Kennametal Inc.
Q2 2018 Earnings Call Transcript

Published: 2 Feb 2018

[Operator:]

Good morning and welcome to Kennametal's Second Quarter Fiscal Year 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Please note that this event is being recorded. At this time, I would like to turn the conference over to Kelly Boyer, Vice President of Investor Relations. Please go ahead.

[Kelly Boyer:]

Thank you, Denise. Welcome everyone and thank you for joining us to review Kennametal's second quarter fiscal 2018 results. We issued our quarterly earnings press release yesterday evening. The release along with the slide deck for today's call is posted on our website. This call is being broadcast live on our website and a recording of the call will be available for replay through March 2. I'm Kelly Boyer, Vice President of Investor Relations. Joining me on the call today are Chris Rossi, President and Chief Executive Officer; Jan Kees van Gaalen, Vice President and Chief Financial Officer; Patrick Watson, Vice President, Finance and Corporate Controller; Pete Dragich, President, Industrial Business Segment; Ron Port, President Infrastructure Business Segment; and Alexander Broetz, President, WIDIA Business Segment. Chris and Jan Kees will review the December quarter's operating and financial performance, as well as our updated outlook. After their prepared remarks, we will be happy to answer your 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 Kennametal'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 8-K on our website. With that, I'll now turn the call over to Chris.

[Chris Rossi:]

Thank you, Kelly. Hello, everyone, and thank you for your interest in Kennametal. Before I begin, I would like to introduce Ron Port, who has been named President of our Infrastructure Business Segment. Ron has worked for Kennametal for about three years as the Vice President of our Engineered Components Unit within the Infrastructure Segment. Please join me in congratulating Ron on his new role. Ron welcome.

[Ron Port:]

Thank you, Chris.

[Chris Rossi:]

Pete Dragich, who was our Infrastructure President for last two years and ran that business with great success, and prior to that, he headed up our Integrated Supply Chain Business Group, is also with us today and Pete has been promoted to the position of President of our Industrial Business segment. Of course the key focus for Pete for the next couple of years will be the successful execution of the monetization plan we have underway and continuing focus on sales effectiveness. Pete, congratulations on your new role.

[Pete Dragich:]

Thank you, Chris.

[Chris Rossi:]

Turning now to our quarterly results, let's begin on Slide 2 of the slide deck that's posted on our website. I'm really pleased to report that Kennametal had another strong operating quarter with both sales and margins improving again this quarter. The additional factor though, as with many companies, is the effective tax reform on our results. Now it's a complicated subject, so we're going to go into some detail in order for you to better understand the underlying strong performance of the company. In the long-term, we believe the effect of the U.S. Tax Reform Act will be a net positive for Kennametal, and U.S. customers. Not only do we expect our ETR to be lower, but we are optimistic that the effect of tax reform on the investment decisions of U.S. manufacturers may provide an additional tailwind for future business. Of course, it's too early at this point to quantify those benefits. So let me get started with a high level view of our results, and then I'll turn it over to Jan Kees, to fill on the specifics during his detailed discussion on financial results. First, starting on Slide 2, the growth rate improved further this quarter to 17% on 15% organic sales growth. Like last quarter, all our business segments experienced double-digit growth over the period prior, with Infrastructure leading at 19%, Industrial at 17%, and WIDIA at 11%. And again, like last quarter all regions grew, with Asia-Pacific leading at 19%, followed by the Americas at 15%, and EMEA at 9%. From an end market point of view, all end markets energy, earthworks, aerospace, transportation, and general engineering, reported continuing strong growth. Margins improved significantly this quarter versus prior year quarter, as well as sequentially. Our adjusted operating margin increased 490 basis points to 12.2% which reflects a 310 basis point increase in adjusted gross profit margin, plus a 150 basis point improvement in our operating expense as a percentage of sales. Adjusted EPS for the quarter was $0.52 versus $0.24 in the prior year quarter. Now it's important to note that this $0.52 adjusted EPS includes an $0.08 adverse effect of the earlier than anticipated reversal of our U.S. valuation allowance which was triggered by the change in the tax law. Now we expect that the long-term effect of tax reform will be positive with our long-term rate decreasing from mid-20s to the low-20s. In addition, the tax change is not expected to affect our near-term capital allocation strategy. As I mentioned, we have included slides specifically on taxes and we'll cover them later in the presentation, but first, let's review the operating results in more detail, please turn to Slide 3. Organic growth continues a positive trend started in Q2 of last year. We are encouraged by the improving activity levels of the end markets and are working to ensure that we can meet demand and the service levels of our customers that they have grown to expect. Activity levels continue to be in good shape in all end markets, but beyond that and perhaps more importantly, we believe the work we're doing on improving our commercial acumen is gaining traction. And I'll talk more about that as I review each segment. Let's turn to Slide 4 which summarizes the quarterly results of our Industrial Business. Industrial posted a quarterly year-over-year sales growth rate of 17% and 14% organic growth. This is the sixth consecutive quarter of organic growth for Industrial. All region showed revenue gains with Asia-Pacific again leading at 20% growth, followed by the Americas and EMEA both posting solid growth rates of 11%. We saw good strength in all Industrial end markets, with our largest sales percentage gains again this quarter in energy at 19% growth. Our two largest end markets reported double-digit growth were transportation at 14%, general engineering at 11%, aerospace posted an encouraging 9% growth rate year-over-year. Note that we continue to believe stock levels within our indirect channel are consistent with end market demand. Adjusted operating margin increased year-over-year to 13.9% from 9% in the prior year quarter, and reflect the progress we're making on our three strategic areas of focus

