Q1 2023 Kennametal Inc Earnings Call
Good morning, everyone I would like to welcome everyone to Ken No matter its first quarter fiscal 'twenty 'twenty 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 Star then the number one on your telephone keypad.
If you would like to withdraw your question. Please press Star then the number two please.
Please note that this event is being recorded.
I would now like to turn the conference over to Kelly Boyer Vice President of Investor Relations. Please go ahead.
Thank you operator, welcome everyone and thank you for joining us to review <unk> first quarter fiscal 2023 results.
Yesterday evening, we issued our earnings press release.
Hosted our presentation slides on our website, we will be referring to that slide deck throughout today's call.
I'm Kelly Boyer.
Thanks, President of Investor Relations joining me on the call today are Chris Rossi, President and Chief Executive Officer, and Pat Watson, Vice President and Chief Financial Officer.
After Chris and paths 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.
These risk factors and uncertainties are detailed in kenna mill 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 now turn the call over to Chris.
Thanks Kelly.
Everyone. Thank you for joining us today.
I'll start today's call with a review of the quarter, our growth road map and some recent strategic wins.
I will go over the quarterly financial results and the outlook.
And finally I'll make some summary comments before opening the call for questions.
Beginning on slide two of the presentation.
First quarter results highlight continuing growth and successful execution of our strategic initiatives offset by macroeconomic factors such as high inflation.
In exchange and regional headwinds in EMEA and China.
Sales increased 9% organically year over year offset by negative foreign exchange of 7% for a total sales increase of 2%.
On a sequential basis sales decreased by 7% from Q4 to Q1.
In line with expectations and slightly better than the normal 8% to 10% seasonal decline due to the European summer holiday season seasonal construction trends.
Year over year on a constant currency basis, all regions and end markets grew.
The Americas led with double digit growth.
In Asia Pacific Rolling Covid, Lockdowns affected growth rates in China, but other Asia Pacific countries remained strong and.
And then EMEA sales were negatively affected by disruptions due to the Ukraine crisis.
Our exit from Russia in Q3 last year.
By end market Aerospace energy and Earth works, all reported double digit growth in transportation and General engineering grew mid single digits.
So overall end market demand is holding up well and we expect that to continue through fiscal year 'twenty three.
That said I know there are diverging views on the direction of the global economy, especially when looking beyond fiscal year 'twenty three.
The good news is that whatever direction. The global economy may take in the short term. We believe we are well positioned in all our end markets for the long term.
We have a strong position in aerospace and expect to continue to take share as aircraft build rates improve.
We are well positioned in both renewable and traditional energy markets to take advantage of the investments that will be needed to meet growing energy demand.
Our earthworks business will benefit from increasing government support for construction and elevated mining activity required to meet the immediate demand for coal and longer term to support the conversion to green energy.
We see transportation remaining supply constrained with production at lower levels in the short term, but gradually improving and we expect to benefit from the leadership position, we are establishing in tooling for electric vehicles.
Lastly, we expect general engineering to benefit from the continuing growth in industrial production and our fit for purpose strategy.
So while we acknowledged the shorter term uncertainty we feel quite good about the longer term underlying growth drivers in our end markets and in our ability to secure market leading positions.
Now looking to profitability for the quarter as we discussed on our last call macroeconomic factors are masking the underlying piece volume leverage we are getting from simplification modernization.
And our focus on operational excellence and.
In Q1, this volume leverage benefit was offset by macroeconomic related factors, including a significant FX headwind.
And a decrease in pension income, which is noncash due primarily to changes in the assumption on return on assets.
In addition, we experienced temporary supply chain disruptions, which Pat will provide more color on later.
In the meantime, I want to remind everyone that over the last several years, we've been successful at managing numerous supply chain and other operational disruptions, resulting from the pandemic. So.
So I am confident we will fully mitigate these most recent challenges by the end of this fiscal year.
As expected operating expense as a percent of sales increased to 21, 9% this quarter with annual salary increases being one of the drivers.
Another major driver is increased travel to customer sites and product trials as customers eased COVID-19 restrictions for supplier partner visits.
This is good news for our commercial and engineering teams as it affords them the opportunity to demonstrate our latest product innovations across our entire brand portfolio.
While obviously an expense we see these costs as an investment and growth and gaining share.
