Q1 2024 Kennametal Inc Earnings Call

Good morning, I would like to welcome everyone to Ken and metals first quarter fiscal 'twenty 'twenty four earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session.

You'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.

If you'd like to withdraw your question. Please press Star then the number two please.

Note that this event is being recorded I would now like to turn the conference over to Michael P. C. Vice President of Investor Relations. Thank you operator, welcome everyone and thank you for joining us to review kind of metals first quarter fiscal 2024 results.

This morning, we issued our earnings press release and posted our presentation slides on our website, we will be referring to that slide deck during today's call.

P C Vice President of Investor Relations joining me on the call today are Christopher Rossi, President and Chief Executive Officer, Pat Watson, Vice President and Chief Financial Officer, Sanjay Chow, Vice President and President metal cutting and Franklin Cardenas, Vice President and president of infrastructure.

After Christmas paths prepared remarks, we will open the line for questions.

At this time I'd 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 metals SEC filings.

In addition, we will be discussing non-GAAP financial measures on the call today reckon.

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.

I'll turn the call over to you Chris.

Thanks, Mike.

Thank you for joining us I'll start the call today with a review of the quarter.

The end market commentary as well as an example of the industry, leading innovation, we're bringing to market.

Then Pat will cover the quarterly financial results in fiscal year 'twenty four outlet.

Finally, I'll make some summary comments at the end then open the call for questions.

On slide three.

For the quarter sales were flat year over year with flat organic growth.

No meaningful effect from the net of negative work days and a positive foreign currency.

Price realization was offset by anticipated seasonal volume declines.

At the segment level metal cutting grew 2% organically and infrastructure declined 3%.

On a constant currency basis, EMEA posted 8% growth driven primarily by aerospace and defense General Engineering and transportation.

Americas declined, 3%, mainly driven by energy and general engineering.

Asia Pacific declined, 8%, driven by General Engineering transportation and energy.

It reflects year over year and sequential declines in China.

By end market Aerospace and defense reported 17% growth.

Energy declined 12% General engineering declined 1% transfer.

Transportation declined 1% in earthworks was flat.

This performance was largely as expected with declines in general engineering oil and gas and in the latter part of the quarter China.

Sequentially as expected Q1 sales declined 10%, which is below our historical average of approximately 8%, but generally in line with a 10% decline from the midpoint of our outlook, However, China was lower than anticipated.

Now, let me take a moment to provide some color on the end market conditions that led to the year over year decline in sales.

In aerospace and defense, we once again reported strong year over year growth of 17%.

Metal cutting benefited from continued execution of our growth initiatives and continued strength in aerospace.

In infrastructure growth was driven by defense order timing.

General engineering declined 1% versus prior year with metal cutting growth in the Americas and EMEA.

All set by declines in infrastructure.

Asia Pacific declined in both segments due to China.

Transportation declined 1% this quarter with a decline in Asia Pacific due to lower demand in China, and a slight decline in the Americas, partially offset by strong EMEA performance.

This was driven by continued supply chain easing and new E V project wins further improving our position in the hybrid and electric vehicle market.

Unknown Executive: Good morning. I would like to welcome everyone to Kennametals' first quarter fiscal 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.

Our transportation results this quarter were not affected by the labor dispute between the UAW and the big three U S automakers.

Unknown Executive: After the speaker's remarks, there will be a question and answer session. If you'd 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 note that this event is being recorded.

Energy declined 12% driven by the lower year over year U S land based rig counts and continued customer inventory adjustments.

In earthworks was flat during the quarter.

Michael Pici: I would now like to turn the conference over to Michael Pici. Thank you for joining us to review Kennametals' first quarter fiscal 2024 results. This morning we issued our earnings press release and posted our presentation slides on our website. We will be referring to that slide deck during today's call. I'm Michael Pici, Vice President of Investor Relations. Joining me on the call today are Christopher Rossi, President and Chief Executive Officer, Pat Watson, Vice President and Chief Financial Officer, Sanjay Chowbey, Vice President and President Metal Cutting and Franklin Cardanius, Vice President and President of Infrastructure.

Turning now to profitability as mentioned earlier price was offset by volume and product mix and the pricing actions taken in both business segments substantially covered all forms of inflation on a dollar basis.

Metal cutting its adjusted operating margins increased 170 basis points year over year, driven by improved price realization.

Operational excellence productivity initiatives and restructuring savings.

As anticipated Infrastructure's operating margins were a headwind in the quarter.

Year over year operating margin decline was driven by unfavorable price raw material cost timing and product mix offset by restructuring benefits and operational excellence productivity improvements.

Michael Pici: After Chris and Pat's prepared remarks, we will open the line for questions. At this time, I'd 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 Kennametals' SEC filings. In addition, we will be discussing non-GAP financial measures on the call today.

Adjusted EPS increased to 41 cents compared to 34 in the prior year quarter.

Cash from operating activities increased significantly to $26 million from negative $11 million in the prior year quarter, driven mainly by lower inventory levels.

Finally, we continued to repurchase shares this quarter with $14 million of shares bought back bringing the total amount of repurchased since the beginning of the program to $148 million.

Our share repurchase program reflects the confidence we have in executing our strategic initiatives for long term value creation, despite quarterly macroeconomic headwinds and uncertainties.

Michael Pici: Reconciliation to GAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our form 8K on our website.

Turning to slide four I wanted to take a moment to provide some additional commentary on our end markets for the full year.

Christopher Rossi: And with that, I'll turn the call over to you Chris. Thanks Mike. Good morning and thank you for joining us. I'll start the call today with a review of the corridor and some end-market commentary as well as an example of the industry leading innovation we're bringing to market. Then Pat will cover the quarterly financial results in the fiscal year 24 outlook.

As we talked about on our last call. There were several drivers for our expected second half growth acceleration in.

Christopher Rossi: Finally, I'll make some summary comments at the end and open the call for questions. Beginning on slide 3. For the corridor, sales were flat year-over-year with flat organic growth and no meaningful effect from the net of negative work days and positive foreign currency. Price realization was offset by anticipated seasonal volume declines. At the segment level, metal cutting grew 2% organically and infrastructure declined 3%. On a constant currency basis, the media posted 8% growth driven primarily by aerospace and defense, general engineering and transportation.

And despite continued uncertainty these drivers remain intact.

Overall U S land based rig counts are still forecasted to increase slightly during the second half of the year.

In addition, public commentary from oilfield service customers indicate that they expect their north American revenues to grow in calendar year 'twenty four.

General Engineering is expected to improve in the second half of fiscal year 'twenty four as ISI EMEA Ipi forecast indicates gradual improvements starting in calendar year 'twenty four and.

And in the U S. According to the National Association of manufacturers survey manufacturing production is expected to grow 2% through September of 2024.

Additionally, we're also encouraged by the latest S&P Global Flash U S. PMI data, which shows an improvement from 47 in August to 50 in October.

Christopher Rossi: America's declines 3% mainly driven by energy and general engineering. Asia-Pacific declined 8% driven by general engineering, transportation and energy and reflects year-over-year and sequential declines in China. By end-market, aerospace and defense reported 17% growth, energy declined 12%, general engineering declined 1%. Transportation decline, 1% and Earthworks was flat. This performance was largely as expected with the clients in general engineering, oil and gas, and in the latter part of the quarter China. Sequentially, as expected, Q1 sales declined 10%, which is below our historical average of approximately 8%, but generally in line with a 10% decline from the midpoint of our outlook. However, China was lower than anticipated.

Earthworks is anticipated to improve during the second half of the year.

In line with normal seasonality and.

And we continue to make progress on our growth initiatives to expand into underserved applications.

For example, I want to highlight a win in infrastructure that demonstrates our focus on gaining share in.

In underserved mining applications, which we discussed at our last Investor day.

Recently, the team secured an order for our 10 cash where protection solution, which typically is applied to coal mining applications to reduce maintenance downtime.

This particular win however was for a gold mining customer in Brazil.

This demonstrates our ability to leverage our existing solution portfolio to expand into new applications.

