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 Eli S.

Lustgarten - Longbow Research LLC Ann P. Duignan - JP Morgan Chase & Co, Research Division Julian Mitchell - Crédit Suisse AG, Research Division Andrew M.

Casey - Wells Fargo Securities, LLC, Research Division Adam William Uhlman - Cleveland Research Company Walter S. Liptak - Barrington Research Associates, Inc., Research Division Brian Michael Rayle - Northcoast Research Stephen Stone - Sidoti & Company, LLC Steve Barger - KeyBanc Capital Markets Inc., Research Division Samuel H.

Eisner - William Blair & Company L.L.C., Research Division Holden Lewis - BB&T Capital Markets, Research Division Tim Bui - Third Avenue Management, LLC

Thank you, Regina. Welcome, everyone.

Thank you for joining us to review Kennametal's first quarter fiscal year 2013 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 November 26, 2012. I'm Quynh McGuire, Director of Investor Relations for Kennametal.

Joining me for our call today are Chairman, President and CEO, Carlos Cardoso; Vice President and CFO, Frank Simpkins; Vice President, Finance and Corporate Controller, 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. Hello, everyone.

Thanks for joining us today. As we enter the first quarter of fiscal year 2013, we expected to face some economic challenges.

However, political uncertainty in the U.S., sovereign debt issues in the eurozone, pending leadership transition in China and slowing growth in emerging markets have curtailed demand in many of our served end markets more than we initially anticipated. For the September quarter, we reported earnings per share of $0.57 on $629 million of sales compared with prior year period of $0.88 on $659 million in sales.

Despite the effect of the decreased volume and low absorption of manufacturing cost, we deliver an operating margin of 10.8% for the quarter when adjusted to exclude the Stellite acquisition. This margin performance is due to our relentless discipline on controlling costs.

Also on an adjusted basis, we maintained strong return on invested capital of 14.6%. We have contingency plans to further reduce cost and maximize our cash flows.

Although market conditions make organic growth more challenging in the near-term, we remain highly focused on cost control to deliver mid-teens EBIT margin for the full year. Also, Kennametal consistently generates strong cash flow each year throughout the economic cycle.

As end-user demand softened during the quarter, particularly in the month of September, it was further intensified by inventory destocking. Our customers, particularly distributors, are working down their inventory levels.

We believe that those challenges are near term in nature, fueled by uncertainty since we expect that pent-up demand to be realized in the future. As a consumables business, our products are required in manufacturing processes and must be replaced regularly.

Sooner or later, customers need to replenish their inventories. At the International Manufacturing & Technology Show or IMTS, held in Chicago in September, we showcased innovative and new products for both Kennametal and WIDIA brands.

Registration for the show marked the highest level ever, and machine tool builders reported seeing healthy level of customer interest. We believe those are encouraging indicators for longer-term sentiment.

In the meantime, we'll continue to execute our strategies to maintain high profitability, financial flexibility and our strong balance sheet. In addition to further reducing our cost structure, we are deeply focused on maximizing cash flows.

Accordingly, we have scaled back on our planned capital expenditures for fiscal year 2013 from the prior level of $115 million to $125 million, to a new range of $95 million to $110 million. At this time, I would like to provide an overview of end market trends.

In aerospace, IHS Global Insight expects commercial global production to increase 32% in 2012 and 16% in 2013, which suggests the aircraft production is back on track. In general engineering, the Institute for Trend Research reports that U.S.

capacity utilization has been high and increasing machinery inventories may suggest some overproduction. Therefore, manufacturers and distributors may be inclined to decrease inventories as industrial markets reflect a slowdown in the near term.

In transportation, light vehicle sales in North America has benefited from improved credit conditions, but the overall economic growth environment remains tedious. Vehicle sales in North America are expected to grow moderately through the remainder of calendar year 2012.

In Europe, production is expected to decline end of December quarter, and this demand outlook was revised to reflect that 2013 sales are estimated to be lower than 2012. European production is not projected to return to its 2011 high level for several years.

In China, passenger vehicle production has higher, but light commercial vehicle production decline year-over-year. In India, light vehicle production declined partially due to a local manufacturer's plant shutdown due to labor unrest.

Consumer confidence, credit availability and pent-up demand will play key roles in strengthening auto demand. In mining, the 2012 year-to-date thermal coal consumption in the U.S.

declined by 27% from prior year. This is primarily due to many utilities switching from coal to natural gas.

Currently, the electricity sector coal stockpiles at all-time level, and coal production has been lower year-over-year. China and Australia also have an oversupply situation.

However, there is modest growth projected in South Africa, which is forecasting 3% year-over-year growth of imported coal. In the oil and gas markets, there has been measurable slowing in drilling activity with world rig count decreasing by 5% year-over-year.

Historically, colder weather in the northern hemisphere during the winter months helps to deplete storage levels and encourage an increase in drilling activity. Overall, we are staying the course to build a global portfolio to generate revenues in equal terms from North America, Western Europe and rest of the world markets.

