Q3 2024 Kennametal Inc Earnings Call

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Good morning, I would like to welcome everyone to Kinder metals third quarter fiscal 2024 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 he would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

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

Unknown Executive: After the speaker's 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 two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Michael Pici, Vice President of Investor Relations. Please go ahead. Thank you.

Michael Pici: If he would like to withdraw your question. Please press Star then two.

Michael Pici: Please note. This event is being recorded I would now like to turn the conference over to Mr. Michael P. C Vice President of Investor Relations. Please go ahead.

Michael Pici: Thank you, Operator. Welcome, everyone, and thank you for joining us to review Kennemetal's third 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 throughout 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 Chaubey, Vice President and President of Metal Cutting, and Franklin Cardenas, Vice President and President of Infrastructure.

Michael Pici: Thank you operator, welcome everyone and thank you for joining us to review kind of metals third quarter fiscal 2024 results. This morning, we issued our earnings press release and posted our presentation slides on our website.

Michael Pici: We'll be referring to that slide deck throughout today's call and Michael <unk>, Vice President of Investor Relations joining.

Michael Pici: Joining me on the call today are Christopher Rossi, President and Chief Executive Officer, Pat Watson, Vice President and Chief Financial Officer, Sanjay Shah, Vice President and President of metal cutting and Franklin Cardenas, Vice President and president of infrastructure.

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 Kennametal's SEC filing.

Michael Pici: After Chris and Pat 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.

Michael Pici: 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.

Michael Pici: These risk factors and uncertainties are detailed in kenna metals SEC filings.

Michael Pici: 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 8K on our website. And with that, I'll turn the call over to you.

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

Michael Pici: 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.

Michael Pici: From 8-K on our website and with that I'll turn the call over to you Chris.

Mike: Thanks, Mike.

Christopher Rossi: Thanks, Mike. Good morning, and thank you for joining us. I'll start the call today with a review of the quarter and some end market commentary, as well as an example of the industry-leading innovation we are bringing to market, and Pat will cover the quarterly financial results as well as the fiscal year 24 outlook. Finally, I'll make some summary comments and then open the call for questions.

Speaker Change: Good morning, and thank you for joining us.

Christopher Rossi: Start the call today with a review of the quarter and some end market commentary as.

Christopher Rossi: As well as an example of the industry, leading innovation, we're bringing to market.

Christopher Rossi: Then Pat will cover the quarterly financial results as well as the fiscal year 'twenty for outlook.

Christopher Rossi: Finally, I'll make some summary comments and then open the call for questions.

Christopher Rossi: Beginning on slide three, for the quarter, sales decreased 4% year over year, with an organic decline of 2%, unfavorable business stays of 1%, and unfavorable currency exchange of 1%. However, price was offset by volume declines and product mix. At the segment level, organic growth was flat at 0% in metal cutting and declined 5% in infrastructure. On a constant currency basis, the media posted 0% growth, Asia Pacific sales declined 1%, and the Americas declined 5%.

Pat: On slide three for the quarter sales decreased 4% year over year with organic decline of 2% unfavorable business days of 1% and unfavorable currency exchange of 1%.

Christopher Rossi: Price was offset by volume declines in product mix at.

Christopher Rossi: At the segment level organic growth was flat at zero percent in metal cutting and declined 5% and infrastructure.

Christopher Rossi: On a constant currency basis, EMEA posted zero percent growth Asia Pacific sales declined 1% in the Americas declined 5%.

Christopher Rossi: Moving to our end markets Aerospace and defense grew 10%.

Christopher Rossi: Moving to our end markets, aerospace and defense grew 10%, transportation was flat at 0%, general engineering declined 2%, Earthworks declined 5%, and energy declined 14%. These results are in line with what we expected and noted on our previous earnings call.

Christopher Rossi: <unk> was flat at zero percent General engineering declined 2%.

Christopher Rossi: It works declined 5% in energy declined 14%.

Christopher Rossi: These results are in line with what we expected and noted on our previous earnings call.