And transportation per IHS light vehicle production is projected to grow globally low single digits in the second half of fiscal year 'twenty four.

Christopher Rossi: Now let me take a moment to provide some color on the market conditions that led to the year-over-year decline in sales. In aerospace defense, we once again reported strong year-over-year growth of 17%. Metal cutting benefited from continued execution of our growth initiatives and continued strength in aerospace. An infrastructure growth was driven by defense order timing. General engineering declined 1% versus prior year with metal cutting growth in the Americas and Amia, offset by declines in infrastructure.

And we anticipate aerospace and defense to continue its strong performance in both segments during the second half.

Aircraft build rates still remain below pre pandemic levels and major Oems are continuing to project second half build rates to increase over the first half of our fiscal year.

And our strategic focus continues in this end market to drive share gain.

As it relates to China.

Optimistic that we'll experience improvement as the PMI indices are approaching 50.

Christopher Rossi: Asia-Pacific declined in both segments due to China. Transportation declined 1% this quarter, with a decline in Asia-Pacific due to lower demand in China, and a slight decline in the Americas partially offset by strong Amia performance, which was driven by continued supply chain easing and new EV project winds further improving our position in the hybrid and electric vehicle market. Our transportation results this quarter were not affected by the labor dispute between UAW and the big three US automakers.

So that's a bottom up view of the drivers for an improving end market environment in the second half.

We know of course that there are an increasing number of risk factors that could affect our end markets and as always we'll be monitoring the end market conditions and will adjust if conditions differ from our expectations.

Now on slide five I'd like to highlight an example of our innovation advantage.

This slide shows our latest Harvey for Anvil for metal cutting.

Notably this end mill is used in applications with difficult to machine materials, such as titanium high temperature alloys and stainless steel.

Christopher Rossi: Energy declined 12% during the lower year-over-year US land-based rate counts and continued customer inventory adjustments, and earthworks was flat during the quarter. Turning out of profitability, as mentioned earlier, price was offset by volume and product mix, and the pricing action is taken in both business segments so stance recovered all forms of inflation on a dollar basis. Metal cutting to just about operate margins increased to 170 basis points year-over-year, driven by improved price realization, operational access productivity initiatives, and restructuring savings.

These applications across all end markets, including engine and suspension parts in aerospace and surgical cutting guides for use in medical applications.

Oh proposition for customers as lower cost of ownership, including 400% longer to life and 40% higher metal removal rates now.

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'll begin on slide six with a review of Q1 operating results. The quarter's results show that we continue to execute our initiatives in the face of challenging market conditions sale.

Christopher Rossi: As anticipated, infrastructures operating margins were a headwind in the quarter. The year-over-year operating margin decline was driven by unfavorable price raw material cost timing and product mix, offset by restructuring benefits and operational excellence productivity improvements. Adjusted EPS increased to 41 cents compared to 34 cents in the prior year quarter. Pass from operating activities increased significantly to 26 million from negative 11 million in the prior year quarter to have been mainly by lower inventory levels.

Sales were flat year over year with flat organic growth and no meaningful effect from workplace, where foreign exchange.

As Chris pointed out we perform as expected and our outlook for the lack of recovery in China. The.

The decline in China pressured both segments, but had a much larger impact on metal cutting and sales in several end markets in the Asia Pacific region.

Once again price remains a key strategic lever as we price for value and offset cost inflation.

Christopher Rossi: And finally, we continued to repurchase shares this quarter with $14 million of shares bought back, bringing the total amount of repurchased since the beginning of the program to $148 million. Our share repurchase program reflects the confidence we have in executing our strategic initiatives for long-term value creation despite quarterly macroeconomic headwinds and uncertainties.

From a sales perspective.

Favorable price mitigated the lower volumes, we experienced this quarter <unk>.

Operating expense as a percentage of sales decreased 80 basis points year over year to 22, 7% as a result of wage inflation and the effects of foreign exchange, partially offset by our savings from our restructuring program.

Christopher Rossi: Turning to slide four, I want to take a moment to provide some additional commentary on our markets for the full year. As we talked about on our last call, there were several drivers for our expected second half growth acceleration and despite continued uncertainty, these drivers remain intact. Overall, U.S, land-based rig counts are still forecasted to increase slightly during the second half of the year. In addition, public commentary from oil field service customers indicate that they expect their North American revenues to grow in calendar year 24.

Adjusted EBITDA and operating margins were 16, 6% and nine 9%, respectively versus 15, 9% and nine 8% in the prior year quarter.

As in prior quarters, higher pricing offset higher raw material wage and general inflation in the quarter on a dollar basis.

Additionally, during the quarter, we realized approximately $4 million in savings from the restructuring program. We started in June and we remain on pace to achieve our stated run rate savings of $20 million annually by the end of FY 'twenty four.

Christopher Rossi: General engineering is expected to improve the second half of fiscal year 24. As ISI's IMEA IPI forecast indicates gradual improvement starting in calendar year 24. And in the U.S., according to the National Association of Manufacturers Survey, manufacturing production is expected to grow 2% through September of 2024. Additionally, we're also encouraged by the latest S&P Global Flash US PMI data which shows an improvement from 47 in August to 50 in October. Earthworks is anticipated to improve during the second half of the year in line with normal seasonality.

Our results. This quarter include a $5 million headwind from pricing ahead of raw material costs in the prior year.

The adjusted effective tax rate decreased year over year to 21%, primarily due to a benefit of approximately $6 million from a one time tax item, which was expected partially offset by a settlement related to tax litigation in Italy of approximately $3 million.

Adjusted earnings per share were <unk> 41 in the quarter versus EPS of <unk> 34 in the prior year period.

The main drivers of our EPS performance are highlighted on the bridge on slide seven.

The year over year effective operations. This quarter was neutral this reflects price operational excellence initiatives and restructuring savings offsetting lower volumes higher raw material costs and wage and general inflation headwinds.

Christopher Rossi: And we continue to make progress on our growth initiatives to expand into underserved applications. For example, I want to highlight a win in infrastructure that demonstrates our focus on gaining share in underserved mining applications which we discussed that our last investor day. Recently, the team secured an order for our Kencast Wear Protection Solution which typically is applied to coal mining applications to reduce maintenance downtime. This particular win, however, was for a gold mining customer in Brazil.

You can also clearly see the effects of a lower tax rate, which reflects the one time benefit and the Italian tax settlement of <unk> in total.

Foreign exchange and a lower share count contributed <unk> <unk> each.

There was no material change in pension income compared to last year and our U S pension plan remains overfunded.

Christopher Rossi: This demonstrates our ability to leverage our existing solution portfolio to expand into new applications. In transportation, per IHS light vehicle production is projected to grow globally low single digits in the second half of fiscal year 24. And we anticipate aerospace and defense to continue its strong performance in both segments during the second half. Aircraft build rates still remain below pre-pandemic levels and major OEMs are continuing to project second half build rates to increase over the first half of our fiscal year.

Slides eight and nine details the performance of our segments this quarter.

Reported metal cutting sales were up compared to the prior year quarter with 2% organic growth and a favorable foreign exchange effect of 1%.

This marks the fourth consecutive quarter, where we have demonstrated growth that outperformed the market when compared to sweat peers on a constant currency basis.

We achieved growth in EMEA, and the Americas with Asia Pacific declining due to China.

The transportation and energy end markets performance on a constant currency basis was also the result of the slowdown in China VI.

Christopher Rossi: And our strategic focus continues in this end market to drive share gain. As it relates to China, we're optimistic that we'll experience improvement as the PMIE indices are approaching 50. So that's the bottom up view of the drivers for an improving end market environment in the second half. We know of course that there are an increasing number of risk factors that could affect our end markets. And as always, we'll be monitoring the end market conditions and we'll adjust its conditions differ from our expectations.

By region EMEA led at 8% followed by the Americas at 3%, while Asia Pacific was negative 13%.

And these year over year performance reflects growth driven by general engineering, and OEM supply chain improvements and EV wins in transportation.