[Jan Kees van Gaalen:]

Thank you, Chris, and good morning and hello everyone. Let me walk you through the income statement starting on Slide 7 on both a reported and adjusted basis. On a reported basis, EPS for the quarter was $0.50 per share compared to $0.09 per share in the prior year quarter. Current quarter reported EPS includes the impact of recording an out of period charge to provision for income taxes of $0.07, and the one-time benefit of releasing the U.S. tax deferred tax valuation allowance of $0.05 per share. Prior year quarter reported EPS included restructuring and related charges of $0.13 per share. Sales in the December quarter increased 17% to $571 million, with organic sales growth posting at 15%. Currency tailwinds favorably affected sales by 3%, partially offset by 1% impact on fewer business days. As Chris mentioned, sales grew in every end market and every geographic region. Adjusted gross profit increased 29% to $194 million this quarter over prior year-end quarter. Adjusted gross profit margin increased by 310 basis points year-over-year to 33.9%. The main drivers for expansion at the gross margin level were organic sales growth, incremental benefit from restructuring initiatives, and a higher productivity, and a fixed cost absorption, partially offset by higher variable compensation expense and more overtime costs. Adjusted operating expenses increased on a dollar basis to $120 million on increased volume. On a percentage of sales basis, adjusted operating expenses improved by 150 basis points to 21.1%. We continue to be pleased with the progress we are making, particularly given the strong end market environment, and we'll continue to focus on further improvements as we move forward. The improvements in both gross profit margin and operating expense margin contributed to adjusted operating income margin increasing significantly year-on-year by 490 basis points in margin terms to 12.2%. For the second quarter of fiscal 2018, adjusted EBITDA was $94 million, up 54% from the prior year period. Adjusted EPS improved year-over-year to $0.52 in the second quarter of 2018 versus $0.24 in the prior year quarter. The impact of the increased effective tax rate was a negative $0.08. The detail of tax impact are itemized on Slides 8 and 9. First, the fiscal year 2018 second quarter ETR Bridge on Slide 8. Starting with a 29% U.S. GAAP ETR on the left side of the bridge, we had a 9% non-cash one-time unfavorable impact due and out of period adjustment, partially offset by a one-time benefit from the release of the valuation allowance on our U.S. deferred tax assets of 7%, along with restructuring and related charges impacting the effective tax rate of 1%. This brings us to the adjusted effective tax rate for the quarter of 28% versus 28% in the prior year quarter. When we originally recorded the valuation allowance on our U.S. deferred tax assets in the fourth quarter of fiscal 2016, our U.S. entity was operating at a loss such that the allowance was required. During the last several quarters, our U.S. business has been profitable, but we did not expect to have enough evidence to require a release of the valuation allowance during the current fiscal year 2018. The earlier than expected release of the valuation allowance this quarter was triggered by the Tax Cuts and Jobs Act of 2017, requiring a one-time toll tax on unremitted earnings of our foreign subsidiaries. The $77 million toll tax charge from the deemed repatriation is expected to consume a significant portion of our previously available deferred tax assets. Along with expected full-year income in the U.S. in fiscal 2018, we anticipate our domestic deferred taxes to be in a net liability position by June 30, 2018. The toll tax charge is preliminary and subject to finalization. Effectively, for this quarter, this meant that we had to tax effect our U.S. earnings which increased the adjusted ETR by 10% in comparison to the previous 18% forecast. Slide 9 provides you with a projected U.S. GAAP 24% ETR for the total fiscal year 2018 on the left. The