Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to Kennametal's Second Quarter Fiscal 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Quynh McGuire, Director of Investor Relations. Ma'am, you may begin your conference.

Thank you, Regina. Welcome everyone. Thank you for joining us today to review Kennametal's second quarter fiscal 2008 results. We issued our quarterly earnings press release earlier today. You may access this announcement via our website, at www.kennametal.com. Consistent with our practice in prior quarterly conference calls, we've invited various members of the media to listen to this call. It is also being broadcast live on our website, and a recording of this call will be available on our site for replay through February 22nd, 2008. I am Quynh McGuire, Director of Investor Relations with Kennametal. Joining me on our call today are Chairman, President and Chief Executive Officer, Carlos Cardoso; Vice President and Chief Financial Officer, Frank Simpkins; and Vice President, Finance and Corporate Controller, Wayne Moser. Carlos and Frank will provide details on the second quarter financial performance, as well as our outlook for the remainder of fiscal 2008. After their remarks, we will be happy to answer your questions. At this time, I would like to direct your attention to our forward-looking disclosure statement. The discussion we will have today contains comments that may 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 in/or implied by such forward-looking statements. Additional information regarding these risk factors and uncertainties is detailed in Kennametal's filings with the Securities and Exchange Commission. In addition, Kennametal has provided the SEC with a Form 8-K, a copy of which is currently available on our website. This enables us to discuss non-GAAP financial measures during this call in accordance with SEC Regulation G. This 8-K presents GAAP financial measures that, we believe, are most directly comparable to those non-GAAP financial measures, and it provides a reconciliation of those measures as well. I will now turn the call over to Carlos.

Thank you, Quynh, and good morning everyone; thank you for joining us today. Let's talk about the December quarter results. We continue to make further progress during the December quarter in terms of EPS and ROIC. Sluggish conditions in North America, along with lower demand in certain market sectors, provided a particular challenge in the quarter. However, we grew our sales in several geographic regions and end markets, reflecting the strength and diversity of our global business. Sales growth while lower than we expected, represented 16 consecutive quarters of year-over-year organic growth. We remain focused on driving ongoing sales growth while moving forward with additional initiatives to generate margin expansion and earnings growth, in line with our long-term goals. We can accelerate actions related to manufacturing rationalization, SG&A initiatives, and lean projects to reduce our cost structure. For the December quarter, we achieved EBIT margin growth of 100 basis points and EPS growth, on a comparable basis, of 52%, despite raw material cost headwinds and a more challenging environment in North America and the effects of an ongoing plant outage, mentioned last quarter. In addition, our ROIC was up 120 basis points year-over-year on a comparable basis. As we have stated previously, our priority uses of cash are value-creating combination of making strategic acquisition, buying back our stock and continually investing in our business. During the December quarter, we repurchased 1 million shares of Kennametal stock on a post-split basis. We will continue to repurchase our stock in opportunistic basis. During the past quarter, we took additional actions designed to drive higher levels of profitability. We continue to take steps to rationalize our manufacturing footprint. As an example, in a planned closure of the Manchester Tool facility that was part of our acquisition of the Federal Signal cutting tool business…

Thank you, Carlos. I'll provide further comments on our performance for the December quarter then I'll move the outlook for the remainder of fiscal 2008. Some of my comments will exclude the effect of special items recorded in the prior year quarter, and we had no special items in the current year December quarter. To summarize, we had a solid quarter in terms of our overall financial results. December quarter turned out a bit more challenging than in the past. While we continue to make progress in many areas, the softness in our organic sales growth rate was greater than anticipated. But despite the top-line performance, we delivered a record December quarter for actual sales, EPS and ROIC. Also during the quarter, we completed our 2-for-1 stock split in the form of capital stock dividend to shareowners of record on December 4. All earnings per share amounts have been restated to reflect the impact of the split. Moving forward, our reported diluted earnings per share for the second quarter of fiscal 2008 were $0.64 a share, this represents a 68% increase over the prior year's quarter recorded EPS of $0.38, and a 52% increase over the prior year quarter adjusted EPS of $0.42. Now I'll walk through the key items of our operations. For the December quarter, consolidated sales came in at $647 million and this compares with $569 million in the same quarter last year. Our sales were up 14% year-over-year and reflected 2% organic growth, 6% from acquisitions and 6% from FX. Our organic growth rate of 2% was less than our guidance of 4% to 5% due to sluggish conditions in North America, lower demand in certain market sectors and softer than expected sales in the month of December. We expected somewhat less activity in the month…