And I'll discuss on a later slide some examples of the returns we're getting on this investment.
Taxes increased slightly year over year in the quarter to 27, 5% due mainly to regional mix.
Adjusted EPS declined to 34 compared to 44 in the prior year quarter with the majority of the decline driven by the macroeconomic factors I discussed are.
Our free cash flow this quarter is consistent with our typical use of cash in Q1, driven by payment of performance based compensation.
Also affecting cash flow this quarter was an increase in working capital mainly inventory due to higher raw material costs and increased safety stocks to mitigate supply chain related disruptions.
Finally, another use of cash was the buyback of $19 million of shares which brings the total amount bought back since program inception to $105 million.
Our share repurchase program reflects the confidence we have to execute on our strategic initiatives for long term value creation. Despite the current macroeconomic headwinds.
Now, let's turn to slide three to review our growth roadmap.
As you can see the road map outlines the share gain initiatives mega trends in other growth areas that comprise our commercial excellence strategy.
First of course, we are focused on growing our share of the current base business.
In addition to innovative products and best in class customer support the investments we made over the last few years on modernization and our ongoing operational excellence initiatives are enabling us to drive a larger share of wallet with existing and new customers.
Beyond the base business, they're also megatrends that are well aligned with our technical expertise and market exposure and therefore, creating opportunities for growth and market segments, such as electric vehicles aerospace digital and ESG.
Also and still within the organic growth areas of focus we are now able to cost effectively reach segments of our end markets and application spaces that we historically were unable to serve.
This is due to simplification modernization as well as digital customer targeting and our digital customer experience platform.
Examples of that platform includes supporting small to medium size job shops, providing tooling for medical device manufacturers and supporting micro machining and fit for purpose applications.
And finally.
We have the opportunity to supplement our organic growth initiatives through acquisitions now.
Now please turn to slide four for some recent commercial wins that are great. Examples of our success in executing on this roadmap.
Again this quarter, we had significant wins in aerospace, including providing tooling for a large aerospace engine supplier.
Having this customer's technical challenges has opened the door for additional business.
We also had a win with an aerospace customer for high performance tooling used in the creation of specialized components for space stations, an astronaut backpacks.
This quarter, we again gained a larger share of wallet with existing customers, including in oilfield services customer, where we applied our material science and additive manufacturing capability to become the sole source supplier for the customer's new nozzle design, which cannot be manufactured using traditional manufacturing techniques.
And in the process industry segment, we collaborated with an OEM and leveraged our technical and manufacturing expertise to provide a plastic extrusion die significantly outperforms, the competition and delivery performance and technical support.
And finally in the rapidly growing electric vehicle segment.
Where we have established a leadership position in metal cutting we broadened our reach with a win in our infrastructure segment by providing aware solution used in battery production.
These are just some examples of impressive wins that demonstrate our ability to gain share and give us confidence that the investments we are making in commercial excellence expense and innovation are paying off.
Now, let me turn the call over to Pat who will review the first quarter financial performance and the outlook.
Thank you, Chris and good morning, everyone I will begin on slide five with a review of Q1 operating results before I begin. Please note that we did not record any non-GAAP adjustments. This quarter. Therefore adjusted numbers are not presented.
Today's discussion year over year comparisons will be against the prior year's adjusted results.
The quarter's results show that we continued to execute our initiatives in the face of headwinds from inflation foreign exchange Lockdowns in China disruptions in EMEA and temporary supply chain disruptions.
Sales increased 2% year over year, with 9% organic growth largely offset by 7% foreign currency headwinds.
On a sequential basis from the fourth quarter sales declined, 7%, which is slightly better than our normal Q4 to Q1 seasonal decline.
As Chris noted adjusted operating expense as a percentage of sales increased 70 basis points year over year to 21, 9% from higher salaries and travel and demonstration tooling to support sales growth.
Adjusted EBITDA and operating margins were down to 15, 9% and nine 8% respectively.
The year over year operating margin performance was due to higher pricing offset by higher raw material costs, and general inflation higher manufacturing costs, including $5 million of temporary supply chain disruptions as well as foreign exchange headwinds.
