Q4 2021 Kennametal Inc Earnings Call
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Thank you operator, and welcome everyone and thank you for joining US review Kennametal fourth quarter and fiscal 2021 results yesterday.
The evening, we issued our earnings press release and posted our presentation slides on our website.
And it will be referring to that slide deck throughout today's call.
I'm Kelly Boyer Vice President of Investor Relations joining me on the call today are Chris Rossi, President and Chief Executive Officer, and Damon Audia, Vice President and Chief Financial Officer.
After Chris and Damon's prepared remarks, we will open the line for questions.
At this time I would like to direct your attention to our forward looking disclosure statement. Today's discussion contains comments that constitute forward looking statements and as such 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.
These risk factors and uncertainties are detailed and kennametal and SEC filings.
In addition, we will be discussing non-GAAP financial measures today reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our form 8-K on our website.
And with that I'll now turn the call over to Chris.
Thank you Kelly good morning, everyone and thanks for joining the call today.
For today's call I'll start with some general comments on the year, followed by an overview of the fourth quarter.
For their Damon will review, the quarterly financial results and our outlook and more detail.
And finally I'll make some summary comments before opening the line for questions now.
Now turning to slide 2.
Year 'twenty 1 despite the obvious COVID-19 challenges, we continue to operate safely to serve customers and invest and our commercial and operational excellence initiatives, including simplification and modernization.
We ended the year on a particularly strong note with positive momentum heading into fiscal year 'twenty 2 enabled by continued market recovery.
And advancement of our strategic initiatives that are transforming the company.
The additional simplification monetization savings in fiscal year 'twenty 1.
Brought the total savings achieved for the program to $186 million in line with the target range, we announced at our December 2017.
Mr Day, despite lower volumes than we envisioned at that time.
This is a notable achievement and.
While fiscal year 'twenty, 1 and they have marked the end of investment and our simplification modernization program. We will continue to derive benefits from this investment.
The structural cost savings for the program are already contributing to strong underlying operating leverage as volumes recover which we saw in Q3 and Q4 of fiscal year 'twenty, 1 and expect to continue and fiscal year 'twenty 2 and beyond.
In addition, our investment and modernized processes will drive future growth and share gains these investments enable higher levels of customer service and new product innovations. So recent examples of which include the Harvey 1 and Bill which was a 2020.1 Golden Edge Award winner for best product innovation at the China, Inc.
Our national machine tool Tradeshow and is helping us gain share and aerospace and general engineering and.
And our new index for billing platform mill for 2014 designed to improve customer productivity.
And share, especially and general engineering.
We also saw a major win and the electric vehicle space with our IQ Reamer, which was selected over top competitors by a major electric vehicle manufacturer for motor casings.
We would not have been able to make this tool without our investments and additive manufacturing as part of modernization.
And finally, our fit for purpose products, which as a result of modernization and.
And now I'll be produced at a price point and availability to win and a multibillion dollar application space and metal cutting that we previously had not focused on.
We are making excellent progress in this space for growth of our fit for purpose product portfolio outpacing the broader general engineering and market growth.
We're also seeing success and renewable energy applications, such as the machine of components for wind turbines and our infrastructure business segment is successfully leveraging their simplification and modernization investments to improve global reach and expand into mining adjacencies for.
Looking forward, we are excited and confident to deliver additional returns on our simplification modernization investment as.
As we leverage it for growth share gains and improved profitability throughout the economic cycle.
Now, let's review a summary of Q4 on slide 3.
We saw underlying momentum picking up across all our end markets and in the fourth quarter, we posted 29% organic growth versus a decline of 33% and the prior year quarter.
On a year over year basis, all regions and end markets posted positive growth except for aerospace.
It's worth, noting however that on a sequential growth basis aerospace was 1 of the leading and market.
Our adjusted EBITDA margin increased to 19, 2% drip.
Driven mainly by increasing volume and associated absorptions.
Incremental simplification modernization benefits, partially offset by the reversal of temporary cost control actions taken and the prior year.
Free operating cash flow was $66 million for the quarter and $113 million for the full year.
Adjusted EPS was <unk> 53 for the quarter.
Please turn to slide for to compare our margin performance to prior downturns.
Graph on the left shows the sales level on a rolling 4 quarter basis through the downturn.
Relative to our sales during the great recession.
While the graph on the right shows the corresponding adjusted operating margin.
And margins at the trough for 600 basis points higher through this downturn illustrating our substantially improved cost structure.