Americas year over year growth this quarter was driven by the execution of our growth initiatives in aerospace and defense and the general engineering end market.

Christopher Rossi: Now on slide five, I'd like to highlight an example of our innovation advantage. This slide shows our latest Harvey IV end mill for metal cutting. Notably, this end mill is used in applications with difficult to machine materials such as titanium, high temperature alloys, and stainless steel.

Asia Pacific's decline as Chris noted was primarily from market conditions in China included lower auto build rates.

Looking at sales by end market Aerospace and defense grew 7% as our strategic initiatives continued to drive results in this end market.

General engineered grew 1% with the strongest growth in EMEA and the Americas, partially offset by market softness in China.

Christopher Rossi: These applications cross all end markets including engine and suspension parts and aerospace, and surgical cutting guides for use in medical applications. The value proposition for customers is a lower cost of ownership including 400% longer tool life, and 40% higher mental removal rates.

Energy declined 3% this quarter driven by the Asia Pacific region due to lower activity in wind energy.

And lastly, transportation declined 1% year over year, with improving customer supply change and EMEA more than offset by weaker conditions in Asia Pacific.

Patrick Watson: 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 six with a review of Cuba on operating results. The quarters results show that we continue to execute our initiatives in the face of challenging market conditions. Sales for flat year over year with flat organic growth and no meaningful effect from work face or foreign exchange.

As Chris noted earlier, we did not experience any effect this quarter from the UAW strike.

Metal cutting took a meaningful step forward in profitability this quarter, while operating in a weak volume environment with adjusted operating margin, increasing 170 basis points year over year.

Adjusted operating margin improvement was due to higher price realization operational efficiencies and restructuring savings. These factors were partially offset by higher wages general inflation and lower sales volumes.

Patrick Watson: As Chris pointed out, we performed as expected in our outlook but for the lack of recovery in China. The decline in China pressured both segments but had a much larger effect on metal cutting and sales in several end markets in the age of a civic region. Once again, price remains a key strategic lever as we price for value and offset cost inflation. From a sales perspective, favorable price mitigated the lower volumes we experienced this quarter.

Turning to slide nine for infrastructure.

Reported infrastructure sales were down year over year due to an organic sales decline of 3% with foreign exchange headwinds and unfavorable business days contributing negative 1% each.

Regionally EMEA grew 11% Asia Pacific was flat and Americas sales declined by 10%.

Patrick Watson: Operating expense as a percentage of sales increased 80 basis points year over year to 22.7% as a result of wage inflation and the effects of foreign exchange partially offset by our savings from our restructuring programs. Adjust the EBITDA and operating margins from 16.6% and 9.9% respectively versus 15.9% and 9.8% and the prior year quarter. As in prior quarters, higher pricing offset higher raw material, wage and general inflation in the quarter on a dollar basis.

Looking at sales by end market on a constant currency basis energy declined 17%, mainly in Americas due to lower U S land rig counts and destocking of inventory at our customers.

We expect this to continue into the second quarter, but as Chris noted earlier customer feedback is indicating a recovery in the second half of our fiscal year.

General engineering declined 8% due to softer market conditions across all regions.

<unk> was flat with underground mining growth offset by lower construction volume in the Americas.

Patrick Watson: Additionally, during the quarter we realized approximately $4 million in savings from the restructuring program we started in June and we remain on pace to achieve our stated run rate savings of 20 million annually by the end of FY24. Our results this quarter include a $5 million headwind from pricing ahead of raw material costs in the prior year. The adjusted effect of tax rate decreased year over year to 21%, primarily due to a benefit of approximately $6 million from a one-time tax item which was expected, partially offset by a settlement related to tax litigation in Italy of approximately $3 million.

Lastly, aerospace and defense increased 67% due to defense order timing when compared to the prior year.

Adjusted operating margin declined year over year to 8% primarily from two factors first lower sales volume primarily in the energy and general engineering end markets in the Americas.

The second significant factor affecting the margin this quarter was higher raw material costs compared to the prior year, which benefited from price raw material cost favorability that did not repeat in addition to higher wages and general inflation.

These headwinds were partially offset by operational excellence initiatives.

Patrick Watson: Adjusted earnings per share were 41 cents in the quarter versus EPS of 34 cents in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on slide 7. The year-over-year effect of operations this quarter was neutral, this reflects price, operational excellence initiatives and restructuring savings, offsetting lower volumes, higher raw material costs and wage and general inflation headwinds. You can also clearly see the effects of the lower tax rate which reflects the one-time benefit and the Italian tax settlement of $5 cents in total. More in exchange and a lower share count contributed 1 cent each. There was no material change in pension income compared to last year and our U.S, pension plan remains overfunded.

Now turning to slide 10 to review, our free operating cash flow and balance sheet.

Our first quarter cash from operating activities was $26 million up from negative $11 million in the prior year.

Our free operating cash flow increased to negative $3 million from negative $40 million in the prior year quarter, a significant improvement year over year.

Primary working capital this quarter was flat to the prior year. The company continues to focus on optimizing inventory levels and remains focused on driving improved working capital.

On a percentage of sales basis primary working capital increased to 32, 7%.

Net capital expenditures were flat at $29 million compared to the prior year quarter.

In total we returned $30 million to shareholders through our share repurchase and dividend programs.

Patrick Watson: Slide 8 and 9 detailed the performance of our segments this quarter. Reported metal cutting sales were up compared to the prior year quarter with 2% organic growth and a favorable foreign exchange effect of 1%. This marks the fourth consecutive quarter where we have demonstrated growth that outperform the market when compared to select peers on a constant currency basis, and the Americas with Asia Pacific declining due to China. The transportation and energy and markets performance on a constant currency basis was also the result of the slowdown in China.

We repurchased 14 million shares in Q1 for a total of $148 million or 5 million shares representing approximately 7% of outstanding shares since the inception of the program.

As we have every quarter since becoming a public company over 50 years ago, we paid a dividend to our shareholders.

Our commitment to returning cash to shareholders and reflects our confidence in our ability to execute our strategy to drive growth and margin improvement.

We continue to maintain a healthy balance sheet and debt maturity profile at.

Patrick Watson: By region, a mea led to 8 percent, followed by the Americas at 3 percent, while Asia Pacific was negative 13 percent. And Evie wins in transportation. America's year-over-year growth this quarter was driven by the execution of our growth initiatives in aerospace and defense and the general engineering and market. Asia Pacific's decline, as Chris noted, was primarily from market conditions in China, included lower auto-build rates. Looking at sales by end market, aerospace and defense grew 7 percent, as our strategic initiatives continued to drive results in the end market.

At quarter end, we had combined cash and revolver availability of approximately $772 million and were well within our financial covenants.

The full balance sheet can be found on slide 17 in the appendix.

Turning to slide 11 regarding our second quarter outlook.

We expect Q2 sales to be between $490 million and $515 million with volume ranging from negative 5% to flat.

Price realization of approximately 3% and we expect foreign exchange to be about a 1% tailwind.

Let me share some detail on the sales assumptions and trends in the Q2 outlook.

Our Q2 range at the midpoint reflects growth that is generally in line with our historical norms.

Patrick Watson: General engineering grew 1 percent with the strongest growth in the mea and the Americas, partially offset by market softness in China. Energy declined 3 percent this quarter, driven by the Asia Pacific region due to lower activity and wind energy. And lastly, transportation declined 1 percent year-over-year with improving customer supply chains in a mea more than offset by weaker conditions in Asia Pacific. As Chris noted earlier, we did not experience any effect this quarter from the UAW strike.

On a year over year basis, Aerospace and defense growth continues energy declines due to inventory Destocking, continuing general engineering declined slightly but will remain at similar levels to Q1 transportation increases. However, generally flat with Q1 as we monitor the lingering UAW effects in north.

<unk>.

Work experiences modest growth and we anticipate a slight improvement in China Encouragingly in China, We began to see order intake improving late in Q1.

