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Text: We will be referring to that slide deck throughout today's call.
I'm Kelly Boyer, Vice President of Investor Relations.
Joining me on the call today are Chris Rossi, President and Chief Executive Officer; Damon Audia Vice President and Chief Financial Officer; Patrick Watson, Vice President, Finance and Corporate Controller; Franklin Cardenas, President, Infrastructure business segment; Pete Dragich, Chief Operating Officer, Metal cutting business segment; and Ron Port, Chief Commercial Officer, Metal Cutting Business Segment.
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.
For today's call, I will start with some general comments on the year, followed by a quick overview of the fourth quarter.
After that, I will discuss fiscal year '21 and our strategic agenda that will well position the company as markets recover.
From there, Damon will review the quarterly financial results in more detail.
Beginning on Slide 2, I would describe our fiscal year '20 as a year of significant challenge, but also a year of significant progress on our strategic growth and profitability improvement initiatives.
As you recall, we began the year in what was already considered an industrial downturn.
737 MAX production halt and a significant decline in the price of oil followed soon after.
Last, but certainly not least, COVID-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 and 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 planned simplification/modernization capital spend.
I'm pleased with how our team came together to tackle the challenges.
COVID-19 protocols we successfully implemented continue 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 lockdown.
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 COVID-19 headwinds such as increased furloughs, salary and variable compensation reductions, and reduced production schedules.
These measures helped to align our cost more closely with demand and finish 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 intention to close a plant in 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, with production consolidated into other newly modernized Kennametal facilities.
We are also substantially complete with the spending on simplification/modernization capital, which marks a significant milestone in our journey to fundamentally reduce our cost structure, improve 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 recognized full-year run rate savings from fiscal year '20 actions, bring additional modernized processes online, and recognize the benefits from accelerating the simplification/modernization structural cost actions.
Also, of course, as volumes return, the savings will grow from increased utilization of our modernized processes and rationalized 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 into 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.
But first, let me quickly review, on Slide 3, the fourth quarter results, which as you know, like other industrial manufacturing companies, we experienced significant headwinds due to COVID-19.
In Q4, the Company reported an 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%, WIDIA 32%, and Infrastructure at 29% compared to negative 4% and 3% for Industrial and WIDIA and infrastructure at 1% growth in the prior year quarter.
Also, all regions were negative with the Americas posting a 39% decline, EMEA 34%, and Asia Pacific 24%.
Remember that Asia Pacific saw COVID-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 4, due to COVID-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, an approximately 10% seasonal decline in revenues from Q4 to Q1.
So as customers' continue their reopening process in Q1, the resulting 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 increase production to when we see a corresponding increase in demand.
Beyond Q1, it's helpful to consider customer sentiment, which seems to be that while there are signs of improvement from Q4 to Q1 there is still a lot of uncertainty because of COVID-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 prudent, due to the uncertainty of COVID-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 actions to protect margins and liquidity.
Regarding capital expenditures for fiscal year '21.
Capital spending will be significantly reduced by over $100 million to be in the range of $110 million 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 savings since inception to approximately $180 million at fiscal year-end, including total Company headcount reduced by approximately 20% and a rationalized 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 and share gain as markets recover.
For example, on Slide 5, in fiscal year '20 we continue to launch new products with great value propositions for customers in key end market.
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 won a 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've also continued to advance our Commercial Excellence initiatives to gain share when markets recover.
As you can see on Slide 6, we announced yesterday that as of July 1st, we combined Industrial and WIDIA into a single metal cutting organization.
This move will enable us to more effectively direct our commercial resources, products, and technical expertise toward capturing a larger share of wallet, in addition to executing a new brand strategy.
Previously, WIDIA operated to serve a customer need segment within metal cutting that significantly overlap the Kennametal brand positioning.
Our new approach is to reposition the WIDIA brand and portfolio to serve a multi-billion dollar segment within metal cutting that we previously have not focused on.
We expect that this approach will open up a 40% increase in 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.
It is this part of the customers' metal cutting share of wallet that we are targeting by repositioning the WIDIA brand and product portfolio, which 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 suite through both direct and indirect channels, in effect a one-stop shop model to cover a broader range of their metal cutting needs.
I will begin on Slide 7 with the review of our Q4 operating results on 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 COVID-19.
For the quarter, sales declined 37% year-over-year, in line with the decline seen in April or negative 33% on organic basis to $379 million.
Foreign currency had a negative effect of 2% and our 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/modernization 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.
The 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 magnified effect of GILTI 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 $0.11 versus earnings per share of $0.74 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, earnings per share was $0.15 per share in the quarter versus $0.84 in the prior year.