Also note that the current trend lines are showing an upswing and both revenue and margin.
And we believe that these trends will continue in fiscal year 'twenty 2 supported by the strong operating leverage from our simplification modernization investments as demonstrated on slide 5.
And see from the slide and a sequential basis, we increased operating income by 57%.
On a 6% increase and sales. This strong operating leverage is also evident on a year over year basis and is even more impressive when you consider the roughly $45 million of temporary cost actions, we took and the prior year quarter.
And with that let me turn the call over to Damon.
Thank you, Chris and good morning, everyone.
We'll begin on slide 6 with a review of our Q4 operating results for both the reported and adjusted basis.
As Chris mentioned demand trends improved significantly year over year and our results highlight the strong operating leverage we are now demonstrating from our continued focus on commercial and operational excellence.
For the quarter sales of 516 million improved 36% year over year and 29% on an organic basis from the low of $379 million in the fourth quarter last year.
Foreign currency had a positive effect of 6% on sales and business days contributed another 1%.
Adjusted gross profit margin of 34, 5% was up 680 basis points year over year.
Adjusted operating expenses increased year over year to $108 million, reflecting the reversal of temporary cost actions taken last year.
Nevertheless, we were able to hold our operating expenses at 29% of sales close to our target of 20% this quarter.
Adjusted EBITDA margin increased to 19, 2% up 150 basis points from the prior year quarter and adjusted operating margin of 12, 8% was up 400 basis points year over year.
The 19, 2% adjusted EBITDA margin is another validation point related to the successful execution of commercial and operational excellence.
The last time adjusted EBITDA margins were over 19% was in the third and fourth quarters of fiscal year 2019, and that was based on quarterly sales of approximately $600 million.
And were 15% higher than this quarter.
This is yet another data point of the structural cost improvements, we have made and confirming our ability to achieve the 24% to 26% adjusted EBITDA margin target as sales reached $2.5 to $2.6 billion level.
The improved year over year performance was related to higher volumes and associated absorption benefits from simplification monetization and a slight positive for price and raw materials.
Partially offset by roughly $45 million of temporary cost actions taken last year and a modest mix headwinds.
The adjusted effective tax rate and the quarter was 24, 3% for more normalized level than the previous year due to higher pretax income as well as a reduced effect of guilty and the effective tax rate this quarter.
The adjusted effective tax rate for the full year was approximately 23, 6% as expected.
We reported GAAP earnings per share of <unk> 41 versus a loss per share of <unk> 11, and the prior year period.
On an adjusted basis EPS was <unk> 53 per share versus <unk> 15, and the prior year quarter.
The main drivers of our adjusted EPS performance are highlighted on the bridge on slide 7.
The effect of operations this quarter amounted to positive <unk> compared to negative <unk> 68, and the prior year quarter and negative 33, and the third quarter of this fiscal year.
The operations bucket turn positive for the first time since Q3 of fiscal year 19, reflecting improving volumes offset by approximately 26 related to the reversal of temporary cost actions and effect last year.
Simplification monetization contributed an incremental 13th and the quarter, bringing the total FY 'twenty, 1 and simplification modernization savings to <unk>, 68, or <unk> $85 million and $186 million for the total program.
The detailed full year results can be found in the appendix.
Slides 8 and 9 detail the favorable performance and continuing progress we have achieved on our initiatives and our segments this quarter.
Metal cutting sales increased 30% organically versus a 35% decline and the prior year period.
All regions posted year over year sales increases with the largest increase and EMEA at 37% followed by the Americas up 30% and Asia Pacific at 23.
The slightly lower sales growth and Asia Pacific reflects the earlier timing of the recovery in China last year as well as the ongoing challenges in India. This quarter due to a surge in COVID-19 cases.
From an end market perspective on a year over year basis for increasing strength and demand is broad based.
Transportation was the strongest and market with 50% growth followed by general engineering up 35%.
Energy was up 4% year over year, despite slowing demand in China due to the reduced wind subsidies.
Although aerospace declined 7% year over year. It showed the strongest sequential improvement up 10%.
In addition to aerospace on a sequential basis General Engineering also showed strong signs of improvement and energy was slightly positive.
Transportation declined 11% sequentially due to the temporary supply chain challenges, which force transportation customers to slow their metal cutting factories like engine plants to better align with their overall production.
Based on comments from our customers. We expect these challenges to persist into our fiscal first quarter and to start to improve sequentially thereafter.
However, the situation continues to be fluid and different customer by customer.