effects on the ETR of the prior period adjustment offset by the release of the valuation allowance resulting in the adjusted ETR forecasted at 23%. And after now tax affecting our U.S. earnings by 5%, bridging to our previous forecast of 18% before tax reform. We now expect our full-year fiscal year 2018 ETR to be in the range of 20% to 25%. Our long-term ETR is expected to be reduced as a result of tax reform from the mid to the low 20s. A complete bridge of the factors affecting adjusted EPS this quarter versus the second quarter of the prior year is presented in the EPS Bridge on Slide 10. Let me walk you through the bridge. The 117% increase in adjusted EPS year-over-year is due primarily to the net favorable effect of organic sales growth, mix, fixed cost absorption, and productivity in aggregate amounting to $0.28, incremental restructuring benefits of $0.15, and currency impact of $0.02, offset by additional incremental over time and variable compensation of $0.08, salary inflation of $0.04, higher taxes of $0.01, and other items totaling $0.04. For the second quarter of fiscal 2018, total savings from our headcount reduction initiative were approximately $21.5 million or $86 million annualized, $11.5 incremental benefit over Q2 fiscal 2017. Chris talked about the segment sales trends earlier in the call. We're seeing strength in all of our end markets, particularly oil and gas and general industries and engineering. The detail of our segment sales by region and end markets can be found on Slide 11. On a consolidated basis, all regions and end markets reported double-digit growth with the exception of aerospace, which reported 9% growth this quarter. Industrial expanded adjusted operating margins by 490 basis points to 13.9% year-on-year reflecting primarily organic sales growth and incremental restructuring benefits partially offset by higher variable compensation expense. WIDIA reported adjusted operating margins up 370 basis points to 2.2% year-on-year reflecting primarily organic sales growth. Infrastructure's adjusted operating margin increased by 470 basis points to 12.6% due primarily to organic sales growth, incremental restructuring benefits, and favorable mix, partially offset by higher compensation expense, raw materials, raw material costs, and overtime. As shown on Slide 12, primary working capital was $710 million as at December 2017, an increase of $58 million from the previous fiscal year-end. However a $4 million of decrease from the September 30th figure. On a percentage of sales basis, primary working capital decreased 80 basis points to 30.6% as at December 31, 2017, from the June figure. Slide 13 summarizes the cash flow statement. Second quarter free operating cash flow was $44 million as compared to a negative $1 million for the prior year quarter. The increase in free operating cash flow is due primarily to higher cash from operations, in addition to lower restructuring payments, before working capital items, partially offset by higher capital spending. Regarding capital spending, net capital expenditures were $43 million this quarter compared to $26 million for the prior year quarter. Dividends paid out were $60 million consistent with last quarter and we remain committed to maintaining our dividends. Turning to Slide 14 for a discussion of our balance sheet. Our conservative capital structure and investment grade ratings are of key importance to Kennametal, and we continue our commitment to maintaining them. Cash on hand at December 31 increased to $160 million as compared to $111 million last quarter. At the end of December, our net debt was $537 million. With no current outstanding borrowings on our revolver, we have no significant maturities until November 2019. Gross debt to adjusted EBITDA currently stands at 1.9 times. The full balance sheet can be found in the Appendix of the slide deck. We are confident in our balance sheet and liquidity positions and will continue to work to maintain them as we execute on our modernization initiatives. And with that, I'll turn it back over to Chris.

