Q4 2020 Kennametal Inc Earnings Call
[music].
Good morning.
I would like to welcome everyone to Kennametal fourth quarter fiscal 2020.
Conference call.
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I would now like to turn the conference every two Kelly Boyer Vice President of Investor relation.
Thank you operator, welcome everyone and thank you for joining a tribute kennametal fourth quarter in fiscal 2020 or so.
Yesterday evening, we issued our earnings press release.
Posted a 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, our Chris Rossy, President and Chief Executive Officer.
Damon Audia, Vice President and Chief Financial Officer.
Patrick Watson, Vice President Finance corporate controller.
Frank claim car Dan Yes.
President infrastructure business segment, Pete Dragovich, Chief operating officer metal cutting business segment.
And Ron Port Chief commercial officer metal cutting business.
After Christendom his 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.
Our implied by such forward looking statements.
These risk factors and uncertainties are detailed in kennametal SEC filings.
In addition, we will be discussing non-GAAP financial measures on the call today reconciliations to GAAP financial measures that we believe our most directly comparable can be found out 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.
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.
Oh, My quick overview of the fourth quarter after that I will discuss fiscal year 21, and our strategic agenda that we're well positioned the company as markets recover.
From there Damang 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 year of significant progress on our strategic growth.
Profitability improvement initiatives.
As you recall, we began the year and what was already considered in industrial downturn.
737, Max production halt and the significant decline in the price of oil follow soon after.
Last but certainly not lease Kobin 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, they 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 plan simplification monetization capital spend.
Im pleased with our team came together to tackle the challenges.
Over 19 protocols, we successfully implemented.
Do you to allow us to operate safely and serve customers globally.
So all our facilities operated throughout the fourth quarter with a notable exception of our Bangalore, India plant.
Which was closed for approximately six weeks due to a government mandated locked down.
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 cobot 19 headwinds such as increased furloughs salary variable compensation reductions and reduced production schedules.
These measures helped align our costs more closely with demand.
Finished the year on a strong liquidity position despite the challenging environment.
In addition, we continue to make significant progress on our strategic initiatives.
Yesterday, we announced our attention to close a plant and 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 Essen, Germany facility.
We expect the Johnson city closure to be substantially complete by fiscal year end.
What production consolidated into other newly modernize kennametal facilities.
We're also substantially complete with the spending on simplification modernization capital.
Which marks a significant milestone in our journey to fundamentally reduce our cost structure.
Fruit financial performance throughout the economic cycle and improve customer service to enable share gain 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 monetizations structural cost actions.
Also of course as volumes return the savings will grow from increased utilization of our modernized processes and rationalize 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.
And to 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.
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 covert 19.
Q4, the company reported and 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%.
Video at 32% and infrastructure at 29% compared to negative, 4% and 3% for industrial Nvidia and infrastructure at 1% growth in the prior year quarter.
Also all regions were negative with the Americas, posting a 39% decline.
34% and Asia Pacific 24%.
Remember that Asia Pacific saw Cobot 19 related declines earlier than EMEA, followed by the Americas.
Adjusted 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 cobot 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 in approximately 10% seasonal decline in revenues from Q4 to Q1.
So as customers continue the reopening process in Q1.
The result, and 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 increased production to when we see a corresponding increase in demand.
Beyond Q1, it's helpful to consider customer sentiment.
What seems to be that while there are signs of improvement from Q4 to Q1, there's still a lot of uncertainty because of covert 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 prune due to the uncertainty of cover 19.
The plan for demand to be stable or only modestly improving through the end of calendar year 2020.
But regardless of how end market demand unfolds in fiscal year 21, we will continue our cost control access to protect margins and liquidity.
Starting 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 saving since inception to approximately $180 million at fiscal year end.
Putting total company headcount reduced by approximately 20% and rationalize 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 is share gain as markets recover.
For example on slide five in fiscal year 20, we continue 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 Kennametal 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 want to 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 have 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 Onest, we combined industrial and video into a single metal cutting organization.
This move will enable us to more effectively direct our commercial resources products and technical expertise towards capturing a larger share of wallet. In addition to executing a new brand strategy.
Previously video operated to serve a customer needs segment within metal cutting.
Significantly overlap the kennametal brand positioning.
Our new approaches to reposition the video brand and portfolio to serve a multibillion dollar segment within metal cutting that we previously have not focused on.
We expect that this approach will open up a 40% increase and 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.
Is this part of the customers metal cutting share of wallet that we are targeting by repositioning the video brand and product portfolio.
You will leverage our newly modernized manufacturing capabilities for improved delivery and cost performance.
So from a customer perspective, and this is true across all end markets. We are providing customers access to the company's full metal cutting sweet 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.
Thank you, Chris and good morning, everyone.
I will begin on slide seven with review of our Q4 operating results for both the reported and adjusted basis.
As Chris mentioned demand trends already at depressed levels from the industrial downturn deteriorated significantly in Q4, driven by the effects of cobot 19th.
For the quarter sales declined 37% year over year inline with the decline seen in April were negative 33% on organic basis to 379 million.
Foreign currency had a negative effect of 2% divestiture contributed another negative 2%.
Adjusted gross profit margin of 27.7% was down 790 basis points year over year.
The year over year performance was primarily due to the effect of lower volumes and associated absorption, partially offset by cost control actions, including furloughs, increasing benefits from simplification monetization and the positive effect of raw materials, which amounted to approximately 140 basis points.
Adjusted operating expenses of 68 million were down 41% year over year and decreased to 18% as a percentage of sales.
Although much of this decrease is temporary it is reflective of our aggressive approach to managing costs in this environment.
EBITDA margin was 17.7% down 330 basis points from the previous year quarter.
Taken together adjusted operating margin of 8.8% was down 700 basis points year over year.
