Jul 26, 2012
Executives
Quynh McGuire - Director of Investor Relations Carlos M. Cardoso - Chairman, Chief Executive Officer and President Frank P.
Simpkins - Chief Financial Officer and Vice President
Analysts
Eli S. Lustgarten - Longbow Research LLC Michael Shlisky - JP Morgan Chase & Co, Research Division Adam William Uhlman - Cleveland Research Company Charles Clarke Stephen Stone - Sidoti & Company, LLC Brian Michael Rayle - Northcoast Research Steve Barger - KeyBanc Capital Markets Inc., Research Division Justin Ward - Wells Fargo Securities, LLC, Research Division Doug Thomas Henry Kirn - UBS Investment Bank, Research Division
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 Fourth Quarter Fiscal Year 2012 Earnings Call. [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 fourth quarter and fiscal year 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 to this call.
It's also being broadcast live on our website, and a recording of this call will be available on our site for replay through August 27, 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 the 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 achievement 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 the reconciliation of those measures as well.
I will now turn the call over to Carlos.
Carlos M. Cardoso
Thank you, Quynh. Hello, everyone.
Thanks for joining us today to hear about Kennametal's fourth quarter and fiscal year 2012 results. I'm pleased to report that in fiscal 2012, Kennametal again made excellent progress in further implementing our strategies.
We outperformed our markets and set new performance records. We established clear goals, realized further improvements in operational efficiencies while successfully managing multiple headwinds.
As a result, we more than delivered on our financial target exceeding 15% EBIT margin and 15% return on invested capital. We achieved those measures a full year earlier than planned.
This performance represents the second year of all-time records for profitability and return levels. For fiscal 2012, global industrial production increased by 2.9%, demonstrating that a number of end markets continue to grow.
Yet by comparison, Kennametal realized 9% organic sales growth over the prior year, clearly outperforming the industrial markets. In addition, our company-specific initiatives such as geographic expansion, new product development and complementary acquisitions continue to position Kennametal to achieve significant margin and earnings expansion.
In particular, I want to thank Kennametal employees worldwide for their dedication and engagement at all levels to drive the performance of our company. Our team demonstrated their commitment to continuing to deliver value to our customers, shareholders and colleagues around the world.
We have made outstanding progress on priorities that contributed positively to our results. This includes improved safety and productivity, as well as utilizing standardized SAP to streamline our processes and maximize efficiency.
Thanks to those efforts and steps taking over the past several years to restructure and reduce our costs, we realized $170 million in permanent savings on an annualized basis. We continue to be diligent about cost reduction actions.
As always, we are actively pursuing measures to continuously improve our operating excellence and further strengthen our foundation. We finished the year on a positive note as well, posting our 10th consecutive quarter of organic sales growth.
This reflects successful execution of our strategies across a balanced and diverse mix of served end markets and geographies. We further increased sales and strengthened our business portfolio with the recent Stellite acquisition.
During the June quarter, we did see some moderation in demand. However, the manufacturing sector continued to outgrow the overall economy.
We realized ongoing growth in industrial markets, such as transportation and latest cycle, aerospace. For the Industrial segment, on a regional basis, both Europe and the Americas reported year-over-year sales growth, while Asia declined versus a stronger comparison to prior year.
For infrastructure market, sales are flat overall despite lower production activity in North America due to relatively high storage levels in mining and energy. We view those as near-term challenges and expect to see growth return in the next 1 to 2 quarters.
Regionally, for our Infrastructure segment, sales were lower in the Americas but were strong in Asia and modestly positive in Europe. Keep in mind that Kennametal's diverse mix of served end markets and geographies should help reduce volatility across economic cycles, as demonstrated by this year's results.
In terms of geographic diversity, Kennametal sales were 46% from North America, 28% from Western Europe and 26% from the rest of the world markets for this year. Another way we improved our sales mix is through our channel strategy for the WIDIA brand, which continues to perform well and gain market share.
WIDIA is positioned as a premium brand in its addressable markets. For fiscal 2012, WIDIA brand sales grew 12% over prior year, reflecting the success of the strategy.
Further, we continue to focus on developing new products for both the Kennametal and the WIDIA brands. This supports our organic growth strategy while also maintains the market leadership position of our brands.
We generated 41% of sales from new products in fiscal 2012. Innovation enhances our value in the marketplace.
And as our strong margin performance reflects, we maintain pricing discipline to recover raw material cost inflation, especially costs related to tungsten. I would like now to share our perspective on end market trends that drive our outlook for the year ahead.
In aerospace, the recent Farnborough International Airshow in London was reported to generate orders for 800 new aircraft, totaling approximately $72 billion, which represents a substantial increase from the same event 2 years ago. Aircraft manufacturers now have a significant production backlog.
For example, Airbus plans to establish a fourth A320 plant in the U.S., while Boeing is expected to increase production by 30% to accelerate aircraft deliveries and reduce its backlog. In transportation, we continue -- production increases are expected in North America and suppliers remain relatively optimistic.
In Europe, the economic uncertainty appears to be dampening demand, suggesting further decline in auto production rates. However, the premium European carmakers, where Kennametal has stronger presence are, expected to hold production steady for the remainder of calendar year 2012.
In China, vehicle production is expected to increase modestly in the near term. In the general engineering market, the outlook for production of machinery and equipment remains favorable.
In the U.S., customers are cautious due to concerns about tax policy, health care, the election and regulatory climate. We expect U.S.
exports of machinery to show continued growth in 2012 but at a slower pace, while Europe is expected to weaken significantly. In metalworking machinery, manufacturers are benefiting from increased production of autos and commercial aircraft, partially offset by slowing in Europe and key emerging markets.