[Chris Rossi:]

Thank you, Jan Kees. Turning to Slide 15, the outlook for fiscal year 2018. We're increasing our expectations for organic sales growth to the range of 9% to 11%. In terms of taxes because of the changes we have highlighted, we now expect full-year effective tax rate to fall in the range of 22% to 25%, an increase from the prior guidance of 18% to 22%. We are raising our full-year adjusted EPS to be between $2.40 and $2.70. Now it's important to note that this includes the adverse effect of $0.15 to $0.20 of increased taxes triggered by the tax reform. Our expectations for capital spending for the full-year remain unchanged at $210 million to $230 million, and we are increasing our expectations for operating cash flow up to $30 million reflective of course of our continued investments in modernization. To summarize on Slide 15, we continue to show very good progress on our initiatives in Q2, our growth for the quarter exceeded expectations, and we're looking forward to ensure that we are efficiently meeting the demand that's out there in the marketplace. Looking forward, we're focused on executing our improvement programs to create really meaningful returns for our shareholders, great products, and services of course for our customers and a really great place to work for our team members. Operator, please open the call for questions.

[Operator:]

Thank you, sir. [Operator Instructions]. And the first question this morning will be from Ann Duignan of J. P. Morgan. Please go ahead.

[Ann Duignan:]

Hi, good morning. This is Ann Duignan.

[Chris Rossi:]

Good morning, Ann.

[Jan Kees van Gaalen:]

Good morning, Ann.

[Ann Duignan:]

Good morning. Can we focus on Slide 10 maybe initially just looking at the negative impact of over time, variable comp, and salary inflation? Could you talk to us by segments what's happening there, one of the big risks we see for the Group in general is wage inflation as we go through this year and into next year. So if you could just talk to us how much is steeper discounts maybe to distributors and WIDIA versus overtime in Infrastructure, just give us a clear picture of what's going on the wage side and over time?

[Chris Rossi:]

Yes, one of the reasons we set the slide up this way, Ann, is we want this to kind of differentiate between let's say salary inflation which once you give employees the increase that's kind of baked into your fixed costs going forward or your cost level going forward. But the additional over time in variable costs in particular, what we want to point out is that as we go through this transition and modernization, we're bringing on more capacity to meet demand. But that capacity has not come online yet. And in interim instead of adding cost to our existing structure, we're trying to add or increase that that manufacturing capacity using things like temporary workers who are working perhaps more overtime than we normally would, while we wait for the modernization program to come online. So that builds in as we go through modernization a certain amount of inefficiency that once we modernize the factories that inefficiency won't be there. And so we highlight those as potential costs that after modernization would come out of our baseline cost structure.

[Ann Duignan:]

And how much for each of those buckets, have you baked in for the back half of 2018 or when would we anticipate the overtime and variable comp to dissipate?

[Chris Rossi:]

Yes, I think the overtime and temporary workers that's going to be a phenomenon that will continue through this sort of three-year program that we're on. But of course as we progress through modernization, it will start to decrease. But we definitely will see through this transition period, the use of overtime and temporary workers until we're fully complete.

[Ann Duignan:]

And combined how much of a headwind in the back half of this year the two buckets?

[Jan Kees van Gaalen:]

Well, do we have that?

[Ann Duignan:]

In other words should I take the $0.04 and bake that in for quarter? I mean, to your point, it's a fixed cost?

[Jan Kees van Gaalen:]

It is baked in, Ann.

[Chris Rossi:]

Yes.

[Ann Duignan:]

It is baked in.

[Chris Rossi:]

That's I think is the way to think about it, Ann. That's the right way.

