Kennametal(US:KMT)2020-05-11 11:43Financial Data and Key Metrics Changes - Organic sales declined by 17% in Q3 2020 compared to a 3% growth in Q3 2019, marking the third consecutive quarter of double-digit organic declines [19][33] - Adjusted EBITDA margin decreased by 80 basis points year-over-year to 18.6% on revenues that were down almost 20% [23] - Adjusted EPS decreased year-over-year to $0.46 from $0.77 in the prior year quarter, but increased sequentially by $0.31 [24][36] Business Line Data and Key Metrics Changes - Industrial sales declined 17% organically compared to 1% growth in the prior year, with all regions posting year-over-year sales decreases [39] - Widia sales declined 16% organically against positive 3% in the prior year period, with the largest decline in Asia Pacific at 25% [43] - Infrastructure organic sales declined 17% versus positive 6% in the prior year, primarily driven by a 29% decline in the energy sector due to falling oil prices [45] Market Data and Key Metrics Changes - The energy end market faced a year-over-year percentage decline in the mid-20s, expected to be further tested in Q4 due to extreme drops in oil prices [20] - Transportation saw a high teens percentage decline year-over-year, impacted by several auto plant closures globally [21] - By region, all posted double-digit declines, with Asia Pacific experiencing the smallest decline, reflecting easier comparisons [22] Company Strategy and Development Direction - The company is focused on cost control actions while maintaining operational capability and executing strategic initiatives like simplification/modernization [10][18] - The simplification/modernization program is expected to deliver modestly higher savings than the $40 million achieved last year, despite lower volumes [30] - The company is continuing to innovate with new products, such as the HARVI I TE end mill, which has exceeded sales expectations even in current market conditions [28] Management's Comments on Operating Environment and Future Outlook - Management expects Q4 to be more challenging than Q3, with continued cost control actions necessary depending on the economic environment [17] - Preliminary April sales were down approximately 35% year-over-year, indicating severe market headwinds [25] - The company remains confident in its ability to manage through uncertainty and position itself for growth when markets recover [27] Other Important Information - The company pre-emptively drew $500 million on its revolver to maintain a strong liquidity position amid COVID-19 uncertainties [18][49] - Free operating cash flow for Q3 was $2 million, a year-over-year decline of $37 million, with expectations for improvement in Q4 [52] - The company maintains a conservative approach to its dividend program, which remained flat year-over-year at $17 million [54] Q&A Session Summary Question: Trends in end markets or geographies - Management indicated that the Americas are expected to decline more than 35%, while EMEA and Asia Pacific may perform slightly better due to easier year-over-year comparisons [65][66] Question: Profitability and decremental margins - Management confirmed that decremental margins would likely be around historical averages, with ongoing structural cost changes being evaluated [72][78] Question: Raw material impacts - Management expressed confidence in a raw material tailwind for Q4, with expectations for a slight decrease compared to Q3 [85][87] Question: Variable compensation impact - Variable compensation had a meaningful impact but was less than the simplification/modernization benefits reported [90] Question: Long-term demand recovery - Management noted uncertainty regarding the duration of COVID-19's impact on demand but anticipated a potential snap-back recovery once conditions stabilize [94][96] Question: Cost reduction strategies - Management is using furloughs to adjust workforce levels while planning for structural changes if the downturn persists [99][101] Question: Aerospace and oil & gas strategy - Management plans to continue focusing on aerospace for profitable growth and does not foresee major strategic changes in the oil and gas sector despite current market conditions [108][109]