Also, we'll continue to diversify our mix of served end markets to reduce volatility and mitigate downside exposure in cyclical sectors. We continue to make progress with strategic growth initiatives to increase our addressable market and gain share.

For example, our distribution-exclusive WIDIA brand strategy increases our market presence and provides innovative solutions specifically generated to customers that buy through the indirect channel. In addition, we further increase our value proposition to the marketplace by consistently introducing new technologies and developing new products to improve customer productivity.

Kennametal has successfully managed through economic headwinds in the past. We have never been in a stronger position than we are now, having effectively executed our strategies to increase operating efficiencies and deliver improved profitability.

By executing our company-specific initiatives, together with our strong balance sheet, we'll continue to position Kennametal well for future growth. 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 September quarter, and then I'll move on to our revised outlook for the remainder of fiscal 2013.

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 get straight to the point.

September quarter was a challenging quarter given the macro environment, fueled by uncertainty in the U.S. and Asia, as well as fiscal concerns in Europe.

We experienced weaker-than-expected demand in most markets, especially in our General Engineering and Earthworks businesses. September, which is typically our strongest month in the quarter, broke from past patterns.

The month started off fine but deteriorated quickly as destocking continued and demand levels from transportation customers in Europe weakened further. In addition, there were further underground coal mine shutdowns and energy customers pushed out orders.

These factors led to a weaker-than-anticipated September. And another headwind was foreign currency.

However, that was as we expected. On the other hand, as Carlos pointed out, positive in the quarter was that prior restructuring programs and cost containment measures helped deliver double-digit adjusted operating margin of 10.8% for the base business despite all the commercial challenges of the quarter.

We have initiated cost containment actions in all functions and are managing the business to market conditions while staying focused on our long-term strategies. Now I'll turn to the income statement.

Sales for the quarter were $629 million compared to $659 million in the same quarter last year. Sales were down by 4%, driven by a 7% organic decline, 5% unfavorable foreign currency effect and 1% from fewer business days, partly offset by the acquisition contribution of 9% from the Stellite business.

Looking at individual segments, our Industrial segment sales were $353 million and they declined by 15% in the prior year quarter. This was driven by 9% organic decline and a 6% unfavorable effect from currency exchange.

On an organic basis, sales declined 15% in general engineering and 1% in transportation, partly offset by sales growth of 7% in our aerospace and defense unit. General engineering was unfavorably impacted by lower sales to the indirect channels due to continued inventory destocking as a result of the slowing macro environment.

Our expectation was that destocking at distributors would end in August, especially in the United States. However, distribution inventory levels grew in September, and distributors continued to reduce purchasing activities in an effort to burn down their inventory.

Transportation was also impacted by higher unit inventory levels at dealerships. The big 3 inventory levels were at 67 days in North America compared to a normal level of around 60.

In Europe, Germany and Southern Europe slowed and implemented extended shutdowns. Many European customers implemented short-term work programs given the weakening demand rates.

And on a regional basis, our sales in industrial segment decreased by approximately 13% in the Americas, 7% in Europe and 1% in Asia. We believe that there is pent-up demand and the indirect channel sales can reaccelerate quickly once there is more certainty in the overall macroeconomic outlook.

Our Infrastructure segment sales were $276 million, and they increased 15% from the prior-year quarter, driven by the Stellite acquisition, contributing 25% growth. This was partly offset by a 5% organic sales decline, 4% unfavorable foreign currency and 1% fewer business days.

On an organic basis, sales declined by 6% in both Earthworks and energy. Earthworks continues to be impacted by weak underground coal demand in North America.

Although we saw an improvement in this sector in August, many major U.S. underground coal companies idled mines and announced additional closures in the middle and latter part of September.

This negative outlook was reinforced at the recent MINExpo show in Las Vegas. Energy is being affected by lower global demand as customers have temporarily postponed orders and have also been destocking inventory.

However, they are now forecasting an improvement in the March quarter. And regionally, our sales decreased by 11% in the Americas, 7% in Europe, and Asia sales were 5% higher.

Now a recap of our operating performance. Our gross profit margin was 33.1% compared to 38.1% last year.

The decline was due to lower sales volume, lower absorption manufacturing cost and the inclusion of Stellite in the business. However, the prior year gross margins benefited from strong organic growth and pricing, as well as favorable absorption of manufacturing cost, hence the challenging comparison.

Operating expense continues to be a good story and they declined 7% year-over-year. Overall, lower employment and related compensation cost, favorable foreign currency were partly offset by the Stellite acquisition operating expenses.

Operating expenses as a percent of sales was 22.1% for the quarter, down 10 basis points from the prior year of 22.2%. And amortization expense was 5.1 for the quarter and that's up from 3.5 last year due primarily to the Stellite acquisition.

Operating income of $64 million compared with $102 million last year. Operating income included $3 million of Stellite-operated income contribution for the quarter.

Operating income decreased as a result of lower sales volume, lower absorption of manufacturing cost and unfavorable foreign currency impact. Our operating margin for the September quarter was 10.2%.