[Ann Duignan:]

Okay, okay. And then just on WIDIA, can you talk a little bit about the different strategies regionally you did give us a little bit of overview of how those are progressing but just a little bit more color there would be great? And to make a final clarification in which is more important to your infrastructure business well completions or rig count?

[Chris Rossi:]

Well let's -- let's -- let's let JK why don't you talk about the rig counts here and then we'll update.

[Jan Kees van Gaalen:]

So, Ann, we have on the Infrastructure side as well as on the Industrial side exposure to the oil and gas sector. On the Infrastructure side, we have rig-related business such as components for drill bits and matrix powders, and on the rig list side, we are exposed to the completion activities. So we followed a number of ducts at the moment, we have approximately in the U.S. 7,000 ducts that are waiting for completion, and with the current frac spreads completing those 7,000 ducts would take about two quarters. But as you know, the frac spreads that we have in the U.S. are not only working on ducts, they're also working on wells that have just been drilled. And the oil and gas companies always would like to have a mix between ducts and to make sure that in terms of the operational efficiency, they can manage their frac activities. So we actually see with the current rig count which has been up a little bit in the first part of the third quarter and the number of ducts we see a relatively steady market ahead of ourselves.

[Ann Duignan:]

Okay. But I'm sorry, are you saying Infrastructure is more dependent on rig count and Industrial is more leveraged to ducts completion?

[Jan Kees van Gaalen:]

Infrastructure is more leveraged to rig count and ducts.

[Ann Duignan:]

Okay. Okay, I’ll leave at there and get back in queue on the WIDIA question.

[Operator:]

The next question will come from Ross Gilardi of Bank of America Merrill Lynch. Please go ahead.

[Ross Gilardi:]

Hey Chris, I was just wondering could you comment on the management changes at the segment level. I mean obviously Kennametal has been through a lot of management change over the last several years and from the outside, it seemed like the transformation or the restructuring has been going fairly smoothly, you're going into this big modernization. So why transition now? Was there anything based on performance of the prior leaders that weigh into this?

[Chris Rossi:]

No, I think, we did make and we have made good progress over the last couple of years to bring the company at a point where it is today. But as I sit there and assess what we need going forward, especially in the Industrial segment, we need a General Manager that has frankly a great deal of operational experience. And the good news is that as I looked around the leadership team table, I had a person sitting right in front of me who has really broad general management experience, including good customer or business development skills and sort of the front-end of the business what needs to be, what needs to be from a leadership position to continue to improve sales effectiveness. But also especially if we're going to spend $200 million to $300 million on modernization, it's very important that we have a leader that well understands manufacturing and logistics and supply chain. And so that's why I made the change just making sure that we have the right people on the bus in the right seats. It's not because the prior leader just didn’t have those skill sets as part of his normal experience range.

[Ross Gilardi:]

Got it. Okay. And then, could you comment a little bit more on your longer-term, your sort of your multi-year capital spending outlook, do we stay at this $200 million to $250 million level for the next several years due to your modernization program. What I'm trying to get at is just what kind of free cash flow conversion should we expect for the next several years? Obviously it's depressed right now because of everything you're doing on automation, but really just trying to get when is Kennametal start to kickoff some real free cash flow. I mean, you obviously, you're slightly positive, you had a good quarter, but you're still guiding to $15 million, $20 million, $0 million to $30 million for the year. When does that really start to inflect, if everything you're trying to do is successful?

[Chris Rossi:]

Yes, I think the -- when we talked about at the Investor Day, we show that we'll continuing to have this higher level spend of modernization through 2018, 2019, and 2020, and then 2021 it starts to come down to the more nominal levels that you're accustomed to seeing.

[Ross Gilardi:]

But is there anything else going on in the business, I mean is it just the cap, I mean your earnings hopefully are going up the next several years, but is there anything from a working capital perspective you would just think from the outside given all the simplification you're doing and the rationalization and so forth, the automation you're putting in that the business would be spitting off more cash right now. So is it in terms of getting to a better conversion is it just the CapEx coming down or is there anything you're doing supply chain wise that's causing these numbers to be so low right now?