You adjusted effective tax rate in the quarter was significantly higher at 51.2% due to the combined effects of geographical mix changes in our taxable income as well as the magnify the effect of guilty on the effective tax rate as we finalized actual full year taxable income versus estimates.
It's worth noting that our adjusted effective tax rate for the full year was approximately 33%.
We reported a GAAP earnings per share loss of 11 cents versus earnings per share of 74 cents in the prior year period, which reflects the reduced volume and higher tax rate, partially offset by our cost control actions coupled with restructuring items.
On an adjusted basis.
EPS was 15 cents per share in the quarter versus 84 cents in the prior year.
The main driver for our adjusted EPS performance are highlighted on the bridge on slide eight.
The effective operations this quarter amounted to negative 68 cents. This.
This compares to negative eight cents in the prior year period, and negative 39 cents in the third quarter.
The largest factor contributing to the 68 cents was the effect of significantly lower volume and associated under absorption.
This was partially offset by cost control actions, including lower variable compensation as well as positive raw materials of eight cents.
Simplification monetization contributed 14 cents in the quarter.
On top of the 10 cents in the prior year.
This brings the total fytwenty simplification monetization savings to 46 cents.
As Chris mentioned, our expectations for F. Why 21 is that the simplification monetization benefits will be in the range of 80 cents driven by actions already taken or announced.
Remember restructuring is a subset of our simplification monetization program.
In terms of benefits from our restructuring program the savings from our F. why 20 restructuring actions delivered approximately 33 million in run rate annualized savings at the end of F. White 20.
For a 21 restructuring actions are expected to contribute an additional 65, the 75 million of annualized run rate savings by the end of 40 to 41.
The total year results in detail in the EPS bridge can be found in the appendix.
Slides nine through 11 detailed the performance of our segments this quarter.
Industrial sales in Q4 declined 36% organically on top of 4% decline in the prior year period.
All regions posted year over year sales declines with the largest declined in the Americas at negative 40% followed by EMEA at 38% in Asia Pacific a 27%.
Slightly better performance in Asia Pacific reflects more mixed results in the region with growth in wind energy and improvement in China slightly offsetting significant contraction in other countries such as India.
From an end market perspective, the weakness in demand remains broad based with significant declines and transportation in general engineering down 45% in 32% respectively.
This was primarily driven by the demand effects of cobot 19, as well as related customer shutdowns that continued throughout Q4.
Sales in aerospace also experienced a significant decline both year over year and sequentially driven by the associated effects on demand in the supply chain from Cobot 19.
Adjusted operating margin came in at 7.7% compared to 18.3% in the prior year quarter.
The decrease was primarily driven by the decline in volume and associated under absorption, partially offset by reduced variable compensation and other cost control actions increase simplification monetization benefits in a 90 basis point benefit from raw materials.
On a sequential basis adjusted operating margin decreased 540 basis points as lower volumes were partially offset by aggressive cost control actions and lower variable compensation.
Turning to slide 10 for video.
Sales declined 32% on top of a negative 3% in the prior year period.
Regionally the largest declined this quarter was in Asia Pacific down, 41%, the Americas, 31% and EMU, 28%.
The decline in Asia Pacific was mainly driven by India with its countrywide co bid 19 shutdown for approximately half of the quarter.
Adjusted operating margin for the quarter was negative 2.9% due to volume declines, partially offset by lower variable compensation and other cost control actions or raw material benefit of 220 basis points and increase simplification monetization benefits.
Turning to infrastructure on slide 11.
Organic sales declined 29% versus positive 1% in the prior year period.
Other items that negatively affected infrastructure sales included a divestiture of 4% FX of 2% and fewer business days of 1%.
Regionally large decline was in the Americas at 39%, then EMEA at 22% and Asia Pacific at 14%.
By end market. These results were primarily driven by energy, which was down 47% year over year, given the extreme drop in oil prices in the corresponding decline in the EU us land only rig count.
General Engineering, and earthworks were down, 31% and 17% respectively.
Adjusted operating margin of 12.7% remained relatively stable sequentially with decreased 280 basis points from the prior year margin of 15.5%.
This decrease was mainly driven by lower volumes and associated underabsorption, partially offset by reduced variable compensation and other cost control actions favorable raw materials that contributed 200 basis points and benefits from simplification monetization.
Now turning to slide 12 to review, our balance sheet and free operating cash flow.
Before I review the numbers like I did last quarter I would like to emphasize that we view liquidity as extremely important particularly in these uncertain times, we will remain conservative to ensure the company has ample liquidity to whether the current environment as well as continue to execute our strategy.
Our current debt maturity profile is made a book to 300 million dollar notes maturing in February of 2022 in June of 2028, as well as a use $700 million revolver that matures in June of 2023.
Fiscal year end, we had combined cash and revolver availability of approximately $800 million.
At quarter end, we were also well within our covenants.
Primary working capital decreased both sequentially and year over year to 596 million.
On a percentage of sales basis, it increased to 35.4% reflection of the significant decline in sales in the quarter.
Net capital expenditures were 38 million the decrease of approximately 20 million from the prior year, bringing the total capital spend for the year to 242 million as expected.
Our fourth quarter free operating cash flow was $39 million and represents a year over year decline, reflecting lower income due to volume and increased cash restructuring cost.
Total free operating cash flow for the full year was negative 18 million.
As mentioned on our last call, while we expected positive cash flow in the fourth quarter free operating cash flow for the full year was projected to be slightly negative given the level of capital expenditures and cash restructuring charges.
In addition, we paid the dividend of $17 million in the quarter.
Full balance sheet can be found on slide 20 in the appendix.
Before I turn the call back over to Chris a one to spend a couple moments, providing some additional thoughts regarding f. white 21 for modeling purposes.
Turning to slide 13.
This slide shows how certain factors are expected to affect EPS and free operating cash flow during each half of F. White 21 on a year over year basis as I mentioned earlier.
