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 First Quarter Fiscal Year 2011 Earnings 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) I would now like to turn the conference over to Quynh McGuire, Director of Investor Relations. Ms. McGuire, you may begin the conference.

Thank you, Regina. Welcome everyone. Thank you for joining us to review Kennametal's first quarter fiscal 2011 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's also being broadcast live on our website, and a recording of this call will be available on our site for replay through November 28, 2010. I'm Quynh McGuire, Director of Investor Relations for Kennametal. Joining me for 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, Marty Bailey. Carlos and Frank will provide further explanation on the quarter's financial performance. After their remarks, we'll be happy to answer your questions. At this time, I'd like to direct your attention to our forward-looking disclosure statement. The discussion we'll 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 represents 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. Good morning everyone and thank you for joining us today. During the September quarter, we saw continued improvement in the global economy. Our industrial end markets are benefiting from an increase in manufacturing activities. The developing markets continue to show the strongest growths with North America as well as Europe reflecting ongoing activities. The first quarter of fiscal year 2011 reflected excellent performance by Kennametal at many levels. We realized organic sales growths of 34% compared with prior year quarter. We achieved record operating margin performance for any first or second quarter. Our adjusted earnings per share of $0.47 reflects an improvement of $0.51 per share compared with prior year period. The year-over-year improvement in EPS was driven by increased sales volume and higher incremental margins. We continue to realize significant year-over-year sales growths as well as strong operating leverage. Restructuring has been an important driver in enabling Kennametal to further streamline our cost structure and we continue to implement those initiatives. We currently have four plant closures underway and we are on track to realize $165 million of permanent savings on an annualized basis. That is up $5 million from our previous guidance. When those efforts are complete, we have reduced our manufacturing footprint by a total of 20 facilities including divestitures. At the same time, we will have retained much of our operating capacity as a result of utilizing our lean practices to shift production to our other plants. As we continue to focus on top line growth we retain our value selling approach for the end markets we serve. We have begun notifying our customers of price increases effective on October 1st. And we will continue to implement pricing actions throughout fiscal year 2011, as appropriate. From a macro perspective, we continue to see…

Thank you, Carlos. I will provide some comments on our performance for the September quarter and then I will move to our updated outlook for the remainder of fiscal 2011. Some of my comments will exclude special items, so please refer to the reconciliation schedules provided in our earnings release related to Form 8-K. To start, the September quarter started off the new fiscal year on a very positive note. We had a stronger than expected top line performance. That was across all markets and all geographies. We are also pleased with the exceptional operating performance and leverage delivered by both of our business segments and our operating adjusted margins of 11.7% was a September quarter record and as a result of our performance, we are increasing our annual sales and earnings guidance for fiscal 2011. As you know, in order to take advantage of growth opportunities as well as provide a better platform for continually improving efficiency and effectiveness of our operations we implemented a new operating structure at the start of new fiscal year on July 1st, 2010. This was highlighted at a recent Analyst Day in New York. As a reminder, the key attribute of the new structure is the establishment of two operating segments by market sector, which replaces the previous two operating segments that were based on a product focus. The prior two segments were MSSG and AMSG. The two new reportable operating segments are named industrial and infrastructure. The industrial business is focused on customers within the transportation, aerospace, defense and general engineering market sectors while the infrastructure business is focused on customers with the energy and earthworks industries. Additionally, more corporate expenses are a now allocated to the segment, so you will see a smaller portion in the corporate line, as the new…