In the underground mining, the Energy Information Administration reports that year-to-date, U.S. coal production is 6% lower than prior year, and it's predicting year-over-year declines of 9% for calendar 2012 and 4% for calendar year 2013.
Although coal share of the U.S. electric power generation has been declining, it is expected to grow modestly in calendar year 2013, with the likelihood of higher natural gas prices.
In China, the coal market has slowed, while increased exports in South Africa are expected to bring growth to the industry. In the road construction, the new 2-year $105 billion U.S.
federal highway bill that was recently passed should be favorable to the industry longer term. Due to the wait time required state by state for upfront project work at various transportation departments, this legislation will likely take until calendar year 2013 to benefit highway rehabilitation activity.
In Europe, the construction outlook depends on the outcome of the debt crisis. However, Germany is expected to remain stable for the near term.
In the energy market, the rig count in the Americas increased 5% year-over-year as increased oil drilling makes up for the decline in development of gas wells. With the decline and unseasonal warm weather for 6 months to date in 2012, storage levels for natural gas have decreased and are closer to a 5-year average.
On a long-term basis, natural gas infrastructure is continued to build and is viewed as the power supply for the next century. In developing countries with increased middle classes, energy continues to grow.
Behind those market sectors, Kennametal's global team will continue to execute our strategies. We deliver historically high levels of profitability and earnings by exceeding our target of 15% EBIT margin and 15% return on invested capital in fiscal year 2012, 1 year ahead of schedule.
There is additional upside to our investment story, and we continue to focus on growing our business. At this time, I would like to make another comment on Kennametal's record financial performance.
Results like these are due to sound planning and successful execution. One of the key reasons can be attributed to our excellence in strategic planning.
During the June quarter, Kennametal was honored by the Association of Strategic Planning with Richard Goodman Strategic Planning Award. This recognition is awarded to those organizations that demonstrate strong analytical methodologies and sound processes in strategic planning.
It speaks to the fact that we have established an effective planning system to advance our strategies at Kennametal, helping us to continually deliver the promise to our customers and to be a breakaway company, one that can be profitable throughout the economic cycle. To summarize, we continue to pave the way for profitable growth.
We are diversifying our business, both organically as well as through acquisitions such as the recent Deloro Stellite transaction. Our guidance for fiscal year 2013 reflects organic top line growth of 5% to 7%, which is approximately 2x the currently forecasted industrial production growth of 3.4%.
Including Stellite, Kennametal expects total sales growth in the range of 7% to 10%. We'll continue to execute our strategies for value creation and expect to sustain strong performance over the diverse cycles represented in our portfolio.
I now turn it over to Frank, who will go into more detail on the financials.
Frank P. Simpkins
Thank you, Carlos. I'll start off by making some overall comments on the full fiscal year and then I'll review the fourth quarter in a little bit more detail.
Some of my comments are non-GAAP. So please refer to the reconciliation schedules provided in our earnings release and related Form 8-K.
Let me start off with fiscal '12. I'd say that fiscal '12 was another record performance for sales, profitability, earnings per share and return on invested capital for Kennametal.
We more than delivered on our goal to achieve 15% EBIT and 15% return on investment capital, 1 year earlier than our commitment. We also enhanced our overall financial position, liquidity and financial flexibility.
We refinanced our $300 million 10-year bonds at 3.875%. And consistent with our priority uses of cash, we reinvested into the business with $96 million of capital expenditures.
We acquired Deloro Stellite for $383 million. We repurchased 2 million shares of stock, and we increased annual dividend by $0.08 per share or 14%.
This is a great year on many fronts. Turning to the June quarter.
Our results were also strong, especially in light of moderating macro conditions. Organic sales was 1% and was notable, given the slowdown in energy and mining markets and softening macro concerns.
Our operating margin was 15.9%, and adjusting for Stellite, our operating margin was 17.6%. Earnings per share were $1.08, excluding integration cost to nonrecurring purchase accounting charges, and Stellite contributed approximately 4% per share operationally in the quarter and incurred approximately $0.06 of integration and nonrecurring charges for a net dilution of around 2% per share.
Foreign currency was a headwind in the quarter, and our foreign currency rates had an unfavorable impact of approximately $0.08 per share compared to last year. We also paid off our 2002 bonds at maturity on June 15 and we delivered strong free operating cash flow.
And we made further progress with our inventory reduction initiative. And our adjusted return on investment capital of 16.3% was a June quarter record.
Now I'll walk through the key items of our income statement. Sales for the quarter increased $45 million or 7% to $739 million, and this compares to $694 million in the June quarter last year.
The increase is due to organic growth of 1%, the Stellite acquisition contributed 10%, and more business days of 1% significantly offset by foreign currencies which had an unfavorable impact of 5%. In the June quarter, we experienced moderating conditions and unfavorable foreign currency impacts and had a significant impact on total sales growth.
Despite the headwinds, as Carlos noted, this represented the 10th consecutive quarter of year-over-year organic sales growth. Turning to the business segment sales performance.
Our Industrial segment sales of $421 million declined 4% from the prior year quarter. This was driven by 2% organic growth, offset by 6% unfavorable foreign currency effect.
On an organic basis, the increase in sales was again led by aerospace and defense growth of 14%, transportation growth of 6% partly offset by a 4% decline in general engineering. And regionally, our sales increased by approximately 7% in Europe, 3% in the Americas and declined 9% in Asia due to decelerating market conditions in China, coupled with strong comparisons from the prior year.