Christopher Rossi: Let me take a moment to provide some color on end markets year over year in Aerospace and Defense. Sales increased 10% year-over-year, metal cutting grew 9%, and infrastructure grew 13%. Both segments benefited from continued execution of our growth initiatives and market strength in aerospace. Transportation was flat at 0% this quarter due to continued strength in EMEA, which was driven by EV and hybrid project winds, offset by a decline in the Americas due to prior year project winds that did not repeat.

Speaker Change: Let me take a moment to provide some color on end markets year over year.

Christopher Rossi: In aerospace and defense sales increased 10% year over year.

Christopher Rossi: Metal cutting grew 9% and infrastructure grew 13%.

Christopher Rossi: Both segments benefited from continued execution of our growth initiatives and market strength in aerospace.

Christopher Rossi: Transportation was flat at zero percent this quarter due to continued strength in EMEA, which was driven by EV and hybrid project wins offset by a decline in the Americas due to prior year project wins that did not repeat.

Christopher Rossi: General engineering declined 2% versus prior year due to lower industrial production in EMEA and the Americas that affected both segments.

Christopher Rossi: General engineering declined 2% versus the prior year due to lower industrial production in EMEA and the Americas that affected both segments. Earthworks declined 5% during the quarter, primarily due to lower mining activity in China. Energy declined 14%, primarily in oil and gas, as a result of the 20% decline year-over-year in U.S. land-based rig counts and wind energy project delays in Asia.

Christopher Rossi: Earthworks declined 5% during the quarter, primarily due to lower mining activity in China.

Christopher Rossi: Energy declined 14%, primarily in oil and gas as a result of a 20% decline year over year in U S land based rig counts and wind energy project delays in Asia.

Christopher Rossi: Turning now to profitability in the quarter, adjusted EBITDA declined 150 basis points primarily due to lower sales and production volume, higher wages and general inflation, unfavorable foreign exchange, and the continued effect of unfavorable timing of pricing compared to raw material costs in the infrastructure segment. These were partially offset by higher price realization in the metal cutting segment and restructuring savings of approximately $6 million. However, metal cutting adjusted operating margins decreased 230 basis points year over year, driven by lower sales and production volumes, higher wages and general inflation, and a property sale gain in the prior year.

Christopher Rossi: Turning now to profitability in the quarter.

Christopher Rossi: Adjusted EBITDA declined to 150 basis points, primarily due to lower sales and production volumes higher wages and general inflation.

Christopher Rossi: Unfavorable foreign exchange and the continued effect of unfavorable timing of pricing compared to raw material costs in the infrastructure segment.

Christopher Rossi: These were partially offset by higher price realization and the metal cutting segment and restructuring savings of approximately $6 million.

Christopher Rossi: Metal cutting with adjusted operating margins decreased 230 basis points year over year, driven by lower sales and production volumes higher wages and general inflation and a property sale gain in the prior year.

Christopher Rossi: These items were partially offset by higher price realization and restructuring savings of approximately $5 million. The infrastructure segment's adjusted operating margins decreased 100 basis points year-over-year, primarily due to lower sales volumes, higher wages and general inflation, and the unfavorable timing of pricing compared to raw material costs. These factors were partially offset by restructuring savings of approximately $1 million. Adjusted EPS decreased to $0.30 compared to $0.39 in the prior year quarter.

Christopher Rossi: These items were partially offset by higher price realization and restructuring savings of approximately $5 million.

Christopher Rossi: The infrastructure segment's adjusted operating margins decreased 100 basis points year over year, primarily due to lower sales volumes higher wages and general inflation and the unfavorable timing of pricing compared to raw material costs. These factors were partially offset by restructuring savings of approximately $1 million.

Christopher Rossi: Adjusted EPS decreased to 30, <unk> compared to 39 cents in the prior year quarter.

Christopher Rossi: Pre-operating cash flow year-to-date was $84 million, up from $60 million in the prior year. The increase in free operating cash flow was driven primarily by working capital changes, including improved inventory levels, partially offset by higher capital expenditures and lower net income. And finally, we continue the share repurchase program this quarter with $15 million of shares bought back, bringing the total amount repurchased to $178 million. Our share repurchase program reflects the confidence we have in our ability to execute our strategy for long-term value creation.

