Q2 2022 Kennametal Inc Earnings Call
[music].
Good morning, I would like to welcome everyone to Kennametal second quarter fiscal 2022 earnings conference 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. If you would like to ask a question. During this time simply press. The Star then the one key on your telephone keypad, if you will.
To withdraw your question. Please press Star then the number two please.
Please note. This event is being recorded I would now like to turn conference over to Kelly Boyer Vice President of Investor Relations. Thank you operator, welcome everyone and thank you for joining us to review <unk> second quarter fiscal 2022 itself.
Yesterday evening, we issued our earnings press release and posted our presentation slides on our website, we will be referring to that slide deck, Joe 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 statements.
Risk factors and uncertainties are detailed in kennametal SEC filings.
In addition, we will be discussing non-GAAP financial measures on the call 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 turn the call over to Chris.
Thanks, Kelly good morning, everyone and thanks for joining us for today's call I'm going to start with some general comments on our continuing strong results.
And highlight some recent strategic wins, followed by comments on our expectations for Q3 and the full year.
Damian will then go over the Q2 financial results and outlook in more detail.
Finally, I'll make some summary comments before opening the call for questions.
Beginning on slide two of the presentation.
We posted strong results again this quarter by executing our commercial and operational excellence initiatives.
Underlying demand continue to improve in all our end markets this quarter with the exception of transportation.
Our sales performance was within the range of our expectations as discussed on our last quarterly call, increasing 11% organically year over year and in line with our normal sequential seasonal trend despite challenges in transportation in China.
By end market the strongest year over year performance was in aerospace and energy both at 24% growth followed by general engineering at 14%.
Transportation decreased by 10% year over year, which was worse than we expected.
While we believe underlying demand remains strong in transportation supply chain availability is still an issue due mainly to chip shortages and it's our expectation that chip shortages will likely continue through the balance of our fiscal year.
On a regional basis, we saw year over year growth in all our regions led by the Americas at 16% and EMEA, 9%.
Asia Pacific also grew but at a slower pace of 3%, reflecting weakness in China, mainly in transportation and energy related to wind turbines. The rest of Asia Pacific performed well during the quarter.
Despite these isolated end market and regional challenges, our commercial and operational excellence programs drove strong operating leverage once again this quarter adjust.
Adjusted EBITDA margin improved by 320 basis points year over year to 16, 2%.
Operating expense as a percentage of sales was effectively flat as compared to the prior year at 22% or.
Our target for operating expense remains at 20%.
Adjusted EPS improved significantly to 35 compared to <unk> 16 in the prior year quarter.
And free operating cash flow was $22 million.
We also bought back $23 million of shares this quarter up from $13 million in the previous quarter, reflecting the confidence we have in our growth and margin improvement initiatives and free cash flow generation.
Looking ahead, we believe market demand is strong in all end markets. However in transportation, while the underlying demand for vehicles remains strong the majority of our customers production continues to be affected to varying degrees by supply chain bottlenecks.
And we believe this effect is likely to continue for the balance of our fiscal year.
Nevertheless, overall, we expect Q3 sales to be up 3% to 7% year over year, which is above our normal sequential growth pattern of 3% to 4% and highlights the relative strength of our end markets outside of transportation.
Inflation supply chain bottlenecks and other uncertainties presents some challenges to our own operations, but we believe to a far lesser extent than some of our customers and other manufacturers.
In that regard we benefit from our in region for region local supply chain setup.
In addition, our proactive pricing approach continues to dampen the effect of inflationary pressures. For example, we saw approximately a $12 million increase year over year and material cost, but still maintained positive price versus raw in the quarter, which David will provide more details on later.
As always we are focused on what we can control and despite the market uncertainties. We remain confident in our ability to drive strong underlying operating leverage for the full year.
Now, let's turn to slide three for an update on our commercial excellence initiatives aimed at gaining share.
Some of our recent wins are shown on this slide underscoring that our initiatives are continuing to deliver results by leveraging our application engineering expertise product innovations and improved customer service.
We posted another major win with a large auto manufacturer in the EV space further strengthening our leadership position.
We also saw excellent performance with an aerospace supplier leveraging our product innovations and technical support to convert customers to kind of metal solutions.
We continue to see share gains in the renewable space and wind energy due to our innovative products focused on increasing customer productivity.