The Infrastructure segment had sales of $318 million and increased 24% from the prior year quarter, driven in part by the Stellite acquisition which contributed 26% growth. This was partly offset by 2% unfavorable foreign currency.
Organically, sales modestly increased in earthworks, which reflected a somewhat lower production in North America underground mining which began in April. And the highway construction business got off to a relatively slower start.
In energy, sales were slightly lower due to a decline in natural gas prices, high storage levels and reduced drilling activity. We believe these markets are currently at the bottom and expect improvements in the beginning of calendar 2013 as commodity prices move up and the benefits from the new highway bill begins to materialize.
Regionally, sales increased by approximately 11% in Asia, 3% in Europe, while sales in the Americas were lower by 5%, also due to stronger comparison in the prior year. Now a recap of our operating performance.
Our gross profit margin was 35.8%. Our gross margin also includes the full quarter of the operating results from the Stellite acquisition, which had a dilutive impact to Kennametal's gross margin due in part to purchase accounting and related adjustments during the quarter.
Excluding Stellite, our gross margin expanded sequentially from the March quarter by 150 basis points. More importantly, our gross margins improved sequentially as raw material consumption cost declined as anticipated and we had a better sales mix.
Additionally, our inventory declined $21 million, principally driven by a reduction in finished goods. And our gross margin was down year-over-year due primarily to the Stellite acquisition and a lower volume.
Operating expense declined year-over-year again. Overall, lower employment and related costs and favorable foreign currency exchange were partly offset by the acquisition and related costs.
As always, we remain very focused on controlling general and administrative costs in order to fund selective investments in selling-related areas. Our operating expense as a percent of sales was 19.2% for the quarter, down 140 basis points from the prior year of 20.6%.
Note also that Stellite's operating expense as a percent of sales are lower than Kennametal's and are overall are accretive to the percentage. Our operating income was $117 million compared with $115 million in the same quarter last year.
Our operating income included $1 million of net acquisition-related loss. The prior year operating income included restructuring and related charges of $7 million.
Our operating income benefited as a result of higher sales volume, pricing and lower employment costs and restructuring costs, partly offset by higher raw material costs. Our operating margin for the June quarter was 15.9%.
And as I said earlier, if you adjust for the Stellite acquisition, our operating margin reached 17.6%. Looking at the business segments' operating performance.
The Industrial segment's operating income was relatively flat at $76 million compared to the same quarter of the prior year. Industrial's operating margin included $5 million of restructuring and related charges last year.
Operating income benefited from higher sales volume, pricing, lower employment restructuring cost, offset by higher raw material costs coupled with lower absorption impacts driven by the inventory reduction. Industrial's operating margin was 18.2% compared with an adjusted operating margin of 18.7% in the prior year.
Infrastructure segment operating income was $42 million, and this compares with $38 million last year. Infrastructure's operating income included $1 million of net acquisition-related loss versus $2 million in restructuring and related charges in the prior year.
Our operating income in this segment benefited from sales volume, price realization, lower unemployment and restructuring cost, also offset in part by raw material costs and acquisition-related costs. Excluding the Stellite acquisition impact, Infrastructure's operating margin was 17% for the June quarter, compared with an adjusted operating margin of 15.6% in the prior year quarter.
Interest expense increased in the quarter -- $3 million year-over-year, I should say, in the June quarter to $8.5 million due to higher debt levels attributable to the Stellite acquisition and the February bond issuance partly offset by lower bank revolver borrowing margins. The $300 million June 2002 notes were paid off at maturity on June 15.
Interest expense increased $500,000 sequentially versus the March quarter due to higher debt levels attributable to the acquisition. The effective tax rate was 20.3%, and this compares to 20.8% in the prior year quarter.
And regarding our bottom line performance, we reported the June quarter diluted earnings per share of $1.06 compared with the $1.04 in the prior year quarter. And the June quarter earnings per share included acquisition-related dilution of $0.02 and an unfavorable impact of $0.08 due to foreign currency while the prior year earnings per share included restructuring and related charges of $0.07.
Turning to cash flow. Our cash flow from operating activities was $290 million compared with $231 million in the prior year.
Net capital expenditures were $96 million, compared to $74 million in the prior year. Our free operating cash flow for 2012 was $193 million compared to $157 million in the prior year.
As noted earlier, we have consistently generated a strong operating cash flow, providing substantial liquidity and capital for growth. We are highly disciplined in our capital allocation process and ensure that we invest in initiatives with the highest growth potential.
We also actively manage our business portfolio. As Carlos said, we invested approximately $383 million in the Stellite acquisition and have strong growth opportunities, and we returned over $110 million to shareholders through share repurchases and dividends this year.
As I noted earlier, we repurchased 2 million shares during the fiscal 2012 period and increased our dividend 17% in October. Our disciplined and balanced investment approach is a key contributor for long-term returns.
Our balance sheet remains strong. Our cash position was $116 million.
And we remain focused on improving our working capital, including DSO, inventory turnovers and DPO which were at similar levels to the June quarter compared to March. As discussed earlier in the year, we also continued with actions to better balance our inventory levels.
And as we get into fiscal '13, we expect to make even further progress. At June 30, our total debt was $566 million, down $75 million or 12% from March 31, due to strong free operating cash flow.
Debt was up $253 million versus the prior year, and that's due primarily to the Stellite acquisition and the September quarter share repurchases. During the June quarter alone, our strong free operating cash flow enabled us to pay down 20% of the Stellite acquisition debt.