We expect increased simplification monetization benefits of approximately 80 million enough why 21.
Accumulated benefits will increase as we move through the year.
As we think about the temporary cost control actions that we've announced in June they will generate a savings of $10 million to $15 million per quarter in the first half of F. why 21 relative to the first half of that fly 20.
However, as we look at the second half of acquired 21, the temporary cost control actions implemented an f. why 20 in the reversal of variable compensation, which we currently do not expect to repeat will create a year over year headwind.
As you'd expect from US we will remain diligent in managing our costs and we will take the appropriate actions if markets continue to be challenging.
Based on current tungsten spot prices raw materials will be a positive in the first half due to the headwinds we face in the beginning of F. white, Tony and we'd be roughly neutral for the rest of the year.
Depreciation and amortization will step up to a range of approximately $130 million to $140 million compared to approximately 120 million in at 420.
We currently expect our full year tax rate enough white 21 to be similar to the 33% adjusted effective tax rate. We saw net for 20 would it could fluctuate significantly in any given quarter, depending on the effects of geographical mix and the sensitivity to lower pre tax income.
However should trends in earnings begin to improve in the second half, particularly in the us our tax rate should improve.
As we get back to more normalized environment, we still expect their long term effective tax rate to be in the low twentys.
Regardless of the effective tax rate, we expect cash taxes enough why 21 to be approximately $10 million less than the 37 million paid enough why 20.
In regard to free operating cash flow capital expenditures will be significantly lower versus last year as Chris mentioned by approximately 120 million. However, I want to note that the total spend for the year will be weighted to the first half mainly due to the timing of cash payments associated with machine deliveries.
Primary working capital will depend in part and how market conditions evolve over the next several quarters.
For the first half of quite 21, although we will reduce inventory levels based on current market conditions. The net accounts receivable in accounts payable will likely still be a working capital use.
In the second half assuming market conditions improve we would expect working capital to be use as well given the significantly depressed accounts receivable balance in Q4, VEF Whiting and reduce accounts payable from decreased capital spending enough why 21.
We will continue to be diligence on inventory, while ensuring that we do not compromise on customer service, which is essential for our high volume high margin products.
Lastly, cash restructuring charges are expected to be a negative factor year over year in both the first half and second half due our accelerated restructuring activities. The notes in June.
We currently expect cash restructuring charges to be $25 million to $35 million higher in F. Why 21 with the majority of this increase in the first half.
And with that I'll turn the call back over to Chris.
Thanks statement before we open up for questions I'd like to make some closing remarks, please turn to slide 14.
Looking ahead of fiscal year 21, we will continue to focus on the things that we can control.
So that we manage through the current market headwinds and prepare the company to outperform during the recovery.
We will continue our approach to aggressively manage costs and aligning production to demand, while operationalizing, our modernization investments for incremental benefits.
Second we are committed to maintaining solid liquidity with a focus on optimizing cash flow through lower capital spent working capital management and cost control actions.
Finally, we will continue to pursue our strategic growth initiatives for the weekend positioned the company for profitable growth and share gain.
As end markets recover and to achieve our adjusted EBITDA profitability target when sales reach a topline range of two and a half to $2.6 million.
With that operator, please open the line for questions.
Thank you.
I would like to ask a question. During this time frankly press star one the number one on your telephone keypad.
If you would like to its Joe your question.
Please don't send the number two.
At this time, we'll pause momentarily to double our roster.
My first question comes from Stephen Volkmann with Jefferies. Please go ahead.
Hi, good morning, everybody.
Currency.
So.
I guess, just a lot of moving pieces as we try to get our head around 21, then recognizing volume is probably the most important one which none of us can forecast, but theres a number of things I think we started to kind of way out relative to 21.
So I guess you should get a sense of benefits from modernization in 21, that's that's the number not a run rate correct.
Correct.
Okay and can you say how much you benefited in 20 from these temporary cost reductions that will come back.
Yes, we can Steve the.
And that's why 20 that was about 40 45 cents.
And that included the furloughs lower incentive comp reduced travel austerity measures that sort of thing.
That was about a positive 40 to 45 cents, which as David mentioned in his remarks would become a headwind.
And fight 21, and second halfway 21.
Right, but not in the first half right, because you're going to get that $10 million to $15 million per quarter of continued benefit.
That's correct that's correct.
Okay, and then finally, the restructuring I think one of you said 65 to 75 million run rate in 21, what's the sort of 21 number ballpark.
So Steve that would be embedded MD $80 million of simplification and modernization savings. So what we're getting as part of this restructuring threw up by 21 is going to flow into that 80 million.
Got it okay and is any of the cadence of that sort of more second half loaded for just as you sort of work through this stuff maybe.
So I guess, what I would tell you Steve is as we the announcement in June with the 10%.
Headcount.
Reduction that walks that will transpire here over the first half depending on where in the world those are happening and so I would tell you that the savings will be the full annualized savings will be more more recognize in the back half of a fight 21.
Okay that makes sense to me alright, Thank you I will pass and I appreciate it.
Thanks, Steve.
Our next question comes from Julian Mitchell with Barclays. Please go ahead.
Hi, good morning.
Maybe just.
First question.
In sort of dollars and sense around some of the margin.
EBIT puts and takes.
Just wanted maybe to look at from a margin rate standpoint.
Just to understand what kind of decremental margin managing the business too. So you did in the last six months and overall decremental margin.
Around the mid Twentys.
Understanding that included Tailwinds from tungsten prices, so when we roll together, all the bits and pieces on slide 13.
Should we assume that as on the sales of fulfilling the decremental margin is around that mid twentys.
Right.
The balance of the new fiscal year.
Yes, I mean, I think just I'll lay the foundation here in the naming names you can provide some details inside this but.
