KMT
#Good morning, <UNK>.
Okay <UNK>, let me take that.
I'm not sure we're going to provide forward views on each segment.
Because when we report, those segments are going to look differently, okay.
But in a company ---+ in the Company overall we expected our forward tax rate to be in the 22% to 25% range, and we expected that until we had to book the valuation allowance in the United States.
Because we booked that valuation allowance in the US, it reduces our tax rate going forward.
Therefore, the benefit of 13% to 17%, that range, with a midpoint of about 15%.
That will continue until we demonstrate, which we are confident we will, sustained profitability in our US legal entity.
That will take a couple of years.
So the go-forward profitability from a tax rate point of view will be impacted from a beneficial fairly lower rate.
If we did have a capitalized US tax asset, we'll return back to that 22% to 25% tax rate - so that kind of frames that.
From an operating point of view, we're ---+ 2017 is a year where we have to recover a substantial amount of cost.
We had savings for the wrong reasons in 2016 ---+ because we didn't pay bonuses, because we were restricted in some of our merit increases, because some of our benefit costs are going up.
So we're going to have to recover, in a non-inflation oriented environment, a lot of those costs in planning.
But despite that, we are seeing a fairly meaningful increase in our operating profit, even including recovering some of those costs.
Will be like it to be greater.
Yes, we would ---+ so therefore that's why we initiated some of the additional cuts we've made.
Okay Widia is going to be breakeven at best, maybe in that range but our expectation is to expose it and grow it.
The operating profit from industrial probably will be north of double digits.
And we expect pretty meaningful increases in our infrastructure business.
Don't want to quite dimensionalize that right this minute, but pretty meaningful increases.
The headwinds we're facing are in the range of $30 million to $40 million for those extra costs that I mentioned earlier.
So pretty substantial additional costs that we're having to overcome.
So that's the reason why we got all these basic cost savings programs from the corporation overall, but why only ---+ why the profitability isn't going up quite as much as perhaps it should be.
It will be in the segments.
All right, <UNK>.
Well, do you want to talk about that.
Because <UNK>, you've probably got the biggest European business.
I have a view but you're closer to it.
Sure ---+ Europe was our top performing unit within industrial for 2016 which was slightly under planned, and we see a flat to slightly down market.
Again, there's some currency changes that we haven't planned for Europe that may dampen out the volume delta that we see.
Again, the currency is a negative to industrial for 2017 versus what could be in pieces, a slightly higher build rate.
So perhaps a little different than 2016, where we saw Europe at least a little bit positive, and the Americas quite a bit negative.
The outlook there is a little bit negative for Europe with perhaps the Americas being a little bit more positive.
But I want to add this, before <UNK> comments ---+ we also expect Eastern Europe to be a lot stronger.
There's some parts of the East, where either through Widia or some other places we will capture some new business.
Maybe there's some offset that will be positive there.
<UNK>.
For the infrastructure business we do expect a year-over-year, some slight growth in EMEA.
Most of that is coming from the success we've had in the construction business, as well as expanding into the Middle East ---+ which we saw the benefit of late in FY16 and we're expecting it to continue in 2017, as well as actions that we're taken to improve our cost base in EMEA with localization of manufacturing and leveraging our Asia manufacturing to support our new sales.
We're pleased that we continue the second half we sold at the rate that our distributors were selling at.
That's counter to our first half, where we definitely saw destocking in our distribution channel.
Our sales into the channel were far below what our customers were selling.
Our initiatives around direct to indirect and focus on our large bars in our large national chain here in the US have definitely generated some additional activity that we're seeing in increased sales rates in our distribution channel.
So I think if you reflect upon the trends inherent in what <UNK> said, was our year-over-year organic decline may not be quite as big as it was because I think we shift a little bit more into the channel at the end of last year than we did at the end of this year.
But despite any of those kind of readings, what I'd say is ---+ we're just focused on growth.
We want to gain share, even among our distribution partners.
We're aggressive with them, we're talking to our distribution partners in a way they haven't heard Kennametal talk to them.
And I think that's positive.
So I'd encourage you to ask MSC what they think of Kennametal, ask other partners what they think of the Kennametal of today versus the Kennametal of six to nine months ago.
Great.
Hello <UNK>.
Okay so Walt, we put our plan together, looked at the plan, the plan looked like a reasonable plan but the outcome of the plan was we were working really hard to only get a little bit further ahead.
So we took a hard look at what was possible and we said we need to have fewer people and fewer costs within the company and we started at the top of the Company.
