Kennametal 2Q16 Earnings Call Notes

Kennametal (KMT) Donald A. Nolan on Q2 2016 Results

Conditions continue to worsen during the quarter

“The economic environment remains very difficult and conditions continue to worsen during the quarter. ”

We’ve seen a reduction in oil and gas activities spill into the broader economy

“we saw a continuation of recent trends, weakness in commodity markets, particularly oil and gas and coal, and a strengthening U.S. dollar and deceleration in China. We’ve also seen the reduction in oil and gas activities spill over into the broader industrial economy. These macroeconomic forces have clearly affected our sales, putting significant pressure on our energy and general engineering market sales particularly in the U.S.”

Believe that inventory destocking will continue over the next two quarters

“Further, we believe the recent destocking trends continued in the U.S. and China across our customer base, but particularly in our indirect channel. Our customers reduced their purchases to support their lower sales, but they also brought down inventories to align with lower sales expectations and we believe destocking will continue in the second half of our fiscal year 2016.”

There should be consolidation of coal miners in China

“there’s lots of estimates out there about how many coal mines are in China. I’ve heard anywhere from 7,000 coal mines to 9,000 coal mines out there. And what we expect to be happening is a consolidation. So, that plays right into our hands and if you noticed, but the largest coal mine in China, they have removed as much coal from that mine as all the coal that’s mined in the United States, but just one mine, one owner of mine. So, you can imagine what this will look like as it consolidates in the top 10 coal miners in China. So, it plays into our hands. We’re very good at working with large customers, and we’ve got some great technology that we continue to improve on”

Destocking has always been difficult for us to see

“Destocking has always been difficult for us to see, the magnitude. We hear from our customers quite frankly but difficult with numbers around. I would expect destocking to continue through the next quarter. And beyond that, I couldn’t comment.”

Losing share in auto

“We haven’t actually discussed that in detail, Walt. But I think in automotive, it’s pretty fair to say that automotive is growing and we’re not. So, we need to get on that.”

Seeing price pressure, but not necessarily profit pressure from that price pressure

“I think deflationary being price pressure, just to be clear, Andy, we’re seeing some price pressure. Some of our contracts are tied directly to raw material movements. So, we have some of that built in to our business. But I got to tell you, on the most part, we are not experiencing significant profit pressure from that price pressure.”

Jan Kees van Gaalen – Chief Financial Officer & Vice President

Sales were down in all of our served end markets

“sales were down in all of our served end markets with declines of 33% in energy, 12% in general engineering, 18% in earthworks, 5% in transportation, and 1% in aerospace and defense.”

Kennametal FY 1Q15 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Mixed trends in customer demand. Taking cost reduction actions

“For Kennametal, September quarter results reflect somewhat mixed trends related to customer demand. Those growth was largely driven by the demands in industrial markets such as transportation and general engineering. However, sales related to the infrastructure markets were lower than the prior year. This was due to weakness in underground mining and road construction, partially offset by increased drilling in the oil and gas sector. Due to a more modest growth environment, we are taking some cost reduction actions for the current fiscal year. For example, those measures include hiring freezes, as well as limiting certain expenses.”

Revised guidance driven primarily by Europe

“I want to point out that the decrease is mainly driven by the weakening of the European area, especially Germany. So I would say that we see some strength in the U.S., but we see a very relatively weakness to continue in Europe, and primarily in Germany.”

Infrastructure driven by what our sales force is telling us

“as far as the Infrastructure, given some of the softness we’re seeing with some of the commodity prices and feedback we’re getting from our sales force as well as customers, we expect that to be a little bit softer than we had anticipated.”

Europe is trending in the wrong direction

“I think we saw it towards the end of Q4, a little bit, primarily in Germany. And that continued through the quarter, so nothing significant month-to-month, but trending in the wrong direction. So for us, as you know, Germany’s a very big component of our European sales. And given the transportation and a couple of other end markets we serve there very well, we felt it was prudent to factor that in.”