Finally in infrastructure, we posted a large win in process industries, our proprietary Pelletizing die design and manufacturing techniques beat the competition and supporting our customers large expansion project.
Those are just a few examples of how our product innovations and commercial excellence initiatives are driving share gains.
Together with our operational excellence initiatives, we are confident we will continue to drive growth.
Strong operating leverage and improved margins and with that I'll turn the call over to Damien who will review the second quarter financial performance in more detail.
Thank you, Chris and good morning, everyone I'll begin on slide four with the review of Q2 operating results on both in reported and adjusted basis as Chris mentioned, we continue to leverage our modernized footprint to drive strong results this quarter.
Sales increased by 10% year over year, and 11% on an organic basis with business days contributing negative 1%.
On a sequential basis sales increased by 1% in line with the normal Q1 to Q2 trend despite more challenging conditions in transportation in China.
Adjusted gross profit margin increased 360 basis points year over year to 31, 8%.
On a sequential basis adjusted gross profit margin decreased 170 basis points as expected, mainly due to higher raw material costs flowing into the P&L and the timing of merit increases.
Adjusted operating expense as a percent of sales was relatively flat at 22% compared to the prior year.
Adjusted EBITDA and operating margins were up significantly by 320, and 390 basis points respectively.
The strong year over year margin performance was due to higher volume and associated absorption price more than offsetting raw material increases mix as well as strong manufacturing performance, including some remaining simplification modernization carryover benefits.
These factors were partially offset by the removal of $10 million of temporary cost control actions taken in the prior year.
The adjusted effective tax rate in the quarter increased from 24, 7% to 26, 5% year over year.
Reported GAAP earnings per share of <unk> 37 versus <unk> 23 in the prior year period.
On an adjusted basis EPS was <unk> 35 versus 16 in the prior year.
The main drivers for our improved adjusted EPS performance are highlighted on the bridge on slide five.
The effect of operations this quarter were <unk> 18.
Including approximately <unk> simplification modernization carryover benefits and the negative effect of approximately 9% from $10 million and temporary cost control actions taken last year.
Factors contributing to the substantial improvement in EPS year over year are the same as the drivers of our strong margin performance this quarter that I just reviewed.
Taxes affected the quarterly EPS year over year by negative <unk> and there was no effect due to currency this quarter.
Slide six and seven in detail the performance of our segments this quarter.
Metal cutting sales in the second quarter increased 7% organically year over year versus a 14% decline in the prior year period.
There was no effect due to currency and businesses amounted to negative 1%.
Regionally the Americas led with year over year sales growth of 11% followed by EMEA at 8%.
Asia Pacific posted a decline of 4%.
This decline was concentrated in China, due mainly to the effect of chip shortages in transportation and to a lesser degree reduced sales in renewable energy, reflecting the elimination of government incentives and wind energy last year.
Year over year, all end markets, excluding transportation posted gains this quarter with aerospace, leading a 24% general engineering at 13 and energy had seven <unk>.
Transportation declined by 10% year over year.
As Chris mentioned transportation was down more than expected due to continuing chip shortages and other supply chain challenges affecting our customers.
We continue to believe underlying transportation demand remains strong and as such we expect that a recovery will follow the resolution of the chip shortage.
Sequentially Aerospace posted a 6% increase general engineering, a 2% increase in energy at 3% transportation was a 6% sequential decline.
Adjusted operating margin increased 270 basis points to eight 8%.
The increase was driven by higher volume and associated absorption favorable pricing versus raw material increases and manufacturing performance, including benefits from simplification and modernization carryover.
Mix, partially offset by temporary cost control actions taken in the prior year.
Our growth initiatives remain on track, including fit for purpose with sequential increases outperforming general engineering again this quarter.
We are continuing our pricing actions to cover inflationary pressures in the current environment.
Operational excellence is also on track as we continue to drive productivity and leverage our modernized facilities.
Turning to slide seven for infrastructure.
Organic sales increased by 18% year over year versus decline of 14% in the prior year period. There was no effect due to business days and a foreign currency benefit of 1%.
All regions were positive year over year with America's leading a 22%.
At 15% in Asia Pacific at 14%.
As in Q1, the strength in the Americas was driven mainly by improvement in the U S oil and gas market as seen in the continued increase in the U S land only rig count.
