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 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) Thank you. I would now like to turn the call over to Quynh McGuire, Director of Investor Relations. Please go ahead.

Thank you, Regina. Welcome everyone. Thank you for joining us to review Kennametal’s second 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 is also being broadcast live on our website, and a recording of this call will be available on our site for replay through February 28, 2010. I am 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 would 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 and 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. Thank you for joining us today. I am pleased to report that the second quarter of fiscal 2011 was yet another period of strong performance for Kennametal. We continued to deliver top line growth and realized strong operating leverage. We remained focused on executing our strategies effectively and improving our operating efficiencies. The considered efforts of our global team resulted in our organic sales growth of 31% compared with prior year quarter. Our adjusted earnings per share were $0.57 compared to $0.14 in the prior year period. The year-over-year improvement in EPS was driven by increased sales volume and higher incremental margin. It’s worth noting that we realized 11.8% adjusted operating margin for this past quarter. This is another historical high for any first or second quarter. In fact the December quarter represents the third consecutive quarter that Kennametal has achieved record levels of adjusted operating margin performance. In addition, our adjusted return on invested capital was 10.9% as of December 31, 2010. Overall, the December quarter represents an all-time-record performance for Kennametal. Our second quarter results benefited from a strengthening global economy which reflected growth in many of our geographies and end market serves. Industrial production continued to increase and Kennametal experienced higher customer demands. Emerging markets such as, China, India and Brazil remained strong. Our geographic profile continues to be more balanced. For the December quarter we generated 56% of sales outside of North America with 28% coming from the rest of the world regions. And indicator of ongoing favorable customer sentiments was reflected as (inaudible) which I attended last month and industry page show held in Japan, representing Asian manufacturers. At this event Kennametal generated two to three times the number of leads than that of the prior trade show. This…

Hey. Thank you, Carlos. I’ll provide some comments on our performance for the December quarter and then, I’ll move on to our updated outlook for the remainder of our fiscal 2011 period. As usual some of my comments exclude special items so please refer to the reconciliation schedules provided in our earnings release and related Form 8-K. Let me start off by summarizing the December quarter in kind of tea key takeaways as we saw them. Our first global business environment continues to improve as Carlos pointed out. We’re beginning to leverage our operational structure. We again demonstrated strong operating results, free operating cash flow. And we further strengthen our financial position. We have some headwinds around raw materials but we have been proactively addressing them. And we again increased our outlook due our December quarter performance, improved visibility in a global recovery. Our adjusted operating income that with the December quarter records, coming in at 11.8%. In addition, as Carlos mentioned previously, we performed a major upgrade of our ERP system SAP this quarter, with the cut-off date of January 3rd. And this was a significant undertaking by the entire organization. And I would also like to thank all our employees for their time and efforts spent on this implementation. So now, let me walk you through the key items in the income statements. First sales. Our sales for the quarter increased 28% to $566 million. This compares to $443 million in the December quarter last year. Increase in sales was driven by 31% organic growth, partly offset by 2% unfavorable impact on foreign currency effects and 1% unfavorable impact on fewer business days. This represented the fourth consecutive quarter of year-over-year organic sales growth. We also continued to make progress with a better balancing of our business as…

Thank you, Frank. Going forward, Kennametal is now even better positioned to benefit from a stronger sales environment and realized substantial margin expansion. We have weathered the challenging environment of global economic downturn and emerged as a much stronger company. Our new enterprise structure offers additional growth opportunities. We are committed to continue our tasks to becoming a breakaway company, when that can be profitable throughout the economic cycle. We continued to implement strategies their focus on the customers in their respective end markets. And grow our top line by serving demand, getting market share and developing new products. Based on ongoing improvements in the economic environment and our ability to maintain strong operating leverage, we have again increased our guidance for fiscal year 2011. Our updated sales guidance of 21% to 24% for the year reflects that we are outperforming the forecasted industrial production rate at a very strong pace. Our revised EPS guidance in the range of $2.50 to $2.65 per share, compared with the previous range of $2.25 to $2.45 per share represents an increase of about 10% at the midpoint. This increased guidance reflects record operating margin performance, even on sales volumes that has not yet reached to the prior sequel peak level. During the current cycle, we expect to achieve higher incremental margins than in the past periods. We strongly believe that we can realize 40% incremental margins over the cycle. Our long-term strategies remained consistent. We continue to balance our served end-markets, business mix, and geographic presence. We continue on our path to premier which is defined by customer needs and driven by the power of our organization. The Kennametal global team is highly focused on achieving our next milestone targets of 15% EBIT margin and 115% return on invested capital by no later than fiscal year 2013. We’ve successfully managed through an unprecedented market crisis and a repositioned company for improved margins and returns. We refocused our strategic direction with a new operating structure and enterprise approach. We aggressively manage our portfolio to increase profitability and returns. We strengthened our financial position and enhanced our liquidity. We expect to continue generating strong cash flows. We will leverage our strong financial position to meet our next milestone targets and deliver continue shareholder value. Thank you for your time and your interest in Kennametal. We’ll now take your questions. Thank you.