Thank you, Frank. Moving ahead, Kennametal is well positioned to benefit from the economic upturn and we are prepared to serve customer demand. We have made the necessary changes to reposition the company and emerge in better condition than ever. We already resized the company and have aggressively lowered the fixed costs. Kennametal is now scalable up to $3 billion of sales, a goal we can achieve without making any significant additional capital investments. Based on an ongoing improvements in the worldwide industrial production and our ability to maintain strong operating leverage, we have increased our guidance as Frank said for fiscal year 2011 accordingly. Our revised guidance in the range of $2.25 per share to $2.45 per share compared with previous range of $1.85 to $2.15 per share, represents an increase of 18% in the mid point. During the current cycle, we expect to achieve higher incremental margins than in the past periods. We believe that we can realize 40% incremental margin over the cycle with higher levels earlier in the cycle. In the meantime, our strategies remain consistent. We continue to focus on customers in their respective end markets, develop new core products and drive top line growth. Over the long-term, we will continue to balance our served end markets, business mix and geographic presence to improve our exposure to fast growing markets and regions. In addition, we will maintain a disciplined approach to capital allocation in order to further build shareholder value. We have always been prudent in our uses of cash, which includes reinvesting to add value, making acquisitions, paying dividend, and repurchase shares to offset dilution. In fact, the Board just authorized a share repurchase program of up to 8 million shares, which we will use primarily to offset share dilution from equity issued under the employee benefit programs. The foundational work to advance our mission has been done. Now, we are transforming Kennametal to a market pacing organization to grow our top line and increase our profitability. We are driving a sharper customer focus and delivering improved productivity. In summary, we are in excellent position to achieve the next milestone target of 15% EBIT margins and 15% return investment capital for fiscal year 2013 and delivering superior value to our shareholders. Thank you for your time and your interest in Kennametal. We will now take your questions.

(Operator Instructions) Your first question comes from the line of Eli Lustgarten with Longbow Securities.

Good morning, nice quarter. One second, you said the tax rate will be some what higher. I guess, the adjusted tax rate I think was 25 to 24 quarter if I do it correctly, to that we are talking like 26% or 28% or something like that?

The reported rate, as you know in the release is 27.6%. So, it is about 100 basis point, a little bit less than that, Eli and that is why we guided, I would say 26% to 28%. The only potential there obviously will be the mix of business, and that's all jurisdiction made, but if the Government in the U.S. decides to tax the credit and not going (inaudible) session and we could get a little bit of balance at there, but we can't build that in or becomes a effective litigation.

And, yes, in the guidance you just gave us 40% in the first half, which the implied quarter second quarter is relatively flat with the first quarter, some where between $0.43 and $0.51 I think if we were true to your guidance. Can you give us some idea then how volume for the rest of the year because I know the second quarter gains still be in the low to mid 20s and then you will be trading downward but how you are seeing rest of the year, and more importantly because we have new margin calculation to go through, how do you see the operating profitability averaging for the year, for both the industrial and for structure sector?

I think the margins, you know, if the first up the 46, that is approximation and the best we can give you at this point. But I would imagine the second half, the margins will now be better given the fact that we have more work days, we will have some of incremental restructuring benefits in the second half. So, we feel pretty good about that and then from an incremental margin we will still get 40% for the year. The one thing, I remind everybody is that we don't get 40% leverage on the, benefit of the foreign currency translation benefit. It doesn't fall, so if you exclude that out of the number we will be down and back where we need to be.

I guess, I was trying to driving more the operating margins were 14 in the first quarter, which I know which is effective. What kind of noise margins you think you can do in each of those sectors based on the new segments and putting the corporate numbers up there? What kind of range of profitability should we expect in the sectors?

I think you have to look at the performance that we have had in the past. The first half profitability to your point is similar for the most case and then we will get a little bit of a step up in the second half. Now from the seasonality perspective, infrastructure will have some seasonality in the second quarter, particularly in Europe because of the construction business and that is typically routine. That obviously is stronger in the third, fourth quarter and I would imagine the industrial business will continue to progress on a positive trend for the rest of the fiscal year.

The implication at that, the infrastructure will be second quarter margin will be probably a little lower than the first quarter?

Yeah, that's potentially due to some of the seasonality.