And our debt-to-capital ratio at June 30, was 25.3% compared to 15.9% last year. Our U.S.
defined benefit pension plan remained 100% funded, and our adjusted return on invested capital was 16.3%, up significantly from 14.8% in the prior year. Now I'll give you a quick update on Stellite.
The integration of Stellite is progressing well, and it's in line with our plan. In fiscal '13, we'll focus more tightly on aligning our functional organization, enabled by the implementation of SAP at the principal Stellite operating locations.
For the quarter, Stellite's reported dilution impact on earnings per share was approximately $0.02, and this included approximately $0.06 per share of purchase accounting and integration and related charges, offset by Stellite's operational contribution of approximately $0.04, demonstrating a favorable trend in operating performance. For the year, Stellite's reported dilution impact on earnings per share was $0.09, which includes $0.13 per share of purchase accounting and integration of related charges and Stellite contributed $0.04 operationally for the 4-month period year-to-date.
Now I'll touch on our outlook.In summary, our outlook for fiscal 2013 has earnings per share at the midpoint going over 10% from the prior year. And as Carlos noted, this assumes a 5% to 7% top line organic growth.
Also, we'll continue to follow our priority use of cash. We announced that we increased our dividend by 14% and expanded our share repurchase authorization program from 8 million shares to 12 million shares.
Our outlook for fiscal '13 also takes into consideration a moderation in industrial activity and short-term slowing related to natural gas drilling and underground coal mining in North America. However, we expect to WIDIA to continue to grow faster than the market.
The acquisition of Stellite realized benefits from synergies and our overall company-specific strategies will help us outperform the global IPI. We still believe our margin opportunity potential has room to expand in long term as the markets are expected to continue to grow, raw material prices stabilize and our strategies drive additional opportunities.
The following are assumptions also embedded on our outlook to help you with your model. As I said earlier, we're projecting 5% to 7% organic growth, which is outpacing global industrial production.
Regarding the Stellite acquisition, we expect operational earnings contribution in the range of $0.20 to $0.30 per share. Integration costs primarily for the implementation of SAP are forecast to be approximately $6 million or $0.05 per share.
So on a net basis, we expect Stellite will contribute earnings per share in the range of $0.15 to $0.25 in fiscal '13. Foreign exchange is expected to be a significant headwind compared to the prior year and will have an unfavorable impact on operations, which we estimate to be $0.20 to $0.25 per share.
Interest expense is expected to average approximately $6 million a quarter. That's down $3 million -- or $0.03 per share due to our bond refinancing.
So that will be a favorable pickup. And our effective tax rate is expected to be between 24% and 25% due to including the full year of Stellite's operations and an unfavorable jurisdictional mix, which we estimate to be $0.20 to $0.25 per share lower than the prior year.
Earnings are expected to be somewhat consistent with our historical seasonal pattern, with 40% of earnings in the first half and 60% in the second half of the fiscal year. Consistent with our capital structure principles, we plan to reinvest back in the business with CapEx between $115 million to $125 million for inclusion of expanding tungsten production capability, growth, productivity and some international expansion.
We also approved an increase to our dividend of $0.02 per quarter or 14%. And we increased our share repurchase program to 12 million shares, with 8.5 million shares available under the amended authorization.
We expect our free operating cash flow to approximate 80% to 100% of net income, and this will become an objective for us going forward to move towards 100%. And our compensation metrics have been modified to include free operating cash flow as a metric.
Based on these factors, we expect earnings per share for fiscal '13 to be in the range of $4.10 to $4.40 per share. The midpoint of this range represents a 10% increase for fiscal '12 adjusted earnings per share of $3.86.
At this time, I'd like to turn it back to Carlos for a few closing comments.
Carlos M. Cardoso
Thank you, Frank. As demonstrated in this past year's results, we believe that we can sustain and significantly grow profitability, earnings and return levels.
We look forward to fiscal 2013 and remain committed to executing our strategies. We continue to focus on balancing our served end markets, business mix and geographic presence to more effectively manage risks associated with cyclicality.
We will also maintain discipline regarding our manufacturing footprint and cost structure. Kennametal's fiscal year 2013 outlook reflects our continued expectation to outperform global industrial production to company-specific initiatives.
Our EPS guidance at the midpoint represents a 10% increase from prior year, as Frank mentioned. In addition, we expect to continue generating strong cash flows, which provide us with a stronger financial position, enhanced operating flexibility and greater liquidity.
Most importantly, we will remain disciplined in our capital allocation process and seek to maximize shareholder value. Our priority uses of cash will be consistently applied to acquisitions to enhance our technology platforms, reinvesting strategically in our business, repurchasing shares and paying dividends.
As Frank said, our board has approved expanding our buyback authorization to 12 million shares from 8 million shares and additionally approve a 14% increase in the dividend. Both of those actions represent our commitment to shareholders, as well as our confidence in Kennametal's strong cash generation ability going forward.
In summary, we'll continue our journey of always improving our customer-centric enterprise as part of being a breakaway company, one that is profitable throughout the economic cycle. Thank you for your interest in Kennametal.
We will now take questions. Thank you.
Operator
[Operator Instructions] Your first question will come from the line of Eli Lustgarten with Longbow Securities.
Eli S. Lustgarten - Longbow Research LLC
Can you -- can we talk a little bit about the guidance? You talked about 5% to 7% organic growth.
Can you perhaps give us some insight of the components of the 5% to 7%, how much is Industrial, how much you think is Infrastructure? Which markets are generating that kind of growth because it's really a mixed bag out there?