Patrick Watson: Metal cutting took a meaningful step forward in profitability this quarter, while operating in a weak volume environment with adjusted operating margin increasing 170 basis points year-over-year. Adjusted operating margin improvement was due to higher price realization, operational efficiencies and restructuring savings. These factors were partially offset by higher wages, general inflation and lower sales volumes.

We expect a sequential price raw material headwind of approximately $13 million compared to Q1. This headwind will primarily affect infrastructure and to slightly more than the previous estimate due to some favorability timing experienced in Q1.

Foreign exchange is expected to be neutral on an operating income basis.

We expect adjusted EPS.

PFS in the range of 20 to 30.

Patrick Watson: Turning slide 9 for infrastructure reported infrastructure sales were down year-over-year due to an organic sales decline of 3 percent, with foreign exchange headwinds and unfavorable business days contributing negative 1 percent each. Regionally, a mea grew 11 percent, Asia Pacific was flat and America sales declined by 10 percent. Looking at the sales by end market on a constant currency basis, energy declined 17 percent, mainly in America's due to lower US land rate counts and destocking event inventory at our customers.

Turning to slide 12.

The full year outlook for the full year, we're maintaining our outlook as we continue to expect growth to accelerate as the year progresses with the second half growth outpacing the first half.

We continue to expect FY 'twenty for sales to be between $2, one and $2 2 billion.

With volume ranging from negative two to positive 3% net price realization of approximately 3% with our inflationary pricing actions, partially offset by lower prices for customers with index pricing.

Patrick Watson: We expect this to continue into the second quarter, but as Chris noted earlier, customer feedback is indicating a recovery in the second half of our fiscal year. General engineering declined 8 percent due to softer market conditions across all regions and earthworks was flat with underground mining growth offset by lower construction volume in the Americas. Lastly, aerospace and defense increased 67 percent due to defense order timing when compared to the prior year.

Aerospace and defense volume remains strong.

<unk> <unk> increased slightly and we anticipate general engineering and energy to be flat.

From a cost perspective, we expect the current inflationary environment to persist, but this is soon to moderate.

We expect to offset raw material wage and general cost increases on a dollar basis.

Assuming the pricing level for tungsten remains constant in the second half of fiscal 'twenty four we.

Patrick Watson: Adjusted operating margin declined year-over-year to 8 percent, primarily from two factors. First, lower sales volume, primarily in the energy and general engineering and markets in the Americas. The second significant factor affecting the margin in this quarter was higher raw material costs compared to the prior year, which benefited from price raw material cost capability that did not work. Pete, in addition to higher wages and general inflation. These headwinds were partially offset by operational excellence initiatives.

We'll begin to see a benefit from lower material costs in the fourth quarter.

This will largely affect our infrastructure segment.

Foreign exchange and noncash pension income is expected to be neutral on an operating income basis.

Approximately $15 million of savings from our previously announced restructuring initiative has been included.

We remain on target to achieve an annualized run rate of approximately $20 million at the end of FY 'twenty four.

And we expect interest expense of approximately $28 million and an effective tax rate of approximately 24% for the full year.

Patrick Watson: Now turning to slide 10 to review our free operating cash flow and balance sheet. Our first quarter, cash from operating activities, was $26 million, up from negative $11 million in the prior year. Our free operating cash flow increased to negative $3 million from negative $40 million in the prior year quarter as significant improvement year-a-year. Primary work and capital discord was flat to the prior year. The company continues to focus on optimizing inventory levels and remains focused on driving improved working capital.

We expect adjusted EPS in the range of $1 75 to 15.

On the cash side the.

Our full year outlook for capital expenditures is $100 million to $110 million and the outlook for primary working capital is between 30% and 32%.

Together.

We continue to expect free operating cash flow at 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.

Patrick Watson: On a percentage of sales basis, primary work and capital increased to 32.7%. That capital expenditure is for flat at $29 million compared to the prior year quarter. In total, we return $30 million to shareholders to our share repurchase and dividend programs. We repurchase $14 million to shares in Q1 for a total of $148 million or $5 million shares, representing approximately 7% of outstanding shares since the inception of the program. And as we have every quarter since becoming a public company over 50 years ago, we've paid a dividend to our shareholders.

Thank you Pat turning to slide 13, let me take a few minutes to summarize.

Overall, although the operating environment continues to be challenging we remain focused on executing our strategic initiatives to drive long term value for example, metal cutting delivered a fourth consecutive quarter of above market growth when compared to select peers.

Also our operational excellence initiatives contributed to driving improved margins and metal cutting despite lower volumes and an infrastructure to mitigate the market driven volume declines we experience.

These results give us confidence in our ability to drive above market growth through our innovation advantage and commercial excellence initiatives and to extract even greater operational efficiency from our modernized plants as part of the $100 million cost out margin expansion plan, we discussed at Investor Day.

Patrick Watson: Our commitment to returning cash to shareholders reflects our confidence and our ability to execute our strategy to drive growth and margin improvement. We continue to maintain a healthy balance sheet and debt maturity profile. At quarter end, we had combined cash and revolver availability of approximately $772 million and were well within our financial covenants.

Unknown Executive: The full balance sheet can be found on slide 17 in the appendix.

And with that operator, please open the line for questions.

Yeah.

If you'd like to ask a question. During this time simply press Star then the number one where your telephone keypad.

If you would like to withdraw your question. Please press Star then the number two.

Patrick Watson: Turning to slide 11 regarding the second quarter outlook. We expect Q2 sales to be between $490 million and $515 million, with volume ranging from negative 5% to flat, price realization of approximately 3%, and we expect foreign exchange to be about a 1% tail end. Let me share some detail on the sales assumptions and trends in the Q2 outlook. Our Q2 range at the midpoint reflects growth that is generally in line with our historical norms.

Yeah.

Our first question comes from Julian Mitchell from Barclays. Please go ahead.

Hi, good morning.

Maybe.

Just wanted to start with the second quarter guidance I think before you talked about.

Q2, looking very similar to Q1 and then now we have this you know decent sized sequential step down in EPS. So there's a lot of that to do with the infrastructure.

Patrick Watson: About a year over your basis, aerospace and defense growth continues, energy declines due to inventory destocking, continuing, general engineering declines slightly, but will remain at a similar level to Q1. Transportation increases, however, generally flat with Q1 as we monitor the lingering UAW effects in North America. Earthworks experiences modest growth and we anticipate a slight improvement in China. Encouragingly, in China, we began to see order intake improvement late in Q1. We expect a sequential price-raw material headwind of approximately $13 million compared to Q1. This headwind will primarily affect infrastructure and is slightly more than the previous estimate due to some favorability timing experienced in Q1. Foreign exchange is expected to be neutral on an operating income basis.

Our margin assumption changing and just wanted to understand you know when we think about that full year guide.

We sort of thinking infrastructure margins are.

Low to mid single digit in Q2.

And then ending the year at sort of low double digits helped by the material cost tailwind do you just mentioned.

Yeah, Julien good morning, So a couple of things just in terms of thinking about Q2 and in particular, we'll just talk through infrastructure here for the year, absolutely as we think about the margin progression throughout the year Q2 is going to be our trough and that's really driven by what is happening from them.

Cereal cost perspective.

I think it was we thought about Q2, I'll say 90 days ago thought about that material headwind being around $10 million and our current estimate for that sits around 13 as we've talked about in the prepared remarks, and that's primarily will affect infrastructure.

Patrick Watson: We expect adjusted the EPS in the range of 20-30 cents.

Patrick Watson: Turning to slide 12 regarding the full year. Outlook. For the full year, we are maintaining our outlook as we continue to expect growth to accelerate as the year progresses. With the second half growth outpacing the first half, we continue to expect FY24 sales to be between 2.1 and 2.2 billion dollars, with volume ranging from negative to deposit of 3%. Net price realization of approximately 3% with our inflationary pricing actions partially offset by lower prices for customers within next price.

Progression of margin there as we get to the back through the back half of the year will come up for both segments.

And we will see that not only from a volume perspective at the midpoint as we move throughout the year, but it is also as long as those material costs hold.

