Kennametal Inc.

Good morning. I would like to welcome everyone to Kenna Meadows third 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 the star and then the number one on your telephone keypad. If you would like to withdraw your question, please press star then the number two. Please note that 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 CannaMittal's third 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 June the 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 Brose, President, Vidya Business Segment. Franklin Cardenas, President, Infrastructure Business Segment. Pete Dragich, President, Industrial Business Segment, and Ron Port, Vice President and Chief Commercial Officer. 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 Ken Amedo's SEC filing. In addition, we will be discussing non-GAAP financial measures on the call today, reconciliations to GAAP financial measures that we believe are most directly comparable, can be found at the back of the slide deck and on our form 8K on our website. And with that, I'll now turn the call over to Chris.

Thank you, Kelly, and good morning, everyone, and thank you for joining the call today. To start off the call this morning, let me make some general comments on the quarter and how we are approaching the current environment. Despite the many headwinds we faced this quarter, we posted solid results. As you recall, even before COVID-19, we were experiencing industrial, downturn across all our end markets and had taken cost control actions accordingly. Well, with the onset of COVID-19, we quickly instituted additional cost control actions during the quarter, being careful to maintain operational capability and execute our strategic initiatives such as simplification, modernization that are fundamental to driving long-term shareholder value. Slide two details our approach during this period of uncertainty created by the COVID-19 pandemic. As you heard me say before, it is important to stay focused on the things we can control, and that is particularly important in a crisis environment. First and foremost, our approach has been to protect the health and safety of our employees while continuing to serve customers as an essential business. Early in the crisis, we instituted protocols at our facilities to ensure the safety of our workforce, including social distancing, increase cleaning protocols, self-quarantine, and other preventative measures, such as work from home, where possible. We also established a global task force to react quickly to the evolving challenges and share best practices and solutions in real time. And as a result, we were able to continue to operate with minimal disruption. The only exceptions have been when there was a government mandated lockdown in a region where we have a customer serving facility such as in China and India. As with many other manufacturers, our China operations were disrupted in the early part of Q3, but were operational before the end of the quarter. And our Bangalore, India plant, which was closed on March 26, is reopening this week. Continuing to operate during the crisis well positions us for the eventual recovery. We've already learned how to operate safely in a world with COVID-19. Our production and distribution employees are acclimated to the new protocols, and ramping up production of operational plants when the markets recover will be much easier than restarting plants that have been shut down. In addition, we've supported our customers so they can continue to operate, and that includes some customers that are on the front line of the COVID-19 battle. In fact, we are assisting with products and solutions for some customers that are converting their manufacturing lines to critical need products like ventilator components made from high strength aluminum. And of course, we continue to support other medical applications for customers within general engineering. Now, given the lack of visibility into the length and depth of the COVID-19 challenge, maintaining our strong liquidity position is, of course, a key focus. This quarter, we decreased our operating expenses by 18% year-over-year in dollar terms, maintaining our operating expense at target of 20% despite substantially reduced sales. This was achieved by early and aggressive cost control actions such as furloughs in the U.S. and similar actions around the world, reduced discretionary spending, and extensive travel restrictions. These actions, along with production furloughs aligned with volume decreases and reduced variable compensation, supported our margins, and helped maintain our strong liquidity position at quarter end. This not only allows us to continue to manage through these uncertain times, but also to continue with our simplification modernization program. Furthermore, these types of cost control actions allow us to manage our costs while minimizing the effect on our ability to react quickly once markets recover. Using furloughs and similar actions globally allow us to keep employees in place as much as possible. Looking ahead, it's our expectation that Q4 will be even more challenging than Q3. With that in mind, these kind of cost control actions will continue and may potentially need to increase depending on how long the economic environment and end markets remain depressed. Also, in keeping with our cautious approach in this environment, we preemptively drew on our revolver after quarter end and now have those funds available in cash. We took this precautionary measure to mitigate the potential increased uncertainty in capital markets due to COVID-19, consistent with our conservative philosophy to maintain our strong liquidity position. Together, these actions help enable us to continue our simplification modernization program, which I will talk in more detail about later. Now I'll move on to slide three to review our quarterly results. Organic sales