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

Good morning, everyone.

Hi, Eli.

Hi, Eli. How are you doing?

Not too bad. First question just on the corporate charges where $2 million or so in the segment data is that anything going on there and what’s the run rate for the second half of the year?

Yeah. It’s probably a little lower, obviously, with focusing on costs and the cutover for the system allocation was probably a little bit lighter. So Eli, it is probably going to be in between that number what we have in the first quarter going forward.

Okay. But this did have additional need for that is nothing?

No. There’s nothing unusual when (inaudible).

Yeah. And when we look at the rest of the year, I mean, can you talk a little bit about what kind of profitability in margin do you expect generally at this point, when you go out, the margins in the first half are a little bit sloppy because of raw material costs and the question is that are we going to get back to mid-teen margins across the board by the second of the year?

Yeah. I will start off. I would not call them sloppy. I think they’re actually pretty good through all-time records for the company.

You’re up to a new – you are now up to the gold standard, come on.

Well. Yeah, yeah, I think we’re going to get back to that, infrastructure we had a little from our seasonality there. But I think it is the one issue we know, we know what it is on the raw material side. We’ve been proactively addressing the raw material costs vis-à-vis the price increases. And that was the one that probably accelerated faster than we anticipated and we thought it was going to go up, but it really took a jump in November, December, we acted accordingly. So, we think we’re going to get back to our numbers and that’s probably took up the guidance and we’ll the get the benefits of our leverage in the second half just through the type of volumes that we typically benefit from – with the capacity in our second half. And the restructuring benefits continued to remain on track and hopefully we’ll deliver the better on that front as well.

So, at this point, you’re expecting easy margin comparisons versus last year, I suspect?

Well, again, the fourth quarter from an EBIT perspective was an all-time record for the company at 14.1% and I’ll remind you the operating income leverage last year, we did over 80% in the third quarter as well as over 50 in the fourth quarter. So the comps were tough, but we think we’re driving towards right profitability metrics.

Okay.

Yeah, I’ll add, I mean again, 11.8% EBIT margin. This company historically has never gone over 12% and 18.8 in the first half in particular is exceptional.

All right, Frank. Thank you.

Our next question comes from the line of Chase Baker with Credit Suisse.

Hi, good morning.

Hey Chase. Hi, good morning.

Question on the raw material cost, is there a way to handicap on the dollar basis the impact in the most recent quarter. And I’m just trying to extrapolate what incremental margins could have potentially been, if you didn’t have this short term hiccup?

Yeah, for competitive purposes, we typically try not to provide that type of information, but Chase we would have been, we did 38.4%. But I’ll tell you this, we would have been over 40% in the quarter not have the anticipated raw material cost increases. And just try to give you a flavor and I think I talked about this. Input cost, when you take into consideration, still remain around in the 30% of our cost of goods sold, that will give you a little of a flavor there. So, it’s an impact, but it’s not a – not going to see be significant driver going forward.

Okay, great. Thanks. And then Carlos, I think you’ve mentioned earlier in your prepared remarks that this cycle you still like, you’re on pace for a faster recovery of these raw material cost. And is that just you’re being more proactive with pricing or what’s difference this cycle versus the last?

I think, that one is we have been more proactive, I mean we’ve been anticipating the raw materials to go up. And so number one. Number two is, we are, because of the environment of growth and so forth, I think is a little bit easier for us to get price. And third, as we spoke, we do have a new system that has very good data that really help us do the strategic pricing that would not affect our top line.

Okay. Great. Thanks very much.

Through SAP system.

Okay, thank you.

Our next question comes from the line of Ann Duignan with JPMorgan.

Hi. Good morning, guys.

Hi Ann. How are you?

Doing good, thanks. Just on the revenue outlook, could you just talk a little bit Carlos about, during the course of the quarter where have you seen the most incremental upside, by region and by market?

Yeah, by region leading – the leading was the rest of the world. So, think about Asia, China, India, and Brazil. And by market was general engineering and transportation.