One of the important comments I made was more than 20% of our top 100 paid people in the Company are no longer with the Company.
And while any headcount program and change like this is painful, frankly it's necessary.
And a lot of the headcount is also taking place, changes at our manufacturing operations which were becoming inefficient because the revenue, frankly, was substantially lower.
We didn't include it in our outlook because at this stage our outlook includes flat sales, so what happens if our flat sales aren't flat.
We'll need to be able to get some of that benefit from other places.
So what we wanted to do is to assure ourselves, and consequently our investors that we were doing everything we could to deliver the $1.10 to $1.40 EPS range with the potential of possibly exceeding it if the revenue comes in at about the flat level, and we can execute that headcount reduction program efficiently.
Now, that headcount program is going to take a little bit longer in different parts of the world.
So while we are about halfway through it, at this stage we also have a lot of work to do in some of our European operations.
And we're really not emphasizing reductions in force in Asia; China, and India in particular.
Many of these are proven automation processes that are readily available and we, for whatever reason, have not implemented over the years.
We just approved a $10 million capital investment to automate our packaging.
It will take somewhere in the 18 month timeframe for that to be effective, but we're on our way on that and there are a number of additional programs and initiatives that have been developed by our team for a number of years that we think are pretty proven.
Hello <UNK>.
5% at group level.
No I don't think so <UNK>, because we basically excluded that in our view.
The business, if you exclude the piece that JK mentioned is about $2 billion in revenue, versus the $2.1 billion that we reported.
So we're looking at about $2 billion in revenue in 2017.
Halfway through isn't halfway through like we're saving money today, it's ---+ we've identified the people that participated in a voluntary separation plan, they will roll off the Company's ranks through the first quarter and into the second quarter.
So timing, cost, all those things are in process of being worked through.
So in an ideal world you're right, but I've never seen an ideal world kind of come true like that very ---+ very crisply.
Perhaps we will, but right now I'm not sure.
So <UNK>, we will report obviously with a Q1 and Q2 earnings calls ---+ we'll report on the progress.
I think you might have been in our office yesterday when we were talking about this, <UNK>.
[laughter] Seriously, this is something we want to do, probably late October.
We' love to have people come out to our technology center, where we can actually show them some of the automation projects that are planned and underway.
And when we can kind of tick and tie a little bit ---+ in a little bit more detail, some of the $200 million to $300 million of productivity improvements that are possible with the enterprise.
So we will keep you posted on that.
Thank you, <UNK>, for that question.
The reason we're breaking out Widia has little to do with what we think investors will gain, and a lot more to do with getting greater focus within the enterprise on that brand and on the potential that exists in that brand.
The SEC rules are pretty clear ---+ how you manage, how you should report.
So it is my feeling that Widia has been an under managed brand for this Company for some time.
We've owned it since 2003, I believe, and the business has shrunk and it used to be a premier product.
We think it can grow and we think it can return the Company a substantial amount of new business over time with focus.
When it is combined with Kennametal, it gets the second child syndrome and we need to have it be a first child and a first player.
And if you see this in our competition, you see a number of our competitors have multiple brands with specific value strategies and we think Widia can develop that way.
It is a great brand in India, it has a good reputation in the United States, it has a very good reputation on some places in Europe but it's waned in terms of importance and I just think with a little bit more focus we will bring it back to prominence.
So if I had my druthers, I would have done this internally and not separated it out in terms of external reporting because it's kind of small to do that.
But that's not what the SEC rules, I think, allow.
Good morning, <UNK>.
Yes.
I think you are reading that correctly.
New products have always been part of the fabric of Kennametal and we're going to continue to develop proper new products.
We're also going to continue to solve our customers' toughest problems.
Kennametal's the company people come to when they have tough problems to solve because our engineers know how to get that done.
But that's only a piece of the market it's not the whole market.
And for us to be successful across the range of the market, we need to have better sales execution, which means we need to have a really good initiative for the major customers, and great service level for mid to smaller customers.
We need to have great product availability.
We need to have competitive pricing, and in general we need a service mentality that takes a backseat to no one.
These are areas where intensity and focus and leadership and empowering people closer to the market will make a really big difference.
I think <UNK> and <UNK> have already seen specific impacts of where that can happen, where they can make the decisions, or their people can make decisions that historically might have gotten bogged down a little bit in this Company.
So I hope I've answered your question there.
You want to comment, <UNK>.
Relative to product development, and looking at the markets, we've seen in my business in particular migration from the toughest conditions.
Certainly, as <UNK> said, its always going to be a part of our DNA, but we are going to provide solutions.
