Kennametal Inc. (KMT) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Kennametal Inc. 2020 Annual Meeting. I would now like to turn the conference call over to Larry Stranghoener, Chairman of the Board of Directors. Please go ahead.

Thank you. Welcome all. The meeting will come to order. Good afternoon, ladies and gentlemen. I am Larry Stranghoener, Chairman of the Board of Directors. Speaking for the directors and management, I would like to welcome all of you to our first virtual annual meeting of shareholders, and thank you for attending the meeting today via this audio webcast. Our commitment to personal health and safety is of utmost importance to us. We felt it was necessary to convert to a virtual meeting format this year in light of health concerns related to COVID-19. Madam Secretary, are there any administrative matters we need to address before we begin the meeting?

Yes, Mr. Chairman, there are. First, notice of this meeting was properly made to the shareowners. I have an affidavit to that effect from Broadridge Financial Solutions, the company's proxy service provider, who mailed the notice. The affidavit is available if any shareowner wishes to examinate it, and I'll file it with the records of the corporation. Second, the Board of Directors has appointed as judges of election, Seth Rice, Jackie Myers, and the Carideo Group, represented today by Tony Carideo, to determine the existence of a quorum, the validity of the proxies and the results of the voting. The judges of election have duly taken their oath of office in writing. I have that document and will file it with the records of the corporation. During the meeting, the judges of election will be tabulating the votes. After the meeting, the judges will deliver a report in writing to me for filing with the records of the corporation duly certified relating to the discharge of their duties during the course of meeting, together with all proxies, ballots and vote tallies. Third, the stock record, which reflect the shareowners entitled to vote at this meeting are on the meeting website and are available to shareowners for inspection. And finally, Mr. Chairman, at the close of business on September 1, 2020, the record date, there were 83,246,915 shares of the capital stock of the corporation issued and outstanding. There are present in person or by proxy at this meeting, more than a majority of the total shares issued and outstanding. Therefore, a quorum is present.

Thank you. I declare a quorum present, and the meeting is now open for business. We have set aside a period for questions and discussion following adjournment of the formal business segment of the meeting. Shareowners may submit questions and comments in the designated field of the web portal at any time during the meeting, and we will address them at the end of the meeting. Please note that this meeting is being recorded. However, no one attending this webcast today is permitted to use any audio recording devices. To begin the meeting, I would like to introduce the members of our Board of Directors, all of whom are in attendance via teleconference. Directors whose terms expire today and who have been nominated for election at this meeting are the following: Joseph Alvarado; Cindy Davis; William Harvey; William Lambert; Lorraine Martin; Sagar Patel; Christopher Rossi, our President and Chief Executive Officer; Steven Wunning; and myself, Larry Stranghoener. We also have members of management of the corporation in attendance today via teleconference; Damon Audia, Vice President and Chief Financial Officer; Judy Bacchus, Vice President and Chief Administrative Officer; Franklin Cardenas, President of our Infrastructure segment; Michelle Keating, Vice President, Secretary and General Counsel; Nick Pflugh, Interim Chief Commercial Officer in Metal Cutting segment; Carlonda Reilly, Vice President and Chief Technology Officer. We will now proceed with the agenda items to be voted on by the shareowners. The proxy materials were mailed to shareowners on September 15, 2020. Proxy votes were received and tabulated by the Carideo Group, an independent Inspector of election. The final tabulation of votes is presently being conducted by the judges of election. After all of the proposals have been presented, I will pause to allow time for online voting. We will now consider the election of 9 directors, each to serve for a 1-year term until the Annual Meeting of Shareowners to be held in 2021. As set forth in the proxy statement, the nominees chosen by the Board of Directors of Kennametal are: Joseph Alvarado, Cindy Davis, William Harvey, William Lambert, Lorraine Martin, Sagar Patel, Christopher Rossi, Lawrence Stranghoener and Steven Wunning. No other nominations were submitted by any shareowner prior to the meeting. Next, the ratification of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the present fiscal year is now order. The Audit committee has elected to retain PricewaterhouseCoopers LLP as the company's independent auditors for the fiscal year ending June 30, 2021. The Board of Directors believes that it is a matter of good corporate governance to submit its election of an independent auditor to our shareowners for ratification. Representatives from PricewaterhouseCoopers are attending the meeting via teleconference and will be available to answer questions in the question-and-discussion portion of the meeting. We will now consider the nonbinding advisory vote to approve the compensation paid to Kennametal's named executive officers, as explained in the proxy statement, which we refer to as Say on Pay. This vote is not intended to address any specific item of compensation but rather the overall compensation of executive officers and Kennametal's compensation philosophy, policies and practices. At our October 2019 Annual Meeting of Shareowners, we held our ninth Say on Pay vote. At that meeting, our shareowners overwhelmingly approved the compensation paid to our named executive officers with over 98% of votes cast in favor of approving the compensation. Accordingly, the compensation committee decided to retain its general approach to executive compensation in 2020, continuing to emphasize performance-based incentive compensation, rewarding our executives when they deliver value to Kennametal and our shareowners. We will now consider the approval of the Kennametal Inc. 2020 stock and incentive plan recommended by the Board of Directors as more fully explained in the proxy statement. We believe that the ability to grant equity-based awards is an important part of a responsible executive compensation program. Our program is designed to maintain and strengthen the company's ability to attract and retain key employees and directors who are largely responsible for the company's overall financial performance. We also believe that equity compensation directly aligns the interest of our employees with those of our shareowners. All proposals have been presented for shareowner vote. Any shareowner who hasn't yet voted or wishes to change their vote, may do so by clicking on the voting button on the web portal and following the instructions. If you have already voted by mailing in your proxy or have voted by phone or on the Internet and you do not want to change your vote, no further action is necessary. I will pause now for a few minutes while online voting is completed. [Voting]