During the quarter, we experienced a few disruptions in our supply chain, including a force measure from a key supplier to our infrastructure business, which required us to use higher cost supplies and materials and incur some labor inefficiency at a couple of locations. We expect these disruptions to abate by the end of the fiscal year.
Pricing actions continue to offset raw material wage and general cost inflation on a dollar basis.
The effective tax rate increased to 27, 5% due mainly to regional mix.
We reported earnings per share of <unk> 34.
Versus adjusted EPS of <unk> 44 in the prior year period.
The main drivers of our EPS performance are highlighted on the bridge on slide six.
The year over year effective operations. This quarter was negative <unk> due to the factors that I just discussed.
You can also clearly see the effects of foreign exchange and the reduction in pension income on EPS with currency contributed negative <unk> <unk> and.
And the reduced pension income negative three.
Please note that the change in pension income is noncash and is driven by market factors and our U S pension plan.
This change will affect each quarter this year, our U S pension plan remains overfunded.
And based on the recent spot rates, we expect foreign exchange to remain a headwind to.
Slide seven and eight detail the performance of our segments this quarter.
Metal cutting sales increased 9% organically year over year offset by a foreign currency headwind of 8%.
We achieved growth in all regions and end markets on a constant currency basis.
By region, the Americas, 13%, followed by Asia Pacific at 6% and EMEA at 5%.
As Chris noted Asia Pacific's growth was affected by COVID-19, Lockdowns in China. This quarter. However, we achieved strong growth in other countries in Asia Pacific.
EMEA is year over year growth. This quarter was negatively affected by approximately 400 basis points from our decision to exit Russia in the third quarter last year.
By end market Aerospace led with strong growth of 25% year over year General engineering grew 8% year over year, and transportation and energy group mid single digits.
Adjusted operating margin decreased 70 basis points from the prior year quarter to nine 5%.
The decrease in margin was due primarily to favorable pricing higher sales volumes at normal operating leverage and favorable product mix, which were more than offset by higher costs, including higher raw material costs foreign exchange headwinds and temporary supply chain disruptions turning to slide eight for infrastructure.
Organic sales increased by 10% year over year offset by foreign exchange of 5% all regions were positive year over year with the Americas, leading at 13% followed by Asia Pacific at 8% and EMEA flat.
The end market again energy was up strong double digits, 20% year over year.
The strength in energy 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.
<unk> was up 11% with broad strength in all regions and general engineering was flat with strength in Asia Pacific offset by a decline in the Americas and EMEA as a result of project orders in the prior year that did not repeat.
Operating margin declined by 340 basis points year over year to 10, 7% with price and mix plus the normal leverage on volume, partially offsetting increased raw material costs and higher costs, including temporary supply chain disruptions and foreign exchange.
In Q1 price continued to cover raw material wage and general inflation on a dollar basis.
Now turning to slide nine to review, our balance sheet and free operating cash flow.
We continue to maintain a healthy balance sheet and debt maturity profile at quarter end, we had combined cash and revolver availability of approximately $700 million.
And we're well within our financial covenants.
On a percentage of sales basis primary working capital decreased to 31, 7%.
On a dollar basis primary working capital increased year over year to $664 million.
Reflecting higher raw material costs, and additional safety stock associated with extended supply chains.
Net capital expenditures were $29 million, an increase of approximately $12 million from the prior year, but in line with our expectation that full year capital spending of $100 million to $120 million.
Our first quarter free operating cash flow was negative $40 million a decrease from the prior year quarter, but consistent with our usual first quarter outflow due to seasonal sales patterns and the timing of incentive compensation payments.
Paid a dividend of $16 million in the quarter.
And finally, as Chris noted, we repurchased $19 million of shares during the quarter under our previously announced repurchase program.
Since inception, we have repurchased $105 million of stock. This reflects our confidence in our strategy for growth and margin improvement.
A full balance sheet can be found on slide 15 in the appendix.
Now, let's turn to slides 10, and 11 to review the outlook.
Starting with the second quarter, we expect sales to be between $480 million to $500 million.
On a sequential basis and excluding additional foreign exchange headwinds would be in line with our normal seasonality of 1% to 2%.
Sales range assumes $40 million of year over year currency headwinds and pricing actions of approximately 7%.
We expect strength to continue in underlying demand in all our end markets and we are assuming no significant disruptions from Covid lockdowns in China, where energy uncertainty in EMEA.