By end market energy was up 33% year over year.
General Engineering was up 17% in earthworks was up 11%.
All end markets were up sequentially.
Adjusted operating margins improved by 570 basis points year over year to 10, 1%.
This increase was driven by higher volume and associated absorption mix and manufacturing performance, partially offset by temporary cost control actions taken last year.
Price over raw material increases were effectively neutral this quarter as expected as material cost increased on a sequential basis.
As in the case of metal cutting we remain on track with our commercial and operational excellence initiatives.
Now turning to slide eight to review, our balance sheet and free operating cash flow.
We continue to maintain a strong liquidity position healthy balance sheet and debt maturity profile at quarter end, we had combined cash and revolver availability of 793 million and were well within our financial covenants.
Primary working capital decreased year over year to $620 million, but increased by $12 million on a sequential basis due mainly to an increase in inventory.
On a percentage of sales basis primary working capital was 31, 3% a significant decrease on a year over year basis, and an 80 basis point improvement sequentially.
Net capital expenditures were $20 million, a decrease of approximately $9 million from the prior year.
We now expect fiscal year 'twenty, two capital expenditures to be in the range of $110 million to $120 million.
Our second quarter free operating cash flow was $22 million versus $29 million in the prior year quarter, reflecting strong sales and operating performance this quarter offset by an increase in working capital.
We also paid the dividend of $17 million in the quarter.
And finally, as Chris noted, we repurchased $23 million of shares during the quarter under our previously announced repurchase program and since inception of the program are at $35 million and total shares purchased.
Full balance sheet can be found on slide 14 in the appendix.
Now, let's turn to slide nine to review the Q3 outlook, we expect sales to be up approximately 3% to 7% year over year and in the range of $500 million to $520 million.
This sales range also implies sequential growth of 3% to 7% versus our normal seasonal trend of around 3% to 4%.
This outlook reflects our belief in the underlying strength in the economy, but also the continuing challenges in transportation in China.
We do not expect supply chain disruptions to worsen and at the midpoint have assumed transportation sales will be relatively flat.
Lastly, we arent forecasting meaningful restocking since we believe customers will continue to maintain their cautious behavior.
Adjusted operating income is expected to be a minimum of $55 million up 32% year over year, implying continued strong operating leverage year over year.
Sequentially as discussed on previous earnings calls higher raw material costs are flowing through the P&L as expected.
Lastly for Q3, we expect the adjusted effective tax rate to be in the range of 26% to 28% and free operating cash flow to be positive.
Regarding the full year outlook on slide 10.
We still expect sales in the second half to exceed normal sequential patterns and strong year over year annual operating leverage despite temporary cost control headwinds from the prior year.
In terms of the sequential cadence for the full year the significant operating leverage we experienced in the first half will begin to normalize in the second half based on raw material increases.
The fourth quarter will also be affected by the above normal leverage we saw in the fourth quarter last year related to the timing of net price versus raw material benefits. Nevertheless, we are committed to drive strong operating leverage for the full year, while recognizing the unevenness that can occur in year over year operating leverage comparisons from quarter to quarter.
This is why we believe that looking at leverage over a longer timeframe such as a full year is a better measure of the underlying performance of the business.
Moving on to the other variables.
We expect depreciation and amortization to be approximately $135 million increasing.
Approximately $10 million year over year.
Capital expenditures to be in the range of $110 million to $120 million.
In primary working capital as a percentage of sales to trend towards our 30% goal by fiscal year end.
These assumptions together translate to free annual operating cash flow generation of approximately 100% of adjusted net income in line with our long term target.
And with that I'll turn the call back over to Chris.
Thanks, David turning to Slide 11, let me take just a few minutes to summarize.
We posted another excellent quarter as demonstrated by our strong operating leverage our product innovations commercial and operational excellence initiatives are positioning us well to drive further share gains and improved margins as markets continue to recover.
Although supply chain bottlenecks and other uncertainties continue to affect the transportation end market in China is challenging to forecast. Our other end markets are showing strong signs of improvement.
Furthermore, although we have not yet seen significant restocking, we believe underlying demand is strong and the restocking remains upside for us in the future.
We continue to expect to exceed normal sequential quarterly growth patterns in the second half of fiscal year 'twenty two and.