Right the decremental margins for sort of in that.
Mid twentys kind of percent.
If you if you back out raw materials, and then also the incentive comp and all these temporary cost control actions. We're looking at Decrementals that are pretty consistent and what we would expect with this business.
Including contribution margin and of course that we have to cover some fixed cost.
So.
It looks it looks to me like Thats going to be very consistent with what weve, what we've seen before.
Payment if you want to add anything to that to dig inside those numbers. Please. Please do I think Julian as you look at the first half of that wide 21 of our decrementals will likely be better than our average rates because we have two positives.
We have a raw material.
So when here as we talked about in the first half, which will help and then we also have these temporary cost actions in the first half of the year, which should lead to slightly above average I think to your point a lot depends on the second half will depend on the actual sales and what happens there, but generally speaking we would expect to give more into our traditional.
Decrementals as Chris said, we we lever at around 40% on average plus some sort of fixed cost absorption, which would be more likely the.
Notes given no significant changes to how we run the business would likely be the second half.
Thanks, and on that point Damon Im looking at temporary costs in aggregate for fiscal 21.
We should assume that there was slight negative for the year as a whole year on year is that fair.
Yes, yes, the way I would look at that Julian as Chris said, we were 40 to 45 cents of of savings in the fourth quarter, a little bit more in the if you add the third quarter, where we did start to initiate the furloughs plus some variable comp.
That would put us just north of let's say 50 cents for the back half of the year and what we what we've said as a temporary actions we have right now our ranging 10 to 15 million per quarter. So, let's let's call that 25 for the first half plus maybe a little bit of travel and other cost reductions, but net net it will be.
Headwind for the full year.
That's really helpful and then my second topic.
It's just around the.
Working capital so I see on slide 12.
You know you ended the year with that sort of primary working cap to sales in the mid thirties.
I guess in Latin like I was surprised looking at slide 17 that working cap is a headwind in the first half because I would've thought about mid thirties ratio.
Then down back towards 30%, so and thats occurring alongside what is still a double digit revenue reduction.
So maybe just help us understand why the working cap.
With those two things why it's not a cash tailwinds.
I think Julian so what we're looking at here in the first half is a couple of moving pieces. So one is we do expect inventory to come down in the first half of the year.
However, as we talked about we're going to see a significant reduction in the payables given the reduced level of capital expenditures.
That will go through here in the first half so the payables will from year end divest quite 20 through the first half of the fight 21 is going to be a significant UNFI reuse and then if you look at the receivables and given where we finished fiscal year 20 add if you look at what Chris alluded to for the first quarter, plus any sort of seasonal pay.
Pattern, we would see in Q2, we would expect the receivables to be a use of cash so between the the are in the ATP. Our expectations are that that would offset the reduction in inventory, we're seeing so I would call it more of a modest.
Use of cash in the first half based on that.
Great. Thank you.
Your next question comes from Steven Fisher with you. Please go ahead.
Thanks, Good morning.
Just on those to follow up on the temporary cost savings how definite would you say is the transition from those being a savings in the first half two to a headwind and how confident are how definite is the timing around that just curious on what the signals and triggers.
Need to see to bring those temporary cost back and how long the need to kind of see those signals sustain that.
Yes, we're it's going to basically be triggered by what we see the end market demand doing if it.
If it gets worse.
For where any number reasons were all thinking about covert 19 in those kind of disruptions that starts to get worse.
That would be something in return for us to again.
Make sure that we're focusing on preserving our our decremental margin performance and also liquidity. So it's really going be largely dependent on how.
How end market our end market demand materializes. So as we go through the first six months in the year.
Okay. That's helpful. And then obviously the new video strategy I'm curious.
What has changed that redirect customers focus to make this work and why is now the right time to do this.
Yes, let me.
Start with the now piece.
As we as we look at the fit for purpose segment, which is.
The segment within metal cutting and it's and it's consistent across the customers where they are in.
Arrow, our or transportation or general engineering.
And we have.
Good good market share of customers that are using the kennametal tooling.
And they primarily look at us as a.
Supplier for.
Very specific high performance applications, where we can find to the tooling to to extract the most productivity, but they have a whole host of applications within the same facility in many cases, where they just really don't don't think of us for this sort of fit for purpose tools and we obviously have that in our portfolio videos.
It is capable of serving that portfolio. So they're kind of up there kind of just passing as by not considering us for those opportunities.
And now we've got to win with one organization, we've got the ability to.
Coordinator collaborate and bring the customer the full full portfolio, they're going to need so we don't require.
A lot of reach out to brand new customers and plenty of business inside the existing and existing customer base.
However, if you're going to provide these fit for purpose tools.
You also need to.
Really have super high performance in terms of availability and consistency and quality and those kind of things.
So prior to modernization and as you know one of the reasons. We did monetization is because we're actually falling behind in those areas, but now we feel with the modernized manufacturing process. We have that we can actually deliver the operational performance in terms of availability to target. This market and then the other thing is is frankly the fab.
Acted to demand is low right now.
I think it's a great time for us to be able to go to customers.
We're going to ramp up in their army kind of ramping up at the same time and to have another supplier like kennametal that Ken.
Provide their truly needs not just for the high performance and but for all their needs I think it's a great opportunity for us to pick up share and that sort of fit for purpose area.
And so how quickly do you think this could start to have a material impact on flowing through the financials.
And we have if we look at the voice of the customer there. So there's a lot of near and opportunities that we can that we can target.
We have thought we have some refinement to do our product portfolio, but that'll happen over time of the existing product portfolio can actually bring us these opportunities right now.
One of the things we started to move in this direction one I.
Foot Ron Ron poured in charge of commercial excellence for for metal cutting.
And that was really a way to two to take two organizations are operating separately and.
And bring them all together at a point, where we could actually go and target. Some of these customer. So we've actually already started with certain customers offering in this capability.