Adjusted operating margin improved 540 basis points to 11, 7% compared to 6.3% and the prior year quarter.
The increase was primarily driven by volume and associated absorption simplification monetization benefits and price and raw material benefits, partially offset by temporary cost actions taken last year and a modest mix headwind.
Turning to infrastructure for on slide 9.
Organic sales increased 28% year over year versus a 29% decline and the prior year period.
FX and business days contributed positively to sales and the amount of 5% and 1% respectively.
Regionally the largest increase year over year was and the Americas at 35%.
And then EMEA at 29%.
And Asia at 14%.
By end market. The results were primarily driven by general engineering, and energy up 42% and 41% respectively.
Earthworks was up 12%.
The bright spots and Earth works for this quarter were in the Americas, and agriculture, and forestry and and EMEA construction.
Adjusted operating margin increased to 14, 5% from 12, 7% and the prior year quarter.
The improvement was driven by higher volumes and associated absorption simplification modernization benefits.
<unk> positive effect for price and raw materials, partially offset by temporary cost actions taken last year and mix.
Now turning to slide 10 to review, our balance sheet and free operating cash flow.
We continue to maintain a very strong liquidity position healthy balance sheet and debt maturity profile.
At fiscal year, and we had combined cash and revolver availability of approximately $850 million.
Primary working capital of $602 million was relatively flat year over year and down approximately $13 million sequentially.
On a percentage of sales basis, it decreased to 33, 4% as our focus on working capital during the year continued to strengthen our free operating cash flow even net sales have increased.
Our primary working capital target remains 30%, which we expect to approach by the end of this fiscal year.
Our fourth quarter free operating cash flow was $66 million a significant year over year increase reflecting higher income due to volume and strong operating leverage.
This is similar on a full year basis with free operating cash flow of $113 million compared to negative $18 million last year.
Net capital expenditures for the quarter were $30 million, a decrease of approximately $8 million from the prior year, bringing the total net capital spend for the year to $123 million in line with our expectations.
We also paid the dividend of $17 million and the quarter.
For full balance sheet can be found on slide 18, and the appendix.
Now, let's turn to slide 11 to review our outlook and more detail.
Starting with the first quarter, we expect sales to be and the range of $470 million to $490 million.
At the midpoint this implies a year over year growth of approximately 20% and.
And approximately 7% sequential decline, which is stronger than our normal Q4 to Q1 pattern.
At the midpoint of this sales outlook, we've assumed there will be no significant sequential change and the supply chain challenges and transportation.
We expect these challenges to persist into our fiscal first quarter and to start to improve sequentially. Thereafter. However, this situation continues to be fluid.
Also we do not expect to see demand adversely affected from additional lockdowns associated with the COVID-19 Delta variant.
Lastly, we are planning for the typical EMEA first quarter extended vacation and summer shutdowns for our customers.
Assuming our current outlook, we expect adjusted operating income to be a minimum of $45 million and to improve by at least 300% year over year, Despite the $15 million and Q1 year over year headwinds related to temporary cost actions taken last year.
Also we expect the adjusted effective tax rate to be and the range of 25% to 28% and.
And depreciation and amortization will increase 3% to $4 million year over year.
Lastly, we expect free operating cash flow to be slightly negative, which is typical and the first quarter.
Regarding the full year visibility remains limited and the current environment, but at this time, we would expect to exceed normal sequential growth patterns throughout the year.
Furthermore, we are confident that we will continue to achieve strong annual operating leverage and any growth scenario.
Keep in mind this annual operating Leverages, excluding approximately $25 million of year over year headwinds from temporary cost actions taken last year of which approximately $15 million will occur in Q1, and the remaining $10 million in Q2.
Also it is important to note that leverage may vary quarter to quarter for.
For example in the first quarter after adjusting for temporary cost actions. The operating leverage is expected to be higher than our than our normal annualized level. As Q1 has the greatest combined effect of raw materials and pricing compared to the remainder of the year.
Moving onto other variables for the full year, we expect and adjusted effective tax rate of 25% to 28%.
Depreciation and amortization are expected to increase 15% to $20 million year over year to a range of $140 million to $145 million.
Capital expenditures will be consistent with this year and and the range of $110 million to $130 million.
As I mentioned earlier, we expect primary working capital to trend towards our 30% goal by the end of the fiscal year.
Together this will translate to free operating cash flow generation at approximately a 100% of adjusted net income in line with our long term target, which further demonstrates our progress and transforming the company by continued execution of our operational and commercial excellence initiatives.
