Kennametal Inc.

Good morning. I would like to welcome everyone to CanonMetal's first quarter fiscal 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, Please press star, then the number 2. Please note this event is being recorded. I would now like to turn the conference over to Kelly Boyer, Vice President of Investor Relations. Please go ahead.

Thank you, Operator. Welcome, everyone, and thank you for joining us to review Canada Metals' first quarter fiscal 2020 results. Yesterday evening, we issued our earnings press release. and posted our presentation slides on our website. We will be referring to that slide deck throughout today's call, and a recording of the call will be available for replay through December 5th. I'm Kelly Boyer, Vice President of Investor Relations. Joining me on the call today are Chris Rossi, President and Chief Executive Officer, Damon Audia, Vice President and Chief Financial Officer, Patrick Watson, Vice President, Finance and Corporate Controller, Alexander Broats, President, Vidya Business Segment, Pete Dragich, President, Industrial Business Segment, and Ron Kors, President, Infrastructure Business Segment. After Chris and Damon's prepared remarks, we will open the line up for questions. At this time, I would like to direct your attention to our forward-looking disclosure statement. Today's discussion contains comments that 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. These risk factors and uncertainties are detailed in Kenna Meadows' SEC filings. In addition, we will be discussing non-GAAP financial measures on the call today, reconciliations to gap financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our form, aka on our website. And with that, I'll now turn the call over to Chris.

Thank you, Kelly. Good morning, everyone, and thank you for joining the call today. Starting on slide two in the presentation deck, our results in the first quarter were below expectations due to global market conditions deteriorating more significantly than we anticipated. primarily in the transportation, energy, and general engineering end markets. Organic sales declined by 11% versus 10% growth in the first quarter last year. Adjusted EBITDA margins decreased 820 basis points to 10.9%, and adjusted EPS decreased to 17 cents versus 70 cents in the prior year quarter. Decreases in margin and EPS were the result of three main factors. First, due to the rapid change in end markets, organic sales declined, magnified by unfavorable labor and fixed cost absorption. We are adjusting to the lower volumes by reducing overtime and temporary workers and further adjusting production to the demand outlook. Of course, the full benefit of these actions will not be reflected immediately. Secondly, as expected and discussed on our fourth quarter earnings call, Tungsten prices have come down quickly. To give you an idea of the magnitude of the drop, tungsten was approximately $270 for most of fiscal year 19 and then dropped in the first quarter of fiscal year 20 to approximately $200. The effect is the temporarily depressed margins in the short term until the higher-priced inventory moves through the P&L. This accounted for approximately 360 basis points of the 820 basis point reduction in EBITDA margins. We expect this effect will continue in Q2 and then abate in the second half of the year. And finally, as expected, we are experiencing underabsorption due to footprint rationalization. We expect this effect to decrease as plants are closed later this year and next. Our operating expenses in dollar terms decreased 7%. However, in percentage of sales terms increased slightly to 22% as a result of the decrease in sales. Our target for operating expense margin remains at 20%. We are focused on improving financial performance throughout the economic cycle. Q1, simplification, modernization contributed an incremental $8 million or 7 cents year over year to our EPS on top of the $40 million achieved last year and roughly $10 million achieved the year before that. Note that further benefits from footprint rationalization are still to come and are weighted to the back half of the year. Looking ahead, in addition to our focus on cost-out actions, we continue to make gains on our growth initiatives. For example, our high-volume, high-margin products grew low single digits in the Americas, despite the more challenging market environment. In addition, we continue to get good traction on new products, which I will discuss in just a moment. Though we are encouraged by these results in our growth areas of focus, fundamental weakness in global industrial activity increased during the quarter. And therefore, we've reduced our expectation for organic growth this fiscal year. We are no longer assuming a modest recovery in the second half of the year in transportation and energy, but rather expect the year will simply follow a more normal seasonal pattern from the current lower market environment. As I said, our focus is on improving performance throughout the entire economic cycle, so we are driving forward with our simplification modernization program. We continue to make good progress on restructuring actions, and in fact recently ceased production at a facility in Germany and had moved work to lower cost facilities. We expect the benefits from this and other pending plant closures to increase in the second half of this fiscal year. By the end of the year, our FY20 restructuring actions are expected to reach a run rate savings level of $35 to $40 million. fiscal year 21 restructuring actions will bring an additional $25 to $30 million in run rate savings by the end of fiscal year 21. Also, our second half profitability will benefit as the effects of higher raw material costs and manufacturing inefficiencies from footprint rationalization abate. Now let's turn to slide three for a comparison of our current fiscal year forecast to historical results with similar revenue levels. As you can see on the left-hand chart, our adjusted EPS for fiscal year 20 is expected to be significantly higher than previous years with similar sales. This is primarily the result of the simplification modernization work already completed, including structural cost-out actions, coating, powder, and SKU reductions, strategic pricing, and portfolio rationalization. And remember, these numbers do not include the full run rate effect of the plant rationalizations that I just mentioned. In the right-hand chart, we show the expected improvement in our forecasted cash flow from operations that is implied in our outlook. Again, this significant increase is due to the work done today to permanently remove costs out of the system through simplification and modernization. It is also important to recall that this year's cash flow is reduced by the temporary restructuring costs associated with footprint rationalization. On slide 4, we highlight some of our recent product launches. We are continuing to advance our growth initiatives, even in this period of lower-end market demand, in part through new product introductions. Our growth areas of focus include aerospace and general engineering. The Harvey Ultra 8X is used by aerospace customers for rough milling titanium and offers market-leading metal removal rates. This tool was recently named a 2019 R&D 100 Awards finalist, which is a testament to the innovation of the design. The Harvey 1TE is an end mill used by general engineering customers. It delivers up to 50% increase in productivity and tool life, depending on the application. Another new product, which is also focused on aerospace growth, is the Core 5, an end mill for aluminum machining that delivers a productivity increase of two times. And finally, the RIQ Reamer is focused on the specific growth area of electric vehicles. This tool is used in precision machining operations for drivetrains, and is produced using Kenna Metal's proprietary additive manufacturing technology, which lowers the weight of the tool, allowing for faster setup and machining times. Those are just some examples of the innovations that we are bringing to the market. And with that, I'll turn it over to Damon, who will review the first quarter numbers in more detail.