We believe customers will remain cautious in this environment and do not expect meaningful restocking at this time <unk>.
Adjusted operating income is expected to be a minimum of $30 million, which reflects continued inflation headwinds against our strong pricing actions.
Sequentially from the first quarter raw material costs increased by approximately $15 million and then are expected to remain approximately at this level for the balance of the fiscal year.
It is important to note that over the last five quarters, we have been aggressively raising prices ahead of experiencing the full effect of higher tungsten prices.
In Q2, this favorability of price over material cost is negligible as raw material costs, reflecting the current market costs now flows through the P&L.
This price over material cost timing as normal and primarily affects the infrastructure segment.
Lastly, we expect the supply chain disruptions, we discussed earlier to continue in the second quarter, and then fully abate by the end of the fiscal year.
Turning to slide 11.
Regarding the full year.
We expect FY 'twenty three sales to be between 2 billion and $2.08 billion with volume flat to up 4%.
Price realization of approximately 5% to 6% and a headwind from currency of approximately $130 million.
This sales outlook assumes that there will be no significant disruptions from COVID-19, lockdowns or energy disruptions in EMEA.
We expect adjusted earnings per share to be between $1 30, and $1 70.
Even in this inflationary environment price realization and our operational excellence productivity projects will continue to offset raw material wage and general cost increases on a dollar basis.
The $130 million foreign exchange sales headwinds as expected to result in a $25 million operating income headwind.
Additionally, lower pension income will be a headwind each quarter. This year for a total of $14 million.
We remain committed to driving strong execution on our operational and commercial excellence initiatives and expect to continue to see compelling results from our growth roadmap.
Depreciation and amortization is expected to be approximately $135 million.
And our outlook for working capital and capital expenditures remains unchanged.
And finally over the full year, we expect free operating cash flow at approximately 100% of adjusted net income in line with our long term target further demonstrating our progress transforming the company.
And with that I'll turn it back over to Chris Thanks, Pat turning to Slide 12, let me take a few minutes to summarize.
The results this quarter demonstrate our ability to execute our strategic initiatives despite uncertainty in the economy and headwinds from inflation and foreign exchange.
I am pleased with our progress on growth initiatives as outlined on our growth roadmap.
And our wins each quarter continue to demonstrate our industry, leading innovation and deep understanding of our customers' applications.
Our balance sheet is strong and we expect the total year free operating cash flow gives us the flexibility to continue investing in our strategic initiatives. It also allows us to optimize capital allocation, including bolt on acquisitions dividends and share repurchases.
As a reminder, we have a long history of consistently paying a dividend having done so every quarter since being listed on the New York stock exchange and $19 67.
And our share repurchase program is further evidence of our confidence in the underlying intrinsic value of the company.
Although the current economic environment limits visibility, we expect sales to follow our normal sequential quarterly growth patterns for the full year and.
And despite any short term economic uncertainty we feel good about the longer term underlying drivers in our end markets and are confident in our competitive positioning.
And with that operator, please open the line for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on you touched on phone.
You are using a speakerphone please pick up your handset before pressing Nicky.
You bet Danny Dan. Your question has been at this and you would like to withdraw your question. Please press Star then two.
At this time, we will talk momentarily.
Sure.
Our first question comes from Stephen Volkmann with Jefferies. Please go ahead.
Hi, Good morning, guys. Thank you for taking my question.
I was wondering if we can just focus a little bit on volume since I guess, that's kind of where you get your leverage.
Sorry, if I missed it but what was volume up in the quarter.
And maybe price as well just to sort of round that out.
Yes.
The volume would have been up year over year.
What we said it was at a 4 million dollar effect on operating income positive. So what I think most analysts are modeling that leverage to be at 50%. So that would equal about a volume increase of around $8 million based on that model.
Okay.
Sorry go ahead.
A piece of that.
What was it was on price price realization was at it Steve is that your question.
Please.
Yes. So overall if you look at that we've got the $8 million approximately in terms of volume and they're in the 7%.
FX and then you kind of back into where the price would be based on those two numbers.
Okay, alright, great. So as I look at your commentary around some of these end markets is kind of where I'm going with this I guess Jen.
General Engineering must have been down on a volume basis and b.