Current tungsten price level, we will see that flip to a tailwind for us by the time, we get out to Q4.

Okay. That's helpful. Thank you.

And then just my second question is.

He is around the I suppose general engineering.

Patrick Watson: There is base and defense volume remains strong, birth works and transportation increase slightly, and we anticipate general engineering and energy to be flat. From a cost perspective, expect the current inflationary environment to persist, but this is assumed to moderate. We expect the pricing level for tungsten remains constant in the second half fiscal 24. We will begin to see a benefit from lower material costs in the fourth quarter. This will largely affect our infrastructure sector.

Segment and also Earth works, So general engineering.

You know maybe help us understand sort of what gets better there in the second half I realize it's tricky given its cool general it can be hard to be specific but any any impression of kind of regionally.

You know what you expect to get better in the back half and then for earthworks you've talked about a sort of flattish 2024 sales.

You know I think a lot of other companies getting excited about stimulus and so on in the U S. Next year, just wondering what your perspective on that was vis vis the earthworks market. Thank you.

Patrick Watson: For an exchange, a non-cash pension income is expected to be neutral on an operating income basis. Approximately 15 million dollars of savings from our previously announced restructuring initiative has been included. We remain on target to achieve an annualized run rate of approximately 20 million dollars at the end of FY24. And we expect interest expense of approximately 28 million dollars in an effective tax rate of approximately 24% for the full year. We expected just the EPS in the range of $1.75 to 15. On the cash side, the full year outlook for capital expenditures is $110 million dollars in the outlook for primary working capital is between 30 and 32%.

Yes, Julian good morning, I think from a jet engine perspective.

I went through a number of.

Sort of a bottoms up.

Tricks that would drive that so we largely touched on the European Ipi, which is expected to improve.

In the second half of our year and nice job.

Association of manufacturers.

Sentiment for for growth in the U S. Industrial base is also expected to grow.

And that was.

90 days 90 days ago those were those metrics were exactly the same so that's the basis of why we think jet engine is going to improve China is also a situation where as Pat talked about it was weaker than we thought in Q1, because we were expecting this.

Patrick Watson: Taken together, we continue to expect free operating cash flow at approximately 100% of adjusted net income in line with our long-term target.

Christopher Rossi: And with that, I'll turn the call back over to Chris. Thank you, Pat. Turning to slide 13, let me take a few minutes to summarize. Overall, although the operating environment continues to be challenging, we remain focused on executing our strategic conditions to drive long-term value. For example, metal cutting delivered a fourth consecutive quarter of above-market growth went compared to select peers. Also, our operational excellence initiative is contributed to driving improved margins in metal cutting, despite lower volumes.

Improvement to start in Q1, but it's looking like now that that's moving out to Q2 and we were encouraged in the latter part of September that our order intake.

Started to increase we starting to see that and in fact I'll tell you in October.

They met our expectations in terms of our outlook for Q2. So there is some positive momentum there on that side and then also Gen engine is also affected by transportation in light vehicle production first half versus second half is still expected to increase so those would be the big drivers there.

Christopher Rossi: And in infrastructure, to mitigate the market-driven volume declines we experience. These results give us confidence in our ability to drive above market growth through our innovation advantage and commercial excellence initiatives and to extract even greater operational efficiency from our modernized plans. As part of the $100 million dollar cost out margin expansion plan, we discussed that investor day.

For the earthworks perspective.

If you remember last year Q4.

Erode our road milling business was actually below what we would normally expect and in talking to our customers.

The drop main driver for that was that they only had certain municipalities only having so much budget to spend and they had to reduce the number of road milling Myles because because of inflation and the costs associated with roll milling was up so significantly.

Unknown Executive: And with that operator, please open the line for questions. Thank you.

Unknown Executive: If you like to ask big questions during this time, simply press star then the number one on your telephone key pet. If you would like to withdraw your question, please press star then the number two.

They had a limit the number of road milling miles and so this year, we expect to see actually.

Julian Mitchell: Our first question comes from Julian Mitchell from Barclays. Please go ahead. Hi, good morning.

Greater than seasonal growth in particular in Q4 for earthworks because our feeling is that the to your 0.1st via the infrastructure Bill is in a lot of those municipal budgets have been replenished, our certainly backstopped by some funding from the infrastructure Bill.

Christopher Rossi: Maybe just wanted to start with the second quarter guides. I think before you talked about Q2 looking very similar to Q1 and then now we have this decent sized sequential step down in EPS. So there's a lot of that to do with the infrastructure margin assumption changing. And just wanted to understand when we think about that fully guide, we sort of thinking infrastructure margins are low to mid-single digit in Q2 and then ending the year at low double digit help by the material cost tailwind you just mentioned. Yeah, Julian, good morning. So, yeah, a couple things just in terms of thinking about Q2, and in particular, which talks through infrastructure here for the year.

That's great. Thank you.

The next question comes from Tami Zakaria from Jpmorgan. Please go ahead.

Hi, good morning. Thank you so much for taking my questions and good quarter.

So on aerospace and defense another very impressive growth.

Good quarter can you remind us where you are in terms of volume in that segment versus pre COVID-19 levels.

Yes, the production rates are.

Are still below pre <unk>.

Pre COVID-19 levels I don't know, Mike if we have that specific statistics.

Christopher Rossi: You know, absolutely, as we think about the margin progression throughout the year, Q2 is going to be our trust. And that's really driven by what is happening from a material cost perspective. You know, I think what we thought about Q2, I'll say 90 days ago, thought about that material headwind being around $10 million, you know, our current estimate for that. So it's around 13, as we talked about in the prepared remarks.

But we definitely see I think the other thing is Tammy is that.

Airbus and Boeing and other Oems are still projecting in the second half.

Christopher Rossi: And that primarily will affect infrastructure, progression of margin there as we get to the back after the back half of the year will come up for both segments. And, you know, we'll see that not only from a volume perspective at the midpoint as we move throughout the year. But also, as long as those material costs hold, you know, at the current tungsten price level, we will see that flip to a tailwind for us by the time we get out to Q4.

Julian Mitchell: That's helpful. Thank you.

Production.

Production pace to actually increase now there is still a there is still experiencing some supply chain delays that are kind of limiting that.

So I don't know that they get back to pre pandemic levels. This year I think there is still below by what Mike what is it.

At 10, or so percent 17% growth rate.

In the second half build rates based on the Oems.

Got it got it that's helpful. And then just on energy I know you spent some time talking about it and you said in the second quarter you expect slight.

Slight decline.

Destocking continues stepping back.

What do you think is driving this weakness any specific categories within energy Youre seeing the softness and do you see sort of like a like.

Julian Mitchell: And then just my second question is around the, I suppose, general engineering segment and also earthwork. So general engineering, you know, maybe help us understand sort of what gets better there in the second half. I realize it's tricky, given it's called general. It can be hard to be specific, but any, any impression of kind of regionally, you know, what you expect to get better in the back half. And then for earthworks, you've talked about a sort of flatish 2024 sales. I think a lot of other companies get excited about stimulus and so on in the US next year just wondered what your perspective on that was vis-a-vis the earthworks market.

At the end of the tunnel, where you think <unk> going to be largely done or do you think you can linger a little bit longer.

Yes, I think Tammy that the big driver for our particular business is the U S land based rig count.

And that has been that that has stepped down significantly year over year.

<unk>.

And declined sequentially in Q1 also so from Q4 to Q1 now the other thing that was happening simultaneous to that is that.

Our supply chain has began to mitigate the.

The oilfield service companies started to reduce their safety stock inventories. So we've been talking about that for a number of quarters. We do talk to the customers every quarter and they have they have now they now think that that sort of inventory.

Christopher Rossi: Thank you. Yeah, Julian, good morning. I think from a gen-enge perspective, I, you know, I went through a number of sort of the bottoms-up metrics that would drive that. So we largely touched on the European IPI, which is expected to improve in the second half of our year. And the National Association of Manufactures sentiment for growth in the US industrial basis is also expected to grow. And, you know, that was 90 days ago, those metrics were exactly the same.