The main driver for our adjusted earnings per share performance are highlighted on the bridge on Slide 8.
Effective operations this quarter amounted to negative $0.68.
This compares to negative $0.08 in the prior year period and negative $0.39 in the third quarter.
The largest factor contributing to the $0.68 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 $0.08.
Simplification/modernization contributed $0.14 in the quarter on top of the $0.10 in the prior year.
This brings the total FY '20 simplification/modernization savings to $0.46.
As Chris mentioned, our expectations for FY '21 is that the simplification/modernization benefits will be in the range of $0.80, driven by actions already taken or announced.
Remember, restructuring is a subset of our simplification/modernization program.
In terms of benefits from our restructuring program, the savings from our FY '20 restructuring actions delivered approximately $33 million in run rate annualized savings at the end of FY '20.
FY '21 restructuring actions are expected to contribute an additional $65 million to $75 million of annualized run rate savings by the end of FY '21.
The total year results in detail and the earnings per share bridge can be found in the appendix.
Slide 9 through 11 details the performance of our segments this quarter.
Industrial sales in Q4 declined 36% organically on top of a 4% decline in the prior year period.
All regions posted year-over-year sales declines with the largest decline in the Americas at negative 40% followed by EMEA at 38% and Asia-Pacific at 27%.
The 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 in transportation and general engineering down 45% and 32% respectively.
This was primarily driven by the demand effects of COVID-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 COVID-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, increased simplification/modernization benefits and 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 WIDIA.
Sales declined 32% on top of a negative 3% in the prior year period.
Regionally, the largest decline this quarter was in Asia Pacific down 41%, the Americas 31% and EMEA 28%.
The decline in Asia Pacific was mainly driven by India with its countrywide COVID-19 shut down 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, a raw material benefit of 220 basis points, and increased simplification/modernization 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, the largest 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 and the corresponding decline in the U.S. land-only rig count.
General Engineering and Earthworks were down 31% and 17% respectively.
Adjusted operating margin of 12.7% remained relatively stable sequentially, but decreased 280 basis points from the prior year margin of 15.5%.
This decrease was mainly driven by lower volumes and associated under-absorption, partially offset by reduced variable compensation and other cost control actions, favorable raw materials that contributed 200 basis points and benefits from simplification/modernization.
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 weather the current environment as well as continue to execute our strategy.
Our current debt maturity profile is made up of two $300 million notes maturing in February of 2022 and June of 2028 as well as a U.S. $700 million revolver that matures in June of 2023.
At 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%, a reflection of the significant decline in sales in the quarter.
Net capital expenditures were $38 million, a 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.
Turning to Slide 13.
This slide shows how certain factors are expected to affect earnings per share and free operating cash flow during each half of FY '21 on a year-over-year basis.
As I mentioned earlier, we expect increased simplification/modernization benefits of approximately $80 million in FY '21.
The 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 FY '21 relative to the first half of FY '20.
However, as we look at the second half of FY21, the temporary cost control actions implemented in FY '20 and 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 cost 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 faced in the beginning of FY '20 and will 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 FY '20.
We currently expect our full year tax rate in FY '21 to be similar to the 33% adjusted effective tax rate we saw in FY '20, but 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 U.S., our tax rate should improve.
As we get back to a more normalized environment, we still expect our long-term effective tax rate to be in the low '20s.
Regardless of the effective tax rate, we expect cash taxes in FY '21 to be approximately $10 million less than the $37 million paid in FY '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 on how market conditions evolve over the next several quarters.
For the first half of FY '21, although we will reduce inventory levels based on current market conditions, the net accounts receivable and 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 of FY '20 and reduced accounts payable from decreased capital spending in FY '21.
We will continue to be diligent 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 to our accelerated restructuring activities announced in June.
We currently expect cash restructuring charges to be $25 million to $35 million higher in FY '21 with the majority of this increase in the first half.
Looking ahead to 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'll 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 spend, working capital management, and cost control actions.
Finally, we'll continue to pursue our strategic growth initiatives so that we can position the Company for profitable growth and share gain as end markets recover and to achieve our adjusted EBITDA profitability target when sales reach a top line range of $2.5 billion to $2.6 billion.

user
kennametal q4 adjusted earnings per share $0.15.
q4 adjusted earnings per share $0.15.
q4 loss per share $0.11.
q4 sales $379 million versus refinitiv ibes estimate of $399.8 million.
effects of covid-19 were felt in every region during quarter & created challenging environment.
expect fy21 to present ongoing macroeconomic challenges.
as of today, all co's production facilities are operating.
company's primary end markets remains limited.
will not be issuing annual fy21 outlook outside of capital spending.
fy capital spending is expected to be $110 million to $130 million.

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