Yeah. And one final question. Can you talk about the impact of restructuring on the rest of quarters? We got a nickel in this quarter, how much is left for the rest of the year

From a restructuring standpoint, as we pointed out, we will have an additional $5 million. So, I would imagine the first quarter, what we is 39 million that would continue to ramp up each consecutive quarter, I would expect another million plus in the second quarter and then maybe a couple million more in the out two quarters going forward.

What about the restructuring charges?

Eli, there will be a little bit, I mean, we are still going hit the 165, I would say. We were anticipating to have a little bit more of those costs in the second quarter but given some of the delays with some of the issues in Europe, some of those costs are left into the third quarter. So, I have Quynh get back to you.

I think we have $5 million in the first quarter. Is that the similar in the second, third and fourth? How much more, just trying to get the impact per quarter is all.

I don't have that with me right here.

Eli, I can follow-up with you on that offline.

Okay. No problem, thank you.

Our next question comes from the line of Adam Uhlman with Cleveland Research.

Hi, guys, good morning. I was wonder, if you could talk about the increase to the organic revenues to growth outlook for the year, where are you guys feeling better about the business and the full year outlook it seems to counter some of the bigger picture macro indicators that we are seeing a little bit of softness, where are you feeling better about the markets and then about Kennametal's own execution?

Yeah, Adam, we basically had a very good first quarter above our expectations. And we really did not change much for the rest of the year from the original expectations that we had. So, we dropped all of the benefits we had in the first quarter, increased that for the year. I want to remind everyone and we talked about this in New York if you look at IPI, our plan and our current forecast was based on continually decreased of IPI from our first quarter all the way through the fourth quarter. And if you look at, from our plan perspective the decreasing IPI from the first quarter to the forecasted fourth quarter it is like a 40% increase in IPI. So, what we are seeing in the marketplace where you have seen so far is consistent with our guidance and forecast. But you know, we saw better results out of Europe than we anticipated, slightly better out of North America and the developing economies continued to be very, very strong.

Okay. And then secondly, the raw material outlook comes in costs going up. Could you talk a little bit about that and then, related to that, the rare earth industry is it seems some tight supply out of China is that starting to happen in tungsten now and then is there any concern about supply?

No, there is no concern about supply. We haven't really seen tightening and I also remind those of you that have followed Kennametal for awhile when the raw materials, when tungsten went up significantly back in 2005 through now we never have seen a, never had an issue with supply. You know, as then the primarily, I would say it price increase, I think there is some manipulation as, you know, in the tungsten because it is there only traded so it is going to be moderate. So, we believe that we can offset any costs of raw material increases with price increases and we are doing just that.

Could you help just quantify how much price you need to offset the material cost increases? Is it a big number or a small number?

I would say that it is probably a relatively small number. At this point.

Okay. I'll get back in queue, thanks.

Our next question comes from the line of Holden Lewis with BB&T.

Thank you, good morning. Trying to get a sense of you have increased you expectations for the restructuring from 155 to 160 up to 165. You kind of increased that number $5 million to $10 million but you still have four plants in the process of being shut and just sort of thinking along the lines of how many dollars you saved per plant, it seems like it is a pretty modest number when you consider how many plants you shut during the downturn and what your original cut of the savings were. It seems like a relatively small number in light of the fourth plant that is still underway. Can you just make some comments on that?

Some of the plants are smaller obviously and then depending on the timing when they officially close, some of those benefits obviously until the next fiscal year.

Okay. So, continually the number could be higher, just you are not going to get it all during fiscal '11.

Right.

Okay. And then back to the pricing question really quickly, if I could, I think historically you tried to make it your policy that your first goal is to offset raw material increases with productivity and to the extent you can't do the productivity then you sort of turn to the price increases. Seems like you have been a little bit more aggressive with respect to price increases and you've been getting great productivity gains but sort of going to the price well like something you really can't been doing a bit, have you kind of changed the philosophy a little bit about pricing and if you have what is behind that? Is it greater capability on your part in the market or anything like that?