And I assume -- and additionally, geographically, some idea where it's coming from.
Carlos M. Cardoso
Yes. I mean, we will not break it down in -- from Infrastructure and Industrial.
However, I can tell you that the end markets are going to expect -- we expect to grow. It's obviously aerospace.
It's automotive, as you saw in the capital goods market today. The automotive or transportation outpaced -- carried that growth.
We continue to see that. We expect that the energy will come back in the second half of the year, our fiscal year.
And we also think that the highway bill is going to help our business in the second half of the year. And relative to geographies, I think we'll see the North America market to continue to lead.
And perhaps, the rest of the world is going to come a little better for us and then followed by Europe. And again, I want to remind you that we grew 3x IPI this year.
And our plan consists of growing IPI by 2x. So the question is, what happens if IPI is lower?
We also have the fact that we can grow 3x IPI. So we think that it's a pretty balanced outlook.
Eli S. Lustgarten - Longbow Research LLC
So, is it fair to say that you're sort of expecting most of the top line to come in Industrial, and Infrastructure will probably have a more difficult first half of '13 and to sort of improving second half? Is that sort of the profile you're looking at?
Frank P. Simpkins
Yes. Eli, I would say that, particularly in the Industrial side, I think -- we expect the first half to be a little bit softer particularly from Europe and China.
We expect us a bit of rebound there in '13. And very similar to what Carlos said, in the second half, we also expect the construction bill, the energy.
And Stellite will start to come into the organic calculation when we have it for the fourth quarter. And we expect a little bit of an opportunity particularly into the IGT and some of the energy sectors that we were not in previously, which opened the door with the Stellite acquisition from a platform perspective.
So we think that will help us in the second half as we go forward because that will be embedded in the organic growth.
Eli S. Lustgarten - Longbow Research LLC
And can you give us an update of what -- of how the -- your arrangement with Fastenal is working at this point? Are you seeing much -- do you have much in there for expectations in 2013?
And how is the rolling out of the product into Fastenal system working?
Carlos M. Cardoso
Yes. I would say that we met all our expectations, which were aggressive expectations with Fastenal for 2012.
Eli S. Lustgarten - Longbow Research LLC
Give us the -- some idea of how big it was in 2012 or what that means -- or what numbers looked like?
Carlos M. Cardoso
I mean, I think it's still small for us to quantify that. However, we have very high expectations going in 2013 with Fastenal and -- but again, it's a low percentage, but the growth percentage is tremendous, the pin [ph] growth percentage.
Frank P. Simpkins
Eli, I would expect WIDIA sales to do better in '13 than they did in '12, if that helps you.
Eli S. Lustgarten - Longbow Research LLC
Okay. And can you -- this will be my final question.
Can you talk a little bit about the ability to sustain profitability? I mean, you're starting to get numbers that are quite respectable even in the softening kind of markets that we're seeing macro environment.
And what's your expectations on profitability? I assume it's basically just the whole profitability in '13 more than any major expansion.
Carlos M. Cardoso
So Eli, I would start now -- I'll let Frank add. I would by saying without Stellite, our EBIT margin was over 17%.
So if we add 0 organic growth going forward, we should be able to maintain the 15%. Then when you put Stellite on top, which is, I mean -- we are pretty optimistic and confident that we can be at 15-plus percent EBIT margin even if we don't experience growth.
Frank P. Simpkins
The only thing I'll add there, we do have some investments, Eli, built in from both a combination of headcount and some cost from strategies. We, obviously, can control those.
We can defer them to help -- if there is a further softening. And I also anticipate raw material cost, particularly in the second half, should come down on a year-over-year basis.
So we should see that benefit come through in addition of what Carlos said, just a couple of points there are.
Operator
Your next question comes from the line of Ann Duignan with JPMorgan.
Michael Shlisky - JP Morgan Chase & Co, Research Division
It's Mike Shlisky filling in for Ann today. So we've been seeing on few press reports recently about the potential lack of availability of tungsten coming out of China.
They have been [indiscernible] exports on certain rare earth materials. Just wondering if you've seen any impact to your supply chain from those kinds of reports that have been coming out.
Carlos M. Cardoso
Yes. First of all, we have not seen any interruption or any difficulty in getting tungsten.
I also like to remind you that more than 50% of our tungsten that we buy, you could go up to potentially -- even 75% of our tungsten that we acquire comes from western sources that rely significantly on working scrap, in other words, taking scrap and turning it to material. So we do not see or anticipate an issue with getting raw materials.
Frank P. Simpkins
Yes. The only thing, Mike, I'd add to that is first, there is talk in the U.S.
of releasing some strategic stockpiles [indiscernible] they are trying to make some noise in the U.S. But the blessing in disguise there is as you know, we've been chasing our inventory down all year.
So we're focused on finished goods. And we probably have an adequate supply of tungsten at this point.
So I don't see any near-term issues. And if anything, the price should continue to stay where it's at or potentially go down later on.
Michael Shlisky - JP Morgan Chase & Co, Research Division
Okay, great. Just a second one here.
From your comments earlier about North American transportation, I was wondering if you can perhaps break down for us which areas of that end market are kind of doing better than others?
Carlos M. Cardoso
I mean, the automotive in North America is going -- it continues to increase their production. I mean, we -- as you know, we participate in the new projects yet to come.
Our facility is still in Ohio. It is near capacity with new projects.
They are going to be deployed in the next 12 months, which continues to show us -- and the quoting activity continues to show us that, that market is going to stay robust. And as I said, in Europe, we participate in high-end cars, the German cars.
