Kennametal Inc.

Good morning. I would like to welcome everyone to Kenna Metals first quarter fiscal 2021 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. Please go ahead.

Thank you, Operator. Welcome, everyone, and thank you for joining us to review Kenna Meadows' first quarter fiscal 2021 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, and Damon Audia, Vice President and Chief Financial Officer. After Chris and Damon's prepared remarks, we will open the line 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 and, as such, 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 statements. These risk factors and uncertainties are detailed in Ken Amedo's SEC filings. 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, 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 us today. I'll start today's call with some general comments on the level of industrial activity we are currently seeing, then briefly review the corridor, our strategic initiatives, and expectations for Q2. Damon will then go over the quarterly financial results in more detail. Finally, I'll make some summary comments before opening the call for questions. Beginning on slide two in the presentation deck. Sales this quarter outpaced the typical 10% seasonal Q4 to Q1 decline, that increasing sequentially by 6%, of which 3% was due to FX. General engineering and transportation end markets are showing the highest levels of recovery. As a reminder, those two end markets total more than 60% of our sales. On a year-over-year basis, organic sales declined by 21%, on top of an 11% year-over-year decline in the prior year quarter. However, through disciplined execution on several fronts, we were able to effectively maintain profitability. Adjusted EBITDA margin improved by 40 basis points to 11.3% versus 10.9% in the prior year quarter. and our operating leverage was strong as well, despite continued double-digit declines in volume and associated under-absorption. Improvement in EBITDA margin was driven by lower raw material costs, increasing benefits from simplification, modernization, and effective cost control actions. Operating expense as a percentage of sales increased to 23% due to lower sales. However, in total dollar terms, decreased 18% year-over-year. our target for operating expense remains at 20%. Adjusted EPS was 3 cents compared to 17 cents in the prior year quarter, reflecting the factors I just named, as well as a higher adjusted effective tax rate. Looking ahead, of course, visibility in this environment is still limited due to COVID-19, so it remains extremely difficult to forecast how our customers, as well as our end markets, will be affected. especially with additional shutdowns being contemplated in some regions due to recent spikes in COVID-19 cases. We will not be providing a full year outlook for fiscal year 21. However, I would like to provide some color on what we might expect in the second quarter. Based on the monthly sales results in Q1, early indications from our October sales, assuming that there is no additional second wave of COVID-19 lockdowns in the quarter, We expect Q2 to see low to mid single-digit growth sequentially, which would be above our normal sequential growth pattern of 1% to 2%. While it feels like the economic recovery may be gaining momentum, as I said, it is still difficult to predict the pace and trajectory. So we continue to focus on the things we can control, such as executing our operational excellence and commercial excellence strategies to gain share and improve operating results throughout the economic cycle. On the operational excellence side, simplification modernization initiatives are on track to deliver approximately $80 million in benefits this year, an increase of 67% over last year. That will bring the total cumulative savings from inception of the program to $180 million, which is within the original target we set in December 2017, despite much lower volumes than were envisioned at that time. As a reminder, we expect to complete our original footprint rationalization activities with closure of the Johnson City, Tennessee plant and downsizing of the Essendon, Germany plant by the end of this fiscal year. Also, the capital spending associated with the simplification modernization program is substantially complete. This will result in significantly lower CapEx levels going forward, including this fiscal year, where total CapEx is expected to be reduced by approximately 50% $110 and $130 million. In addition to our focus on these transformational operational excellence initiatives, we are equally focused on driving commercial excellence. Turning to slide three. As you recall, last quarter we announced the combination of our two metal cutting business segments, enabling us to direct our commercial resources, products, and technical expertise more effectively toward capturing a larger share of wallets. In addition, we discussed our new brand strategy to reposition the video brand and portfolio to the multi-billion dollar fit for purpose application space within metal cutting, which we previously have not focused on. This strategy opens a 40% increase in serve market opportunity while offering better service and tooling options to our customers. Progress on this initiative is tracking with our expectations, and I'm pleased that we already have several wins with new customers and existing customers, including a recent win at a major machine tool builder to apply fit-for-purpose tooling as standard on new machines they sell. Also, the reaction from our channel partners has been broadly positive, especially to be able to operate in the market with clearer brand positioning. We continue to win share in the full solution application space as well, with a share gain at a major machine tool builder's manufacturing facility. And we are successfully leveraging one of our proven tooling solutions developed for a wind turbine manufacturer in China to capture share of similar projects in India. And of course, we remain committed to product innovation to better serve customers and gain share. For example, during the quarter in the full solution application space within general engineering, we introduced two best in class products. The HPX solid carbide drill, which delivers two to three times more productivity than competing products. KCFM 45 face milling cutter, which offers greater flexibility and a cost effective user friendly solution for a broad range of CNC machinists. Based on our continued ability to deliver products that are highly valued by customers and the positive reaction to our brand repositioning, we're even more confident in our ability to gain share and drive top line improvement. In addition, as you know, we are also focused on improving the bottom line. Please turn to slide four. The last time the company experienced a sales decline of this magnitude was during the Great Recession. Trailing 12-month sales is shown on the left, and corresponding adjusted operating margin is shown on the right. See the improvement in profitability compared to the earlier downturn, illustrating the benefits of simplification modernization, stronger cost control actions. And remember, the present-day numbers do not yet include the full run rate effect of the modernization activities we are currently undertaking. By executing our commercial excellence and operational excellence strategies, we are positioning the company for improved performance throughout the economic cycle. For that, I'll turn the call over to Damon, who will review the first quarter numbers in more detail.