[Chris Rossi:]

Yes, I mean I think we're at the early stages of modernization. So the company is going to continue to grow, it's going to continue to be more profitable. So we expect the free cash position to improve. I'm sorry I thought your question was more along when the capital spending is going to come down to more nominal levels? So you'll see improvement as we go forward, but the step change in terms of capital sort of the transition from year 2020 to 2021.

[Operator:]

The next question will come from Steve Volkmann of Jefferies. Please go ahead.

[Steve Volkmann:]

Just a quick one on the tax. Just is there any cash impact on this as we think about cash flow from the tax and then should we assume low 20s for fiscal 2019?

[Chris Rossi:]

Yes, I think the assumption for low 20s for the federal income tax is I guess is 20%, 21% right. And then to your question on cash flows, I believe not -- there won't be a cash effect in 2018 for sure. But obviously --

[Steve Volkmann:]

Okay, great.

[Chris Rossi:]

There is cash implication as your tax rate goes up, but not in 2018.

[Jan Kees van Gaalen:]

And obviously with the valuation allowance reversed in the U.S. ultimately we start paying taxes again in the U.S.

[Steve Volkmann:]

Okay. So that sounds like there will be a cash impact then?

[Jan Kees van Gaalen:]

Not for this year, for next year.

[Steve Volkmann:]

Okay, all right. And then can we talk just a little bit about price cost specifically, I sort of thought it would be maybe more of a headwind this quarter and I think you mentioned in your prepared remarks, Chris, that there was some things you were doing on the purchasing side maybe you can explain that more. But I thought that might be a little bit more of a headwind and I'm curious specifically on how you're doing on the price side because I know you had some increases a few months back and I think you mentioned that you're planning more and maybe just flush that out a little bit?

[Chris Rossi:]

Yes, I think at a high level way I will look at it and this is our belief at this point is that and across the whole company we think that the price will keep up with base material inflation. We'll be able to sort of keep those two in check. Now in any given quarter, there might be a slight lag, but certainly over the mid-term we think that on average we'll be able to offset the cost increases for material with the price increases. And then, of course no customers are really excited about getting a price increase, but I think many of them expected because there's increased level of activity. The other thing that we're trying to do proactively is make sure that we sell the value that's actually inherent in the products. So many customers have not had a price increase for four or five years and yet they have continued to enjoy the productivity benefits from the new products that we've brought online and enhancements to the existing products. And so we're proactively going out and pointing out to them that, hey, yes, this might be a price increase, but actually the benefit that you derive to your operations is much greater than this. So but that requires an active selling process and that's something that we're pushing. So I guess just stepping back at a high level, we continue to believe across the company that we should be able to offset the material inflation using price, but it does require, it's not just simple as just raising prices in many cases, you have to go out and comment your customers that's what's going to happen and so far we've been we feel pretty good about our progress on that.

[Operator:]

The next question will come from Andy Casey of Wells Fargo Securities. Please go ahead.

[Andy Casey:]

Thanks, good morning everybody. Question on gross margin, you pretty much touched it but I just want to make sure that the dip, the sequential dip from Q1 is related to the incremental over time and raw material costs and just want to make sure there's nothing else going on there?

[Chris Rossi:]

Yes, you've got it. That’s what it is. And again we wanted to make sure that we highlight that we see a lot of that is part of this transition period that we're going through with modernization. And so that's kind of is what it is as we work through this process but we believe that should eventually come out of our cost base line.

[Andy Casey:]

Okay, thank you. And then could you help us currency benefit of the first half, what do you expect for the full-year just holding rates where they were in the quarter?

[Chris Rossi:]

Jan Kees, what do you think?

[Jan Kees van Gaalen:]

Yes. So in terms of the currency benefits, we had a couple of cents from currency impacting our OpEx and so we think there will be $0.01 or $0.02 in terms of the OpEx line again for the second quarter obviously were impacted by the euro dollar specifically how that develops over the next few months.

[Andy Casey:]

Okay. So I should have been more clear, sorry. Could you, Jan Kees could you talk about revenue growth as opposed to the OpEx for the year?