Thank you, Frank. As always, the Kennametal value business system remains an important tool in executing our strategy. KVBS is our proven management operating system, and it guides all of the decisions we make related to strategic planning, product development, sales growth, talent development, mergers and acquisitions and lean enterprise processes. As Kennametal moves forward, we will continue to apply our disciplined growth strategy. Delivering 15% EBIT margin and 14% to 15% return on invested capital for fiscal year 2009 remains our goal. However, the softening in the North American economy as well as a more moderate expansion in global demand may cause our achievement of those targets to be pushed out. We continue to believe that we have the ability to deliver margin expansion, earnings growth and strong cash flow over, both, the short- and long term. While we may be impacted by the cycle on the top line, we can accelerate certain actions. We can further reduce our cost by restructuring our manufacturing footprint, implementing SG&A reduction initiatives and continue to actively deploy lean throughout our company. At the same time, we will prudently manage our cash flow to invest in those activities that increase shareholder value. We have an active pipeline of acquisition candidates, but we will remain stringent in our evaluation process. We will continue to buyback our stock opportunistically. We have a strong balance sheet and we continue to expect strong cash flow generation. Whatever business conditions may be, we will stay focused and take advantage of the many opportunities we have to continually increase value for our shareholders. We remain optimistic about the future, growing and balancing our business. Kennametal has a strong business portfolio, a broad geographic presence and numerous platforms for growth. We also have multiple levers, as we always said, to achieve our objectives. We will continue to move forward with our strategy, towards achieving our long-term goals. By staying focus on that, we believe that we will overcome what may perhaps be a more challenging economic environment in the near to medium term. Thank you for listening to this call today, and I will be happy to, now, take your questions. Thank you. Question And Answer

[Operator Instructions] Your first question will be from the line of Stephen Volkmann with J.P. Morgan.

Hi, good morning.

How are you doing, Stephen?

Pretty well, thank you. Question, maybe, Frank; is it possible to give us a sense, maybe in terms of margin basis points, on what this plant outage cost you in AMSG, and then also, if you could just update us on where that stands now and when that will be behind us?

Yes Steve. We estimate it was 40 basis points on AMSG's margin in the December quarter, slight impact in the first but not in excess of [ph] 40, and we expect that by the end of the month to be up and running. And that's in pretty good shape now but it was just... took a little bit longer than we had anticipated.

Okay, good. So that's kind of behind us. But even backing that out, I guess, I am surprised that the detrimental margin there is as big as it is. And the other issue; it seem like they may take a little more time to get behind us. Would you agree with that or how should I think about that?

Yes, I think the raw materials... we have stepped up some initiatives there to address... and that was a little bit more pervasive than we anticipated. And then the highest margin businesses in that side, of the corporation, were down. So, the mix and the raw materials, really, drove that to where it came out.

Okay, alright. And then just a follow-up with Carlos, you talk about accelerating some of the consolidations... I don't want to put words in your mouth... but things in the manufacturing and SG&A space and so forth, should we be looking for additional restructuring here? Is there any portfolio pruning possible or maybe you could just elaborate a little on that, and specifically if there are going to be any costs associated with that that we should be mindful of?

Yes, the answer is, yes. We are looking at, obviously, taking opportunity of doing the things that we can do as fast as we always done. As a result of the headwinds that we have, we are also looking at potentially doing some restructuring.

Okay. But that would not be in your numbers yet, I am assuming?

They are not in the numbers. We are still in the planning process at this point.

Got it. Thanks very much.

Your next question will be from Andrew Casey, Wachovia.

Good morning everybody.

Hi Andrew.

Couple of questions. First on the guidance, I am trying to understand the pattern that it seems to suggest for Q3 and Q4. The midpoint of Q3 suggest about 11% growth; and then for Q4, the implied midpoint is around 18% growth. Can you talk a little bit more about what you expect, is the growth rate change more related to large pricing effect and timing of restructuring initiatives or what do you see in there?

Yes, Andy, part of it, it is some of the pricing initiative. I think Carlos said it takes several quarters to get the full benefit of that coupled with some additional introduction of products will help in the third, and then more particularly in the fourth quarter. And then some of the end markets, particularly in the energy side will, because some of the orders we have were longer. We see more of those type of products being released in the fourth quarter given some of the demand that we have internally.