And with that I'll turn the call back over to Chris.
Thank you David before we open the line for questions I'd like to make some closing remarks, please turn to slide 12.
Looking ahead and fiscal year 'twenty 2 we're excited to build off Q4 as momentum by leveraging our modernized footprint and strong operating leverage to drive growth and higher profitability as well as cash flow at approximately 100% of net income.
We expect the end market recovery and continue.
And our visibility remains limited right now we expect growth to outpace our normal quarterly sequential trends throughout the year.
This sales performance will be driven both by market growth and our commercial excellence initiatives aimed at gaining share and targeted end markets, including growth of our fit for purpose offerings.
In summary, I believe fiscal year 'twenty, 2 will be a year, where we further demonstrate the ability to achieve our adjusted EBITDA target when sales reached $2.5 million to $2.6 billion by continuing to execute on our strategic operational and commercial excellence initiatives.
And I look forward to further outlining the details of these strategic initiatives and our next Investor day, which is tentatively planned for early next calendar year.
We will provide more details on that as we get closer to the day and with that operator. Please open the line for questions.
Thank you.
I'd like to ask a question. During this time simply press Star then the number 1 on your telephone keypad.
And you'd like to withdraw your question. Please press Star then the number 2.
Our first question comes from.
And then a volkmann from Jefferies. Please go ahead.
Hey, good morning, guys.
And I wonder if we can spend a minute on sort of the distributor channel. What are you seeing there relative to growth and also any comment on kind of inventory levels or shortages or lack thereof, and the distributor channels specifically thanks.
Yes.
And.
Yes in terms of restocking.
Steve.
I think that.
And metal cutting and we're starting to see modest restocking activity, mainly in Asia Pacific and EMEA and.
A little more modestly and the U S. But overall I think customers still have this attitude of.
Being a little bit cautious and trying to.
<unk> inventory with demand.
So that's what we see there on the on the infrastructure side, we think the customer inventory.
Levels appear normal across really all the end markets.
But again, the big the big issue for metal cutting is.
As you know and this industry. When there is a recovery usually there can be a snapback caused by a lot of restocking, but we don't see that and see a little bit more methodical approach, but still moving in the right direction.
Okay, Great and then maybe David can you just take us through some more detail on kind of price cost it looks like it was positive in both segments and can.
Can you just sort of take us through that and your outlook for the next few months.
So we were excuse me, we were positive and both of the business units marginally and the fourth quarter as we had mentioned on the third quarter call. The team had put some pricing actions in place and both sides of the business and the raw materials increases that we were seeing normally have about a 2 quarter lag for us.
And so we did see some positive price versus raws and Q4 I think as you heard in my and my preset remarks here, we will see that benefit as well here in Q1 as those pricing actions are now in place and the first quarter. The raw materials, we're really not we're really starting to flow into our cost of goods sold until Q2.
<unk> and.
And so our expectations are that price versus raws as we've said in the past that price will offset raws, but you will see a slight benefit here in Q1.
Great. Thank you so much I'll pass it on.
Okay.
The next question comes from Steven Fisher from UBS. Please go ahead.
Great. Thanks wondering if you could just talk a little bit about how mix affected margins and this quarter and what you expect over the next couple of quarters or whenever you have visibility to and I know there has been.
And relative drag from auto strength versus.
Aerospace and energy, but it seems like the tide might be turning there. So maybe you can just kind of give us a little color on mix.
Sure.
And in fact.
<unk>.
Q4 results and a little differently than what we had thought it's 1 of the reasons why we had better and better margins and particular, Stephen we thought that for metal cutting that we knew that transportation would be would be down and affected by the chip issue, but we're trying to estimate what that might look like and.
We underestimate the fact transportation was actually lower than we thought but the good news is that general engineering was actually stronger than we thought and so.
General Engineering and carries higher margins and transportation you saw improved margin performance on metal cutting from what our expectations were and something similar happened and infrastructure.
Normally the fourth quarter is the high construction season and well.
And that's good business, it's actually less profitable than the zone.
And energy and oil and gas surprised us and not only surprised us was surprised our customers because we do have.
A fair amount of detail customer voice, voicing and and it surprises them to that oil and oil and gas bounce back as strongly as it did so again since oil and gas is higher margins that helped to raise the margin above what we thought was going to happen on on the infrastructure side.
Okay. That's very helpful and also just maybe to follow up on Steve's question.