And adjusting for the Stellite acquisition, our base business operating margin was 10.8%. The Industrial segment's operating income was $35 million compared with $73 million in the same quarter last year.

Industrial operating income decreased due to lower sales volume, lower absorption of manufacturing cost and unfavorable currency impacts. Industrial's operating margin was 10% compared with 17.4% in the prior year.

The infrastructure segment operating income was $32 million compared with $33 million in the same quarter of the prior year. Infrastructure operating income benefited from the Stellite operating income of $3 million, which were more than offset by the effects of organic sales decline and lower absorption of manufacturing cost.

Infrastructure's operating margin was 11.5% for the September quarter compared with 13.5% in the prior year. Interest expense increased approximately $0.5 million year-over-year in the September quarter to $6 million due to higher debt levels attributable to the Stellite acquisition, partly offset by lower bank revolving borrowing cost and a lower bond coupon rate.

The effective tax rate was approximately 21% compared to 23% in the prior year quarter. The current year rate reflects a net benefit from the effect of the settlements of an income tax audit in Europe, partly offset by the impact of stronger earnings in the United States where the income tax rate is higher.

And regarding our bottom line performance, we reported September quarter diluted earnings per share of $0.57 compared with $0.88 in the prior year. And the September quarter earnings per share included acquisition-related contribution of $0.01.

Turning to cash flow, our cash flow from operating activities was $3 million compared with a cash outflow of $7 million in the prior year. Net capital expenditures were $15 million compared to $12 million in the prior year.

Free operating cash flow for the quarter was $12 million or an outflow compared with an outflow of $18 million in the prior year. We remain committed to our priority uses of cash.

During the September quarter, we purchased 706,000 of our shares, and we continue to be highly disciplined in our capital allocation process to ensure that we invest in initiatives with the highest shareholder returns. Our balance sheet remains strong.

Our cash position was $111 million. We'll remain focused on improving our working capital, and our DSO, ITO and DPO were at relatively similar levels in the September quarter compared to June despite the substantial decline in economic activities.

This demonstrates that our operating model has become more adaptable to the dynamic market environment. Inventory increased approximately $32 million from June.

The increase is almost entirely attributable to raw material purchase commitments. This is related to the sales decline in the September quarter.

And as we have previously stated, we still remain committed to reducing our inventory by $60 million for fiscal 2013. At quarter end, our total debt was $601 million, up $35 million or 6% from June, due primarily to share repurchases of $26 million and a free operating cash flow outflow of $12 million, partly offset by lower foreign exchange.

That was up $288 million versus the prior year due to the Stellite acquisition. And our debt-to-cap ratio at September 30 was 26% compared to 25.3% at June 30.

And our U.S. defined benefit pension plan remains 100% funded and our return on adjusted capital was 14.6%.

Now I'll give you a quick update on our acquisition of Stellite. The integration of Kennametal Stellite continues to proceed well with focus turning to further alignment of business processes with Kennametal standards.

Most noteworthy is the project to implement SAP or integrated business operating system, which was launched last quarter. This project will further enable the efficiency in growth synergies between our organizations.

The integration team reports that 49% of all work streams are complete at quarter end, slightly ahead of our plans. During the quarter, Stellite experienced similar weaknesses in its core end markets, particularly the construction market in Asia, as well as automotive softness in Europe.

Cost control measures have been implemented to mitigate the short-term effects of the weaker commercial environment. We remain committed to our aggressive integration plan and our cost control measures will not impact initiatives critical to achieving synergies in fiscal 2013.

In the first quarter, Kennametal Stellite sales were approximately $60 million, and Stellite contributed $0.01 per share to the Kennametal results. Now I'll turn to the outlook.

When revising our guidance for fiscal 2013, we took into consideration the effects of the global uncertainty, as well as the potential for additional inventory destocking by our customers. We believe that customers are waiting for better clarity, pending the outcome of the U.S.

elections and decisions regarding the fiscal cliff situation, the ongoing fiscal and monetary challenges in the eurozone and, finally, the position that China's new leaders will take on any new economic stimulus. While underlying fundamentals suggest the resumption of growth beginning in calendar 2013, particularly in the U.S.

and Asia, we have revised our expectations with a more conservative scenario. In addition, we remain focused on cost reduction initiatives that are within our control.

In response to these many factors, Kennametal has lowered its fiscal 2013 total sales growth range from 3% to 6% to a flat to negative 3% organic sales from the previous sales growth of 7% to 10% with organic sales growth of 5% to 7%. As a result of the lower sales now expected, we reduced our earnings per share guidance for fiscal 2013 to a range of $3.40 to $3.70 from the previous range of $4.10 to $4.40.

We expect to generate approximately 35% of earnings in the first half and approximately 65% of earnings in the second half of the fiscal year. Included in this revised earnings outlook are the following assumptions: First, the accretive contribution of Stellite acquisition still expected to be in the range of $0.15 to $0.25 per share net of integration cost.

