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Kennametal expects flat sales next year, hopes to boost profits through cost-cutting

| Tuesday, Sept. 13, 2016, 4:30 p.m.

Kennametal Inc. will rely on cost cutting to improve profitability next year amid flat sales growth, as the struggles of its oil and gas customers continue to weigh on revenue.

The Downtown-based toolmaker is not expecting any bump in sales next year but has forecast adjusted earnings per share of $1.10 to $1.40 in fiscal 2017, compared with $1.11 in the fiscal year that ended June 30, executives said Tuesday at the International Manufacturing Technology Show in Chicago.

Low oil and gas prices have led to falling demand for the drill bits and tools sold to energy companies, which account for 17 percent of Kenna­metal's $2 billion in sales.

Executives were not available Tuesday for an interview, but newly appointed CEO Ron DeFeo told the Tribune-Review last month that he intended to step up pressure on expense cuts while demand from the energy sector recovered.

“We have to pay attention to the pennies,” DeFeo said. “You pay attention to the pennies and they add up to dollars.”

Kennametal expects to save at least $100 million by eliminating 1,000 jobs by the end of 2017, and is hoping to find up to $300 million in additional savings over the next 2 to 3 years by becoming more efficient, according to slides presented Tuesday. The slides did not offer specifics on how the company would become more efficient.

Flat sales would be an improvement from last year. The company reported a 21 percent decline in fiscal 2016 revenue.

Kennametal's outlook may be better than the company is forecasting, said John Tumazos, an analyst and owner of Tumazos Very Independent Research in New Jersey. Tumazos said he expects to see a recovery in demand from the energy and mining industries because prices for oil, gas, iron ore and other metals have bounced back. Oil and natural gas prices have nearly doubled since February and March.

“There's a chance that Kenna­metal's revenues could rise 5 to 10 percent next year given that some of the metals prices and energy prices are starting to rise,” Tumazos said.

Brent crude oil prices are forecast to hit $52 per barrel in 2017, up from an average of $43 per barrel this year, according to the U.S. Energy Information Administration. And benchmark natural gas prices are expected to rise to $2.95 next year, from $2.50 in 2016.

But the bounce in oil prices is far from certain. On Tuesday, the International Energy Agency said global oil demand growth is faltering. The report sent the price for the benchmark Brent crude down $1.23, or 2.55 percent, to $47.09.

Kennametal also is looking to diversify its customers and sees promise in pushing more heavily into aerospace and transportation. A $305 billion highway bill approved last year will boost demand for road projects, and aerospace customers require new tools to cut harder materials being used in airplanes.

DeFeo told the Tribune-Review last month that he hoped to grow the company's market share in the $2.5 billion aerospace market. Currently, Kennametal's market share in aerospace is 8 percent, and it has a 10 percent share in transportation.

DeFeo's efforts to lead Kenna­metal's turnaround come ahead of the company's annual meeting in Latrobe on Oct. 25. It will be DeFeo's first annual shareholder meeting as CEO. He came on board in February when his predecessor, Don Nolan, was dismissed after a 15-month tenure at the helm.

Nolan was paid $3.8 million in total compensation last year, mostly through stock awards, according to proxy materials filed Tuesday. His compensation included severance pay of $382,500.

Chris Fleisher is a Tribune-Review staff writer. Reach him at 412-320-7854 or cfleisher@tribweb.com.

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