That is going to pretty much stay flat. And we're starting to see a rebound in the automotive in China as well.
Operator
Your next question comes from line of Adam Uhlman with Cleveland Research.
Adam William Uhlman - Cleveland Research Company
Frank, congrats on the -- on getting the inventory down. I'm wondering if there was an additional earnings impact from that in the fourth quarter.
I might have missed it. And then is there -- what's built into the guidance for this year in terms of inventory reduction, both the impact to earnings and then what you think you can get absolute dollars down by?
Frank P. Simpkins
Yes. I'll only start with the fourth quarter.
We're down 21 net, I would say a combination of finished goods and some raw materials there. And I would say that the second half impact was about $0.07 per share, most of that -- which happened in the fourth quarter.
So we think that's pretty much behind from that perspective. But as we go into fiscal '13, right now, I want to reduce inventory at minimum, 10%.
So I'm talking about $60 million approximately. And the related unfavorable absorption is already built into the plants.
So there's no significant impact that I would call up. But we'll continue to focus on reducing inventory.
And that's a big area for cash flow generation as we go forward. I think from both the SAP system, our internal processes and aligning free operating cash flow with the bonus metrics, I think we'll get the desired behavior as we go forward.
Adam William Uhlman - Cleveland Research Company
Has there been any impact of fill rates from taking down the inventories?
Carlos M. Cardoso
Yes. Our fill rates have improved significantly.
Adam William Uhlman - Cleveland Research Company
Okay. And then just a clarification on the tax rate, how should we be thinking about the earnings progression through the year between the U.S.
and international earnings? It sounds like the domestic earnings is going to be a bigger chunk of the earnings this year unless there is some other type of an adjustment.
Frank, could you just kind of walk through that, how that plays out this year?
Frank P. Simpkins
Yes. Again, I think you're right.
I think with the benefit of our European structure being down a little bit and higher incomes and other jurisdictions, it's going to put a little bit of pressure on it. And I think we have that pretty well in line with the 40-60 split with our earnings off of the midpoint.
So we think that we should be in a -- can we get a couple of discrete benefits which we would call out maybe short term if we can resolve a couple of things, which I wouldn't put necessarily in the guidance? And then the other wild card will be in the United States if they decide whether it's a lame duck session or after the election if they decided to do something with the RD&E credit.
So I have not built anything in nor we allowed to build anything in the tax rate as we go forward. So if you take the discrete items out, the Stellite had an overall effect of higher tax rate or, call it, above Kennametal's.
So I'd say most of the 24%, 25% reflects the impact of Stellite. It expects the earnings switch there.
And if we have any potential upside, it will be from some discrete items maybe in the first half, depending on what happens with election.
Operator
Your next question comes from the line of Julian Mitchell with Credit Suisse.
Charles Clarke
It's Charlie Clarke for Julian. It just seemed that the European businesses held up pretty well in the June quarter.
I just don't know if you can add any color on the last 3 weeks in those businesses.
Carlos M. Cardoso
I mean, I think so far, what we see is aligned with our guidance. I want to say that if you guys follow our orders, we put orders in the first 2 months of each quarter.
The orders are very -- we have -- as an example, this quarter, the first 2 months of the quarter were very challenging and June was a great month for us. And so we try not to predict or react too much to 1 month to another because, I think, the customers are -- our fill rates are very good.
So the customers tend to get stuff from -- orders, stuff when they absolutely need it because they know that we're here and we're going deliver for them. So as a result of that, we see within the quarter pretty good month and pretty bad month.
And this has taken place for the last couple of quarters. So I wouldn't judge where we are today to -- I wouldn't read to much into everything -- to anything, but we feel good about Europe.
And I remind everyone that the majority of our sales comes from Germany in Europe, which is a blessing right now. Germany continues to hold their own.
Frank P. Simpkins
Yes. I would -- Charlie, I would add.
And I think some of the newer products and the strategies that the European leadership team is doing is continuing to drive very good results. And I think as Carlos talked about some of the steel plants, whether it was Solen or whether it's Lichtenau in Europe, we've seen a lot more activity in the steel plants, which is a very good leading indicator for us as we look at our business because when they're packed, if we are making tooling, they eventually are going to go into the energy market, the aerospace, transportation.
And later on, you get the pull-through when you put the inserts in the pockets. And given the automotive and transportation stuff that Carlos alluded to, there is going to be an opportunity.
So I would think it's a combination of the transportation. And believe it or not, some of the business in the infrastructure is actually still hanging in there.
Charles Clarke
Okay, great. And I'm just curious to just kind of that IPI forecast that you guys put out there, the 3.5% or the 3.4%.
Is it fair to say that if we kind of look at the IPI by region that your regional forecast are pretty similar to those as well, kind of 1.5 to 2x, like the regional IPIs or is there any kind of...
Frank P. Simpkins
I'll start and Carlos could add. I mean, we looked at it.
I would say the Americas is a little bit below that. We expect Western Europe to be flat to slightly negative, particularly in the first half of the fiscal year, and then it gets a little bit stronger in the March and the June quarter.
And then I would say Asia, we're assuming for global industrial production like a 6-ish kind of number there. So when you take Americas, add a little less than 3%, a slightly negative Western Europe front half loaded, and the overall Asia of about 6 to 7 in that range.
That's we're getting into that 3.4% with -- at the sequential -- I would say the toughest part is the September quarter. And then it's pretty much consistent as we go out with 1 or 2 offset in the other.