As well can you just sort of comment on what youre seeing there.
Yes, what I would say for <unk> for metal cutting in sort of Q4 to Q1.
The Americas sort of stay at a strong level.
And that will continue through our forecast for Q2, EMEA did weaken slightly and AP stayed around the same for transportation. It was.
Pretty stable on all regions, but as you know, it's still kind of lower levels.
In the current environment as they still are waiting for chips et cetera.
Aerospace did increase Q4 to Q1, and we expect that that will continue at these higher levels.
Through Q2, and actually that's part of our forecast for the full year.
And then energy was.
Kind of remains stable, Steve at higher levels.
So that was.
That continues to be a strength for us on the infrastructure side.
<unk> the U S was steady and Pat had mentioned some of the factors that.
Affected.
<unk>, which was Ukraine Russian conflict AP was steady and then we had some pluses and minuses with large orders not repeating that.
Distorted the number there, but generally the underlying.
Business and infrastructure with the exception of the Ukraine conflict.
That's pretty strong energy of course remains at strong levels, and then mining the underground mining projects.
I really I would say at an elevated level, maybe arent, increasing but they are expected to stay at that higher level.
And construction for Asia Pacific was strong and China, EMEA I would say is sort of flat sequentially in the Americas of course was down due to seasonality.
Great. That's very helpful. Thank you, Chris and then just one clarification and I'm curious and I'll pass. It on you said in your prepared remarks that you expected. Some of these unusual headwinds to mitigate by the end of this fiscal year are you talking about sort of the supply chain and the pension and then kind of all these things are just maybe.
Be a little detail on what youre expecting to sort of be done with by the end of the fiscal year.
Yes, we were really talking about the temporary supply chain issues. We also gave.
<unk> guidance on what's going to happen with pension and.
And FX for the full year. So I'll just direct you to those to the slides there, but you have a temporary cost actions or temperature temporary supply chain disruption Steve we.
We started to see those obviously in the first in the first quarter and they were it turns out they were stronger than what we thought and then we had a new one from a supplier, which is a forced measure and frankly I'm not even sure our suppliers saw that coming because it's actually a result of their supply chain.
But.
And this in this current environment certainly throughout the pandemic we're used to.
Putting in mitigation strategies, and so I would say that we've we've got the plan in place to find alternative suppliers and we're implementing that plan right now and then as the reason they will abate as it as we move through the second half of the year.
The mitigation plans that are actually our suppliers have in place will allow them to continue to supply us and we can return to the normal source of supply, which would be a less cost costly mix. So.
We're calling it temporary because it's kind of a result of the current.
Chaotic environment that we're operating in.
But those will those will abate by the end of the year.
Okay.
Yes, I'm going to add on the pension that we set those parameters in terms of the assumptions at the beginning of the year. So those numbers are pretty locked in for the year in terms of the $4 million $14 million headwind, we have for the full year.
Thank you guys.
Yeah.
Our next question comes from Julian Mitchell with Barclays. Please go ahead.
Hi, good morning.
I guess.
Wanted to follow up on the two headwinds you've called out on slide 10 around the raw materials of $25 million year on year and that supply chain one of $5 million in the second quarter, maybe just help us understand.
What started into that full year guidance.
The second half.
Those two items in terms of year on year understand that raw materials sequentially starts to stabilize.
As we think about year on year for those two items in the second half how would you kind of steer us.
Yes, I would say on this on our supply chain.
So for the first half of the year, it's about a $10 million subject and is expected to abate by the end of the year Julian and I think you could you could model somewhere between maybe.
$5 million to $7 million still in the back half of the year order of magnitude.
And then Pat why don't you talk about the price covering raws.
Julien on the raw material you are correct once we kind of get to this level here in the second quarter it should be basically at that level.
Rest of the year sequentially on a year over year basis that will be a net headwind for us for the rest of the year from a material perspective, but that is inside our expectations of our price realization covering our cost inflation for the full year.
Okay.
Got it okay.
Okay, so that raw material headwind.
$25 million in Q2.
Second half as a whole.
Something like that number is it.
Yes, yes, but it's again covered inside that the entire price cut.
Perfect. Thank you and then just my.
Follow up question would just be around.
When we're thinking about the sort of.