Second, foreign currency is still forecasted to be a significant headwind compared to the prior year and will have an unfavorable impact on operations estimated in the range of $0.10 to $0.15 per share. And lastly, our effective tax rate for fiscal 2013 is expected to be approximately 25% due to the year fully included Stellite, as well as unfavorable jurisdictional mix and the combined effects, which are now expected to be 20% to 25% per share lower in the prior year.

We now expect to generate cash flow from operations in the range of $320 million to $385 million in fiscal 2013 versus the previous range of $425 million to $475 million. Based on lower anticipated capital expenditures of approximately $95 million to $110 million, we expect to generate between $225 million and $275 million of free operating cash flow for the full fiscal year down from the previous range of $300 million to $350 million.

We continue to expect our free operating cash flow to approximate net income and our incentive compensation metrics continue to include free operating cash flow as a factor. In summary, we have demonstrated in the past that we have successfully navigated challenging economic times.

We are confident that we will weather the soft patch and continue on our path to premiere financial performance. At this time, I'll turn it back to Carlos for closing comments.

Thank you, Frank. As we move forward, we will execute the same strategies that have transformed Kennametal into a company that can deliver profitable growth throughout the economic cycle.

We'll continue to meet the demands of our customers by further balancing our served end markets, business mix and geographic presence. We'll continue to adhere to our cost control strategies, maintaining our reduced cost structure and further driving business efficiencies.

In addition, we'll continue to capitalize on our strong balance sheet to increase shareholder value. We'll remain disciplined in our capital allocation process with priority uses of cash to include stock buybacks, acquisitions, capital expenditures and dividends.

In summary, we will continually evaluate changing economic conditions around the world. We have always acknowledged the risks related to the macro uncertainty.

We'll make tough decisions, as needed, related to capital expenditures, manufacturing production and headcount. In the meantime, we'll continue to focus on maintaining operational excellence in every area of our business.

Thank you for your interest in Kennametal. We will now take questions.

A couple of quick things if I may. It sounds like things really did sort of step down pretty meaningfully in September.

We've heard that from other companies as well. I guess the first question is, is that continuing into October as far as you can see?

And I'm curious how long you think this destocking kind of lasts, and I guess that’s the first question.

Yes, Stephen, I think that you are correct. Things kind of, especially in the last 2 weeks of September, really declined unexpectedly.

And it's really too early relative to October. I mean, a lot of activities.

Just like in September, the last 2 quarters were the weeks that surprised us. It's too early to tell in October.

It's definitely not getting worse but too early. Relative to the stock, we did a look at this last quarter.

And typically, in the U.S., we thought that our distributors were carrying about 60 days worth of inventory. I mean this is an educated guess, in Europe about 90 days.

And that was at the rates that at the growth rates that we have projected. So with the lower growth rates, we probably had a month to each one of those areas.

And again, this is another educated guess. So I would say that we probably have -- starting in September, probably had about 3 months with the new growth rate in the U.S.

channel and maybe 120 in Europe. So I mean that's kind of the best guess we can have at this point.

And I guess, given the sort of the downshift across what sounds like most of the company based on your comments, Carlos, about end markets, do you change your view of cash utilization at this point? Does share repurchase become more or less interesting given the uncertainty?

Do the acquisitions get tougher to do? Do you sort of try to sit on your cash for a little while and make sure things don't get worse?

Or am I thinking about it the wrong way?

All of the above. I think the acquisitions are now going to get tougher.

I think that this is -- we haven't seen really a change in sort of in the mode and in the space of the acquisition. Certainly, again, as I said, we have a strong balance sheet.

We have committed to doing 2.5 million shares versus in this year. And we have -- as you know, we expanded our authorization.

So we are willing and capable of doing more if that's the best -- in the best interest of the shareholders at this point.

Yes. I would add, we have the balance sheet, as you know, to handle both buyback as well as acquisitions.

And stock buyback could become more of a priority if the acquisitions -- if we can't tie them, right? So we'll continue to be aggressive with both.

Just a clarification on the tax rate at 25% for the year. Should we assume 25% every quarter?

Or are you going to average 25%, and therefore you got to be by 26%, 27% somewhere out there?

Yes, to make it easy, it'll be 25% for the year and will probably, as best we know, 26% for the quarter 2 to 4 based upon the mix we have right now. So that's why it basically stayed at 25% despite the benefit in the first quarter.

Okay. And how big was the gain, the adjustment that you got in net settlement in the quarter?

About $3 million.

Now can you just help us a little bit on your organic growth outlook as you sort of interpreted? The first quarter was not exactly pretty, down 7%, but you had real ugliness in industrial.

I guess industrial was way down 15%, I think it was, in that. Can you give us some idea of these segments, how you see the organic growth unfolding for the next couple of quarters?

I mean I assume the second quarter will be a little bit better than the first quarter in industrial but not -- still probably down double digits. Is that sort of the way we should think about this then?

Yes, I would think the second quarter. It actually also has 1 more workday year-over-year, but sequentially, it's almost down 1 to 2 days the way the calendar fell this year.