And our plant will obviously will be at full run rate by the end of the third quarter.

Okay. And then on the inventories, could you, first, comment on what you are seeing at the distribution level, just in case things deteriorate further. And then could you elaborate on, I think you said you have a desire to take advantage of the strategically increased inventory level. Does that mean you are placing a little bit higher premium on share gains? And how does that, kind of, dovetail with the January pricing actions?

Andy, relative to the distribution, our distributors carry very low inventory. In many cases we... we have 24-hour shipping history with our customers, including our distributors. So, typically, our distributors don't carry much inventory. So, in our business model that's not a big indicator for us, a big issue. Relative to the inventory, last year we actually lost some sales as a result of our inability to deliver on time, when the customer needed. And we put effort, we put more capacity into our facilities and purposely did some strategic inventory, we are now at a very good fill rate. So, we have... we feel we have an opportunity now to get some market share and get more customers to come to us.

Okay, thank you.

Your next question will be from the line of Walt Liptak of Barrington.

Hi, Walt, are you on? Hello.

Hello, can you hear me?

Yes, now we can... how are you doing?

Okay, good morning everyone. My question is on the guidance, and with the reduction to your '08 outlook is, on an EPS, only 3%. And on operating basis it looks like about 5% to 7%, if you are adjusting for the tax rate. Given the credit situations out there and the concern about Europe slowing down considerably, why is it that you didn't take a bigger cut to the EPS in the back-half of '08? And then as a follow on, is the pan-European tax strategy, is the tax rate that you mentioned... 22%, 23%... sustainable as we go through 2009?

Yes, the tax rate in that... we think that at this level it's going to be in the low-20s going forward. The China tax dividend was something we are hoping to get at the beginning of the planning process, wasn't a guarantee, that actually came in and we have to spread that into the rate accordingly. So, we will have a good tax rate going forward, but at this time, it will depend on, kind of, how the business is on a global basis, but the pan-European strategy continues to help drive that tax rate down into the low-20 from where it's been in the past in the 30s. And then, you are looking at kind of the out-markets and the growth, we have looked at couple of things. I think, we think the ISA facility will be up and running here as we go forward. On the Advanced Materials side, we did factor in the pricing in some of the end-markets that we looked at, and we tried to take as realistic an approach in the second half of the fiscal year when we determined our guidance outlook. And based upon the input and some of the insight that we have with our general managers globally, this is what we feel the... this is the best estimate we have at this time.

I only add two things, again, I continue to hear that the tax rate as a result of the pan-European is just a tax rate, but the way to look at this is, as we made structural changes in our European business, we invested to make those changes. And as a result of that our European business is performing way above market. So, as we generate more revenue and more profit out of that European unit, because we made the structural changes, obviously, we have a benefit from tax. And we expect that performance to continue. Relative to looking ahead of Europe, as I said in my discussion, we do anticipate a decelerating growth in Western Europe. And basically we are looking at the GDP from 2.5% to 3% in 2007 to go to 2.1% to 2.3%, approximately there. So there is a decline... there is a decline in our estimates going forward. However, as a result of our performance we have continued to do better in that marketplace, and we anticipate that we will continue to do better.

Your next question will be from Mark Koznarek of Cleveland Research.

Hi, good morning.

How are you doing, Mark?

I've got maybe a similar question to Walt, with regard to thinking about the outlook. As I am trying to work through some of the changes here, it looks like you've lowered the earnings looking at the midpoint by about $0.08. And then that lower tax also contributes a further $0.08, so you can really say your second half is $0.16 lower than what you originally anticipated. And then if we consider your core revenue growth reduction, it looks like the second half, you are thinking about the run-rate is maybe about two points lower than what it previously would have been, and that's around $30 million. And what it suggest is that the operating income, pre-tax is off more than half that amount, like $17 million or so. So, it seems like that pretty severe negative incremental margin and it... I've heard you mention that you're taking some aggressive posture regarding expense reduction, but it seems like there is something else going on in the second half, and is it... I am just wondering is... are you expecting this mix to remain negative for the entire second half, and so these cost reductions are just matching the revenue reduction, you are not really getting ahead. Can you kind of discuss the moving parts here a little bit?