So we feel we can get traction pretty pretty quickly.
Okay. Thanks very much.
Your next question comes from Ann.
You bet with.
Morgan. Please go ahead.
Hi, good morning, everybody.
Just on the video and industrial strategy I mean, when don't because thats where were separate that I think a lot of guys question good strategic rationale.
Yes, I'm wondering if biniak could.
Really compete on its own and its own right.
Are you acknowledging today that that that's where the plugged strategy and into your hope that you will lead Gainshare lost market share as opposed to like gaining market share and fresh.
Yes, thanks for the question I think.
I'd characterize it as follows when not one Ron to fail, who is my predecessor.
Came in and set that up he he recognized a couple of key things. He's looking at the technology that underlines the video portfolio and the brand recognition and we are talking to customers. These like there's there's a lot here. Okay. This is this is actually could be a diamond in there in the rough and you and his as philosophy was if I.
If I if I make it a PNM now and part start to put resources to really gone and figure out how to grow that brand and understand what's going on.
I think thats the best thing to do at the at the time and sell it was so what we've just move to now and is actually culmination of the things that the media people have been working on and and they're the ones that have brought to the table. This is fit for purpose opportunity.
So I think it's just a logical conclusion of of the journey that we started before I even got here in terms of evaluating just where can we where can we put us in this thing for the most growth and before the approach was we're kind of looking for some white spaces, and we're kind of making sure that into two brands are competing with each other and looking for.
For other opportunities, but as we went through that process.
We actually discovered that no one really the opportunity here is.
We talked about one to bites of the same Apple, it's actually going to be two separate apples that we uncovered so I feel like I'm not sure. We would have we've got would have got for the same strategy had we not started from the point that we work. Nevertheless, we're looking we're looking forward and I think.
It's a 40%.
Larger opportunity than we've ever targeted before and as I mentioned in my previous comments, we're kind of walk in right past, okay. Their customers many customers want us to do this they're just thinking that this is not something that were interesting because we've never focus on.
Okay.
Helpful I guess.
And then.
The same vein had cats. This one notion of continuing to move manufacturing to low cost countries. When the whole I think the whole restaurant. The world is doing the opposite then moving back to being closed customer.
Can you talk about why are we continue on this low cost country strategy. When I think there's enough evidence that there that it's not a viable strategy long term because low cost countries end up being.
Neutralized normalized and are no longer and low cost.
Yes, I think that said Thats right. So let me just clarify something.
Our strategy is to is to move sort of in region for region.
So I think strategies exactly what you what you said, where we want to be closer to the customers and I think you're also right. There 20 years ago. There was a lot of low cost countries.
Thats not necessarily the case now there are lower cost countries and we've talked about that in our footprint rationalization is taken advantage of that.
Keep in mind, we had heavy heavy up a lot of our production capability was in Germany, right and I think anyone would argue the Germany is the lowest cost option.
But we didn't necessarily move out of Germany, or rationalize our footprint just around cost we rationalize it around customer service and what do we got to do too.
They have the right availability and delivery performance and then still optimize the structure. So it hasn't been optimize around around lower.
Low cost that being said, we do have thought we do have an excellent facility in India, which happens to have low labor costs.
Have a facility in Vietnam, which also happens to have low labor costs and also China, but this strategy is really driven about by what do we what do we need due to serve the customers and penetrate that market.
While we also look for opportunities to continue to improve our profitability.
Got it and if I may just a quick clarification and you didnt mention pension and the impact of low interest rates.
And Thats kind of 21 would you anticipate any incremental costs from pensions and going into this fiscal year.
No so and our pensions are our pension plans are actually in a really good shape. Our us pension plans are actually over funded.
They improved the funded status enough by 21 from 103% to 105%.
So we're actually generating pension income and you see that in the other income and other expense line and that would be around 14 million last year, and we would expect it to be around the same this year.
And there's no okay I appreciate it could be plan.
Thank you I leave it there.
Appreciate it.
Our next question comes from Dillon with Morgan Stanley. Please go ahead.
Hi, Good morning, guys. Thanks to the question.
I guess starting off as a kind of relates the channel inventory that the customer level kind of curious we've gotten a good sense across your end market mix as to kind of where production rates are settling relative to threeq over levels, and I guess, whether you're going to be in any underproduction or de stocking activity here in the first half of the year.
Yes, I think it turns of.
Production levels, whether it be automotive or arrow and really just about any end market.
We haven't seen anyone return to the I guess, yet to the to the pre covidien production levels.
And so as a result of that we also feel like.
Some destocking, we'll certainly continue.
I think generally there is as we talked to customers.
They may start to see demand signals and start to see things improve but they're really not necessarily going to go out in.
Order a bunch inventory restock the the inventory in the channels.
So I think they get a little bit further into this thing and see how it see how it plays out so we could see some more de stocking for sure in the first quarter and we'll have to wait and see what happens in the in the second quarter and it could start to improve.
Or or it could be that they're just going to use that period of time sort of stabilize their inventory and then decide what to do.
Okay got it thanks, Chris and then maybe to through EBITDA as a kind of relates to energy organic growth in the quarter, obviously, no surprise business, what's going on with the rig count, but I guess as we think about kind of post on the trend is that a business that you see as more structurally challenged going forward or the expectation that you can eventually grow that business back to pre go at levels and I guess kind of related to that.
Seems like you had some share gains and when recently that you called out is there any potential there to kind of offset some of the legacy oil and gas businesses share gains elsewhere.
Yes, I think Theres, a couple of moving pieces first of all.
You know as it relates to infrastructure and energy we we've been at this game for a long time and.
We we understand how to run the business in this sort of cyclical environment and a lot of the modernization projects and things. We've done have helped to really lower the breakeven point of the of that business. So that we're in a better position to sort of whether these is the cyclicality. The other thing is that I think we've talked about this on previous calls is.