Just kind of looking to understand how much the operating leverage could be less robust and the second half of the year versus the first half I am not sure. If there's any way you can.
And of quantify that but maybe also related if you could just give us a sense of what's happening with tungsten capacity.
And I imagine that's going to have and impact on it on what the direction of that input cost might be.
And I'll, let didn't name and speak to the leverage share but relative the tungsten.
And we are expecting the tungsten prices will.
And will increase.
As demand increases, but 1 thing that we have.
We factored in in terms of our outlook.
So far we've factored in what we think tungsten is going to be and thats kind of and our estimate, especially for the for the first quarter.
And beyond that we also know that this industry and we've demonstrated in the past that we.
And if theres, a big move and tungsten prices, we have the ability to raise prices and adjust accordingly, and thats kind of been the.
The history of this of this type of industry, where price does coffers raws and as you know on the infrastructure side of the business. Some of that is some pricing is actually index to the price of.
And so we feel pretty good that even as.
ADT rises.
Good news is is that if it's not going up that means demand for our product is going up but we also believe and we can cover that with price.
Over the course of the year.
And you want to talk about the operating leverage.
Thanks, Steve going to the operating leverage what we've said is we would expect to have strong full operating leverage here for the full year and I think as we've said on some prior calls it's 40% plus some absorption. So we've been using that 50% sort of rule of thumb and so as we look at full year FY 'twenty, 2 we would expect to lever.
<unk> at around that 50% Mark I think to your point, we will see a little bit higher leverage here and the first quarter and the first half and then as some certain cost come back into the system. So we go through our annual Merit will have inflation that will deal with travel will start to flow back into the system throughout the course of the year.
At least as we sit here today again very hard to predict for second half of our fiscal year, but we would expect fuel probably slightly weaker leverage and the second half versus the first half given some of those costs that would flow back in.
And I think overall Stephen for that for the year.
The model and many of you have been using as the sort of 40% plus some fixed cost absorption and some reviews and around 50%. So we.
We would expect that even though the margins and the operating leverage might be higher and the first half net across the year net 50% model that some are you using as a pretty good estimate.
Terrific, Thanks very much.
The next question comes from Julian Mitchell from Barclays. Please go ahead.
Hi, good morning.
Thank you for that Kelly, just now and the operating leverage I just wanted to.
Focus on a little bit and maybe help us understand.
Within that sort of 50% ish number for the year and understand its higher than that and the first half by the sound of it.
Embedded and maybe in the half and the year from pricing and raw materials.
You noted I think a 100 bps.
And our faith in Q4 for.
Raw materials, but if we look at the sort of combination of price and rule was how much of a margin tailwind is that embedded in the guide please.
Yes.
We don't give we don't give specifics related to pricing and raws, but I guess for what I would tell you is.
On the raw material cost increases that we're seeing with tungsten and escalating really won't flow into our cost of goods sold starting until Q2, and then it would sort of be sort of a run rate at that point and time the pricing activities that the teams have put in place here started either in late fourth quarter or early first quarter.
And so youll start to see that materialize here in the first quarter and so again and what I would tell you as we think about from a leverage standpoint price and raws will be a positive contributor to the leverage here of the delta between those 2 and the first quarter and then as that raw material cost starts to increase into our cost of goods sold it will indicated.
So more to the second quarter and the back half.
That's very helpful. Thank you.
And just sort.
1 day around the the operating leverage across the 2 divisions.
I think you had called out some surprises on mix, specifically and the fourth quarter within metal cutting and infrastructure, but as you're looking at those sort of.
Mix today, and your assumptions, how youre thinking about operating leverage between the 2 segments for the balance of 'twenty 2.
Yes, I think what I would say is.
Tom.
We've talked about before Julien.
Metal cutting and is more labor labor intensive.
Which is 1 of the reasons why we're so focused on modernizing factories were less dependent on labor to need and we were before but.
But.
You need you still need more volume to run through those factories.
A larger and larger sales and expense. So we would expect and metal cutting margins will overtake the infrastructure margins by the time, we get to the end of the year based on our current volumes.
And Andy.
Great. Thank you.
The next question comes from Joel <unk> from BMO capital markets. Please go ahead.
Hey, guys have gone and.
Good morning.
I Wonder if we could take a little bit of a different direction and can you can you highlight some of the markets or the customers, where you feel like you're really gaining momentum because this is just sort of.
Tangentially related to you're not great visibility for for 2022, So I just wondered if maybe some other pieces you might have better visibility on some of the pieces.