Volume outlook, it looks like Youre, assuming sort of steady year on year volume trends.
<unk> of the year normal seasonality I think as you called out.
Sequentially.
When we're looking at any of the main end market moving pieces anything expected to change sort of sharply as you go through the year I guess transportation is one that I might have thought would be.
More at some point then what you saw in fiscal Q1.
Yes, I think a lot of the.
Companies selling into transportation that sales are up double digits right now.
So you're looking at.
Vehicle. This morning for example.
Just wanted to kind of any main moving parts, you're calling out and market swings for the balance of the year and anything particular in transport transportation.
Yes, I think on transportation that may be an opportunity for us, but frankly Julien.
We are.
We have sort of baked in that we've got things are going to kind of stay steady where they are.
<unk>.
Just because as.
As I listened for example, too.
Ford I think last quarter. They are chip issue wasn't as big an effect of Gms was in it switched around this this quarter. So.
So I think that's our best estimate that could be some upside for us.
If you look at our range for the full year.
$2 billion to $2 billion $80 million.
I would the way I would think about the drivers there is that.
Pat highlighted a couple of the significant risks.
The energy potential energy issues in EMEA, and then Covid Lockdowns in China.
And then underlying the baseline assumption of course is that there is still continued resilience in the U S. Industrial production base. So I would say that what's going to kind of move us on that range of from the low end to the high end is probably these regional factors, whether they become worse or some in some cases.
They may they may actually improve those would be the big drivers as opposed to specific end markets.
That's the way I have a great got it.
Thanks very much.
The next question.
Fisher with UBS. Please go ahead.
Hi, Thanks, good morning, and I'm, sorry to come back to the second quarter.
<unk> materials dynamics I, just want to make sure I understand it.
Down from the first quarter.
Is that the message that the prices are no longer covering.
The pickup in raw material cost is that is that the message.
And if so then why not I may have misunderstood that.
I think when I take a look at that pricing versus raw material dynamics over a longer term basis as we've talked about in our prepared remarks, we've been very aggressive in the last five quarters.
Going out and getting price and we've experienced that price realization.
In front of some of those material costs showing up in the P&L and so simply what's happening as we're moving into the second quarter here is that what I will say we are on the same basis in terms of charging for our customers around material cost perspective, and where the material costs are and so as we get into the second quarter here, that's where we see the sequential headwind, but that will.
Not be a headwind again as we move forward for the rest of the year and again once we think about that overall material cost.
He's been successful covering that with price.
Okay, and then I guess just on the second half in terms of.
Revenue run rate.
I know, you're just giving some of the puts and takes here I mean, I guess to what extent should investors be looking at things like the <unk> new orders.
Coming in below 50 that kind of suggests some lower revenues to what extent.
Is it new programs that you have in the works that you think are going to make up for any potential difference or.
I know you said there was maybe a little bit of upside in aerospace just trying to.
Think about conceptually.
What.
How are you thinking about some of these leading indicators and how that's factored into.
To your revenue outlook and kind of daily run rate for the second half of the year.
Yes, I think Steve.
We gave the guidance that we're going to sort of follow our normal seasonality from this point forward so that would suggest that.
But all things being equal that seasonality is going to happen.
Yes.
Regardless of what the Ipi do unless the Ipi has moved significantly.
North or south.
So our outlook is sort of the things kind of the world. The world is defined in Q1 kind of stays.
That world going forward that that will be the.
That will be the driver as to whether we're at the high end, where it might improve or at the lower end where things get worse.
We are.
Our outlook, we are assuming that the U S continues its resilience and as you know.
PMI and ipi or PMI has been hovering somewhere around the 50% or the 50 Mark for the U S.
Okay. Thank you very much.
The next question comes from Warner Music ARIA with JP Morgan. Please go ahead.
Hi, good morning, Thanks for taking my question.
So.
6% pricing you expect.
King.
Cisco.
I was curious is that uniform across the two segments and how about the region is it five to six.
Regions as well.
Yes.
We're not going to disclose that kind of information family, but I think the way to the <unk>.
Think about it is.
The answer is probably no in general.
Every customer is different.
And.
We start with the value based pricing of course.
But there can be there can be differences between infrastructure and metal cutting for sure and even within those businesses there's differences.
From customer to customer.