[Jan Kees van Gaalen:]

I don't think we have disclosed that and that level of detail in terms of the mix and forward-looking, we wouldn't be able to give you.

[Operator:]

And the next question will come from Adam Uhlman of Cleveland Research. Please go ahead.

[Adam Uhlman:]

Hi good morning. Yes, I was wondering if we could talk about the increase of the revenue guidance for the year, could you talk about where you are feeling better about the business between the segments or end market geographies, what drove the increase to the outlook.

[Chris Rossi:]

Yes, it's pretty simple. The markets continue to be stronger than our expectations. And obviously we're transitioning from what was the trough of these markets to what seems to be the early innings of a recovery, so that's really what's driving it.

[Adam Uhlman:]

Okay. So there wasn't any specific market that caught you by surprise?

[Chris Rossi:]

No. That's not being a person who came out of oil and gas, which was highly depressed for a long time, the surprise for me is that they all are increasing at the same time. So that's quite handy.

[Adam Uhlman:]

Okay, thanks. And then back to the pricing discussion and infrastructure, could you maybe just ballpark the magnitude of the price increases that you need to offset the material costs, order of magnitude to be able to transition through the higher material cost?

[Chris Rossi:]

Yes, I'm not going to discuss the details of the percentage of price increase that we need for that. But I'll just say that we continue to believe at the end of the day the customers have to react to this and you've got to stay competitive. So we think it should be in line with for sort of normal practice of running the business and what clients are expecting in terms of a price increase, but a specific percentage, I really can't give you at this point.

[Adam Uhlman:]

Okay. But it's nothing significantly above what has happened in the past. I guess is what I'm getting at?

[Chris Rossi:]

Yes, exactly. That's the right takeaway.

[Operator:]

The next question will be from Walter Liptak of Seaport Global. Please go ahead.

[Walter Liptak:]

Wanted to ask about kind of a follow-on to the last one about revenue, when I put the second quarter numbers into my model looks like you didn't take up the second half revenue from prior expectations. So I guess the question is, did second quarter beat your own internal expectations on revenue growth at 15% organic? And as you modeled out the back half of the year, did you leave your model alone for the back half or did you actually raise the organic growth rate for the back half?

[Chris Rossi:]

Yes, the first half of your question, yes, the second quarter organic growth was higher and so on that basis and using what happened to us in the first quarter and the second quarter on our underlying model, we actually raised the organic growth rate in the second half and that's the basis of our increase in the overall sales for the year.

[Walter Liptak:]

Okay, all right. Okay. How much did you take up the growth rate in back half of the year, I guess on a organic basis?

[Chris Rossi:]

Do you have the number? Maybe 4% or 5%.

[Walter Liptak:]

4% or 5%, okay. All right. And where was the variance or where did you see was it across the board, where you saw better organics or was it in one or two of those sectors?

[Jan Kees van Gaalen:]

Walter, as I mentioned, all of our end markets are positive and all of our product groups are positive. So it's all over. It's a unique occurrence of our three geographic regions growing and all of our end markets growing.

[Walter Liptak:]

Okay, great. All right. And then I was hoping to get one question into Pete about the CapEx programs. And I wonder when you look at a $200 million to $300 million in spend, some that's going to go through Industrial. How much has been spent so far and have you learned anything, are you getting benefits from those projects that are complete?

[Pete Dragich:]

Yes, we've heard just in the beginnings of the modernization. Within Industrial, a good portion of the total spend obviously is going to go towards Industrial. And I would say my early on assessment is that we’re on track with what we said we’re going to do. I'm very excited now to have the opportunity to work with the team as we go forward with implementing our modernization and I have high confidence that we're going to do what we said we’re going to do.

[Operator:]

The next question will be from Joel Tiss of BMO Capital Markets. Please go ahead.

[Joel Tiss:]

All right, thank you. Just a lot of stuff, I was going to ask has been asked already. Can you talk a little bit about the market share like where do you think you've kind of come in the last two or three years and what's going on with the mix you told us the strength across different areas but I wonder how that impacts the mix?