Our energy exposure in infrastructure is really is really in the us and we brought in a new executive and Frank and Cardenas, who has a lot of expertise in running businesses internationally and and he sees identified many opportunities I think to grow outside the us and we're setting ourselves up to focus on that.
[music].
And one example is.
As in mining Okay. We.
We had lot of exposure to Appalachian coal and that's all gone a lot of that it's been permanently reduced but we can use that same tooling technology and other mining adjacent fees and they happen to be outside the United States. So.
So there's opportunities to grow there.
And then I would also say one of the technologies that we mentioned.
Was was in the earthworks area for road rehabilitation and road construction, so theres opportunities to grow some of the other spaces around this to give us some.
Diversification, if you will.
And then I think energy.
As I said, it's been largely focused.
Focus in the us, but there are there opportunities to.
To grow and other in other regions, but I think the bigger opportunity is we still have technology to bring to bear in that space Theres still plenty of business. There a lot of the oilfield services companies, our biggest customers and they are there still expecting us to advance our technology and looking for opportunities to still grow.
So while it is cyclical there's still opportunities for us to grant gain share even in the current configuration.
Okay. That's helpful. Thanks for the time Chris.
Our next question comes from tilted squid CFO. Please go ahead.
Hey, guys over Don.
Well.
I Wonder if you know since.
Thats companies go under all this all the stress anything anything coming out of that that gets you to think about sort of the next round of restructuring and simplification or any product lines that that may not be as strong as others are.
Or anything that that kind of comes out of this this experience.
Positive or negative.
Okay.
Well I think.
Yes in terms of port portfolio shaping that's something we kind of do as a matter of course.
But as it relates to this current environment was there anything to prompted us to say take another look at it I don't think so.
But I would say and just good business practice, Joel we would we would be doing those kind of things anyway.
And so I think domain. The main thing that this maybe the one thing to do come out of this crisis I think it did did give us an opportunity to accelerate some things that we didn't we talked about.
The major and so acceleration from simplification monetization of things that we had planned to do later in flight 21.
Sort of porn pull those things forward and take advantage the opportunity we have right now and I think thats also.
That also equaled some significant changes to what our manufacturing footprint is in Europe in Germany and.
That can be a challenging process to effect change in.
At our workers Council Representatives have been very very cooperative very open minded and have.
They are good business people and they see what's what's happened in the overall economic environment and that sort of heads as given everyone a.
I would say burning platform to make the necessary changes so.
If anything Joel it's helped us to to accelerate.
And give us a platform to accelerate some things were going to do anyway.
Okay, Great and then.
You know and any can you give us any examples of sorta winning in the recovery instead of.
You know versus winning and in the downturn.
Other companies have talked about sort of how do we how do we play offense and come out of this much better off than than we thought we wouldnt we would have been.
Year ago.
Yes.
I would say that.
This is this expansion into the into the fit for purpose tools is.
This is a big is a big opportunity for us because we're as I said, we've been talking to customers about this for a while and before we made the consolidate acts of physical consolidation. The two organizations, we had sort of put Ron port and have an AD hoc team together to try to target. Some of these customers ahead of making the structural change.
So what we learn to that processes that customers are very interested and there there may be even a little concern that as they do have to ramp up quickly.
They are happy to see kennametal, there to provide them not only things that we would normally provide them at this whole other space, where we can or we can support them and add another could significantly supplier to that effort.
Because what's going to happen as everyone, everyone gets busy real fast and.
And they want to make sure that they have plenty of supply chain power too.
To help them ramp up quickly. So that's that's one thing I think that it's kind of come out of this thing and it's a big opportunity for us which is why.
I Didnt think Cray coven 19, but if there was any positive to it.
This is a good opportunity for us to enter this type of market I would say.
Alright, Thanks, very much you you definitely cleared something up for US what we were all wondering if you are the ones who created this.
Illness. Thank you [laughter].
Our next question comes from Garden Lynn.
Cleveland Research. Please go ahead.
Hi, guys good morning.
Just a follow up on the on the video change here.
Is there can be a change in the distribution strategy at all to to execute this plan and then can you also speak to the profitability implications from.
It sounds as if you're shifting more towards mid market or at least lower market. Then in which you had been targeting before could you maybe share any any thoughts on that.
Yes, our approach to distribution, we have a direct and indirect model.
And.
Through simplification, we obviously had kind of rebalance that thing, but we've also always said there wasnt a particular.
Number we are looking for like so much so much percent directs almost percent indirect our philosophy. There from a commercial actions perspective is too is to look at a potential market segment or region and figure out how to get as much shares we can and that requires the proper connectivity and sales channel. So we'll we'll continue to optimize.
Hi, guys the direct versus indirect equation based on that that type of philosophy.
In terms of the.
The.
The margin issue.
I would just I would just make make 1.1st before I talk about it and more general terms is the up in you know theres a theres a low cost segment of that market, which is really provided by people that are just selling on price on there's not much the value proposition other than we've got the lowest price.
Customers get what they pay for and there is some customers that have a need for that type of area, but thats not an area that we're talking about so there is still differentiation that can happen in this fit for purpose.
And we had set some targets for margins for the industrial and video segment in our Investor Day.
Some three years ago, and so the way we're looking at it as we believe that we can still grow in this fit for purpose segment and still maintain those margin targets that we et cetera.
Back at our last Investor day.
So this is not necessarily a just lower the price and get the business. It's a little more nuance. There is value proposition that has happened there, which way which is why we want to play in that space and not not in low the low low cost of competing on price only space.
Okay got it thanks and then.
To your comments on the first quarter.
Yes granted the visibility is is obviously very low but.
Can you think you mentioned that July sales were a little bit less worse could you share what that looks like and then if it's the quarter ends up being close to typical seasonality I guess would you expect to be able to remain profitable or is that.