Actually, we have had maintained our philosophy is a little different than what you mentioned. Our philosophy is always been that we for the last five years that we want to offset the raw material with increase and we always say that it takes us about 12 months to do that and as we know with our philosophy, our productivity, we want to keep that productivity to be honest with you. So, nothing changed, I mean, I think we are still operating within that philosophy. I think you are correct in your assertion that we have been very, very effective in realizing the price in the marketplace. And then, I should mention that we have had now seven years of new products, sales from new product to be about 40% of our total sales so that is paying off good dividends because those new products come with higher productivity for the customer. So, you know, getting more of margin out of those products is not as difficult sell. And I think that this year is turning out to be probably one of the most innovative years for us, for Kennametal, so we are putting a lot of new products out there in the marketplace. We haven't slowed down, we didn't slowed down during the recession. Our R&D efforts and I think that we are going to get a good payback from that.

Great, thank you.

Your next question comes from the line of Ann Duignan - JPMorgan.

Good morning. It's Ingrid standing in for Ann. If we could go back to the cost savings, I'm assuming that this is a gross number and then somebody's costs, we are going to like we creep back into the system over the years. Where would you expect cost increases over the next few years?

Zero. What about that, we have been very consistent to say the $160 million was fixed costs. We went to a great deal of paying to separate six permanent costs and temporary costs. We said out of $160 million of fixed costs, which is now $165 and $30 million of temporary costs that would come back to the business and those costs are at this point in the run rate all in. This is 20 plants that disappeared. They are no longer here. That cost cannot come back to the business, that cost is gone.

Okay.

Versus the temporary costs that we talked about, which is cutting expenses, you know, not traveling, taking furlough salary, temporary salary cuts, all of those are in. But this, the 20 plants are gone. We are not going to have them any more. That production has moved into current facilities, current square footage that we have that brings the benefits additional benefits because of absorption and things like that.

Okay. So, I mean, volume increases could it is, like other costs but the costs that you have taken out will not come back in?

The only thing you would have is your typical variable costs associated with higher sales person, that type of stuff.

Raw material, to build those further.

And just to go back to a prior question. You know, for the charges by quarter, we have $4 million on the first quarter. Probably going to go to about 8 in '013 and then the remaining probably got '011 or '012 in the fourth quarter just to help you guys with the charges by quarter.

Great, thanks. And then, just on the share repurchase program, I just wanted to clarify, this is probably just to offset equity dilution, it is not a signal that you are deemphasizing acquisitions in any way?

Absolutely not. This is basically 100% to offset dilution.

Have you started repurchasing at all?

We can now, we have blackouts that we have to follow SEC rules.

Okay.

So, we just got the Board to approve it. So at this point I want to blackout period though.

Thank you very much.

Your next question comes from the line of Walt Liptak with Barrington Research.

Thanks, good morning, guys. A good quarter. It is good to hear that you are steadfast about the costs not coming back and I wanted to ask about, as business starts to improve could there be costs that come in that are like incremental to R&D or new product or market share and things like that. I think, we would like to see the returns get to that 15%, before doing that I wonder your outlook is for incremental growth related spending?

I mean I think that we never relative to R&D, as I said we never slowed down our investment in R&D. As a matter of fact, you were at the Chicago IMTS show and you saw the number of new products that we had there, which I would consider massive new product introduction. Nobody in the show had that level of new products out there. And so, I don't see us needing to increase that just because the environment is going to get better.

Well, the only thing I would add, I think with the new structure, I think there is a number of opportunities that we still have on the table and combined of the integrated supply chain logistics and we have better global visibility with all the financial function versus the way it was in the past having individuals. So, you have this great make organization that allow if costs if some deployment would need to invest in our G&A we're able to find it in another to offset as the rate of the offset any grow with the opportunity we have in front of us.