Some of the end market pieces is that what you mean, yeah, our customers whichever direction you feel like you've had really good discussions and youre, gaining momentum and all of a sudden and I really noticing all the changes you've made and all the improvements and they are really buying into it.
Yes.
Well look.
And the general engineering space.
And we launched our fit for purpose product portfolio.
Which.
And <unk> customers and all markets, but as you know they have and sort of.
And general engineering, and they have high and high performance needs for tooling, but they also have what we call fit for purpose and fit for purpose segment was never 1 that kind of amount and really focused on and as I said in my opening remarks, it's basically because without it without a modernized footprint, we really werent at the right price point and Couldnt couldnt deliver with the right availability.
Ability so.
Now that now that where we are.
And nearing the end of our modernization journey, we're able to sell at the right price point and still make the margins that we feel are acceptable and this business and have the right availability and customers because they're they have as they always have this need for this to me, but they never were necessarily looking to kennametal theyre starting to see.
See that we can offer this tooling, we already have the brand recognition and so they feel they feel good about that and general engineering.
We expect is going to continue to strengthen from Q4 to Q1 and throughout the year across all the regions. So every region, whether it's Americas, EMEA and Asia Pacific We have examples for.
For a for instance, where.
We had and existing distributor, we've now giving them access to this portfolio and we're displacing we're displacing some of their other metal cutting products with those with those customers and in the case of.
Brand, new brand new customers and in some cases feedstock we've added some channel access to those customers and again, we're now selling new to them and we also have a program where we have targeted accounts.
We actually have a list of top accounts and general Engineering Aerospace and fact energy and we're looking at our entire product portfolio and saying that.
You currently are only buying ex amount from us and we want a larger share of your wallet.
And so we have we are keeping track of the wins and no spaces, where we can actually measure that and some customers. We've gone for maybe 5% share to 30% share because.
And the way, we approach them and and also in part because we now can offer this fit for purpose tooling. So those are some examples.
When I said in my opening remarks that we're encouraged by the traction we're getting fit for purpose and also just generally speaking this is modernized footprint, which is helping us to.
And actually and things to our products and innovations that we couldnt have we couldn't have added before because we simply could manufacture them and then also the increased availability and customer service level and the price points. All of that is all that equals that we feel like we're gaining we are gaining share and on the uptick in that direction. If you will.
And that's awesome and.
Then with your balance sheet rapidly repairing and can you talk a little bit about.
Youre looking or youre going to look at acquisitions or are you going to be more focused on share repurchase and and in terms of acquisitions, what what what would make sense or maybe it doesn't make sense at this point because you don't want to layer on to all your modernization benefits.
Yes, I would say in terms of the capital allocation I think the best use we feel that the best use for our and our excess cash is continuing to invest and the business.
Wow.
We launched this initial simplification modernization program.
And we're going to continue to lever that it's not like we're going to stop investing and internal processes and.
Of course every 1 of those has to have the.
Required returns so we think that investments there to continue to improve our manufacturing operations and also advance our technologies and also advance things like from a commercial excellence perspective with.
And with digital and digital Commerce, and these type of things for digital connectivity to customers. Those are all good areas that are going to help us drive growth and improve the underlying business I think next is.
It is worthwhile looking at acquisitions.
And my philosophy on that is they have to be well aligned with your strategy. So probably this is going to be more of a bolt on scenario, where we can actually have an opportunity to target a specific market segment, and maybe attack that market and more quickly or grow faster or maybe even augment our technology portfolio, but we're going to stay.
And stay inside our fairway, if you will and then the last thing is more of a direct return to shareholders and.
And I was 1 of the reasons why we have and.
Now for the share buyback, it's a vehicle by which we can do that we for sure and at least helped to offset dilution.
But I would say that's kind of the priority sequence invest and ourselves and the organic business.
Don't shy away from acquisitions, but make sure, they're they're strategically aligned and and your fairway.
And you can get them at the right price and then also more of a direct shareholder return.
That's the way we're thinking about it.
Well that's great. Thank you so much.
The next question comes from Dillon coming from Morgan Stanley. Please go ahead.
Great and good morning, guys. Thanks for the question I guess just to start this might be a bit kind of harder to quantify but just curious if you can kind of give us a sense of what growth would look like over the next quarter and some of these issues and transportation moderate maybe a bit faster than expected and maybe that's already accounted for and the high end.
And the pilot and the outlook range, but.