Is that too big of a job.
Yes in terms of the July number taken in isolation we.
I tried to put it in the context of.
Before you guys have what what the implication would mean from a Q4 to Q1 shift the July number just an isolation.
As I said it that coupled with the month to month sequential pattern. We saw in Q4 gives us some indication that many markets have sort of stabilized or modestly improving.
So the July number in isolation is not really particularly helpful. Because we actually have a seasonal pattern inside a quarter. So you need to put it in the overall context. So I think the best way to look at while we experienced in July is.
Yes, there's there are signs of some markets improving and summer summer stabilizing.
In terms of the.
The overall profitability.
Where we're.
We're managing the company aggressively through cost control.
Our philosophy in terms of planning for liquidity and making sure that accompany whether this this colby 19 storm is.
If it continues to take those aggressive cost cost control action. So we feel that we're we're still going to be a.
Of viable company for sure even at the volumes stay at the at the current level.
And it's like I believe that the.
That there will we will come out of this thing at some point.
But the way Damon and I are looking and leadership team is.
Let's let's sort of planned for the scenario, where it stays down for a while and make sure that accompany can survive and we feel we feel quite confident that that will be the case.
Okay alright. Thanks.
Our next question comes from Andy Casey with Wells Fargo Securities. Please go ahead.
Thanks, a lot thanks for squeezing me and good morning, everybody.
Hi.
Hi.
No more questions on this video repositioning first.
Or the competitors in this.
Mental white space for Kennametal, your traditional competitors or or other companies.
Then a couple other questions.
With these fit for use products go through a third party kiosk or or do they really require direct sales support.
Too as you put it reshape customer opinion of your products.
And then lastly is direct sales will you will you really be increasing your commercial presence are relying on existing.
Network of salespeople and then do you expect skew count expansion to cover the market.
Okay, and you might have to remind me of all those questions. Let me, let me try to try to.
Come off here.
In terms of the the competitors.
It would be the traditional the traditional competitors I guess you can you could argue.
So you've got Sandvik has some different brand segments that are that are targeting that fit for purpose. The AMC group also does.
So I think there the traditional competitors.
In terms of the.
The direct.
Versus indirect again, we're optimizing around.
What is the best thing for that particular customer in that particular region.
So the fit for purpose.
A lot of lot of small general engineering type of customers are in that Florida sort of require that broader.
Water application portfolio, which is perfect for fit for purpose. So so in that sense, a lot of that will be up through through distribution.
But there also a number of customers that are currently direct that.
That we that we will also sell that portfolio too.
Once they realize that we can make that that kind of an offering.
And.
Damon and what about this skew count.
Comment on the scale I guess, maybe I don't see there's not a material change and the number of SK use.
Think as we go through the product lifecycle management, and we start to introduce new products, we take other ones that us out of service here longer term, you're not going to see a material change in the absolute number.
Okay. Thank you very much.
Our next question comes from Walter Liptak with Seaport. Please go ahead.
Hey, good morning, guys.
Well.
Wanted to ask about.
Just some of the trends that you know you might be seeing in the cutting tool metalworking markets I.
I think from my perspective.
As we were going into June.
Some of them virus cases were coming down and then things seem to have gotten worse here as we go into the summer is are your customers kind of following that trend with maybe.
Yes.
Our to happen some green shoots and then within viruses going out they're pulling back in.
And that resulting in the.
Some of the tone that we're we're hearing on the call today.
Yes, I wouldn't say, if I start with transportation, particularly in Americas as I looked at what the automotive companies are doing they they seem to be still committed to.
To ramping up their production.
And while there's been an increase in cases.
And particularly in the us.
I didn't get the sense from them that they were that there were slowing down they were going to continue there continue to ramp up.
And and I think thats up that's actually the case for.
For aerospace and.
Sort of the energy companies up so I think.
We see aerospace transportation energy kind of being flat in terms of market demand from Q4 to Q1.
But it but it's not it's more it's more of.
Macroeconomic then there somehow pulling back now from a or my sense is there not nestle pulling back from from their ramp up plans and then general engineering, which has got a lot of smaller.
Size machine shops, and that type of customer.
There could be a little bit of them.
Pulling back as.
As they try to ramp up there is increasing cases, but my sense. There is it's it's just.
Maybe more macro driven there.
There.
The demand signal hasn't quite hasnt quite caused them to want to ramp up.
So I don't I don't know if the cold in 19 disruption is.
Is necessarily affecting it but that is a that is one thing that they're all worried about in they're not really sure which is why it's very difficult for them to.
To speculate beyond even even the first quarter and so it's hard to pull that out of them because they just don't know.
Okay. Thanks, I appreciate the color I wonder early in the presentation you talked about.
Good long term goals and how they're on track I Wonder.
You just review those for US and then maybe talk about the competitive situation has anything changed with your competitors are they just similarly suffering through the virus in the volumes going down and.
And as the markets you up at some point.
The market returns to prior levels.
Yes.
I'll start with the last part of question first the up that the some some of those sandvik courses as a publicly traded company. So we have some insight as to what theyre experiencing.
The IC group, which is the next.
Larger.
Metal cutting.
Supplier.
That we we have some competitive intelligence on in our summary of all that including including information for some of the smaller suppliers is that.
Were all down about the same same amounted stake kind of everyone's in the same in the same boat.
When you look at the year over year declines in that type of thing so everyone's kind of gone through this and experiencing the same same thing.
In terms of our you know our opportunities here one of the things that.
We have been really focused our capital allocation and lot of management attention was fixing or bringing bringing our manufacturing capability to to a point, where we can be competitive again.
And.
So we that's why we're so focused on not letting anything get in our way to do that because that was sort of foundation on fundamental and so not only now the phone starts where we can start to leverage that capability.