A bit more color on the general engineering in the transportation if you could please, what is included in general engineering?

Yeah, in our general engineering, I mean we have a lot of the small shops, with is things like valves and pumps, just general like medical. And, so we lump a little bit more into the general engineering because it’s hard to, some of the middle small job shops actually produce products for a number of industries from one week or one month to another.

Okay, so following kind of general industrial production, that’s the way to think about this?

Yeah. But I want to make a point that, we are considerably outpacing the IPI index, which we’re just not following the industrial growth, but the new organization with the focus on the customer and the new products that we worked on during the economic downturn are actually paying off for us in the top line.

Yeah, I can appreciate that. And then in that light, I am thinking about 165 million in net cost out. At what points do you think that some of your CapEx spend is going to have to for a capacity expansion, I mean it looks like end markets coming back faster than you might have expected, should we be really thinking about that 165 million as a gross savings not really a net, because you are seeing incremental employment costs and 401(k) costs, and compensation costs come back in?

Yeah. We always talked about two cost buckets, the variable cost, which would be a worth $40 million, which – that’s where we talk about costs coming back the employment costs. So, there was furloughs temporary at salary reduction, payments to 401(k) that we didn’t make and so forth. So that’s what you’re seeing coming back. The 165 is comer, I mean we’ve changed the structure, twenty plants are gone, I mean the cost of those plants will never come back. Yeah we moved the capacity into existing plant. So as we get as a top line back, that’s where we get a lot of leverage. And we always said that because we did move the capacity of those plants that we closed into existing plants. We have the capacity to reach $3 billion in sales without significant investments in capital. So we plan to continue our capital acquisition at the depreciation, more or less depreciation level.

Yeah. And the only thing I would add to that, in parts up to that is the SKU reduction that we’ve gone through over the cycle were taken out particularly in the industrial side, almost three to 400,000 SKU combinations, plus with the new product focus, we continue to marry those up and rationalize on top of the line. And then I think with the branding both with the Widia umbrella as well as Kennametal to have that better structure and focus. We think we’re set for capacity for a while. So we shouldn’t have to bring back a lot of cost.

And I appreciate all of that. Carlos, then just finally my question on when could you achieve the $3 billion just looking at how quickly some of these end markets have recovered?

All our assumptions, we gave our top level assumptions over ‘15 by ‘15 by 2013. Our assumptions are that we would be at close to that level by 2013. However, as you said, we have – our top line has grown at a faster rate, and but we haven’t really looked at, what we need to do, what’s – is that going to be different going forward, I mean we just implemented this SAP 6.0 and – system. And so we were very focused on finalizing or all our restructuring and all that. And I think in the next couple of months we’re going to be looking at the economic environment and what does that mean to our previous anticipated projections.

Okay. So you all re going to take a re-look at that in the next couple of months, is that what I take away from it?

Yeah. I mean, we typically go through our annual plan during the end of the third quarter, beginning of the fourth quarter. So I mean, I think that’s probably where we’re going to have a really good view of what’s – what does the environment look like and what is the (inaudible) for Kennametal?

Okay. Thanks. I appreciate it. And I know there is a lot going on and good luck with the SAP.

We are done.

You are done. Good.

It’s done. 100% done, so –

Okay. I empathize.

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

Hi, guys. Good morning.

Hey, Adam. How are you?

Well, thanks. Just a couple of clarifications if I could, first of all within the new revenue growth outlook for the year, can you quantify how much of that is expected to be price realization?

It’s probably a couple of points in there, Adam.

Okay. And then, you had mentioned that we are still going to see some margin in delusion as the price is going to completely offset the higher raw material costs, could you like quantify how much margin delusion baked into the numbers.

Again, I still think as Carlos pointed, we’re committed to get back to the 40 and for competitive purposes we don’t want it. But obviously, it’s a – it’s more than a couple of hundred basis points in any period. But anything else, my point is just on the delusion affect, if you get dollar for dollar it just affects the overall percentage there. So from a cost perspective and then the (inaudible) anticipated. So, raw materials continue to go up or down, we’ll adjust accordingly. But it’s tough to really give you a specific number at this time.

Got it. Okay. Just a last question on working capital to date, second half of the year, inventory look to be in really great shape relative to where sales are coming in and even with this material cost pressure, can you talk about how do you expect that to play out in the back half of the year and tighten with that, good companies are growing cash balance maybe you can talk about the acquisition environment or other uses of cash?