So, yes, I would expect a slight improvement, and that's why we looked at the 35-65 but when you really take it into consideration, we expect a little more growth in the second half and that's due to some of the things that we've talked about, WIDIA construction kicking in, in the March quarter. And we don't think destocking will go past in December, there may be some -- I don't want to call it restocking, but we think that cycle will be worked through.

U.S. should pick up a little bit in a couple of other sectors, particularly, with the aerospace and defense.

Stellite will have a stronger second half. They start flipping into the organic growth numbers, and then we expect -- the cost controls that we've put in place could lower our material costs, as well as lower interest expense across the board to help us drive particularly stronger earnings in the second half.

And can you also, maybe, give us some help on operating profitability. I mean, if you want to make a mid-teens EBIT with the second quarter probably, again, a little bit better than the first quarter, looking, we are talking about over -- north of 15% in both sectors in the second half of the year, I mean, is that sort of the way the focus of the cost-cutting will be?

Yes. And by the way, that's normal.

I mean, if you look at our -- for previous year -- years, I mean, the percentage margin grows every quarter sequentially. I mean the worst, the lower percentage is always in the first quarter and the highest percentage is always in the fourth quarter.

It's historical.

Yes. The other thing I'll add to that, too, Eli, particularly in the fourth quarter this year, we actually have 2 additional workdays.

We'll get some additional benefits as sales slowly pick up, we'll get some additional absorption benefits in the fourth quarter. So the fourth quarter will be a little bit better profitability-wise/margin.

And my final question, has pricing been held up throughout this whole process? Or any pricing issues taking place as we go through the weakness in the marketplace?

Absolutely staying. The pricing is stuck.

So pricing is flat, I mean, there's no change in pricing? I mean, to this point?

No.

Can you talk a little bit about where exactly, both by end market and by region, where you saw the greatest surprise in decline in demand as we went through September?

So by region, the highest decline was North America followed by Europe, and we actually had slightly positive in Asia. By end market, the worst decline was at general engineering, followed by Earthworks and then, energy and transportation and aerospace is actually positive.

Okay. And Carlos, we are now in October 23 and just to follow-up on Steve's question, it doesn't seem like we're too early in October, given that you get daily order rates.

Why do you feel like it's too early to tell how October is looking at this point?

Because in September, we experienced the largest decline in the last 2 weeks of the month. So I mean, that -- we would have a better idea if there was not this destocking phenomenon going on.

So I mean, as Frank said, we think that sequential -- the second quarter is going to be better. It's not getting worse, but I'm hesitant to talk about knowingly that just in September -- actually, when we started the September month, we were -- our indicators were still showing us that we're not going to be too far from where we needed to be.

Okay. And just as a follow-up to that, given that you have excess raw material inventories, your customers are destocking and your decrementals were quite weak, how should we think about modeling the decrementals by segment going forward?

Well, I think that decrementals will be more pervasive in the industrial side, but I don't think Ann, we’ll have as much destockings we experienced in the industrial sector in the September quarter. It should start subsizing in the December quarter, but we don't get the big benefit on the infrastructure side given the larger material content product.

But if -- when we have the volume, I would say, it's a little bit stronger in the industrial side, particularly, for the whole year compared to what we have in the first quarter if things don't improve. We're looking at cost cutting across the organization.

And with the little volume, given our restructuring programs that we did, we should see a quick turnaround if we get a little bit of a benefit.

Again, I continue to emphasize that at the current levels that we deliver -- sales level, in the quarter which was very low, we still were around 11% EBIT margin. And the first quarter is always the lowest quarter, the lowest margin quarter.

Yes, but then the issue is that, going forward, your compounding the problem with having excess inventories. Most of the inventory in the industrial sectors, in such, where you saw most of the destocking?

Yes.

So just a follow-up on the point on industrial decremental margins and thinking about the incremental in the second half. So I guess, you did about a 58% decremental or something in industrial in Q1.

If you think about Q2, it sounds like sales will be down a bit decrementally, and it maybe more like 40% because with the underabsorption related to inventory destocking is less severe as a headwind and then, you're looking at kind of 30%-plus incremental for the second half, as sales start to rebound. Is that a reasonable view of what your expectations are for the industrial business?

I don't think it's unreasonable to that point but you can get the guidance number right? What we took down, you can see the sales, so it was a pretty big haircut from where we're at, but it should improve particularly in the second half.

Okay. But I guess the key point is, I mean, you're saying that, that 58% decremental, I mean, is a function of a lot of underabsorption because of destocking and also, I guess, the cost-cutting measures haven't started to come through yet.

I mean, did you start to take cost out measures in the September quarter itself, or those are things that you're mulling over now to put in place in the next 6 months?

Yes, they really started, I would say, late in the September quarter. It's starting to gain some traction.

Okay. Got it.

And then just in terms of the -- I guess, the regional expectations, you've given your organic sales growth outlook for the year, globally. Could you just give a little bit color on each region, just very top down, I guess Americas, Europe and Asia?