Curious what your view is in terms of whether or not those for those issues and supply chain and the transportation side actually do kind of improve faster than expected.
Yes, I think if I could if I could just use the first quarter as and.
And as a gauge for the for the full year.
We have we're expecting to transportation.
A decrease from Q3 to Q4, largely because of the supply chain disruptions and.
And we think that that's going to stay at about the same level as we saw in Q4, so to your point deal and if it actually alleviates more and more readily than.
We should move towards the higher end of our guidance.
And that actually is something you can think about for the whole year. We did say that we should we should outperform.
Given our current and we should be able to perform given our current view of what the markets look like and it is it is it is a challenge because there's a lot of uncertainty.
But generally we feel like given the uncertainty we know about now we should be able to for the full year achieved sales and are in excess of our normal sequential growth.
But obviously if.
And if markets become stronger or some of the supply chain shortages.
Our alleviated more readily and thats.
The only thing that does is help us and drives us towards that towards the higher and.
And it's hard to tell how that's going to play out and I really think that if things are going to go into direction, they're going to go into direction and things get better faster, but we're.
It's hard to predict which is why we didn't give you a full year outlook.
Yes.
Unstainable and appreciate that color.
And then kind of last question for me I think you guys had called out wind and a few times in your prepared remarks, and I'm just curious what level of growth youre seeing and out of that business. Today I guess first of all on the context and some of those government subsidy headwinds you called out and then I guess.
And what Youre kind of penciling in for fiscal 'twenty, 2 in terms of growth out of that business.
Yes, we.
And we talked about.
<unk>.
And the subsidy has gone away and China.
Which has kept the growth, but the growth is still significant it's still it's still growing quite significant year over year.
It's a good chunk of the energy business that we report and metal cutting and Asia. So while the subsidies arent there it's still it's still growing and a growth engine for us So we feel like.
We'd love to have the subsidies back, but we still feel like for this great business and it's continuing to grow and our.
Over certainly over.
And.
Well I don't want to give you an exact number but it's.
And substantial growth.
Got it thanks for the time Chris.
The next question comes from Steve Barger from Keybanc capital markets. Please go ahead.
Hey, good morning, guys.
Chris going back to the commercial excellence and the increased opportunity coming from fit for purpose. What do you think your growth rate should be relative to domestic and global industrial production and is there a relationship you think about there for gauging performance.
Yes.
1 of the measures and what we're using is we're looking at how that fit for purpose portfolio.
And for US is because it's a fixed portfolio, we know exactly what we're selling in any given and we kind of give a point.
And we.
And we also have.
Models of how general digital and your overall general engineering market is moving and including including our existing kennametal brands that were selling into that space.
And the fit for purpose is out is outpacing that growth.
And it's not outpacing it by a small amount is actually quite significant now we're starting we're starting with a low base but.
And we measure this quarter after quarter and we're very encouraged by the fact that the.
The growth is outpacing fit for purpose and it would be and the normal general engineering space and that gives us a good indication.
We're gaining share plus we also.
We also as I said, we kind of track this customer by customer. So we kind of know why we're winning and where we're winning and and we know we're picking up share with those customers. So that's that's our gauge of how were measuring success. If you will are getting and understanding that we're moving the right direction and that fit for purpose space.
So I guess, if you think about the portfolio on a consolidated basis.
We on the outside are assuming that we see IP growth of 4% or pick a number.
What do you think the relationship to Kennametal as growth is that is it in line with IP is at 2 times and any kind of framework that you think about.
Yes, I would just maybe just a couple of things if you are looking at Ipi.
And that really is as we as we as we use that.
As 1 of the inputs into our our growth model and mostly would affect the general engineering space.
And.
So if you had if you had a specific ipi.
And mind, I'd say like 5%.
That would that's a little that's a little bit more than what we're assuming and R and.
Our full year kind of forecast.
So I, just and I just through 5% out there and they as an example number if you're if you think ipi is going to be higher than that and then.
And we're going to see general engineering beyond what we've given you. If you think it's going to be slightly less than that and that you might be closer to a range that we're in.
I understand and I know, it's hard to predict the back half, but just thinking about that and using your assumption of continued end market strength and no new shutdowns is it fair to say the 11% revenue growth rate expected and consensus for FY 'twenty, 2 as reasonable or do you think that there is more or less opportunity as you go.
And in the back half.
Yes, I mean I was I was kind of looking at if you just took the middle of our range for for Q1, and then did our normal the middle of the range of our normal sequential pattern.
