. So they're gaining good momentum.

They're ahead of what we think they -- than where we thought they're were going to be. And -- but the opportunities is -- we're just scratching the surface here.

And can you give the same insight of what's going on with sales to Boeing, now that the 787 is starting to ramp up production?

I don't right off the top of my head here, but I can tell you there are aerospace businesses growing at a good pace. And -- but I think that the productions again, the 787, they're still not at full production rate.

So the best is yet to come with that.

So do you have any feel for how much aerospace sales were up in the quarter?

Well, we said -- probably I mean, Industrial side was up 14%. But it's hard to gauge, Eli.

We have distribution in -- whether it's the West Coast or in the North East, where you have concentrations of aerospace and related customers. They've grown up much faster there.

I want to go back to the inventory question. And did you start bringing down inventories this quarter?

Yes.

And is it finished good inventories? Or is that raw material?

It's mainly whipped and finished goods. Raw materials went up and some carryover in the early part of the quarter, but it's mainly focused on finished goods at this point.

Okay. But it sounds like the inventory reduction is largely going to be in the fourth quarter.

How much do you expect to take down inventories?

I mean, I don’t know. We're going to see how we go forward here.

But again, I think it's going to be down from the current levels excluding the effect of Stellite. But it's going to be more -- it's going to be down more than we have in the March quarter.

So I just don't want to throw a number out there because the way the business operates sometimes.

Okay. Let me just ask about that gross margin and the impacts that -- any production cuts to the reduced inventories you may have on gross margin.

If you could put a target on what gross margin might look like next quarter.

Well, I expect it to be up sequentially. What I -- then again, I think, we'll have more of an impact in the fourth quarter because I said last quarter, I think what I said is we're going to chew up a dime to try to get this inventory in line.

And then we're going to offset that with productivity and pricing. We didn't get the productivity.

So were on track for that $0.10 impact it, but I'm not getting the offset with the productivity that we have anticipated.

Yes, I mean, we're talking a lot about the gross margin and going to a lot of details. I mean, let's not forget that we delivered at 16%, 16%, 16% EBIT margin this quarter, okay?

This business has never -- by the way, we're on target for making 16% EBIT margin. The highest ever in the history of this company was 12%.

Here we are delivering 15% EBIT margin. So we can -- you guys are doing your job, I understand, of looking at the EBIT margin on the Infrastructure.

But the industry is doing well. And overall, as a company, we're delivering record, record performance, in spite of all this turmoil that we have in the macro.

So let's not lose sight of that.

Yes, I agree. It's clear that you've had a lot of the success getting the operating margins up in general.

But we have a little bit of turbulence this quarter. I'm just trying to see how much is -- how much of that is going to be a continuation, how much goes away.

Sure. I understand that, but I still want to make sure we don’t lose sight of the bottom line, which is to me, a bottom line is the EBIT margin for the business.

This is Quynh McGuire. There are several posts left in the Q&A queue.

And in the interest of getting to everyone, I would ask you to limit your questions to just one please. Operator, go ahead.

As the growth slows down, assuming it does, does that open up some further restructuring opportunities that you couldn't get to when the markets were growing faster?

I mean, the theoretical answer is yes. Again, we don't see -- I mean, when I look at mid single-digit growth with the base that we have -- the cost structure that we have, we have still a lot of opportunities.

I mean, you still can improve our margins. EBIT margin is I'm talking about.

So I don't really -- looking at all the indicators, I really don't think that we're going to see -- we're going to see that dramatic of a slowdown. And again, we streamline our operations every year.

We are a lean company. We drive productivity every year -- so including this year.

So I mean, again, we're in the middle of the plan right now for 2013. All the indicators are -- look positive to us.

Again, and I'll remind everyone that 3 quarters ago, we gave guidance between the time we gave guidance and where we are today, the world and Wall Street fell apart about half a dozen times and here we are still, pretty much where we said we're going to be. And so we have a fairly good visibility to -- and good planning process.

So I think that we're going to continue to expand this growth. It's not going to be at the 20% that we had last year.

But it's going to be in the single digit -- mid to high single-digit growth. I mean, that's kind of what we see going forward.

Just a quick question here on the inventories, I guess the associated utilization rates for the company. What are you presently -- or I guess, what was it in the third quarter versus the second quarter and what are you anticipating for the fourth quarter?

It was probably in the mid-70s. The fourth quarter, we typically do a little bit better.

It's not going to change much, Sam, significantly one way or the other.

Okay. And you still -- and have you changed what you anticipate the overall production to be in the fourth quarter, based on inventories still being around 21%, 22% of overall revenue?

Yes. We've been working at it over the last -- obviously the last quarter.

And we backed it in and we have weekly meetings. We have [indiscernible] Process, where we're looking at demand plan as well as manufacturing.

So I think we have a pretty good handle on it.

It seems like you're burdening the second half of this fiscal year in ways that should sort of end once you go into fiscal year '13. I just want to make sure I have the moving pieces.

I mean, it sounds like if you go to 2013, you're going to recapture the $0.10 one-time profits from Deloro. It sounds like the $0.10 negative from inventory will go away.

Just tell me if that's -- if those are right or wrong. But I'm kind of curious of the price cost side because it sounds like it's still diluting margin, but you expect by the end of this year that you'll be neutral.

Do you have plans to raise prices again to sort of get there? Because it doesn't sound like you would see the benefit of softening tungsten until you get into the September quarter.

So directionally, everything you said is right. We have increased all the -- we don't need any more price increases.

If tungsten stays at the prices, not of last week, of the previous prices, okay? So we don’t need to do that.

And so I think that there's 2 things. Again, let's talk about calendar year so it's not perceived as guidance at this point.

All the indicators, if you look at the -- all the global indicators show that the second half of calendar year is going to be stronger than the first half of calendar year from an economic point of view. So that will be a benefit.

I would say that we, most likely, will have our inventory in line with what we need to be. And again, it's hard to tell exactly where it is because we have to finalize the growth for next year.

And we are in good position with cost -- the price versus raw material even if raw material stays high as it was throughout the whole year. And we are -- we will be fully recovered in a margin -- as a margin basis in the raw materials at the end of this year.

So do you still have tax price increases that are still sort of have yet to flow through? That's like -- because again, you were margin negative, I guess, in the third quarter.

If you get the fourth quarter with no fresh price increases at the same tungsten, you still have some stuff that flowing through, is that how that works?

Exactly, I mean -- and the reason it's affecting Infrastructure is because the amount of material -- raw material in the Infrastructure is much higher. So we put price increase 6 months ago.

If the customer doesn't buy that part until this quarter -- I mean, the price doesn't get included until all of those sales go through, right? So that's what's happening.

It takes us 12 months to recover. This is the last quarter of recovery.

Thank you, Regina. This concludes our discussion.

Please contact me, Quynh McGuire, at (724) 539-6559 for any follow-up questions, and thank you for joining us.