And our confident in driving strong full year operating leverage.
Our strong balance sheet and free operating cash flow allow us to have the flexibility to both continue investing and all our strategic initiatives and optimize our balanced capital allocation strategy.
I remain fully confident we will meet our adjusted EBITDA profitability target of 24% to 26% when sales reached the range of $2 5 million to $2 6 billion.
With that operator, please open the line for questions.
Thank you.
Like to ask a question during this time simply press Star then the number one on your telephone keypad.
I'd like to withdraw your question. Please press Star then two.
The first question today comes from Stephen Volkmann with Jefferies. Please go ahead.
Hi, Good morning, guys. Thanks for taking the question.
Since transportation was kind of the standout I apologize, but I'm going to start there.
You talked about a sequential decline I believe of about 6% and I'm. Just curious that's not really what we're hearing from the various transportation markets. We've looked at although I'm sure I don't see everything but I'm wondering if this is kind of an inventory situation where.
Some of these transportation companies are kind of getting product out the door that may have been actually produced in previous quarters or something and so it maybe they don't need you as much right now and therefore as somewhat temporary or do you think there is something more going on here.
I think thats, probably a pretty good assessment and we also know there is.
Theres always a little bit of a lag when they start their production they will.
We will see a little bit of lag in terms of when we start to see the consumables.
So, but I think your I think your assessment is probably right.
And when you say transportation or are we really kind of talking about automotive or is there something else in there that might be.
Really it's really light vehicles.
And the final one there and I'll pass it on or are you fairly confident that there is nothing going on here from a sort of market share perspective.
Yes, absolutely confident there is no question in my mind about it.
Okay. Thanks, I'll pass it on.
Next question comes from Tami Zakaria with Jpmorgan. Please go ahead.
Hi, Good morning, Thank you for taking my questions.
My first question is.
You said, you expect to drive market share gains across regions.
Where are the biggest opportunities and how do you measure share gains in this environment.
Yeah.
Good questions I think.
The biggest opportunities I would say for example or in aerospace.
Tammy you're I think you're new to following kennametal, but part of our history was we had focused a lot of our engineering resources on.
On automotive and we've redirected them in the last few years to aerospace customers. They require high end high performance tooling.
So.
We feel confident that we're getting traction there and the way the way we measure that is.
Since we had a reasonably low low share in.
And we have a process by which we target.
Particular customers we actually.
Reward our salespeople based on.
The increase in share of wallet of those customers. So we have some metrics that say this is how much business, we have with the customer last year. This is what it is this year.
And then we also account for.
Any increase just due to normal market. So it's almost measured on a sort of a project by project basis.
He also.
So we have a number of we are.
A number of metrics that are sort of project by project basis.
And that.
That works well for somewhere like aerospace, but then if you take general engineering, which is much broader.
Had a rebranding and moving our video product portfolio into what I would call fit for purpose.
And that's basically tools that are just like they say fit for purpose theyre not the real high end specialized tools that are customized for particular applications more broader based.
And in that case, the way we measure our success as we look at the overall general engineering and what metal cutting is doing and then we look at how we're growing and the fit for purpose.
And sequentially I can say that.
Last quarter for example, our growth in the fit for purpose is much larger than the general engineering broader market. So that gives us some confidence that we're moving in the right direction.
And then in many many areas around the world people do report, whether it would be metal cutting or infrastructure type business. They report their sales into associations, and we kind of measure our our sales versus them.
And then we also get good feedback from our distributors. Many of those agreements are actually written so that.
We have they have incentives to increase our share of wallet with them and so that's something we also track so tammy.
It is.
It's kind of a complex question. It's a good question. It's one that we're focused on because we really believe that with the foundation of the modern syndication monetization that we've done over the last few years that this company is really poised for for.
For not only growth.
In accordance with the market's recovery, but we believe we're well positioned to take share. So it's something that we're absolutely measuring and holding ourselves accountable for.
Great. That's all from me. Thank you so much.
The next question comes from Julian Mitchell with Barclays. Please go ahead.
Hi, good morning.
Hey, just wanted to start out maybe with a question around your revenue guidance. So.
Guidance for the March quarter implies.
With slow down into that sort of mid high single digit organic growth range. So.