So that's kind of an average four for both businesses.
But yes.
Sure. Thanks, Dan I want to make sure I want to make the point that wasn't just a peanut butter spread of price.
Will.
Got it that's super helpful and then very quickly.
The supply chain pressures continuing.
What are the main one or two pressure points now it'd be the same they were let's say two quarters ago or anything new has popped up.
Last quarter or so.
Yes, I guess if your question is from a customer perspective.
We see some some easing in supply chain in general we just had a conversation about transportation that maybe that gets better we're not we're not expecting it to be but it.
It could potentially improve but there is some easing of supply chain pressures on.
On our customers.
Although its not it.
It hasnt been that significant yet and we haven't seen it materialize into a substantial increase in orders.
And then of course, we already Todd you were talking about are temporary disruptions I think we covered that on some previous questions.
Got it okay. Thank you so much.
Our next question comes from Michael Feniger with Bank of America. Please go ahead.
Yes, thanks for taking my questions.
Inventories was up you flagged how you're how you're building some safety stock I'm just curious with the inventory build has that been positive to your absorption and your margin over the last.
A quarter or two and how do you see your inventories progressing through the year based on your demand outlook.
Yes, I think it's good.
Good question Michael.
While we put that inventory in place to make sure that we can maintain the right customer service levels.
Especially as our customers are coming out of the pandemic and we wanted to make sure we didn't miss an opportunity there.
Based on our current outlook we have.
Our forecast for primary working capital so it's baked in there, but I think in general we would expect inventory to start to start to come down.
And.
I think in terms of the the absorption issue.
<unk>.
That would be more of a subject inside inside metal cutting where they have more of a higher labor content in their costs. So there was a little bit of there was a little bit of that inventory driving.
Better absorption of course, but.
As the inventory build reduces.
Think it is going to have a substantial effect on the.
Sort of first half profitability versus second half profitability.
Thank you for that and I'm just curious on competition on competition is there any intensity or increasing intensity on the competition side with maybe currency playing a factor with some of the foreign competitors.
I'm trying to get to is.
The 7% pricing is there anything preventing you guys from from from going further from from pricing not just the cost but above the cost is it competition is it working with your customers that are that are under pressure. Just curious if there is a ceiling. There that you guys are starting.
To hit that wont, let you price even further thank you.
Yes, that's a good question and certainly a conversation we have with our sales folks it is a balance.
And this this the magnitude of this price increase is much larger than I think the industry would normally have and that's that's that's understandable.
Because we want to.
We have to price commensurate with the inflationary environment, but there is Michael there is there is limits and every customer has got to be treated differently.
So that's the way we're approaching it.
In some cases.
We're looking at we ultimately starwood what value are we bringing to the customer and.
The more value we have more aggressive on price we can be so we don't necessarily just try to cover the cost.
We price based on value and but even that even that has some some limitations. So we're trying to do ultimately the way. Your question suggests there is a balance between how much price you can get and then the volume.
And we're trying to strike that right balance patent you got anything you'd like to add to that just wanted to say, we do have a strategy from an in region for region production perspective, So when we think about our currency exposure much of our currency exposure is simply translational.
Since.
Trying to produce in region for the customers we are serving.
Okay.
Michael are you done with your questions.
Yes. Thank you.
Thank you. Our next question comes from Steve Barger with Keybanc capital markets. Please go ahead.
Thanks, Good morning.
Alright.
I just wanted to ask about the commercial excellence initiatives what are the market indices, you measure growth against I guess, how can you tell if the team is performing in line with the cycle and then taking share on top of that how are you measuring that.
Yes, that's a good that's a good question.
What we we have a sort of a very a very detailed process where by customer we.
We calculate what we think an entitlement is for that particular customer. So we'll we'll know for example, certainly their current level of business.
And then.
Then we can tell we can tell how much of that how much of their business that we're getting on a sort of a per customer basis.
It's actually if you try to fly to at too high a level, Steve it's hard to find just how much is market and how much is a share gain but if you measure it on a sort of a per customer basis.
That's the way we look at it the other thing we can do with our distribution channel is we have targets were for our distribution channels about how much growth, we're trying to get because obviously theyre dealing with tens of thousands of different customers.
And in that case, we do look at indices of based on regional.