Reduction is behind us in Q2.

And they're optimistic that that will start to recover in the second half of our year. The other thing that I would say Tammy.

With some of the oilfield service customers is that when they when they go through this destocking effort.

It's not uncommon that they overdo it and there is a pick up on.

On the back end, where they have to do some sort of recovery because they may be under a reorder stocking.

Christopher Rossi: So that's the basis of why we think gen-enge is going to improve. So China is also a situation where, as Pat talked about, it was weaker than we thought in Q1 because we were expecting this improvement to start in Q1. But it's looking like now that that's moving out the Q2. And we were encouraged in the latter part of September that our order intake started to increase. We started to see that.

That can be a typical scenario that happens.

Yeah.

Got it very helpful. Thank you.

The next question comes from Mike Feniger from Bank of America. Please go ahead.

Hey, guys. Thank you for taking my question just.

With the pricing guidance of plus three I believe this quarter you probably did something similar to that number just to get to that full year number just help us do you have to put in price increases in Q2 or in the back half to achieve that full year is that kind of already set base.

Christopher Rossi: And in fact, I'll say in October, it met our expectations in terms of our outlook for Q2. So there's some positive momentum there on that side. And then also, you know, gen-enge is also affected by transportation and, you know, light-beal protection, first half versus second half is still expected to increase. So those would be the big drivers there.

On your contract and whatever you have in the backlog just curious you kind of help us understand the cadence of that and to achieve that full year number.

Christopher Rossi: I think for an Earthworks perspective, you know, if you remember last year Q4, our road milling business was actually below what we would normally expect. And talking to our customers, you know, the main driver for that was that they only had, so the municipalities only had so much budget to spend. And they had to reduce the number of road milling miles because of inflation and the costs associated with road milling was upsoar significantly.

Yeah, So I think Mike the way to think about that pricing two things number one.

We price for value and we do that all the time and in particular, when we think about the custom solutions portfolios in both businesses. The things we get to quote life, we'd get to adjust those prices I'll say relatively dynamically.

The other thing just to think about here as we think about pricing for FY 'twenty. Four is we did put some pricing into selected markets here in the first quarter and so those actions are underway and they will benefit us obviously throughout the entire fiscal year.

Christopher Rossi: They had to limit the number of road milling miles. And so this year we expect to see actually greater than seasonal growth in particular in Q4 for Earthworks because our feeling is that the, to your point, the infrastructure bill is that a lot of those municipal budgets have been replenished or are certainly backstopped by some funding from the infrastructure bill.

Unknown Executive: That's great. Thank you.

Thank you and just my second question. The follow up is just I am curious you talked about oilfield services. The destocking there and that seems like that that's ended I'm just curious what youre seeing with your general Engineering summit.

Those customers are there destocking, you're seeing there on the horizon. Other inventories you feel like Okay. And then maybe just if you could touch on your own inventories you guys have been working through that just curious how we should kind of think about that through the rest of the year. Thank you.

Tami Zakaria: The next question comes from Tammy Zakaria from JP Morgan. Please go ahead. Hi, good morning. Thank you so much for taking my questions and good porter. So on aerospace and defense, another very impressive growth porter, can you remind us where you are in terms of volume in that segment versus pre-COVID level? Yeah, the production rates are still below pre-COVID levels. I don't know if we have that specific description. But we definitely see, I think the other thing is Tammy is that, you know, air bus and bowling and the other OEMs are still projecting the second half, production pace to actually increase.

Okay, Mike So in terms of general engineering.

Tami Zakaria: Now, there is still experiencing some supply chain delays that are kind of limiting that. So I don't know that they get back to pre-prem level this year. I think they're still below by what Mike, what is it? That 10% or so percent, and that's got 17% growth in the second half. Bill Gates based on the OEMs. Got it, got it. That's helpful. And then just on energy, I know you spent some time talking about it.

You know as we've as we've talked about coming out of this.

This pandemic recovery.

Our distributors and our customers. It seems to me have been fairly disciplined about not getting out over their skis in terms of adding inventory so.

So normally when there is a recovery in these type of markets and in particular in jet engines. There is a there is a restocking that happens and we really did not see a strong restocking we saw a lot of caution and where the restocking happened was in areas to support customers like aerospace where clearly the growth was there. So consequently.

As things have softened.

Around the globe in terms of general industrial production, we have.

Really havent seen any destocking because my theory is it never really they never really got or the scheme. So that's still our view is that we're not seeing significant destocking other than what we talked about in oil and gas and then I think you had a question on our particular inventory situation, which I'll, let Pat take yeah. As you think about the inventory.

Reflect back on the primary working capital outlook, we've got out there really implies that we'll get some improvement in working capital as we get throughout the year. That's really that improvement is going to be driven primarily at this point in time from our inventory position, which we talked about.

Tami Zakaria: And he said in the second quarter, you expect a slight decline. As this often continues, stepping back, what do you think is driving this weakness? Any specific categories with an energy you're seeing this softness? Do you see sort of like a light at the end of the tunnel where you think after two putes going to be largely done, or do you think it can linger a little bit longer? Yeah, I think, Tammy, that the big driver for our particular business is the U.S, land-based ripout.

At Investor Day, this is going to be one of the areas of focus for us on an ongoing basis.

We have opportunity to improve our working capital efficiency.

The next question comes from Chris Dankert from Loop. Please go ahead.

Hey, good morning, everyone.

<unk>.

Tami Zakaria: And that has been, that has stepped down significantly year over year and declined sequentially in Q1 also, so from Q40, Q1. Now, the other thing that was happening simultaneously is that as supply chains began to mitigate, the oil field service companies started to reduce their safety stock inventories. So, we've been talking about that for a number of quarters. We do talk to the customers every quarter, and they have now, they now think that that sort of inventory reduction is behind us in Q2.

Wondering if you could kind of help us triangulate what the impact of operational excellence was in the quarter I know it gets a lot of factors, but it seems like that was the majority of the metalworking operating income improvement is that correct and if you can just kind of give us some signposts or what the impact was.

Tami Zakaria: And they're optimistic that that will start to recover in the second half of our year. The other thing that I would say, Tammy, with some of the oil field service customers, is that when they go through this destocking effort, it's not uncommon that they overdo it. And there is a pickup on the backend where they have to do some sub-recovery because they may be under a re-understocking. That can be a typical scenario that happens. Got it. Very helpful. Thank you.

Yeah, I think as we think about metal cutting they're absolutely wasn't improvement I'll say on overall efficiency in metal cutting and we think about the drivers in terms of what's going on from a margin perspective.

Certainly.

I would say overall they have you know a little bit of headwind from a excuse me a tailwind from <unk>.

FX.

Obviously, a little bit of a tailwind from the restructuring program as well.

And we're continuing to see some cost inflation, but <unk> been able to manage that from a pricing perspective as well. So overall I would say excellent operational performance.

From a cost structure perspective in Q1, I think Chris the other thing I would add is.

As we talked about in our Investor day, we still have opportunity to.

Drive higher operational efficiency from our modernized factories, and I think youre seeing youre seeing that start to flow through.

And the metal cutting margins as you know, it's one thing to modernize and get all the equipment put in.

Mike Feniger: The next question comes from Mike Feniger from Bank of America. Please go ahead. Hey, guys. Yeah. Thank you for taking my question. Just with the pricing guidance of plus three, I believe this quote you probably did something similar to that number. Just to get to that four-year number, just help us. Do you have to put in price increases in Q2 or in the back half to achieve that four-year? Is that kind of already set based on your contract and whatever you have in the backlog? Just curious and kind of help us understand the cadence of that and to achieve that four-year number.

But as Warner as we've ramped that up and now are getting better at operating it.

And.

Putting in smart factory applications to try to do.

Data analytics to improve the factory processes, I think youre, starting to see the benefits of that flowing through.

Got it got it thanks, and then forgive.

Forgive me, if I'm, a little bit slow on the uptake, but just the price cost impact for the full company you were saying was neutral on a dollar basis can you kind of remind what the impact was bought by segments earnings that headwind in it infrastructure within an equivalent tailwind in metal cutting on the way to think about it.