Sharp slowdown from what you were seeing a couple of quarters ago, maybe help us understand sort of what you're assuming for sort of metal cutting versus infrastructure growth in the current quarter.
Any differences in pattern versus what we saw in December .
And then as you look further out in metal cutting.
How are you thinking about that growth rate do you think we're at a sort of a trend growth rate now in the mid single digits.
Or you think no there is some pieces that should push that either higher or lower.
So I guess the context is the PMI are coming down.
There's a lot of other short cycle companies talking about Reacceleration, maybe later in the year. So just wondered about your perspectives.
Yes, I think.
Just I would say broadly speaking Julian.
We talked about transportation. So obviously I don't know if anyone on the phone here is trying to buy a car lately, but there's plenty of demand for cars.
<unk>.
So we think that that is that is a pent up demand situation is going to take a time to time to to.
To replenish that required cars and get caught up with the demand. So that's certainly an opportunity for us going forward and that will also positively affect general engineering.
So it's interesting even though the PMI as they've come down in many countries. They are still they are still in sort of the growth territory in most cases with the exception of China and so we think that the.
The growth is going to is going to continue and.
And of course aerospace is still in a place where they're where they're definitely.
Definitely get more recovery to come.
You also asked a question sort of what's sort of happening between metal cutting and infrastructure how to think about that I would say that.
We talked about 3% to 3% to 7% sequential growth I would say the metal cutting would be.
The higher higher part of that and then.
Infrastructure would be closer to.
Two the lower sequential.
And if you think about infrastructure, we had a nice nice increase.
And rebound in that business and so energy for example, oil and gas we expect that's going to continue to.
To expand but it's expanding off a much much higher level. It has kind of rebounded. So we look forward to that growth.
<unk>.
We're also we also believe that.
In terms of met coal and mining Adjacencies are still going to be very good demand there.
And those have recovered nicely and we should see sort of more steady continuous growth there.
That's helpful. Thank you.
And then just one sort of circle back on the cash flow generation and uses of cash. So you talked about the inventory increase weighing on the working capital side of cash flow just now.
Just wondered about the pace at which you think that inventory to sales ratio can come down I think it is in the high <unk> right now as a share of sort of trailing 12 months sales how quickly can you liquidate that and on the uses of the cash.
I know you do have the sort of the buyback program.
You look at your main global appear.
<unk> been using the cash to sort of upgrade the portfolio.
More money into software acquisitions, and sort of move away from traditional tooling.
Just wondered how attempt to delever if at all by that approach to cash usage.
But what we said on the capital allocation is that we.
We still believe Theres plenty of internal investments that we can make in the company to either put us in a position to drive higher sales growth.
Our digital our digital platform and the investments we're making there.
And then also there's plenty of good productivity initiatives, Julien still still to come and so those projects sort of stand on their own and have to generate the right return.
The next thing that we're focused on and we've sort of activated over the last year or so are sort of our M&A function.
But perhaps different than maybe how kennametal reviewed that in the past is we're very focused on the core business and so we'll be looking absolutely looking for opportunities to probably do more bolt ons that are.
Closer to the core of the core business and again, they may be accelerators to growth.
We're also maybe accelerated with new technologies that.
Whether it would be important in the future. So we're very much focused on that and then of course, we've got the returning to shareholders or invest.
Excuse me.
Share buybacks or for the dividend.
Those are the basic focuses and then in terms of your inventory question I'll, let Damon.
The answer to that.
Julian to your points on inventory on the balance sheet is given.
Cost of our raw materials has risen significantly as you know and I think as we've said on some prior calls we also have a little bit more inventory due to transit times for some of the ore coming out of Bolivia safety stock given some of the disruptions in the supply chain I think when I look at the second half of our fiscal year I don't see inventory as a.
Absolute number really moving materially.
Probably dropped in the fourth quarter as you know, which is our stronger selling quarter.
Infrastructure from a percentage of sales standpoint, what we've talked about it as working capital continuing to trend down here from the second quarter. So if you remember Q1, we were just over 32% now in Q2 were just over 31% will continue to see that improvement as sales hopefully start to continue to pick up.
Here in Q3 and Q4.
Great. Thank you.
Okay.
The next question comes from Steve Barger with Keybanc capital markets. Please go ahead.
Hey, good morning, guys.