Okay. So I'll give you the rationale for the year.

We expect North America to be slightly positive for the year. We expect Europe to be negative, and we expect Asia to actually have mid-single-digit growth.

Okay. And I guess just a final follow-up.

You talked about the -- the slowdown was pretty severe, almost significant U.S. general engineering, there's a subsegment in the second half of September.

And the drop-off, I guess, there was nothing, obviously, from the outside that you could see. I mean, issues in Europe and China have been going on for sort of 6 to 9 months.

The PMIs in the U.S. had taken a leg down already back in July.

So could you -- what sense did you get from the distribution channel as to why, suddenly, the second half of September something changed?

Well I mean, again, 80% of the orders that we get in a month, we ship within the month. So it just gives you an idea that we really don't have, other than the leading indicators in the model that we have, I think everyone was surprised -- and as you heard the earnings from the calls already that took place.

So I mean, I don't know how to explain it any other way that the orders, as a result of destocking, people just got really nervous and they'll go down and they'll go up at the same speed, actually. That's why it's hard to tell how quickly -- we believe there's pent-up demand.

The question is, is it going to come this quarter, is it going to come next quarter or -- all the indicators that we see is that things will come back in the second half -- in our second half of the year, probably not very strong but...

I want to follow up on a component of some previous questions, specifically, the gross profit contribution margin. If I'm correct -- and I'm going back a couple of years, but I think you provided a longer-term incremental gross profit margin target of about 40% for both up and down demand environments.

And the reported quarter number was basically a little more than triple that, but there was a lot of stuff going on in the quarter. So if we adjust currency acquisition and destocking out of the performance, what was the core gross profit incremental?

I would say it's north of 35%. I have to go back and factor in the currency impacts on a couple there but Stellite would add over 100 basis points itself.

And the destocking is always tough in the quarter because of the European holiday in the month of August. So this quarter is a little bit unusual on a standalone basis, but it would be north of 35%.

It would probably be 200 to 300 basis points better off the top of my head.

Okay. And then on the cost control actions, I'm just curious how you're going about it, given that you have within your guidance, you're expecting kind of another weak quarter in front of us and then some improvement in the second half.

What sort of cost control actions are you putting in place?

Well, the first thing that you do is you take direct labor, right? Because it's -- you man for the volume that you have.

So that's the first thing that you do, and we've done that. And so we have adjusted -- we are adjusted for the current forecast that we have.

And then due to things like -- all the controllable expenses, you look at that and you reduce those, and those are pretty straightforward to do.

That would include hiring freezes, moving investments postponing -- looking at all the discretionary stuff within your control and then longer-term, looking at the structure of the business.

Okay. And then lastly, and I don't mean this in an overly negative way, but given the choppiness of the environment right now, I'm just curious as to why you didn't do what some other companies did, and just assumed no improvement for the fiscal second half?

Well, because I mean we have our models, Andy, and our models work 95% of the time. So I mean, we just can't go out and do what other companies are doing.

We got to do what our models are telling us to do. So we have very robust models.

And again, you can question well the models didn't work for this quarter. But generally speaking, we are on 95% of the time.

So we've got to continue to, obviously, improve those models but stick with the models that have worked for us.

I'd like to address the industrial segment sales decline maybe a different way to try to better understand the destocking that you're seeing. Is there any way to divide the decline that you saw between the sales decline seen as direct customers versus the distribution channel?

Yes, we really don't have that broken down. I mean it's hard to tell from the -- we don't get all that data from our distributors, to be honest with you.

And I guess your sales into the distributors, so was it something that the distributors were off 20%, 30% then the direct customers were down only less than half that?

Well, I think the...

We know the distribution was down higher. I don't know what that number is.

Okay. And do you have what the WIDIA performance was in the quarter?

Yes, the WIDIA performance was mid- to high-single digit growth. By the way, it proves that our WIDIA strategy continues to be good.

And then just to get back to the inventory question, I guess, tungsten's down quite a bit in the stock market. It looks like you guys ramped up your raw material inventories a lot.

How should I think about the earnings contribution from that, as you start to work through those inventories?

We have, I mean, it's not that we -- we have purchase commitments that we have to honor with our suppliers and it is the lifeblood of our manufacturing organization, but we've tried to factor in our $60 million reduction, that was in our original plan and that was more focused on the finished goods in the [indiscernible] . Raw material doesn't go bad and over time, we don't pay for what the market price is immediately, so our lag was at 1 quarter in the past, maybe it's 1 to 2 quarters as we work through the raw materials.

And by the way, the raw materials -- we're going to have a build in the raw materials from lower cost in the second half that I would think that would have offset the -- or more than offset any inventory reduction impact.

I wanted to ask about the guidance and the 65% second half, 35% first half. So it looks like you're thinking that this is going to be the low EPS quarter for the year, and that we continue to move up on EPS basis, second quarter, and then in the back half?

Correct.

Okay. And the inventory destocking, is something changed -- we saw a destocking back in '09, too, that was pronounced.