[Chris Rossi:]

Yes, I think the market share is at any point in time, it's tough to sort of calculate where you are. As you imagine, but as I look at maybe historically and what the feeling is in the company is that the company has sort of been on a decline, but in the last few years based on the actions that we have taken, I think people are feeling like we're starting to reverse that trend or certainly stabilize. So this maybe the point at which we start to go in the other direction. I'm sorry, what was the second part of your question?

[Joel Tiss:]

Just about the mix. Can you give us a little color on what the mix looks like from the varying amounts of strength across the different businesses?

[Chris Rossi:]

Yes, I think WIDIA still has a lot more opportunity to grow because we're starting from such a low point. And then Industrial and Infrastructure I think are both poised for sort of similar growth rates. I think the question maybe is more relevant is the regions of the world and the ones that are growing the fastest we see a big opportunity in Asia-Pacific and that applies to both Industrial and WIDIA as well as Infrastructure.

[Joel Tiss:]

Okay. Can you give us a sense of the cost saves -- the cost savings that -- that's in the pipeline for your fiscal 2019 or is it too early for that?

[Chris Rossi:]

Right. But I think we -- yes, it's too early. But I would go back to our Investor Day presentation. We kind of laid out the big pieces of how much cost is going to come out by year over the next three years. I just -- I don't recall the number off the top of my head but you should be able to sort of glean some indication from that presentation as to what the trajectory would be on cost.

[Operator:]

The next question will be from Steven Fisher of UBS. Please go ahead.

[Steven Fisher:]

Thanks, good morning. Just wondering if we should start to think differently about some of the margin target you have over the next few years and perhaps the 2021 target given some of the cost dynamics that you talk about in terms of labor and wages. How you're going to manage it? Or will it just be a kind of a step function increase by the last year, your 2021 target year?

[Chris Rossi:]

No, I think, I just want to be clear. We still believe we can get to the 2021 target, all right. My only point and the reason we said maybe those bridges the way we did is that as we transition through this period, we are going to incur sort of headwinds on additional costs that wouldn't be in our normal run rate once we've completed modernization because there is transition cost that you have to go through like I said temporary workers, you’re working a little more overtime, those types of things. So that’s -- so but I would actually think that we can still achieve the margins that we talked about. Just with those headwinds maybe, maybe there as we go through the transition period that’s the point we just want to highlight.

[Steven Fisher:]

All right. So it might be a little bit of a jump up by the last year once you put all your automation and other investments in place?

[Chris Rossi:]

No, no, I think you know --

[Steven Fisher:]

It might have been otherwise.

[Chris Rossi:]

In any given year you might see steps, okay. But generally if you're looking at a high level year-over-year, you should still see a steady improvement.

[Jan Kees van Gaalen:]

But it’s not a hockey stick, Steve.

[Steven Fisher:]

Okay. And then the implied organic growth in the second half, obviously still slows down, I'm wondering are you anticipating that that's mainly a fourth quarter item given the pace of the comparisons, if you could just help with the kind of cadence over the second half of the year?

[Chris Rossi:]

Give me just a second. Yes, I think, well, first of all we have more challenging comps in the fourth quarter than we did in the third quarter. But the question is do we see that -- do we see the market sort of tapering off. I don't like to try to predict what the market is going to do. But sitting here right now, I'm not sure that's really the phenomenon that we're counting on; we're thinking that it's more just as you look at the comps from prior year.

[Operator:]

And this will conclude our question-and-answer session. I would like to hand the conference back to Chris Rossi for his closing comments.

[Chris Rossi:]

Thank you, everyone for your ongoing interest in Kennametal. Please follow-up with Kelly on any questions you might have. Thank you very much.

[Operator:]

Thank you, sir. A replay of this event will be available approximately one hour after its conclusion. To access the replay, you may dial toll free within the United States [phone]. Outside of the United States you may dial [phone]. You will be prompted to enter the conference ID 10111766 then the pound or hash symbol. You will be asked to record your name and company. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.