In areas like the fit for purpose tools.
You also noticed that through throughout this entire period and also up it was also a commitment by the company to keep the investment in R&D and keep launching new products. We made the shift to focus on from from focus less of our engineering capability and transportation, where it was difficult to.
To get paid for that value into place like aerospace where.
You can get paid for that value and while that market is down right now and probably will stay down for awhile.
We still feel that that was a while I was a very good move because it's still has good good long term growth prospects and it certainly has much better profitability profile than that in transportation.
So we have always been a technology company, we're going to levers that investment we've now got the opportunity around this modernized footprint.
Which has lower costs and better performance capability.
And those two things combined together along with the right commercial excellence strategy.
And sales effectiveness strategy, we feel sort of the skies disguise limit for us.
We're in the game here and we're we're here to take share.
Okay, great, Thanks, and the and just the goals again for EBITDA targets that you want to get to.
Thank God, we had we had set that EBITDA target of.
24% to 26%.
When sales reached a somewhere around the two and half of $2.6 billion range.
And that's still we still feel quite confident that.
Those goals we achieved.
And in fact, if you kind of look at it just step back we already got about $180 million of EBITDA savings.
And that was certainly on a much lower volume profile than than we had vision. When we set those original targets on November $180 million was at the.
It was at the lower end of our total range. So.
All that combined I got a lot of confidence that were going up we're going to hit those EBITDA targets when the volumes come back.
Our next question comes from Steve Barger with Keybanc capital markets. Please go ahead.
Hi, good morning.
Chris.
First just a clarification did kennametal participate in this fit for purpose market in the past and exited because of service levels, where you've never been in that market, even though you have the tools in the portfolio.
Yes, I think that.
We've participated in a little bit if you look at my my diagram in the slides it indicates that we've been sort of touching their skirting that area.
But I don't think up I think they they really have largely focused on the performance and in fact.
When you look at some of the acquisition as they've done over the years and including video which has done quite some time ago. They their strategy seem to be to pull that that those brands into this performance segment. So.
We havent really focused on it.
Like I'm like resetting the organization up to do now even though to your point, we actually had product to to penetrate that market.
Outside of imagining the short term demand ramp whenever that happens can you tell us again, what the competitive advantages for video given you will be the new entrant into a market defined by established competitors.
Yes, we've got.
Keep in mind, we're we're looking at existing customers that we've talked to that.
When you ask them why don't you are giving us any of this this product theyre likely because you guys. You guys don't have product to fit that that portfolio Thats, not where you guys play they perceive us to be.
Excellent and helping them with their difficult machining.
Applications and providing technical support but we also have this we also have a portfolio here and generally customers are are interested in reducing the number of suppliers and they have a lot of confidence and Kennametal and trust me and helping them with the with the very high precision very.
Process defined applications that generally are part of factories that those those processes need to Ron and Thats, where you put your sort of your 18, they're happy to they're happy to give us the opportunity to work on some of this other stuff, which is not quite as which is more broader and application still needs to have excellent quality quality and worked well so they are.
Any perceived that we we have the ability to to meet those requirements. They just where they just we're not aware our thinking of us in that space. So that's the basis, where we where we have the opportunity. So I think it's going to be up it's going to be easy for us to get get traction in there because we're kind of already there. It's not like we got to go out and meet 10000 new customers.
And push our way in the door.
There'll be some of that and I think we'll have opportunity to add new customers based on this.
But our strategy at this point is just to just to get out overall way and actually allow this thing to happen what is what would naturally happen anyway, and let customers really have access to our full capability in our I think our single organization Proche with the commercial excellence on neuron port, we're going to be nimble enough to be able to.
Take advantage those opportunities, which are really already there for us.
We just had a set ourselves up to want to go after them.
So if you're selling some of the video tools into performance tools, right now and you're going downstream from back a little lack of a better word to fit for purpose will that affect pricing on the current sales to the performance tool customers.
No we've got to be we've got to be careful that that doesn't that doesn't happen.
In our pricing our pricing discipline process that we started back in 2018, which is really a.
A value proposition based pricing.
Those controls I feel pretty good are in place and so just lowering lowering the price that would that would kind of a road.
That would be that would not be a good thing and thats not something run a deal.
Yes, I agree in fact, yes so.
And we're going anywhere where even at a price to fit for purpose based on on on value, but it's reasonable for customers to.
When they look at the broader applications are still a great value proposition you got a tool that can cut.
Three or four different metals, you don't have to do not to buy a different tool for each specific type of metal now that may make sense in the performance end of things because that that additional specialized who will give you. So much productivity on a critical part that it's worth it but theres still a great value proposition in.
And values one tool for multiple services and we plan on pricing that accordingly.
Understood and one quick one Damon Slide 13, do you expect to have positive free cash flow for F 121, after capex and cash restructuring.
I think Steve it's a lot I guess I would tell you pay a lot of that it's going to depend on how the market for unfold I think our sales was going to be the biggest driver.
I look at what we tried to explain to you guys.
The areas on the chart the talk about cash flow between lower capital expenditures next year, lower cash taxes, higher depreciation and slightly higher rent slightly higher cash restructuring those numbers in total our about $115 million and better year over year, the bigger drivers going to.
What the sales are for the full year and then what the corresponding impact is on working capital, but I'm going to leave that went to you.
Okay. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Chris Rossi for any closing remarks.
Thanks, operator, thanks, everyone for joining the call.
As I said, we we really feel quite good about progress we made this year despite the challenging environment.
Our efforts on syndication monetization and cost controls.
As you can see from our numbers have been allowed us to protect margins and put us in a good liquidity position.
And also we're focused on executing our strategy and preparing the company.
For growth as markets as markets recover.
So we certainly appreciate your interest and support account mental and reach out the Kelly you have any follow up questions. Thank you very much.
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