But there's another outstanding portion on the market now that requires something ---+ some cases are just good enough we've looked at this from a standpoint of developing products that aren't extremely better but are better than what's out there in the market.
But most important, we will produce those in a competitive cost structure and be competitive from a pricing standpoint.
We've seen success with that in recent introductions in my continuing that with our new product development plan.
Geographically, and I'm talking relative to construction now, the most recent product introductions we've had, in FY16, great success in EMEA and North America.
Year over year growth in construction specifically, that broken crack that we talked about in Q4 was 18%.
Was huge and we haven't even introduced the project in Asia yet.
We are in the process of doing that as we speak and localizing production.
I'm so looking forward to having success in Asia.
<UNK> this is <UNK>, I hope you can come visit with us at IMTS.
We have some major new platform launches we'll be announcing at IMTS.
There's a new duo-lock turning drilling platform that will launch IMTS' new milling 411 platform.
We'll be announcing a significant expansion of our already successful Beyond Evolution group and cut off platform.
And then some exciting new grades in our top-notch grooving platform that will all be rolled out at IMTS, showing significant benefits to customers.
Okay.
Good morning Sam.
Yes.
That's after completion of, materially completing phase 1, that is still the target yes.
( Multiple speakers )
In fact, let me just state it more directly.
I think we want to do better than that.
I think we've added additional cost savings program so we can exceed that.
Sam, we typically don't provide the breakout for this.
Raw materials are a larger portion.
Well, I think the inventories for the company have improved, we're making progress on our working capital.
We've got a little bit more progress to make, but I don't think that's where our today focus is going to be.
We've got to get the cost down, we want to make sure our customer services at the levels that they have to be maintained at, and I wouldn't forecast a tremendous amount of change in our working capital.
We don't report utilization rates and frankly I don't think it's ---+ that's critical for us because depreciation for us is 4% to 5% of our total sales.
In fact, they probably should be a higher percentage.
Our problem in this Company is that we have underinvested in our fixed plant and equipment.
We have too many plants perhaps from a macro perspective, but our depreciation expenses and our biggest challenge.
I'm going to let <UNK> answer that.
<UNK>, this is the biggest change I've seen in my seven months with Kennametal.
We have implemented our direct to indirect strategy, which basically says we're not going to compete with our indirect partners at small direct customers that Kennametal used to hold so close they would never allow our indirect partners to participate in those sales.
We also have continued to invest, as <UNK> mentioned, to address our inventory levels.
So we are continuing to have high fill rates and high availability of product to make it easier for us to do business with.
This direct to indirect change has driven a response from our customers, our indirect partners, that we really want to be their partner and we want to stop competing with them.
I can't explain how positive that is that our indirect customers no longer think of our salespeople as their competitor, but instead they think of them as their partner.
I spend a significant part of my time dealing with our VARs globally and with MSC here in North America, to find any way we can continue this path where they see us as their partner instead of their competitor.
VAR stands for value-added reseller, and I guess what I would say is one of the big customers that <UNK>'s referring to and I won't mention which one ---+ when I visited with them they said we have to look at <UNK>'s card to see whether or not it really said Kennametal on it because he fundamentally understands that we are partners and dedicated to growing our business.
And that's an attitude change, and it starts from the top.
<UNK>, its going to come from everywhere in the organization.
We have some limitations ---+ I mentioned India, Asia, and probably the IT finance and HR organizations which were targeted in our business excellence initiatives that were already underway.
And let me just say it this way ---+ you can't take 1,000 people out of an organization and not have various parts of the organization affected.
Certain levels of work has to change.
And there's got to be a concentration on the most important things.
But at the end of the day, it's probably going to be a preponderance of operational folks with some sales and marketing.
But also, let's be clear, a large portion of the costs is coming out of the highly paid.
As <UNK> mentioned, we changed six people out of nine in DLT.
20% of the highest-paid 100 employees of the company are leaving or have left already, so there's a considerable effort being made to make sure that from the top down, these initiatives are implemented.
I think most of the free cash will be in the latter half of the year, but negative I'm not entirely there yet in the first half.
In other words, probably neutral in the first half and most of it in the second half.
All right, <UNK>.
I think Rocco ---+ I think that probably is it on the call, correct.
So couple of final comments ---+ I appreciate everybody participating and their interest in Kennametal today.
Obviously, please follow up with questions, <UNK>, <UNK> <UNK>, myself and other members of the management team would love to engage with any of your interest in Kennametal today.
Thank you very much.