Manufacturing and we would say that the <unk>.
Our growth with that particular distributor in total has been greater than those indices, which gives us comfort that there is actually a pickup for us. So that's the those are a couple of examples of how we how we try to look at it.
Do you feel like there's been good progress in the share gains as you've measured what you think the customers should be taking relative to what they are.
Yes, we do because.
For example on the.
In aerospace, where we actually were starting with quite a quite a low share and we don't have a huge share now.
That one we can we can tell many of those tier suppliers and even some of the Oems for certain types of their business. We just didn't have that business before and where they are now starting to direct that that to us I can tell you on the fit for purpose.
Application space, which is a lot of small.
And medium sized job shops, the growth in that portfolio of video.
Then rebranded and repositioned for fit for purpose that growth rate is as faster again than what we see in kind of the general General engineering and maybe even the kennametal tooling. So those are all directional indicators that we're we're picking up share with these customers.
Well if I can just do a quick follow up that was one of my questions back on slide three with the underserved markets and.
And supporting small and medium job shops is that a function of incentivizing distributors or do you have new specific sales initiatives from your own internal sales group to drive growth there.
Yes, I think it's a combination of both in some cases some of those small job shops are so small they are not even covered by distributors.
So we have.
We have targeted targeted digital marketing towards those those small customers and in many cases, they may through our supply chain part of our channel partners. They may direct inquiries ultimately through the distribution channel, but together, we're working with our channel partners to make sure we're reaching those those companies.
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And whether it comes back through distribution or whether it comes directly through our our website and we pick up the inquire through our inside sales organization. It doesn't matter to us we're still going to sell sell tooling. So it is definitely a team effort with the distribution channel.
Understood. Thanks.
Our next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.
Hi, Thanks, good morning, everyone.
Good morning, Jeremy.
So my first question obviously growth.
Still remains pretty strong here in the Americas I'm. Just curious are you starting to see any benefit at all from the infrastructure stimulus package that got that got passed last November or is that or do you expect a lot of that still be on the come.
In calendar year 'twenty three.
Yes, I think it is still it's still on the comm, we really haven't seen any.
We've seen a lot of inquiries in quotes but it hasnt translated into business.
And.
You said calendar year 'twenty, three I think we might see it more in calendar year 'twenty or excuse me.
We might see it in our in our fiscal year 'twenty.
24, because I'm not sure that even over the next six months or eight months were going to the trend of.
Just a lot of inquiries, but no business I'm not sure that's going to change so it seems to be taking longer for this these to turn into projects that could be a little bit because.
Inflation is.
Is putting pressure on some of these projects and also frankly some of these companies are still doing with temporary supply chain issues.
So for US I think it's going to be more of a fiscal year 'twenty four subject.
Got it that's helpful. Chris and I guess, maybe just since you just referenced the supply chain I know, we've talked about it a little bit on this call already I'm just curious that.
The force Majeure that you referenced earlier can you maybe provide a little bit more specifics around that.
A.
Is it very much.
Customer customer specific issue.
What particular like.
Components, where they supplying into you just anything any other color there would be helpful.
Yes, I would say that.
It's a raw material to our.
One of our infrastructure powder powder producing plants. So it's not specific to any customer because that infrastructure business really feel feeds the raw materials that we use to make inserts in.
And cutting tools. In addition to the products inside infrastructure. So it's kind of a pause applies across the whole business, but it's definitely limited to a supplier.
Feeding a plant a couple of plants and that disruption.
Permian <unk> through <unk>.
Not only infrastructure, but theres a little bit of that.
That kind of effect into metal cutting, but it's not affecting one customer and I would also emphasize that our customers actually are not going to see any disruption. This is really about we've managed to put another source of supply and we avoided any production disruption.
It's really though that that alternate supply is more expensive and the.
The faster we can mitigate it.
Better.
Got it that's helpful. Thank you.
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.
As I said this quarter, it's another data point I think to demonstrate our ability to advance our strategic initiatives and also our ability to secure what I believe is really market leading positions and also just as a quick reminder.
I encourage everyone to review our third annual ESG report, which was published in September and is posted on our website as always appreciate your interest and support in Kennametal and please don't hesitate to reach out to Kelly if you have any questions.
Everyone have a great day thanks.
Okay.
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