Yes, I mean, the cost reductions... Frank can add to my comments... the cost reductions are in line with the reduction of the top-line, however, as we always talk about, the price increases to offset the raw material price increase typically takes a few months for us to recover. So, although, typically we will recover 100% of the cost of raw material, there is always a lag to that recovery. And as Frank talked earlier, raw materials is one of the major drivers in AMSG for our margin degradation. Anything else you want to add Frank?

No. And I think, Mark, the only think I would add to that is kind of the energy-related sales, we don't expect them to come back, and they are a very profitable business. And so late in the fourth quarter... and we are seeing some volatility as well, as on the capital equipment side some of the businesses that we have. So that's the main driver.

Okay, and then a follow-up for Carlos, is we finished talking about the outlook. You reiterated that you still have that 15% EBIT target that breakdown was slated for '09 but that target may be pushed out. And I am wondering what kind of things... what will lead you to make a decision about ultimately whether you are going to keep that target in '09 or stretch it out, and when will that decision be made?

First of all the decision will be made in the next few months, and the drivers for that is basically what we are working on. How quickly, and how much of manufacturing restructuring do we do during the third and fourth quarter of this year. And we have things like the... we see energy coming back at the end of this year, so we are... continue to look at sales growth, although, at a lower rate, and taking advantage of their leverage as well as the typical SG&A and other levers that I've always... the Company always talked about. That we have those levers, and as leader we are going to pull them harder. So we are in a process of doing all of that. We started, 30 days ago, looking at, as I have always said, these are plans that we have in place, they have been in place, it is just a matter of us pulling the trigger to execute.

So, by next quarter you would have a decision on this?

Yes.

Okay, great. Thank you.

[Operator Instructions] Your next question will be from Joel Tiss of Lehman.

Good morning. How is it going?

Good Joel.

How you are doing, Joel?

Alright. I wonder, it sounds a little bit, and I may just be hearing it wrong, it sounds a little bit like you are taking more quarter-to-quarter in the energy business, and I just wondered if you could take a step back and give us anything structurally that's changing one way or the other, you know, okay, maybe it will bounce back in the fourth quarter. But over the next three years, is there any sense that where... sort of where we need to be, or is there still a lot of activity behind the scenes that's going sustain that cycle longer term?

I mean, we believe that there is some activity behind. I think that the short-term drivers, obviously, the rig count, the whether, the demand, but it's hard for us to see... to look at what's going to be in the next two to three years. Again, we continue to see signs that is going to... things in the fourth quarter, in the energy business, are going to be better. We thought that they were going to be better in this quarter, and then we thought it was third quarter, and now we are looking at the fourth quarter. So, things have moved to the right, but all the indications that we have at this point is that we should see a slight comeback in the fourth quarter... in our fourth quarter. I really don't have any specific remark to share with you at this point.

Okay, that's helpful. And also we heard from some other companies recently too that the... there is sort of a little bit of inventory adjustment. I don't mean, specifically, in your business, but in general going on that's going to hurt, sort of, the first half of calendar 2008. Are you seeing that at all, I mean, you said the distributors don't have a lot of inventory. But are you seeing anything broader than just what your distribution is doing or...?

I think that we saw... I mean we saw an unusual December of plant shutdown which basically for us the correction inventories at the customer level versus in distribution. And some of our energy customers do have... are burning down some of the inventory. So, we see that in the energy. But overall as a business, December was where we saw a little bit of inventory correction, but that... and we got a little bit surprised by that, the December month. But we do not see... like I said, through our distributors and through our customers at this point, other than in the energy business... we don't see that inventory correction.

Okay, and lastly for Frank. Can you just talk a little more about the big drop in your free operating cash flow? Is it pretty much all the factors you gave us before, the mix and the raw material cost increases, or is there anything else in there besides the CapEx that you mentioned?

Yes, the CapEx, Joel, and that's really FX related, and obviously the lower cash earnings and slightly on the working capital, those are the three drivers at this point.

Okay, thank you so much.

Thank you, Joel.

Your next question will be from Seaver Wang of Utendahl Capital Partners.

Hi, most of my questions have, really, been asked, but, actually, I was hoping to get a little bit more color on the dividend via investment plan, tax benefits from China, how does that work exactly?

How are you doing, Seaver. Frank will.

Seaver, there is... the China reinvestment, what that was is we qualified for a technologically advanced enterprise based upon a new plant that we constructed over a year ago. We didn't... there is some legislation in China that these actual credits expire at the end of this calendar year or the end of last calendar year. We were able to take advantage of some of the equipment and some of the R&D needed to actually qualify production in China, hence our tax return. So we had a one-time benefit in there, in the quarter related to the China situation. So that will be smoothened in the rest of the year which won't recur in the following year.