Is this the same sort of a phenomena or do you think something's changed with the way that distributors and OEs are stocking and looking at their cutting tool inventory?

Well, I think that our -- the supply chain always, after a recession, always gets more efficient. So I think there is less inventory in the supply chain.

But I think that one of the things that's different now versus 2009, 2009 was just a recession driven by consumer and all that stuff, and financial crisis and so forth. I think that there is a lot of uncertainty now.

So I think there's pent-up demand. So once the elections are over and we're probably going to see some positive coming back starting 2013.

But again, everyone has an opinion and it's our view.

Walt, on the destocking, I think we also had an unusual quarter. Let me say it, one of our large key distributors bought a lot last year because of the acceleration.

We were removing some private label, so some distributors had to take that into consideration, and some had to deal with the transition out of the WIDIA brand. So on a year-over-year basis, that large distributor, I think we had a large and unfairly comparison year-over-year, which we don't expect to recur as we go out -- so we know that, that destocking should push itself through.

Okay, I understand. So but -- in general, you think the -- maybe starting in the third, second quarter and probably in the third quarter, we start to see inventories build back up, that's sort of what -- that's what's in your model?

Correct.

Yes.

Most of my questions have been answered, but I guess we can go through the process of -- obviously, you guys lowered your cost structure in the first quarter, where that is, is that -- are we're almost done with that or are we going to see that carry into the second quarter. And then, I guess, on the optimistic side, how quickly can that ramp up?

I mean, what kind of parameters exist for orders going either positive or negative on how you can ramp your overall production base?

Yes. We have not reduced physical capacity, okay?

So we took our -- we have laid off hourly people. And obviously, if things -- if demand starts coming back in January, I mean, we'll bring those people back.

So capacity is there so we can ramp up, and we don't intend or have plans to reduce capacity at this point. So we would be very flexible and be able to ramp up pretty quickly.

Yes. And all the discretionary items on a previous question, we started in the first quarter, they will continue to gain momentum as we go in the out period.

And if we need to add people because business comes back that’s a relatively easy comparison because the key thing is, here, we didn't let our cost creep back into the organizational infrastructure. We did take out the fixed cost that are permanent.

And if we take out the Stellite acquisition, our headcount is basically where it was at the end of 2009, so we're purposely cautious on adding people back so we don't have the same situation that we've gone through the past cycles. So we think the cost control, the discipline we have now will pay dividends as we go out.

Just, I guess, a quick question. Most of my questions have been answered, but as far as the WIDIA, how large of a percentage of revenue is that?

About 10%.

10%. And the relationship with Fastenal, how's that progressing according to plans?

Did this destocking -- any of that's changing this, or??

No, we are…

It’s going the other way.

It's actually above our expectations.

Okay. Any...?

It's just -- Steve, on -- at Fastenal, they had a pretty good first quarter. If you look at the numbers, and they continue to focus on the [indiscernible].

We have a good relationship there as well. As they continue to grow faster, they will be, definitely, a pull through.

And I think, to Carlos' point, it was a little bit faster than we had anticipated. So that's a positive as we go forward.

Okay. Any plans on more distribution with WIDIA pushing out Fastenal, increasing that relationship, anything with that?

Yes, that's the plan. I mean, we have -- both Fastenal and Kennametal together have very aggressive expectations for the future.

I think we have a lot of runway left.

Did you give the September monthly order number? Sorry if I missed it.

We didn't provide the stand-alone September number but it's a high-single digit decline.

High-single digit decline, and that's the rolling 3, right? Or is that standalone?

That's the standalone, which contributed to the negative 7 organic decline.

Got it. And just to go back to that growth -- the negative 7% another way, it was -- I know it's hard to quantify, but was half of that end-market decline versus destocking or is there any way you can frame up the magnitude of the 2 kind of buckets?

Yes, I think we'll be speculating at this time. It's really hard to quantify.

I mean, I would tell you that 40% of our sales as a company goes through distribution, and the destocking was higher in the distribution side.

Right. And just one last one, you have a target of growing in 2x to 3x global IPI, as you plugged the numbers into your model at the end of the quarter, what was your estimate for global IPI in year 1Q.

Just trying to get a sense for how much you underperformed in the sense that, that might mean reverting?

I would say in the first quarter, we basically have very low single-digit growth. Very similar to fourth quarter, that's how we had our plan built for organic 1.

We basically -- we're at pretty much the same point in the first quarter. And then we hit the -- what drove the overall business down was obviously, what happened as we said on the call with the Earthworks side, particularly, the underground coal mining and that destocking, particularly at one of our large customers that Kennametal that’ll dissipate as we go forward.

Right. And -- but do you have an estimate for what global IPI itself was?

I mean, obviously, industrial production comps were positive in the U.S. in the first quarter, how are you thinking about what the total IP number was?

We were just looking at those numbers, I mean, I don't have that [indiscernible] global insight yet.