Carlos M. Cardoso
Yes. And this goes to show you that our guidance already assumes that Europe is not going to do as well.
Operator
Your question will come from the line of Stephen Stone with Sidoti & Company.
Stephen Stone - Sidoti & Company, LLC
Just a quick questions -- I have 2 questions here actually. First, can you speak more about raw materials?
Have you caught up in prices? I thought you had already done it in Industrial?
Frank P. Simpkins
Yes. I think we're pretty much aligned as we've said.
It probably was -- we probably were a quarter behind. But as we entered the fourth quarter, as reflected in the sequential improvement in the infrastructure margin, we think we're pretty much where we need to be.
APT has been basically -- this is market, not what we pay. But the APT price has been in the range of 3 90 to 4 15 and this -- at this point, it's been somewhat stable.
So we think we're where we need to be.
Stephen Stone - Sidoti & Company, LLC
Okay. And then can you just talk more about what you're seeing in the Asian markets, I guess especially recently, it looks like you're seeing a slower growth there as well?
Carlos M. Cardoso
Yes. I think that we experienced that in the fourth quarter and it's obviously reflected in our results.
Now I'll also remind that the comps from our fourth quarter, I mean, were very, very high in Asia. So we continue to see some growth.
Like Frank said, when we look at 2013, we anticipate IPI to be about 6%. So we feel that the automotive is going to continue to drive that -- the automotive industry, so transportation, as well as -- we think that the energy and mining is going to come back towards the second half of the year.
Frank P. Simpkins
Yes, I would say actually, the Infrastructure business performed pretty decent in China. That's both mining, as well as surface mining, which was a strategy to get into the adjacencies.
And why I'd say -- it was probably that the softer spot was, I'll call it, local manufacturing in China. So the BYDs, the Cherys, the Geelys, et cetera, where we saw a little bit of an unfavorable mix there, while the exports were good, where we got the benefit in Europe.
We saw the domestic auto manufacturers a little bit softer and we expect them to pick up here when the new person takes over in China.
Carlos M. Cardoso
The new government.
Frank P. Simpkins
Yes.
Operator
Your next question comes from the line of Brian Rayle with Northcoast Research.
Brian Michael Rayle - Northcoast Research
Most of my questions have been answered. But you guys had kind of said historically that you could do about $3 billion in sales with the current footprint.
It's a good problem to have but you're kind of getting close to that. Is there -- does that theoretically move up from here?
Or do you think you need to start adding more capacity?
Carlos M. Cardoso
Yes. So the -- we're forecasting 3-plus billion dollars in sales.
You got to consider 300-plus is in acquisition. By the way, it's probably -- the capacity utilization in the new acquisition is probably in the 50% to 60%.
So that gives us a little more there -- a little more. So -- and every year, through lean benefit, we get about 4% to 6%.
We free about 4% to 6% in capacity. So to the extent that it's going to take us until next year or the year after to get like $3.5 billion -- is sort of the new number that we're looking at as a result of the acquisition.
Brian Michael Rayle - Northcoast Research
Okay, got you. So $3.5 billion total including...
Carlos M. Cardoso
Yes, in total. That way.
Yes.
Brian Michael Rayle - Northcoast Research
Okay. So basically, since you -- I think you gave that number out in '08, the $3 billion number, we can grow that at around the midpoint of, say, 5% a year since '08 to get kind of what the quarter or previous Kennametal with that?
Carlos M. Cardoso
Yes. I mean, directionally right.
Yes.
Operator
Your next question comes from line of Steve Barger with KeyBanc Capital Markets.
Steve Barger - KeyBanc Capital Markets Inc., Research Division
I've been jumping around on a couple of calls. So if this has been asked, just let me know.
But thinking about your sales in Asia or China specifically, I know you expect to outgrow industrial production, but will that growth by the same magnitude is what you did last year? Or is your relative growth rate changing in any of the regions?
Carlos M. Cardoso
It is about the same. I think the one area that is going to probably do better is India but not by much.
Frank P. Simpkins
Yes. The other thing, we did put some investments in Australia as we continue to look at, I'll call it, the earthworks component, whether it's mining.
We put a new facility up in Baotou, China for drum. So I think a combination, we should see a little bit of a pickup there between surface mining, as well as some of the drums on the earthworks side in Asia.
So that should be a little bit stronger as we get into a little bit more capacity into these smaller facilities. But everything else, I agree with Carlos.
Steve Barger - KeyBanc Capital Markets Inc., Research Division
So if North America were to moderate a touch more, do you think you'd pick up share or just kind of maintain where you are relative to the cycle?
Carlos M. Cardoso
Well, I mean, if -- one of the things is if we are outpacing industrial production, that implies that we're gaining share. And so our forecast going forward shows that IPI is going to be slightly lower in North America versus this past year.
So our growth will moderate in North America, but we still are growing at least 2x IPI.
Frank P. Simpkins
I would -- with North America piece, as we talked earlier, I think WIDIA should help us and grow faster on the WIDIA side with the Fastenal and kind of the value-added resellers. And I would expect in the second half of '13, particularly some of the highway construction bill, to pick up in there.
We're also seeing some signs of some life and some energy just looking at some of the, I'll call it, steel projects and some of the orders we're seeing relative to energy. It's up.
So we think maybe that's either the -- I'll call, the December quarter or early part of '13.
Steve Barger - KeyBanc Capital Markets Inc., Research Division
Great. And one last one.
Nice to see the increased buyback authorization. Did you guys talked about a specific trigger that will cause you to get more aggressive?