And you said low-20s for the full year this year, so...?

Yes, we...

Maybe a little higher for next year because you don't have certain credits.

Yes, I mean, it is tough to go and give a rate out for next year given how the business mix comes in the play. I am always hesitant on that, but we expect to finish year at 22.5% to 23%. And then as we get towards a year, we'll have a better idea going forward, but we don't expect the tax rate to go back to the 30, as we have in the past, in the near term.

And can you quantify the China tax benefit, the one-time that was...?

Yes, it was a few million dollars.

Okay, thank you.

Your next question will be from the line of Eli Lustgarten of Longbow Security.

Good morning.

How are you doing, Eli, good morning?

Couple of clean-up questions, then I'll ask something, one, you've had big currency benefits in the first half of the year, 5, 7% by division, is that what you are assuming for the second half of the fiscal year, any quarterly numbers, are we still looking at 5% currency, roughly?

Maybe not that high, in the first half, Eli, we did have some hedging programs, and so we didn't get a very favorable overall on the first half FX, because we did put some hedging programs at the beginning of January around July, but we are expecting a slight benefit from where we were at the end of the quarter.

Okay. And the sales numbers of the 12% to 13%; half of which is currency again, is something across FX currency from the third quarter to fourth quarter?

Yes, because we are assuming organic growth rate is going to be in the 2% to 3%.

I just wonder, the carryover of acquisitions, is really what I am getting to.

Yes, as we talked in the past, the acquisition of Federal Signal anniversaries at the end of January. And the last, the two bigger acquisitions we did in the fourth quarter that was in May, was ISA and KENCI in Europe. So they were the main drivers. So we still have some acquisitions in the third quarter and that tails off in the fourth.

Okay, the raw material cost, big part of the impact. Can you quantify how much was raw material... what is killing you in the quarter?

I think it hit us to about $0.05 to $0.06 this quarter.

Okay. And it will take a couple of quarters to catch up I assume is that you are saying?

Yes, as usual, I mean that's kind of the pattern.

And you bought back 1 million shares in the quarter, the average shares are lower than what we see to that or is it some share accrue, so just trying to get an idea what share count we see you using for the rest of the year?

Yes, I think the share count; it will be about 78 million.

For the rest of the year. Now when you look at the big drop to... in the operating margin event, you say this is [ph] 12.8%, is it fair to assume that we are going to be showing negative margin comparisons than that expected for the rest of the year, is what I am assuming at this point. Is that fair?

Yes, on a year-over-year basis, probably short term that's correct.

Yes, third quarter will be worst, can you catch up in the fourth quarter or do we have to wait on that schedule before you get some improvement, because the mix is not going to change dramatically probably in the next few quarters?

Yes, it's hard to tell, Eli, we may see something... some in the fourth quarter or most likely next year.

Okay. And the improvement that we begun to see in Metalworking continue, I mean you had a step up in margin towards the end of the year or actually in fourth quarter. Can we assume that we are going to see the same timing... improving margins in Metalworking for the next few quarters?

Yes, for the rest of the year.

Right. And then the real question is, coming back, I mean, you sort of put a little hedge clause in for 2009, because of market condition, which is probably appropriate. And one of the thesis that we've always heard is that if things go down there are lots of levers that you can pull, you sort of alluded to them, but we really haven't got much input yet. Should we be expecting a real rush of acceleration of actions over the next couple of months in preparation to meet the 2009... to take a shot to 2009 goal?

Yes, yes.

But you are not ready to give us anything yet, but...?

I mean, I am not sure as... we are going to do them as we go, I am not sure that some of the plant, the manufacturing footprint, I mean we cannot come out and announce that externally until we do it internally for obvious reasons.

And interest charges are going to stay where they are for the rest of the year, aren't they, at this point?

What was that, Eli, I didn't hear it?

Interest charges.

Interest charges?

Exactly, yes.

They don't change very much.

Alright, thank you.

Thank you, Eli.

Your next question will be from the line of Steve Barger of KeyBanc Capital Markets.

Hi good morning.

Hey Steve.

I want to kind of ask you a conceptual question. I went back and looked at the monthly order rates for the '01, '02, '03 timeframe and there was an extended period of negative monthly order numbers, but you are much more North American in Metalworking exposed then. Now that you are kind of at the front-end of North American cyclicality, again, how are your internal models holding up relative to expectations versus actual results, purely on the operating margin performance side? If you can give us any insight there?

