Kennametal Inc.

Good morning. I would like to welcome everyone to Kenna Mendel's second 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 CannaMetal's second 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 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, aka on our website. And with that, I'll now turn the call over to Chris.

Thanks, Kelly. Good morning, everyone, and thank you for joining us today. I'll start today's call with some general comments and a brief review of the corridor, and then discuss our expectations for Q3 and strategic initiatives. Damon will then go over the quarterly financial results in more detail, and finally, I'll make some summary comments before opening the call for questions. Getting on slide two in the presentation, we recorded strong margin improvement and free operating cash flow this quarter, despite ongoing year-over-year market headwinds. These solid results were driven by improving sequential sales, reflecting both market improvement and growth from our strategic initiatives, as well as increasing benefits from simplification modernization. Sales this quarter increased sequentially by 10%, outpacing the 1% to 2% increase from Q1 to Q2 that we typically see. Transportation and general engineering end markets, although still declining year over year, continue to show the highest levels of recovery. As a reminder, those two end markets total more than 65% of our sales. Energy and aerospace, as you know, continue to be challenged. On a year-over-year basis, organic sales declined 14%, on top of a 12% decline in the prior year. However, through disciplined execution of our strategic initiatives and cost control actions, we were able to improve profitability despite the drop in volume and associated underabsorption. Adjusted EBITDA margin improved by 160 basis points to 13% versus 11.4% in the prior year quarter. The year-over-year 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 year-over-year to 22% due to lower sales. However, in dollar terms, decreased 9%. Our target for operating expense remains at 20%. Adjusted EPS of 16 cents was essentially flat versus 17 cents in the prior year quarter, reflecting the factors I just mentioned. Looking ahead, visibility in this environment continues to be limited. However, there are some reasons for optimism, such as recent end market momentum and some modest indications of restocking, as well as the early stages of the vaccine rollout. Nevertheless, with possible additional shutdowns being contemplated in some regions due to recent spikes in COVID-19 cases, it remains difficult to forecast how end markets and our customers will be affected. Therefore, similar to the last couple of quarters, we will not be providing a full year outlook for fiscal year 21. However, I will provide some color on what we expect in the third quarter. Based on monthly sales in Q2, early indications from our January sales, and assuming that there are no additional significant COVID-19 related shutdowns in the quarter, we expect Q3 sales to see mid to high single digit growth sequentially, with part of the sequential sales growth coming from FX. We expect the underlying organic growth, excluding the effect of FX, to be in the mid single digits. which is modestly above our typical sequential growth pattern of 3% to 4%. But regardless of the pace and trajectory of the recovery, we will continue to focus on the things we can control, such as executing our operational and commercial excellence initiatives to gain share and improve profitability levels throughout the economic cycle. On the operational excellence side, simplification modernization initiatives delivered $23 million this quarter. 117% year-over-year increase and are on track to deliver approximately $80 million in benefits this year as expected. As a reminder, we expect to complete our original footprint rationalization activities with the closure of the Johnson City, Tennessee plant and downsizing the Essendon, Germany plant by the end of this fiscal year. Total cumulative savings from inception of the program are expected to be $180 million by the end of this fiscal year which is within the original target range we laid out in December 2017, and will be achieved despite much lower volume levels than originally planned. This is a major accomplishment and sets us up well for the recovery. Capital spending associated with simplification modernization is essentially complete, and as such will result in more normalized CapEx levels going forward. Total CapEx is expected to be between $110 and $130 million this year, a 50% reduction year over year. Preoperating cash flow was $29 million for the quarter, bringing the year-to-date figure to approximately break even. This was excellent performance by the team as they remained focused on working capital without compromising customer service. Based on the year-to-date performance and current second half outlook, we now expect positive free operating cash flow for the second half and total year, which Damon will go into more detail on. As you recall, at the end of fiscal year 20, we announced two important changes as part of our commercial excellence strategy. First, the combination of our two metal-cutting business segments to better direct our commercial resources, products, and technical expertise on capturing a larger share of wallets. And second, repositioning the video brand and portfolio to address the multi-billion dollar fit-for-purpose application space within metal cutting that we had not previously focused on. This approach opens up a 40% increase in served market opportunity while offering better service and tooling options for our customers. Overall, progress on these initiatives is tracking with our expectations, and I'm very encouraged by the wins we are seeing in fit-for-purpose applications as we roll the program out globally. Please turn to slide three. We presented this slide on the last earnings call and have updated the graphs to reflect this quarter's results. As a reminder, the last time the company experienced a sales decline close to the one we are currently experiencing was during the Great Recession in 2009. The graphs show trailing 12-month sales on the left and the corresponding adjusted operating margin on the right. As you can see, we have been able to maintain significantly higher levels of profitability throughout this downturn. And in this quarter, the 12-month profitability level is approximately the same, but on much lower revenue. This is due to the benefits of simplification modernization that we've already captured, combined with stronger and more timely cost control actions. Two additional points to note. First, the present day numbers do not yet include the full run rate effect of simplification modernization. We are anticipating an additional approximately $40 million in savings by the end of this fiscal year. And secondly, we have not yet exited the downturn. The previous downturn lasted about five quarters. This downturn has already lasted seven quarters, and we are just now starting to see early signs of recovery. In summary, I'm very encouraged by these results. We have maintained higher profitability throughout this downturn and are well positioned to outperform as markets recover due to the initiatives we've executed over the last several years. And with that, I'll turn the call over to Damon, who will review the second quarter numbers in more detail.