Or is this going to be more mechanical in terms of reducing share count? Did you already talk about that?
Carlos M. Cardoso
No. I mean, it's going to be a combination of -- we're going to follow sort of our strategy of redeployment.
I mean, obviously, it has to do with where we are in the acquisition pipeline and where the share price is and so forth. So again, I encourage everyone to look at what we did in 2012, which was we bought 2 million in the first quarter and made a large acquisition in the third quarter, so -- and by the way, increased dividends last year.
We increased dividends this year again. So we want to have the flexibility of -- if the acquisitions don't come through and the stock doesn't do better, obviously, we have the ability to go buy up to the full authorization.
Operator
Your next question comes from line of Justin Ward of Wells Fargo Securities.
Justin Ward - Wells Fargo Securities, LLC, Research Division
You kind of answered my question, which was what are you guys seeing that gives you the conviction that your sales to North American energy and mining markets have bottomed. I think you just mentioned you're seeing some improved orders there.
Can you elaborate on that a little bit?
Carlos M. Cardoso
Yes, I mean, I think our quotes are very strong. I think our orders that are led to the sort of steel orders that lead into -- are indicated and lead into our insert sales and our stock are strong.
But I want to continue to remind everyone, our models -- our forecast models are pretty good. Last year, we -- a year ago, we forecasted our growth.
We are pretty close to our forecast even though the IPI and all this stuff is going on. It went significantly down.
We still delivered 3x the IPI. So we have a fairly good level of confidence in the guidance that we're giving.
And again -- and every one is consistent with our previous years, 40% in the first half, 60% in the second half. It is mainly due to work days, vacations in Europe and all that stuff.
That's pretty much historical.
Justin Ward - Wells Fargo Securities, LLC, Research Division
And that 40% to 60%, does that apply to sales, as well as EPS?
Frank P. Simpkins
No. Sales is anywhere is from 47%, 48% in the first half and then the remainder in the second half.
That's been kind of the split.
Justin Ward - Wells Fargo Securities, LLC, Research Division
Okay. And then just one last quick one.
You talked about the EPS impact of currency next year, what are you expecting for the top line?
Frank P. Simpkins
Well, I would say it's almost 4% of top line sales. That's over $100 million.
It's a big impact.
Operator
Your next question comes the line of Doug Thomas with JET Investment.
Doug Thomas
But Carlos, I think sometimes people, investors, analysts in particular, lose sight of the big picture. And I just -- I wanted to -- one other thing that's always impressed me about Kennametal in the years that I've covered the company is the direct alignment between compensation and performance, the significant insider ownership, and the fact that you guys spend money in general and make investments like it was your own money as opposed to many other companies out there.
And so I think maybe it might be helpful if you could just -- because a lot of guys don't read proxies and don't pay attention to much of this stuff. And obviously, with the stock having come in from where it was and trading at the valuation it's currently trading at, I think maybe you should remind people about the fact that you do have direct alignment and that you are -- you guys are consistently acting in the best interest of shareholders when it comes to running the company.
Carlos M. Cardoso
Yes. I mean, the point is -- I mean, that's a good point.
I mean, obviously, our compensation is very mechanical to be [indiscernible] formulaic. And so if we -- whatever guidance it is, our compensation depends on that guidance.
So we would not think of giving guidance that we did not have a very strong conviction to that guidance because at the bottom line, it's going to cost us in our pocketbook significantly. And for me, personally, as you can read in the proxy, my compensation is close to 70% at risk.
So there is a big incentive for me to be very cautious about the guidance that I put out there. So there's a lot of work that goes on, too.
And like I said, even if you look at last year, we had the same question that we had last year and it was, "we kind of don't believe, your guidance is too aggressive growth," and all that stuff. And guess what?
And by the way, it turned out to be much worse than what we talked back then that the whole economy, and here we are. We met all the objectives, and so we feel very good.
And Doug, I appreciate your words because that is so true.
Operator
Your final question comes from the line of Henry Kirn with UBS.
Henry Kirn - UBS Investment Bank, Research Division
You mentioned that WIDIA grew 12% last year. What kind of growth expectation is in the guidance for WIDIA for '13?
And can growth rates remain at or above 2012 levels?
Carlos M. Cardoso
Higher. It's going to be higher than those levels.
And one of the reasons for that is that last year, we also had some products that we moved from WIDIA to Kennametal. So this year, it's going to be a like-to-like and it's going to show us a higher growth.
But we're not going to specifically talk about that for competitive reasons, the exact number, but it's higher.
Henry Kirn - UBS Investment Bank, Research Division
Okay. That's helpful.
And forgive me if I missed this, but what share count is the EPS guidance predicated on?
Frank P. Simpkins
It'll be down a little bit, Henry, because we have twofold -- as Carlos said, we're probably by between 2 million to 2.5 million evenly over the quarters. That's for planning purposes.
And then we typically issue -- it's a bit like 800,000 shares. That happened in the first quarter.
So at minimum, we'll be doing 2 million to 2.5 million. That's what's in our plan and, as Carlos said, consistent with our priority uses of cash.
Pending all the acquisitions, the timing, we could accelerate it or we'll see how we best to play our funds.
Operator
Our Q&A period is now complete. I will now turn the conference back over to Ms.
McGuire for any closing remarks.
Quynh McGuire
Thanks, Regina. This concludes our discussion.
Please contact me, Quynh McGuire, at (724) 539-6559 if you have a follow-up question. Thanks for joining us.
Operator
Today's call will be available for replay beginning at 1:00.