I think from an internal they were actually holding up pretty good until we saw some deterioration on the energy-related businesses, that's been the major disconnect.

So, if you continue to get end-market volatility is it possible that your sensitivity analysis didn't capture fully, I guess the question is, are you really less cyclical then you strive as we go into a weaker North American end-market environment?

Yes, this quarter results is an example of that. If you take the raw material prices out and if you take the full raw material price increases and if you take the mix out of it there is an example of where North America we grew in a negative rate, and as a company we still have positive growth and still have done well overall. I mean, I want to emphasis that there are no guidance that the end of the year on top of all the challenges that we have, we are still going to grow year-over-year by 20% and that's not too bad in a market environment as we are today. So, our model then we will continue to do SG&A and so forth, so our models, if you take those elements out are very close to what we were before.

Okay thanks. And with the moderation in North America, do you get the sense that you are down in line with the market in those weaker areas or are any of your competitors getting more aggressive on price or is your sales force selling you... potentially you are losing share anywhere?

We believe that we are the number one and number two in every market that we play, and we believe that we are, in many cases, outpacing the market.

Okay, thanks. And one last question, Frank, in your comments you talked about strategic raw material purchases, are you trying to -- does that go to hedging of cobalt or steel or are you buying ahead in anticipation of price further increases?

Yes, a little bit.

Okay, thanks.

Your next question will be from the line of Rauf Wederala [ph] of Goldman Sachs.

Yes, hi friends this is Rauf [ph] just filling in for Terry Darling here. Just a quick question regarding the raw material assumption, what prices are you obviously baking into guidance for cobalt in terms of going forward?

We don't... you could see what the spot price is doing, and we don't expect that to change that much. Now we have contracts with some of our suppliers, and we're not at liberty to disclose those, but we don't see cobalt... we're still coming down in the near term.

Okay. And just one more question. In terms of the foreign exchange impact, earlier you had actually called... in prior calls you called out the exact EPS impact. I am wondering for this quarter if you could call out what the EPS impact was and what would be kind of going forward?

Yes, going forward, again, I'm not sure how it's going to be with some of the hedging and what the currencies do, but we're expecting a similar amount to what we had in the first quarter, which I think was less than a $0.05.

Okay, so it will be about $0.03 a quarter and that would be the same it was this quarter?

Yes.

Yes.

Okay, thank you very much.

Your next question will be from Marty Pollack from NWQ Investment Management.

Yes, just would like to get a little better understanding, that $0.05 you are describing is over only on the higher raw material is over there the total company's business, right? But you'd indicate that is a factor primarily related to AMSG. What is the overall impact of raw materials and certainly AMSG did extremely well here relative to expectations. In fact, better margins, I remember the last time they made better margin in Advanced. Can just cover that for us?

I think, Marty. We gave the both sides of the business MSSG and AMSG, both use tungsten, steel and cobalt, so when you are going to talking about... AMSG has a maybe a more higher material content than some products, but it varies by individual business, and we have number of them, so when we are talking, we are talking in total.

Okay. With regard to just, let's say, that more carbon-related steel with same price increases now being implemented pretty much across January, February, March, fairly aggressive, that's also in your raw material assumption. What is that content for you specifically and how are you... are you pricing... are you looking to price that through, what is your flexibility?

Again, we don't, obviously, give out the content of steel in our products. But we've gone up with prices in steel; we did it in October, we have done it again. Our suppliers are going to increase ours, in most cases will pass it on.

As far as structurally, longer term margins, is there any reason to assume... is there any change there. I mean AMSG, because having 16%, 17% high percent margins historically, is that a margin level we should recover just once things normalize, is that the way to think about that?

Yes, we continue to believe that... and that the AMSG margin is at least 200 basis points better than Metalwork, and so we will expect the business to come back to the margins that we have enjoyed. I mean again that's to do with the mix. That's to do with a lot of sales but we feel nothing in the business has fundamentally changed.

And as far as Metalworking then, what about those margins. Clearly their performances is been very strong here, which will be expecting normalized margins there to be still a little bit lower than what they were in this quarter?

Yes, as our strategy is that we are going to maintain the marketing margins in Metalworking and we are going to reduce the cost of serve, so that overall our EBIT margin improves, that's been sort of our strategy and we have been implementing that strategy, we'll continue on that road.