Patrick Watson: Yeah, so I think Mike, the way to think about that pricing, two things, number one, we price for value, and we do that all the time, and in particular when we think about the custom solutions portfolio in both businesses, the things we get to quote live, we get to adjust those prices, I'll say relatively dynamically. And they will benefit us obviously throughout the entire fiscal year.

Yes, I think thats one of the things get.

What should we think about the margin and the price dynamic relative to raw materials and infrastructure. We do have these contracts that are indexed we have seen the prices constant come down Theres, a natural repricing that occurs again, that's going to continue as we move through in Q2 here, but that's that's how would that affect it infrastructure in a quarter.

Yes, thanks for the color guys.

The next question comes from Steve Barger from Keybanc capital markets. Please go ahead.

Mike Feniger: Help, thank you, and just not my second question to follow up is just I'm curious, you know, you talked about oil field services to destocking there, and that seems like that that's ended. I'm just curious what you're seeing with your general engineering, some of those customers are there. You're stalking, you're seeing there on the rise and other inventories, you feel like, okay, I think maybe just if you could touch on your own inventories, you guys have been working through that.

Thanks, Good morning.

Chris you talked about some of the factors around reacceleration in the back half, but if I look at consensus three Q revenue relative to the mid point of view <unk> guide it implies about a 9% increase which is above seasonal which is like 6% ex the pandemic. So when you think about timing of back half improvement does that.

It seem reasonable or should we assume more normal seasonality and then maybe you exit the year, a little bit better just trying to get a sense for cadence.

Mike Feniger: I'm just curious how we come to think about that through the rest of the year. Thank you. Okay, Mike, so in terms of general engineering, you know, as we've, as we've talked about coming out of this pandemic recovery, our distributors and our customers, it seems to me have been fairly disciplined about not getting out over their skis in terms of adding inventory. So we, so normally when there's a recovery in these type of markets, in particular in Gen-Enge, there is a restocking that happens.

Mike Feniger: And we really did not see a strong restocking. We saw a lot of caution, and where the restocking happened was in areas to support customers like aerospace where clearly the growth was there. So consequently, as things have softened, you know, around the globe in terms of general industrial production, we really haven't seen any destocking because in my, my theory is they never really, they never really got over the skis. So that's still our view is that we're not seeing significant destocking, other than what we talked about in oil and gas.

Yes, I think generally I would say, it's pretty even but there are a couple of factors.

One of which I talked about with the Etame was on the earthwork side.

Road milling was very low in construction was low for us last year and even if it even if it just gets back to normal seasonality.

We think that that's going to drive a little bit higher fourth quarter. So I think it's generally even but there is a little bit of a ramp up in the fourth quarter.

Got it thanks, and you mentioned energy declined from both slower oil and gas and the delays in wind energy products and I think we've all seen the stories around how the economics of someone projects are less favorable due to inflation and interest rates can you just remind us how big that business is for you.

Yeah, I don't think we broke out a win but.

Separately, but I can tell you that.

If you look at our energy business and in Asia for metal cutting that's the preponderance of that is as wind.

Patrick Watson: And then I think you had a question on our particular inventory situation, which I'll let Pat take. Yeah, I think about the inventory. I was, it reflect back on the primary work in capital out what we've got out there, really implies that it's improvement working capital as we get throughout the year. That's really that improvement is going to be driven primarily at this point in time from our inventory position. You know, as we talked about, you know, at investor day, this is going to be one of the areas of focus for us on an ongoing basis. We think we have, we have opportunity to improve our work in capital efficiency.

There is some power gen and stuff in there, but the preponderance is wind.

And the other thing about the China when it seems to us that what's happening is.

There are a lot of these wind farms are to be located in Taiwan Straits and.

While we have seen is that given the dynamic between China, and Taiwan Theres been some uncertainty about continuing investing in those wind farm fields, and so we've seen a little bit of delay, but that according to our customers that that's what's driving it. They don't expect that to last forever, but that's that's put a little damper on.

Chris Dankert: The next question comes from Chris Dankert from loop. Please go ahead. Hey, morning, everyone. I'm wondering if you could kind of help us triangulate what the impact of, you know, operational excellence wasn't the core. I know it's, it's a lot of factors, but it seems like that was the majority of the metal working, you know, operating income improvement. Is that correct? And if you just kind of give us some some time post or what the impact was?

On that wind business in China.

Got it I appreciate the detail thanks.

The next question comes from Steven Fisher from UBS. Please go ahead.

Thanks, Good morning, just coming back to the second half improvement I mean, you gave some of the factors again I'm just curious how you actually translate.

Chris Dankert: Yeah, I think as we think about metal cutting, there absolutely was an improvement. I'll say an overall efficiency in metal cutting. You know, we think about the drivers in terms of what's going on from a margin perspective. You know, certainly, I would say overall they had a little bit of headwind from a, excuse me, a tailwind from FX. Obviously a little bit of a tailwind from the restructuring program as well. You know, and you'll continue to see some cost inflation, but, you know, been able to manage that from a pricing perspective as well.

All of those indicators, you've talked about into the magnitude of the growth forecast.

You have how much science is there in it are you sort of just using historical seasonality percentages.

And I know that I guess, there was an automotive forecasts that you could apply just curious how you get to the actual magnitude of whats implied in the second half growth rates.

Yes.

We have models that tie.

For example, ipi is by region or light vehicle production and what that translates into <unk>.

Chris Dankert: So, overall I'd say excellent operational performance, from a construction perspective in Q1. I think Chris, the other thing I would add is, you know, as we talked about in our investor day, we still have opportunity to derive higher operational efficiency from our modernized factories. And I think you're seeing that start to flow through in the metal cutting margins as, you know, it's one thing to modernize and get all the equipment put in.

Business for Us Steve So there is some math behind it but obviously it starts with a forecast of what those Apis are going to do I kind of laid out the.

Chris Dankert: But as we've ramped that up and now are getting better at operating it. And putting in smart factory applications to try to do data analytics to improve the factory processes. I think you're starting to see the benefits of that flowing through. Got it, got it, thanks. And then forgive me if I'm a little bit slow on the uptake, but just the price cost impact for the full company you're saying was neutral on a dollar basis.

Third party Prognosticators and their view of that but then we always have the ability to balance that with customer customers. So in an infrastructure business, where that's a lot of project a project business, we do rely heavily on what our customers are telling us.

But those are so there is math behind part of it and then and then certainly there is.

What's the customer sentiment is.

Okay. That's helpful and then in the event that.

Some of that doesn't play out.

To the extent that you hope what's the potential to accelerate any restructuring benefits that you might have for going forward could you pull that forward or would you just sort of let that play out.

Chris Dankert: Keeps out, reminds me what the impact was by segment earnings that had went in in infrastructure with an equivalent tailwind in metal cutting. Is that the way to think about it? Yeah, I think that's very, one of the things again was we think about that margin and the price dynamic relative to raw materials and infrastructure. We do have these contracts that are indexed. We have seen the price of tungsten come down. There's a natural repricing that occurs. Again, that's going to continue as we move through in Q2 here. But that's, that's how that affected infrastructure in the core. Got that's a call you guys.

And the timing of when it's supposed to be.

Yes, I think that's a good question.

As we talked about at Investor Day, we we've got $100 million of cost out actions and improvements.

Productivity based and.

And we're moving some structural costs associated with plants in.

A number of other things and the down payment on that was our project we call project rebalance the restructuring Pat just spoke of which is $20 million. So the point is that we have we already have active projects that are that are in flight and.

Christopher Rossi: That next question comes from Steve Barger from keep and capital markets. Please go ahead. Thanks. Good morning. Chris, you talked about some of the factors around re-acceleration in the back half, but if I look at consensus, 3Q revenue relative to the midpoint of your 2Q guide, it implies about a 9% increase, which is above seasonal, which is like 6% extra pandemic. So when you think about timing of back half improvement, does that seem reasonable or should we a new assume more normal seasonality and then maybe you exit the year a little bit better?