Okay, good. On the guidance, I was a little bit surprised that you took up guidance, I'm glad you did but a little bit surprised. What changed from when you gave your guidance three months ago for the year? Was it that everyone was worried about the sovereign debt and then your first quarter came through without much of a slowdown in Europe? And you mentioned cost outlook, what improved?

I will let Frank get up there. From my comment, I mean, we experienced a more top line growth than what we anticipated and our restructuring benefits came in at a better than we anticipated.

I think, Walt, too, remember when you are doing your plan, like in June, July of last year, I mean, there were still a lot of costs double dip, a lot of concerns out in the marketplace and it is always try to, very difficult at the June 30 year end to try to predict obviously the new calendar year for fiscal '011 and I think a lot of companies have the similar issues. Going through the guidance and we had expectations that it could happen, we needed a little bit more time. We just did a recent bottoms up forecast and as a result of that forecast a moment we feel much better and hence we pick up the number.

Okay, got it. Alright, thanks very much.

Our next question comes from the line of Henry Kirn with UBS.

Good morning, Eric Crawford on for Henry. Could you talk a bit about how video performed in the quarter? Is it still 10% of the portfolio and what share of the portfolio is embedded in your guidance for the full year?

You know, it is still 10% of our portfolio. I think that the, we performed better than our expectations and we believe that we will continue to perform better. We introduced the brand at in the U.S. at IMTS at Chicago and to be honest with you, it drove a tremendous level of interest. As a matter of fact, as I said earlier, we had five times more leads, this IMTS than we did in 2008 and actually, I'm just leaving tomorrow morning first thing in the morning to Japan to go to the [Gymsoft] which is the IMTS of the Asia Pacific and we are introducing and launching the Video brand there for Asia. So, it is exciting and s going to continue to grow and we anticipate it is probably going to continue to be 10% of our total sales because we expect the Kennametal business to grow just as much.

Okay. That's helpful. And then, on the M&A front, could we get an update as to what you are seeing there? Are you seeing expectations relative to pricing get more attractive?

Yeah, I mean, we have a healthy pipeline at this point. I think that we continue throughout the recession to talk to potential candidates and to build relationships. I believe the companies that we have an interest in and fall within our guidelines and as you know we have been pretty disciplined about that, still have an expectation of a higher value than what they can get for it now. So, I don't know when that is going to change but it could change soon but we have a number of companies there we feel are very close from our relationship and knowing what they want and negotiating with them and they continue to see that, you know, they are trying to see what the economic condition is going to do and see if they can, when is the right time for them to sell. So, it is still a little bit of hesitation out there in the marketplace.

Okay. Thanks very much.

Your next question comes from the line of Andy Casey with Wells Fargo.

Good morning, everybody. Carlos, I jumped on the call a little late, so, I apologize if you addressed this question. But your gross margins suggest fairly high capacity utilization. Is that a part of it in addition to the productivity gains that you talked about and if so does the capacity utilization some what limit the ability to flex the SG&A line?

Hi, Andy. I wouldn't say it is been a high capacity utilization. I think there is a period that we go through in the first quarter has obviously some seasonality. So, I don't see any issues there.

I mean, as we said if you look at our run rates, we are running at $2.2 billion type of run rate. We can add capacity at this point is $2 billion so.

I'll follow up then later on. Thank you.

Thanks.

There are no further questions at this time. I will turn the conference back over to Ms. McGuire for any closing remarks.

This concludes our discussion. Please contact me Quynh McGuire at 724-539-6559 for any follow-up questions. Thank you for joining us today.

This concludes today's conference call. This call will be available for replay beginning today at 1 o'clock p.m. Eastern Standard Time. It will run through mid-night Eastern Time on November 28, 2010. The number to dial to access the replay is 800-642-1687 for callers in U.S. and 706-645-9291 for international callers. The conference id number for the replay is 14593557. Thank you for participating in today's conference call and you may now disconnect.