Voting is now completed and the polls are now closed. The Secretary will now announce the preliminary results of the voting as tabulated by the judges of election. Michelle?

The judges of election has completed the preliminary tabulation of votes by the shareowners. The results are: regarding the election of 9 directors for terms to expire in 2021, Joseph Alvarado, Cindy Davis, William Harvey, William Lambert, Lorraine Martin, Sagar Patel, Christopher Rossi, Lawrence Stranghoener, and Steven Wunning have been elected directors. Regarding the ratification of the independent auditors for the fiscal year ending June 30, 2021, the selection of the firm PricewaterhouseCoopers LLP has been ratified. Regarding the nonbinding advisory vote to approve the compensation paid to Kennametal's named executive officers, it has been approved. Regarding the approval of the Kennametal Inc. 2020 stock and incentive plan, it has been approved. We will report the final voting results in a Form 8-K to be filed with the U.S. Securities and Exchange Commission within 4 business days. Larry?

Thank you, Michelle. We will now adjourn the business segment of the meeting and proceed to our reports. At this time, I'd like to introduce Christopher Rossi, our President and CEO, to provide some remarks. Chris?

Thanks, Larry. Good afternoon. It's my pleasure to share with you a brief overview of Kennametal's fiscal year 2020. This year presented one of the most challenging environments we have seen. It started with an industrial downturn early in the year, which was worsened by the challenges in the aerospace end market related to the 737 MAX and trickle-down effect on the supply chain. Then COVID-19 led to an even more difficult operating environment. In response to COVID-19, we quickly put in place protocols that protected the health and safety of our employees while allowing us to operate and serve our customers. The overall market conditions also necessitated that we take aggressive cost control measures to protect our margins and preserve liquidity. In terms of financial performance, our results were well below our expectations for the year, given the industrial downturn and effects of COVID-19. Organic sales declined by 18% for the year. Adjusted EPS for the year was $0.94, and adjusted EBITDA was $271 million with an adjusted EBITDA margin of 14.4%. Notably in fiscal 2020, we also substantially completed the capital spending on simplification/modernization and continue the footprint rationalization with the closure of 3 factories in the year as part of that program. These actions have significantly changed the cost structure of the company and lowered our breakeven point for improved profitability throughout the economic cycle. In fact, even with the weak market conditions we experienced in 2020, the savings benefits from our simplification/modernization program were $48 million for the year, up 12% year-over-year. By the end of fiscal 2021, we expect that the savings from inception of the program will reach approximately $180 million. Despite the challenging macroeconomic environment, I am pleased with the progress we made in FY '20 on our strategic initiatives, including commercial excellence, which will help us grow profitably, especially when markets improve. As I look ahead to fiscal year '21, we can assure you that we are staying focused on what we can control and preparing the company to outperform when markets recover. We will remain prudent in our approach to protect margins and liquidity, continue to advance our strategy, position the company for improved profitability and share gains and of course, continue to manage the business in the right way by living our values of safety, respect, integrity and accountability. In closing, the Kennametal transformation continued in fiscal year '20 in spite of the significant headwinds, and I'm confident that the steps we have taken will make the company stronger and drive shareholder value. There's still more work ahead, but also significant benefits to come as we execute our strategy in fiscal year '21 and beyond. I look forward to keeping you apprised of our progress, and thank you for your time and your continued investment in Kennametal.

Thank you, Chris. We will now proceed to the question-and-discussion portion of the agenda. During the meeting, shareowners were able to submit written questions on the web portal. In accordance with the rules of conduct established for the meeting, only those questions that pertain to the business of the meeting or the company's business will be answered. We will attempt to answer as many questions as time allows. [ Tristan Albert ] and Gilbert Lindsay of PricewaterhouseCoopers are in attendance today if there are any questions to ask of our independent registered public accounting firm. The Secretary will now facilitate reading the questions and comments received. Michelle?

Yes. Mr. Chairman, no questions or comments were received at this point.

Thank you. Since there are no questions or comments, we will now conclude the 2020 Annual Meeting of Shareowners. We appreciate your attendance. Are there any questions in the queue at this point, Michelle?

There are not, Larry. I think we can conclude the call.

If there are no further questions, we will now conclude the 2020 Annual Meeting of Shareowners. We appreciate your attendance. Thank you.

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect.