Kennametal Inc.

Good morning. I would like to welcome everyone to Kenna Metals' fourth 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 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.

Thank you, Operator. Welcome, everyone, and thank you for joining us to review CannaMittal's fourth quarter and 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. 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, Franklin Cardenas, President Infrastructure Business Segment, Pete Dragich, Chief Operating Officer, Metal Cutting Business Segment, and Ron Port, Chief Commercial Officer, Metal Cutting 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 CanonMetal's 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. With that, I'll now turn the call over to Chris.

Thank you, Kelly. Good morning, everyone, and thank you for joining us on the call. For today's call, I will start with some general comments on the year, followed by a quick overview of the fourth quarter. After that, I will discuss fiscal year 21 and our strategic agenda that will well position the company as markets recover. From there, Damon will review the quarterly financial results in more detail. Finally, I'll make some summary comments before opening it up for questions. Beginning on slide two, I would describe our fiscal year 20 as a year of significant challenge, but also a year of significant progress on our strategic growth and profitability improvement initiatives. As you recall, we began the year in what was already considered an industrial downturn. 737 max production halt and a significant decline in the price of oil followed soon after. Last but certainly not least, COVID-19 significantly affected end markets in all regions in the second half of our fiscal year, especially in Q4. As a result, organic sales declines occurred throughout the year and got worse as the year progressed. However, we focused on the things we could control by implementing aggressive cost control actions, staying the course to advance our strategic agenda, including positioning the company for profitable growth and to gain share as markets recover. These actions resulted in strong decremental margin performance in the second half, as well as substantially completing our planned simplification modernization capital spend. I am pleased with how our team came together to tackle the challenges. COVID-19 protocols we successfully implemented continue to allow us to operate safely and serve customers globally. So all our facilities operated throughout the fourth quarter, with the notable exception of our Bangalore India plant, which was closed for approximately six weeks due to a government mandated lockdown. Some examples of our cost control actions are the acceleration of planned structural cost reductions associated with our simplification modernization program and further temporary cost control actions to mitigate COVID-19 headwinds, such as increased furloughs, salary and variable compensation reductions, and reduced production schedules. These measures help align our costs more closely with demand and finish the year in a strong liquidity position despite the challenging environment. In addition, we continue to make significant progress on our strategic initiatives. Yesterday, we announced our intention to close a plant in Johnson City, Tennessee as part of our simplification modernization program. This brings the total number of plant closures to six since inception of the program and is in line with our original target of five to seven plant closures. That does not include the significant downsizing of the Essendon Germany facility. We expect the Johnson City closure to be substantially complete by fiscal year end, with production consolidated into other newly modernized continental facilities. We are also substantially complete with the spending on simplification modernization capital, which marks a significant milestone in our journey to fundamentally reduce our cost structure, improve financial performance throughout the economic cycle, and improve customer service to enable share gains. As we navigate through another challenging fiscal year, we will see the benefits from simplification modernization increase. This is driven in part as we recognize full year run rate savings from fiscal year 20 actions, bring additional modernized processes online, and recognize the benefits from accelerating the simplification modernization structural cost actions. Also, of course, as volumes return, the savings will grow from increased utilization of our modernized processes and rationalized footprint. In addition to simplification modernization, we continue to advance our strategic growth initiatives, including launching new high-value added products and preparing to extend our reach into a large segment of metal cutting that we previously had not focused on. And I will talk more about these growth initiatives in a minute. But first, let me quickly review on slide three the fourth quarter results, which, as you know, like other industrial manufacturing companies, we experienced significant headwinds due to COVID-19. In Q4, the company reported an organic sales decline of 33%, on top of the 2% decline in the prior year quarter, which is the worst quarterly organic decline since the Great Recession in 2008. All segments reported negative organic growth for the quarter, with industrial declining by 36%, Bidia, 32%, and infrastructure at 29%, compared to negative 4% and 3% for industrial and Bidia, and infrastructure at 1% growth in the prior year quarter. Also, all regions were negative, with the Americas posting a 39% decline, EMEA, 34%, and Asia Pacific, 24%. Remember that Asia Pacific saw COVID-19-related declines earlier than EMEA, followed by the Americas. Adjusting operating expenses declined 18%, reflecting our cost control measures. These actions in the quarter, combined with benefits from our simplification modernization program, significantly mitigated the effect of lower volumes on operating leverage. Adjusted EBITDA margin for the quarter was 17.7%, a decrease of 330 basis points from 21% in the prior year. Turning to slide four, Due to COVID-19, it remains difficult to forecast how our customers as well as our end markets will be affected. As a result, we will not be providing an annual outlook for fiscal year 21. However, I would like to provide some color on what we might expect, especially in the first quarter. Based on our July sales and the month-to-month sequential sales pattern throughout Q4, market demand in Q1 would seem so far to be stable or modestly improving from Q4 levels for many end markets and regions. But as you know, the company typically sees on average an approximately 10% seasonal decline of revenues from Q4 to Q1. So as customers continue the reopening process in Q1, the resultant improvement in demand may not be sufficient to fully offset the normal seasonal pattern. Also note that there can be a lag of a few months from when customers increase production to when we see a corresponding increase in demand. Beyond Q1, it's helpful to consider customer sentiment, which seems to be that while there are signs of improvement from Q4 to Q1, there is still a lot of uncertainty because of COVID-19 on how these signs would translate to Q2 and beyond. So while many customers are hopeful for continued improvement, they seem to feel it prudent due to the uncertainty of COVID-19 plan for demand to be stable or only modestly improving through the end of calendar year 2020. But regardless of how in-market demand unfolds in fiscal year 21, we will continue our cost control actions to protect margins and liquidity. Regarding capital expenditures for fiscal year 21, capital spending will be significantly reduced by over $100 million to be in the range of $110 to $130 million for the full year. The reduction, of course, is as expected, given we are substantially through the capital spend for the simplification modernization program. The benefits of these investments will continue to increase in fiscal year 21, bringing savings since inception to approximately $180 million at fiscal year end, including total company headcount reduced by approximately 20% and a rationalized footprint with six fewer plants and more production moving to lower-cost countries. So we are successfully managing through the current environment while still advancing simplification, modernization, and our other strategic initiatives to drive growth and share gain as markets recover. For example, on slide five, in fiscal year 20, we continued to launch new products with great value propositions for customers in key end markets. As you can see from the customers' feedback, they speak of the incredible versatility and performance of Kenna Metal products. We are creating tremendous value for our customers and differentiating ourselves from the competition. These types of innovations fuel growth. For example, in fiscal year 20, we won a five-year strategic supplier agreement with a leading aircraft OEM and a complete tooling program from a leading wind power bearings manufacturer. And these are just a few examples of how creating value for customers is driving new business growth. We've also continued to advance our commercial excellence initiatives to gain share when markets recover. As you can see on slide six, we announced yesterday that as of July 1st, we combined industrial NVIDIA into a single metal cutting organization. This move will enable us to more effectively direct our commercial resources, products, and technical expertise toward capturing a larger share of wallet in addition to executing a new brand strategy. Previously, Vidya operated to serve a customer needs segment within metal cutting that significantly overlapped the Kenna Metal brand positioning. Our new approach is to reposition the Vidya brand and portfolio to serve a multi-billion dollar segment within metal cutting that we previously have not focused on. We expect that this approach will open up a 40% increase in served market opportunity while offering better service and tooling options to our customers. More specifically, in speaking with our customers, we know they need technical support and high-performance tooling optimized around specific applications. But they also have a need for high-quality, fit-for-purpose tools that are readily available and have the versatility to offer performance across a broad range of applications. It is this part of the customer's metal-cutting share of wallet that we are targeting by repositioning the video brand and product portfolio. which will leverage our newly modernized manufacturing capabilities for improved delivery and cost performance. So from a customer perspective, and this is true across all M markets, we are providing customers access to the company's full metal cutting suite through both direct and indirect channels. In effect, a one-stop shop model to cover a broader range of their metal cutting needs. And with that, I'll turn the call over to Damon.