We think we were pretty good from our balancing of the inventory, the right stuff that we need to have in the second half. I don’t think we are planning to grow inventory beyond this level. I think with the system with better visibility. I think it will get better as we go through with the new SAP systems, kind of like some of things we are seeing here. So expect that better velocity as we exit this fiscal year into next year. But I can’t see inventory going significantly up or down for the rest of the fiscal year. The M&A environment is getting a little better. And we are and have been active in looking at properties and working some relationships in those properties, but M&A is a really difficult thing to forecast. So I think that as we see from our balance sheet – I think we have a strong balance sheet that allows us to be flexible and we’re going to continue to look at it.

Great. Thanks.

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

Hey. Good morning, guys.

Hey, Henry. Good morning.

As you are able to price this faster, could you talk a little bit about the price discipline in the market if you see the competitors, and maybe if you see yourselves today as price leader or if the markets generally responding faster than historically?

Yeah. I mean, we are the price leader in North America and we are probably a follower in Europe. And, sort of neutral developing economies. But the pricing environment, the competitor environment is being very good. I think that our competitors had followed us, in most cases what we have gone, first. And we certainly have followed our competitors when they have gone elsewhere. So I would say that the environment is – price increases are always difficult. But I would say, in a relative basis the environment is okay.

Can you possibly give an update on Widia for the quarter, maybe any metrics you could share?

Sorry. I couldn’t hear you, Henry.

Is it possible to get an update on Widia for the quarter or any metrics if you could share there?

Yeah, I mean, all I can tell you is that, all our distribution is growing at a good pace and we feel really good about Widia but we don’t have any specific metrics.

Thank you very much.

Thank you.

Our next question comes from the line of Chuck Murphy with Sidoti & Company.

Good morning, guys.

Hey, Chuck.

Hey Chuck, how are you?

Doing all right. I just wanted to talk about the infrastructure real quick, could you just talk a little bit about the sequential decline there. I think you kind of mentioned seasonality before. Was that a particular end-market that stood out?

Yes. It’s the highway and run construction, I mean that’s one of those things when the water comes they just shut and go away. So it was a little bit earlier than we have seen traditionally in the past.

Got you. Okay. And did that also kind of hit the margins a little bit as well or – ?

It’s a combination of that the seasonality coupled with some of the higher raw material costs.

Got you. Okay, that’s all I had. Thanks.

Our final question comes from the line of Walt Liptak with Barrington Research.

Hi. Thanks guys. Good morning. I wanted to ask about, I don’t want to be dead horse on the raw material thing. But I wondered about hedge positions, if you guys hold excess inventory or if you do something in the futures markets?

Yeah. We don’t do anything in the futures market. I mean, the tungsten is a very steadily traded commodity.

Right.

And we do have inventory that we look at to help us through that. But as we said, we are a way ahead in our recovery than any one time that I have been with the company for sure. And the fact that, we’re going to be able to recover 100% of the raw materials in the second half of the year, and it just shows you that again, I don’t see that as an impact for the year.

Okay.

And next – and it’s actually got a position as well for next year because we typically don’t get price back.

Okay. Can you tell us what the – the overhang or the hit was from the rising raw material costs during the second quarter – in like millions of dollars?

Yeah, well. We typically don’t provide that, obviously that’s competitive.

Okay. And what about gross margin. I might have missed it. Did you provide gross margin guidance for the next quarter?

No, we don’t. We typically just give the full year EPS guidance. With the increased guidance from the midpoint last time was 235 to 238 midpoints, that obviously reflects some benefits in the second half with the capacity utilization in the volume, which we typically get that left on the gross margin lines. That’s been embedded in our EPS guidance.

Okay. And what tax rate are you using for next quarter?

Again, it’s probably going to be about the same for the first half average, and the full year as said around 24%. And that’s pretty much where we see it, it could move couple of basis points here and there but nothing substantially. So, given the mix of the business where we have forecasted it, factoring in the RD&E. We had a little bit higher in the first quarter, we threw it up in the second quarter. So we thought we’d start the year at about 25. So probably going to maybe be around 24% for the remainder of the year. And that’s basically the next two quarters.

Okay. All right. Thank you.

Thank you, Walt.

This concludes our question-and-answer session for today. I’ll turn the conference back over Ms. McGuire for 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’s call will be available for replay beginning at 12 o’clock pm Eastern Time today and lasting through midnight on February 28, 2011. The conference ID number for the replay is 27874779. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. This concludes today’s discussion. Thank you for your participation and you may now disconnect.