And when we looked at -- when we developed the plan it was, on average, between 2 to 3 global IP. And that's how we got to 5% to 7% outlook for the year.

But we don't have the actual quarter-to-quarter yet.

Just had a couple of quick questions here. Could you maybe tease out what your utilization rates were, either on the corporate whole or, at least, across the 2 segments?

Yes, I would say in the low 70s.

And how does that compare, I guess, to where they were last quarter?

On the fourth quarter, we have a lot more workdays, I would say they were in the high 70s.

All right. And then when -- if I look at kind of your mid-teens EBIT margin target for the year, is there a way to kind of parse out how much volume recovery, I guess, is embedded in getting there from the 10% that you have -- or I guess 10 and change that you have right now, how much is price, and I would say, how much would be internally driven?

Price will be not much, on average, I think we said at the beginning of the year, maybe 1%. And then, it will be volume, as the main driver and then, our cost discipline and actions we initiated.

Well, there are certain inherent costs that happened in the first quarter that does not take place in the rest of the year.

Stock comp and all that...

Yes. You can always go look at historicals and you'll see the natural gains from sequential quarter-to-quarter.

Got you. And then just lastly, on the cost programs that you got, I guess, you put in place towards the end of this quarter, how much would you say would be fixed versus variable, or is everything variable where it’d come back on volumes coming back?

Everything is variable at this point.

I just wanted to ask about a couple of items that sort of impact -- was there any sort of purchase accounting or integration expense that was unusual related to Stellite in the quarter?

No. I mean, we provided the 15 to 25 net of some of the integration costs, that was in that program.

Everything is going pretty much on track. To your point they will subside or will get lesser in the second half, that's why we have Stellite stronger earnings contribution 2 half have versus 1 half.

But we're going through the purchase accounting and it's pretty much done. The amortization's there, the step-up in inventory has been burned through, so the only thing you really have left is amortization and the integration costs, which are pretty much on-plan at this point.

Okay. And then I wanted to ask about you kept the guidance for Stellite's accretion the same yet it was, I think, $0.01 in the quarter and you did note that perhaps the revenues were coming in less than expected.

Was there just some conservatism built in there to overcome the revenues, or are you doing less in terms of maybe not being as aggressive from a cost standpoint given the environment? How do we maintain it?

Well, on the high end of the range, we would have with the volumes that we were anticipating, we would have been potentially north side of that. But we've done some good restructuring things in the fourth quarter that are paying some benefits here going forward.

And as we start to rationalize the ERP system, with a better visibility, we think there's further cost benefits in the second half that are going to come in. So we've compensated top line softness with a little bit ahead on the synergies going through the business.

Okay. And then the second piece was sort of the -- you anticipated reducing inventories in this quarter, that was your original goal.

Obviously, it went up, it looks like work in progress more than anything else -- raw materials, more than anything else, but has this kind of -- as the dynamics in your inventories that you still want to comp, but didn't make progress in Q1, does that mean that we sort of pushed out the negative effects on productions, so now instead of maybe first half of the year, it's going to drag throughout the year? Is this -- is that how that dynamic is going to work?

I don't think it's going to have a major impact. As Carlos said, if the prices are down, we'll get a little bit more benefit on that side.

But the raw materials of the entire -- I said it's almost entirely raw material, so what we factored in before, I think, still holds true.

Just a quick follow-up, guys. And it goes back to the inventory -- taking out inventory at the firm.

How much below sales do you expect to produce in the second quarter, or rest of the year? Can you give us some idea of what the impact will be, why you're taking inventories out because -- it's quite a program that does have an impact on absorption?

Eli, I don't have that number off the top of my head. We'll have to get that offline for you.

Could you please address the tax rate issue? How long can you keep it at 25%?

Will it go up in the future year?

Based upon the structure and the model we have today, we think 25, I'd like to say, it's higher over time. As Europe comes back, that will drop it down.

We have other components in our portfolio, like Stellite, that's not included in the model which will help as we get out to fiscal '14 and beyond to help mitigate any potential weakness there. But we feel pretty confident based upon the mix of our business portfolio that, worst case, mid-20s is a reasonable number.

The 25% is in the high end, we expect it to be lower than that.

My question was answered. Thanks.

My follow-up, I think you've gotten 2/3 of the way there, but I was just trying to get a sense of the cost-cutting benefits in the second half and, I guess, we haven't really put any numbers around that yet. Is that something we can do?

We haven't provided that. We typically don't.

I mean, this is just normal numbers. Yes, normal like Frank said, we don't travel as much, all that stuff, which is really like-- we adjust the cost to the level of business, that's why it's indirect cost.

We feel really good about our fixed cost. And again, this is another thing our fixed cost is driving.

Stephen, you know that before, at this level of sales, we would never been at double-digit EBIT margin and that is a testimony to our fixed costs. So we feel good about the fixed cost, and the variable cost is variable cost.

I mean, it's adjusted to the level of sales.

This concludes our discussion. Please contact me, Quynh McGuire, at (724) 539-6559 for any follow-up questions.

Thank you for joining us.