And 8%.
Growth and we said, we're going to be high and we said, we're going to be higher than that.
And if you just use Q1 typically were down Q for Q1 about 10% on average and midpoint of us with our guide.
<unk> would be somewhere around 7%. So you can pick up your view on 300 basis points better there. So youre 11, 11% sort of I.
Single digits low low.
And low double digits, I think is kind of rate and the right ballpark and again if the.
And the supply chain strength constraints turn out to be not as bad and all of those kind of things then that just helps to push it up if you will.
Sure understood. Thanks for the.
For the color.
The next question comes from Walter Liptak from Seaport. Please go ahead.
Hey, Thanks, Good morning, guys good morning.
I wanted to ask you about.
Maybe a follow on some of these for.
Full year.
And longer term growth.
Questions, but.
And the infrastructure Bill.
And.
That's on the table.
What do you think the benefits would be for Matt It looks like there's going to be 5 year Road Bill that comes back and you've got some exposure there and.
And some of the other infrastructure and apps.
And the construction markets.
How are you thinking about that and maybe as you get it.
For the end of 2022 or into 2023.
Yes, the infrastructure Bill is.
As a net positive for us for sure.
And a little bit on how much money is allocated to road rehabilitation, but we're not just road rehabilitation and we're also involved and trenching and drilling and so even when you talk about expansion.
The internet and stuff that requires a lot of.
Trenching for example, so we're quite optimistic that it might actually happen.
People have been talking about it for a long time, but that will be that will be a very good good thing for our infrastructure business.
Okay, great. Thank you.
The next question comes from Adam Uhlman from Cleveland Research. Please go ahead.
Hey, guys good morning.
And.
He's been on the working capital for the year I guess what are the main levers that you are looking to port.
To get to 30% of sales by year end.
Yeah, I think Adam what I would tell you that generally that we're not going to youre going to see most of our inventory relatively flat. It's more that the sales growth as we expect here over the course of the year will help reduce the percent.
As a percent of sales, but I would expect a slight use of work of slight use on AR and inventory offset by a slight positive. So when you look at the numbers that I talked about on the call trending to that 30, 30% Mark you start to see working capital is maybe a slight use and cash for off for fiscal year 'twenty, 2 but not.
And material from an overall statement overall use standpoint.
Okay Gotcha.
And then.
And unrelated to that but can we go back to what you guys are seeing and the business in China and I guess outside of.
Wind energy market I guess what.
What sectors are you.
Cited about and seeing optimism and maybe are there signs of slowing and other centers that you serve.
Yeah.
Yes, I think in terms of China in particular, we still see the general engineering as it is on an uptick there.
They were obviously also affected by.
Sure.
Shortages from transportation, but in fact.
For Q3 to Q1, we saw we saw a decline we think thats going to kind of level out here Q4, and Q1, but then transportation should be back on track there. So.
China for Us is.
While it may have may have kind of slowed a little bit here because of the transportation disruption. It's still it's still on an upward trajectory and general and remember they're.
And their growth rate.
Nate may slow over time, and maybe a little bit.
May be it may be slowing and relative to other markets, but there are also.
Further along in terms of the recovery they started and they started earlier, but.
But we still think that.
It's going to be very positive for us going forward this year.
Okay. Thanks.
This concludes the question and answer session I would like to turn the conference back over to Chris Rossi for closing remarks.
Thanks, operator, and thanks, everyone for joining the call today.
As we detailed today on the call we've made significant progress this year on our transformational journey journey.
We stayed focus on advancing our strategic initiatives and demonstrated the type of leverage that we contained with our newly modernized equipment as volumes recover.
And look forward and hosting the Investor day early next year to present more details on our strategic plans for continued profitability improvement and growth outpacing markets and.
It will also be and opportunity for you to meet our segment Presidents and Chief Technology Officer, and view some of our newest product innovations and.
And finally, please be on and look out for our second annual ESG report, which will be released along with our annual report and proxy later this summer and.
As always we appreciate your interest and support for Kennametal.
And if you have any questions. Please reach out for Kelly. Thank you.
A replay of this event will be available approximately 1 hour. After its conclusion, Texas for replay you may dial toll free within the United States 8.7 and 7.3 for for 75 to 9.
And the United States you May dial for 12317008, you will be prompted to enter the conference I'd.
101, and 39109, and then the pound or hash symbol you will be asked to record your name and company. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your line.
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Thanks.
And then.
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