Great. Thanks.
How much of revenue growth was price versus volume in the quarter can you talk about that for <unk> as well just given the mid single digit kind of range how much of that is price.
Yes.
We're not going to sort of disclose that pricing information as you can imagine it's sensitive but.
I guess I could just directionally I would say that the majority of it is as market growth or share gain but there was a substantial price piece.
In fact, you can engage a little bit of that because we told you there was $12 million of cost headwinds that we offset more than offset with price. So you can get some kind of ballpark figure if you back into it.
And I'm sorry, if I missed this do you expect a similar kind of cost headwind in <unk> and <unk> or is that moderating.
Yes, so from a sequential basis Steve.
Operational costs, the merits and other costs, we talked about those will effectively be flat from Q2 into Q3.
Material cost will continue to increase as we move through the fiscal year tungsten prices as we've been talking for the last couple of quarters have continued increase there are about $3 25, right now versus maybe about two 310, a couple of months or a quarter or so ago. So those will slowly continue to trickle into our call.
Here over the balance of the fiscal year.
Chris as you know our team has been very.
Confident in raising prices to more than offset the raw material headwinds that we see.
So again, we feel very confident that price versus raws.
Full year positive before us now.
Got it and for the organic growth rate in metal cutting you said fit for purpose grew at a much higher rate can you quantify that a little more.
His legacy metal cutting outside of transportation is still positive.
Oh, yes, yes, it's definitely positive I guess, what I was looking at is if you look at sort of general engineering as a segment a lot of that fit for purpose <unk>.
Is geared towards that type of industry, where you have sort of machine.
Machine shop, regardless of the size that are doing sort of broad based application. So our theory there Steve is that if the fit for purpose tooling, which we can measure exactly what's what's happening because it's a specific portfolio. If those sales are increasing faster than sort of that broader market.
And what we'd see in the broader metal cutting then that tells us we're.
We're picking up traction that's the basic premise of the measure.
And can you just remind me real quick does fit for purpose mix you down in the segment or is there much of a margin difference between some of the legacy product lines in the newer product lines.
In a fit for purpose since it was repositioning of video.
Which did which did have a lower margin.
So what we're what we're talking about is obviously the blended margin, but it was still it still margin is consistent with what the video portfolio was.
Margins for the Kennametal branded under industrial was around 25% video was around 18% as we reposition.
Into the fit for purpose segment of the market, we think that the margins will be relatively similar there.
Understood. Thanks.
The next question comes from Dillon Cumming with Morgan Stanley . Please go ahead.
Hey, good morning, guys. Thanks for your question.
You mentioned that China kind of went the wrong way on the quarter I think you mentioned transportation when we've got more John .
But I think it would appear as opposed to kind of lay out expectations for the back half calendar year recovery I'm just curious.
What youre seeing there.
I'll get to stabilize over the next few quarters.
John I had I had a lot of trouble hearing you.
Youre talking about energy in China, being I'm, sorry, maybe just to repeat it if you can hear me better now.
That's a lot better deal okay, yes, sorry about that you just mentioned that China kind of went the wrong way in the quarter that you were talking about bolt transportation when being a bit weaker than expected, but I think some of your peers have kind of started to lay out expectations for back half kind.
Kind of calendar your recoveries. So I'm just curious if that's kind of consistent with what youre seeing and if you would kind of late cycle markets will stabilize over the next few quarters.
Yes, I think I mean, our assumption on China as it is not going to get worse.
But.
Took kind of a conservative view and it's probably it's probably going to stay flat.
Through the next few quarters.
That's kind of our thought process.
Okay got it it's helpful and I've been hearing the same thing you there is potential that it will it will start to improve so that's certainly upside, but that's the that's what we've baked into our forecast at this point.
Okay makes sense and maybe if I can switch back over to the EBIT side for a second you kind of called out that major win those kind of major OEM customer.
Curious about when kind of crystallize any content nuances between EV and IC, you've been talking about that's kind of changed the thinking there actually if I can ask a related follow up on that point to Steve's question.
Earlier do you feel like any kind of mix shift at the OEM level between <unk> versus ICEE is actually driving.
Any level of kind of under performance and transportation as well.
No I don't think I don't think there is an underperformance in transportation driven by that that's what you mean.