Okay, thank you.

Thank you.

Your next question will be from Dana Walker of Kalmar Investments.

Good morning.

How are you doing, Dana?

Doing well, thank you. We've been hearing about price cost in the AMSG business not going quite the way you'd like for several quarters. Can you describe the role that raw materials are playing in your inability to get at where you want versus your ability to gain price?

Yes, again our cobalt... we had a phenomenon last year that... or the year before, that tungsten was the big driver on the relative price in business steel. This year tungsten has remained flat, but cobalt has increased basically every quarter. So every time we have a price increase in Cobalt. We obviously have to go out to the marketplace and boost our prices, which is very, very difficult, because two years ago we based our pricing on the tungsten. So, now we are introducing this cobalt, and every quarter our cobalt, as you know, has gone up. So we've had to... that's a difficult thing to do, is to when you have multiple price increases in a sequence, quarter-over-quarter, to be able to recover. And as I said price increases typically lag a few months from the time that you announce to the time that you cover the cost. We typically recover a 100%, however, we can't recover any one quarter.

That helps me understand far better. Thank you. The outage that you have had with the recently acquired property that had a plant down, you talked about 40 basis points of effect on your EBIT margin, what effect did that have on your revenue?

Probably less than 1%.

How costly is the process of bringing that plants up likely to be?

Most of that would have been covered by insurance, so most of that is already been captured. And like I said earlier, Dan, I think it should be up and running here within a week or so. We are just going through some specs and clarifications of certain things, it should be back to normal.

Final question, you described how you will be... you focused on an additional location that you will taking out of operation. I presume those restructuring costs are embedded in your second half guidance?

Yes, correct, so the one from an acquisition, initial cost from a purchase account, but as you have period cost that could be a couple of pennies in the next two quarters as we wind it up.

Okay, thank you.

Your next question will be from Glenn Primack of Broadview.

Hi good morning.

How are you doing?

Alright. In the energy business what percent is land versus offshore, where you are quoting on a pipe and bearings and that type of stuff?

I don't know that question. If you can call... if you can call later we can discuss that with you.

Okay and then...

I will follow-up with our business leader from that business and can get you additional details.

But the bulk of it coming from North America...

Yes.

Okay. And so, I think, from the first quarter you probably start to anniversary the big drop-off in Canada, and then it seems like this was... and a couple of your customers felt that North America is starting to base a little bit, so...

I mean that's what we talked about earlier that we feel that by the fourth quarter we can see some improvement there, yes.

And are you able to tap into those customers and take the product offering internationally, because it seems like that's where the big international land is...

Glenn, our challenge is that we do sell to customers that are global customers, and it is very hard for us, although the sales for us are recorded in North America, it is really hard for us to know where those sales are... those components are actually going.

Okay. So your product maybe going to some of the other...

Yes, we just cannot... at this point we cannot trace it, but when we talk to Schlumberger or customers like that, we really don't know where the product ends up being going.

Okay. And just in terms you feel pretty comfortable with being able to track North America inventories from your distributors and this has been... has there been any channel conflict between people coming into calling direct versus...

No, I mean we have distributor advisory council, we have a really close relationship with our distributors. So, we pretty much know what's going on...

Good.

Thank you.

Thank you.

Your last question will be from Andrew Casey of Wachovia.

Hi Andrew.

Hello again. I wanted to follow-up on the more macroeconomic inventory question, I think, Joel asked a little bit earlier. Other than energy customer inventory liquidation you have talked about continuing. Did you see any continuation of that December abnormal plant shut down so far into January?

No.

No.

I caution everyone because I have been... we have been saying this. We have a great month and then the next month is not so great and so forth. I mean, we've been... it's a rollercoaster now for the last 18 months. But right now, what we saw in December is we're not seeing it in January so far.

Okay. Thank you very much.

Very good, thank you.

And this concludes our discussion today. Thank you for joining us. As your follow-up questions, please call me, Quynh McGuire, my line is 724-539-6559. Thank you.

Thank you for participating in today's Kennametal's second quarter fiscal 2008 earnings conference call. This call will be available for replay beginning at 1 O'clock PM Eastern Time today through 11:59 PM Eastern Time on Friday, February 22nd, 2008. The conference ID number for the replay is 30386679. Again the conference ID for the replay is 30386679. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you. You may now disconnect.