We will certainly look to we're always looking to accelerate those anyway, but if the environment worsens.

Good news is we're not saying, we're not starting flat footed because we've already got some things are moving forward.

Yeah.

Perfect. Thank you.

The next question comes from Steve Volkmann from Jefferies. Please go ahead.

My question is on Europe.

I can't really hear you there Steve.

Alright, and just better sorry about that that much better much better.

Christopher Rossi: Just trying to get a sense for cadence. Yeah, I think generally I would say it's it's it's pretty even, but there are a couple factors that I wanted, which I talked about with Tammy was on the earthwork side that road milling was was very low and construction was low for us last year. And even if it even if it just gets back to normal seasonality, we think that it'll that's going to drive a little bit higher fourth quarter. So I think it's generally even, but there is a little bit of a ramp up in the fourth quarter.

It helps to speak into the Mic I guess.

So my question about Europe, and it seems like you have really strong growth over there in both segments and sort of contrary to a lot of what we're hearing from others in Europe. So I'm curious why you think that is the case and I guess, you're probably seeing some share gains over there, but maybe there's a different mix maybe of a little more.

Space over there or something I don't know just any any commentary on why that is sort of the standout growth area.

Yeah I think.

Steve Barger: Got it. Thanks. And you mentioned energy decline from both slower oil and gas and then delays and wind energy products. And I think we've all seen the stories around how the economics of someone projects are less favorable due to inflation and interest rates. Can you just remind us how big that business is for you? Yeah, I don't think we broke out a win, but I separately, but I can tell you that if you look at our energy business in Asia for metal cutting, that's the preponderance of that is is wind.

In terms of metal cutting Steve.

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It was up.

And that as you know a big chunk of jet engines actually transportation.

And if you think about the light light vehicle production in Germany in particular last year versus Q1 of this year are way down they were producing at very low levels.

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And so what we attribute the improvement is is that there was a year over year improvement off a low baseline. The good news is that there are supply chain issues are behind them and they're still trying to fill.

Steve Barger: There is some power jam and stuff in there, but the preponderance is wind. And the other thing about the China wind, it seems to us that what's happening is.., that a lot of these wind farms are to be located in Taiwan straights and what we've seen is that given the dynamic between China and Taiwan there's been some uncertainty about continuing investing in those wind farm fields and so we've seen a little bit of delay but that according to our customers that's what's driving it, they don't expect that to last forever but that's put a little damper on that wind business in China. God, I'd appreciate the detail. Thanks.

Some of the backlog.

And so then the other thing that I think is equally important and a big driver is that their transformation to EV is happening and we're winning those projects. So as you as you pointed out some of this is also just share gain and winning.

And a good number of those projects.

I think if I and then the other thing is we're focused on aerospace and defense and that that certainly was was up in Europe and.

That's a combination of just continued strong markets there, but we also feel like we're picking up share.

For our for infrastructure it was I think that.

Stephen Fisher: The next question comes from Stephen Fisher from UBS, please go ahead. Thanks, good morning. Just coming back to the second half of the proof in and you gave some of the factors again, just curious how you actually translate some of those indicators you talk about into the magnitude of the growth forecast that you have. How much science is there in it? Are you sort of just using historical seasonality percentages? I mean, I know if there was an automotive forecast that you could apply just curious how you get to the actual magnitude of what's implied in the second half growth rates.

That was largely driven by our aerospace and defense business.

And for obvious reasons, the defense businesses is up in Europe.

Okay, Great that's helpful and then.

Fit for purpose, Chris is just an update there is that still adding to share as well.

Yeah. It is.

As you know we brought the two segments together a video and.

And the.

The normal in the metal cutting business, we've put them. Both together we've now we're now going to market with a strategy, where we offer the broad portfolio to our distributors and our customers that have need for both fit for purpose applications and sort of the higher end.

Stephen Fisher: Yeah, over the years we have models that tie, for example, IPIs by region or might be over production and what that translates into business rusty. So there is some math behind it but obviously it starts with a forecast of what those IPIs are going to do and I kind of laid out the third priority prognosticators in their view of that. Then we always have the ability to balance that with customer customers. So in the infrastructure business where that's a lot of project, project business, we do rely heavily on what our customers are telling us.

Custom solutions that Kennametal brand brings so we feel like that strategy is working and we are picking up share.

Across the across the globe.

Yeah.

Great. Thank you I'll pass it on.

This concludes the question and answer session I would like to turn the conference back to Chris Rossi for closing remarks.

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We're committed to drive above market growth by leveraging our competitive advantages.

Christopher Rossi: But those are, you know, so there is math behind part of it and then certainly there's what the customer sentiment is. Okay, that's helpful. And then in the event that some of that doesn't play out to the extent that you hope what's the potential to accelerate any restructuring benefits that you might have for going forward? Can you pull that forward or would you just sort of let that play out and in the timing of what it's supposed to be?

And margins, while generating strong free operating cash flow and an increase in shareholder value as always we appreciate your interest and support and don't hesitate to reach out to Mike. If you have any questions have a great day everyone.

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Christopher Rossi: Yeah, I think that's a good question. You know, as we talked about an investor day, we've got $100 million of cost out actions and improvements. It's productivity based and we're moving some structural costs associated with plants and a number of other things. And the down payment on that was our project, we call project rebalance, the restructuring patch is spoke up which is $20 million. So the point is that we have, we already have active projects that are in flight and, you know, we'll certainly look to, we're always looking to accelerate those anyway. But if the environment worsens, you know, the good news is we're not starting flat footed because we've already got some things moving forward.

Christopher Rossi: Perfect, thank you.

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[music].

Steve Volkman: The next question comes from Steve Volkman from Jeffries, please go ahead. Can't really hear you there, Steve. All right, is this better? Sorry about that. It helps to speak into the mic, I guess. So my question about Europe and seems like you have really strong growth over there in both segments and sort of contrary to a lot of what we're hearing from others in Europe. So I'm curious why you think that is the case.

Yeah.

[music].

Steve Volkman: And I guess you're probably seeing some share gains over there, but maybe there's a different mix. Maybe you have a little more aerospace over there or something. I don't know, just any commentary on why that is sort of the standout growth area. Yeah, I think the in terms of metal cutting, Steve, you know, gen edge was up and that as you know, big chunk of gen edge is actually transportation. And if you think about the light vehicle production in Germany in particular last year versus the Q1 this year, they're away down, they're producing at very low levels.

Steve Volkman: And so what we attribute the improvement is that there was a year over year improvement off a low baseline. The good news is that their supply chain issues are behind them and they're still trying to fill some of the backlog. And so then the other thing that I think is equally important and a big driver is that their transformation to EV is happening and we're winning those EV projects. So as you point it out, some of this is also just share gain and winning a good number of those projects.

Steve Volkman: I think if I, and then the other thing is we're focused on aerospace and defense and that that certainly was up in Europe. And that's that's a combination of just continued strong markets there, but we also feel like we're picking up share. For infrastructure, it was I think that, you know, that was largely driven by our aerospace and defense business. And you know, for obvious reasons, the defense business is up in Europe.

Christopher Rossi: Okay, great. That's helpful.

Christopher Rossi: And then fit for purpose, Chris, is just an update there? Is that still adding to share as well? Yeah, it is. You know, as you know, we brought the two segments together video and the normal and metal cutting business. We've put them both together. We've now, we're now going to market with a strategy where we offer the broad portfolio to our distributors and our customers that have need for both fit for purpose applications and sort of the higher end custom solutions that the kind of metal brand brings. So we feel like that strategy is working and we are picking up share across the across the globe.

Steve Volkman: Great. Thank you. I'll pass it on.

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Christopher Rossi: I'd like to turn the conference back to Chris Rossi for closing remarks. Thank you, operator. Thanks everyone for joining the call. You know, we're committed to drive above market growth by leveraging our competitive advantages, expand margins while generating strong free operating cash flow. And an increase in shareholder value.

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