Transition to EV is as very early very early stages, I think that they might account for like 5% of all the world's vehicles or something along that over a magnitude.
And so the way the way we do.
And the way we look at that is it's really an opportunity for us and if you look out over the next 10 years.
There's a couple of things going on first of all the increase there is just a general increased demand for light vehicles, that's going to that's going to happen no matter what.
And then as you've probably noticed that.
We're watching ads on TV, you see a lot more ads I noticed for hybrid vehicles.
Turns out the hybrid vehicles actually have more metal cutting requirements.
Then the internal combustion engines.
They have all the equipment you need for EV, but also they have an engine.
So that that.
Is going to drive certainly if we look out over the next 10 years certainly within the next five years, we could actually see an increase in bump in metal cutting because of that.
And then the EV applications it turns out.
Customers are starting to ramp up lines and are thinking about how to do that and those are the wins that we're talking about so we're every one of those sort of sets you up for the future of EV.
And that's why they are critically important and I can tell you we're winning these things not not based on.
Trying to be the lowest price. This is these applications are such that you can actually deliver significant value to this future production line. That's the way we're looking at it. So this this should be very good business.
As there's a transition to evs should be very good business for us and it's business that we want and we're well positioned to win.
And in some cases, we've got even our additive manufacturing technology is allowing us to produce tools sort of in a prototype basis in months, rather than the normal cycle of of <unk>.
Years, where and so that helps us that helps. These these companies that are signing up these new production lines get those lines up faster and prototype much quicker. So lots of lots of ways that we're leveraging our innovation and our technology to put us put us in a position to win these early orders for EV, because thats going to.
Once you're in there, it's very hard to displace yield so that's the theory and that's our approach.
Okay, that's great color thanks for the time.
The next question comes from Chris Dankert with loop capital. Please go ahead.
Hey, good morning, guys.
Yes.
I guess a bit more of a north America centric question, maybe but just can you highlight what the impact of labor availability and absenteeism was just kind of on factory absorption in the quarter and I guess is the dynamic improving at the move into fiscal <unk> here.
Yes, it definitely had an impact in the quarter I mean, if you look at it.
We look at the metal cutting margins, we expected them to come down obviously, obviously with transfer patient down the biggest driver there in terms of the margins coming down was was the transportation volume coming down but inside that we did see the omicron did affect the <unk>.
Factories, especially in the month of December So we're working higher over time and then the other thing is is.
It also impacted our suppliers and freight shipments.
So we actually incurred.
How are your premium freight charges than we thought we would so it definitely had an impact but it's.
I would say that it's starting to.
Starting to normalize back to the situation it was before.
And then and then the other the other part of this I guess the good news is those sort of factors in terms of.
Those inflationary things, whether it's higher over time or some of the disruptions.
We've factored that into our price increase which we just put in place in January so as it relates to metal cutting going forward. We think we've got that we think we've got that covered.
David do you want anything to that.
I think Chris.
We're not immune to any of the issues you are reading out there and so we have a lot of these costs training costs as we're hiring workers and a lot of our factories is your wood costs are modest productive some of our experienced workers. So we aren't dealing with some levels of inefficiency as we work to continue to serve customers needs.
Overall, the team has done a phenomenal job in driving productivity to help offset that.
Manage through that so youre not quite seeing that in our P&L because of the good work. The teams both on the pricing side and on the manufacturing side to help offset some of those challenges.
Got it that's really great color. Thanks, so much for that guys.
And then we touched on mix I guess as we move into the third quarter here General Engineering, I think probably the biggest driver of the softening in growth I guess is that.
Are we contemplating negative mix in the guide at this point.
No.
I wouldn't characterize it like that.
Okay. Okay. So it's principally at this point it's.
Price cost still staying positive on the raws side.
But it really makes it not a factor okay.
Thanks, So much guys appreciate the time.
Welcome Chris.
This concludes the question and answer session I would now like to turn the conference back over to Chris Rossi for any closing remarks.
Thanks, operator, and thanks, everyone for joining us on the call today.
I look at this quarter and I think it is another proof point that our strategic initiatives are working.
We're driving strong operating leverage and share gains and margin improvement.
As always we appreciate your interest in the company and your support and don't hesitate to call. Kelly. If you have any questions. After today's call. Thanks, everybody and have a great day.
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