declined by 17% in the quarter versus 3% growth in the third quarter last year. This is the third consecutive quarter of double-digit organic declines, which speaks to the severity of the downturn we are experiencing and weakened state of our end markets. The energy end market continued to be challenged, with a year-over-year percentage decline in the mid-20s again this quarter. Our expectation is that it will be tested further in Q4, given the recent extreme drop in oil price and the related effect on rig counts and the sector in general. Transportation weakened sequentially in Q3 from Q2 and posted a percentage decline year-over-year in the high teens, with several auto plant closures across the globe. General Engineering and Aerospace also saw year-over-year percentage declines in the high teens this quarter as well. and sequential declines from Q2, with the 737 MAX production challenges continuing and lower demand expectations worldwide due to COVID-19. Finally, Earthworks was negative year-over-year this quarter, but mixed, reflecting slight improvement in seasonal U.S. construction activity and pockets of growth in mining. By region, all posted double-digit declines this quarter and higher year-over-year declines compared to Q2. Although Asia Pacific experienced the smallest year-over-year decline, reflecting easier comps, it was the most affected, mainly in China, by COVID-19 in the quarter. By quarter end, we were seeing some signs of stabilization in China at low levels. EMEA and the Americas were less affected by COVID-19 this quarter, but our expectation is the effect will be amplified in Q4. Adjusted EBITDA margin decreased 80 basis points year-over-year to 18.6% on revenues that were down almost 20%. And sequentially, the margin improved by 720 basis points on lower sales. The year-over-year decline in margin was primarily driven by lower volume and associated under absorption. This was partially offset by positive raw materials, which contributed 280 basis points year-over-year, as well as increased simplification modernization benefits, lower variable compensation, and the previously discussed cost control actions. Adjusted EPS decreased year-over-year to 46 cents versus 77 cents in the prior year quarter, but increased sequentially by 31 cents. Before I turn the call over to Damon, I want to provide an update on the current environment and key focus areas going forward. Please turn to slide four. Given the uncertainty created by COVID-19, we are withdrawing our annual outlook. We do understand, however, the need for transparency and therefore want to provide some color around our expectations for Q4. Preliminary April sales were down approximately 35% year-over-year, which speaks to the severity of the market headwinds. Now, to put April in perspective within the corridor, it's important to consider that this is essentially the first month we are seeing the significant effects of COVID-19 outside of China. Therefore, April may not reflect the full effect that we can expect to see on sales in Q4. Considering these trends, our strong cost control actions will continue. Additionally, we expect the effect of raw materials to remain positive in Q4, but lower than the Q3 benefit. and be roughly neutral for the full year. To help you gauge profitability, assuming the April sales decline turns out to be indicative of the full quarter, we would expect to deliver a modest adjusted operating profit despite the significant decline in sales and would expect free cash flow to improve sequentially from Q3. This would be driven by continued strong cost control actions as well as simplification modernization benefits and implies decremental margins within our expected range. However, as we discussed, the biggest source of uncertainty is the effect of COVID-19 on volume, which of course remains to be seen. That being said, I am confident in the actions we are taking to manage the company through this period of uncertainty and in our ability to position the company for growth when markets recover. As I mentioned, using production furloughs and similar actions to adjust operational capacity enables us to keep employees connected so we can quickly ramp up when markets recover. Furthermore, we were able to continue with our strategic initiatives, such as launching new products like the Harvey 1 TE end mill. This is a new product for metal milling components for aircraft, automobiles, and other applications in general engineering. It sets a new performance standard by enabling machinists to use a single tool to mill many types of metals faster and more efficiently than the previous standard, which required multiple tools. And we were honored that the product was recognized recently as a gold medal winner by the prestigious Edison Awards. Even in the current market conditions, our sales for this product have exceeded expectations, which shows the power of innovation and the importance of continuing to focus on our strategic initiatives. So, let me take a minute to update you on our Strategic Simplification Modernization Program. Overall, we are pleased, having achieved an incremental $34 million savings fiscal year to date, and we still expect full-year savings this fiscal year to be modestly higher than the $40 million achieved last year, despite lower volumes. On our last earnings call, we indicated that our expectation was that approximately 90% of the incremental capital spent associated with simplification and modernization will be complete by this fiscal year end. And the remaining 10%, as we previously discussed, will be reserved for future volume needs. So really, not much change in our schedule, and we remain confident in delivering our adjusted EBITDA targets once markets recover such that we can achieve sales in the range of $2.5 to $2.6 billion. I'll now turn the call over to Damon, and then come back to provide some closing remarks.