Christopher Rossi: Free operating cash flow year to date was 84 million up from $60 million in the prior year.

Christopher Rossi: The increase in free operating cash flow was driven primarily by working capital changes, including improved inventory levels, partially offset by higher capital expenditures and lower net income.

Christopher Rossi: And finally, we continue the share repurchase program this quarter with $15 million of shares bought back, bringing the total amount repurchased to $178 million.

Christopher Rossi: Our share repurchase program reflects the confidence we have in our ability to execute our strategy for long term value creation, despite quarterly macroeconomic headwinds.

Christopher Rossi: Despite quarterly macroeconomic headwinds. Regarding the full-year outlook, as we discussed in detail last quarter, our outlook for the full year is largely informed by forecasts of specific market drivers, and those remain generally unchanged for the balance of the year. Pat will provide more details on the outlook in his section. Now, on slide four, I'd like to highlight an example of how our innovation advantage continues to deliver enhanced product offerings to our customers.

Christopher Rossi: Regarding the full year outlook as we discussed in detail last quarter, our outlook for the full year is largely informed by forecast a specific market drivers and those remain generally unchanged for the balance of the year Pat.

Christopher Rossi: Pat will provide more details on the outlook in his section.

Christopher Rossi: Now on slide four.

Christopher Rossi: Like to highlight an example of how our innovation advantage continues to deliver enhanced product offerings to our customers.

Christopher Rossi: This slide shows our new universal turning grate with Ken Gold technology from our metal cutting portfolio. This new Turing grade offers longer tool life, faster cutting speeds, and enhanced reliability across a broad range of aerospace, defense, transportation, medical equipment, and general engineering applications. Notably, this new turning grade is the fifth product launched for turning applications that leverages our state-of-the-art Ken Gold coating and insert manufacturing capabilities that were enabled by modernization, and they are a great example of how we're no longer forced to play defense due to antiquated manufacturing capabilities, but instead, we are now playing offense with new products to drive growth that outpaces the market. Now, I will turn the call over to Pat, who will review the third quarter financial performance and the outlook.

Christopher Rossi: This slide shows our new Universal turning great with Ken Gold technology.

Pat: Our metal cutting portfolio. This new turning great offers longer tool life faster cutting speeds and enhance reliability across a broad range of aerospace defense transportation medical equipment and general engineering applications.

Pat: Notably this new turning great is the fifth product launched returning applications that leverage our state of the art, Ken gold coding and certain manufacturing capabilities that were enabled by modernization.

Pat: And they are a great example of how we are no longer forced to play defense due to antiquated manufacturing capabilities, but instead, we are now playing offense with new products to drive growth that outpaces the market now.

Christopher Rossi: Now, let me turn the call over to Pat who will review the third quarter financial performance and the outlook. Thank.

Patrick S. Watson: Thank you, Chris, and good morning, everyone. I will begin on slide 5 with a review of the Q3 operating results. The quarter's results show that we continue to execute our initiatives in the face of soft market conditions. Sales were down 4% year-over-year, with an organic decline of 2%, fewer work days of 1%, and unfavorable currency exchange of 1%. Sales performance this quarter was in line with the expectations we previously provided. Operating expense as a percentage of sales was flat year-over-year at 21.1%.

Pat: Thank you, Chris and good morning, everyone.

Patrick S. Watson: I will begin on slide five with a review of the Q3 operating results. The quarter's results show that we continue to execute our initiatives in the face of soft market conditions.

Patrick S. Watson: Sales were down 4% year over year with an organic decline, 2% fewer work days of 1% and unfavorable currency exchange of 1%.

Patrick S. Watson: The sales performance this quarter was in line with the expectations. We previously provided.

Patrick S. Watson: Operating expense as a percentage of sales was flat year over year at 21, 1%.

Patrick S. Watson: Adjusted EBITDA and operating margins were 14.2% and 8.1%, respectively, versus 15.7% and 9.8% in the prior year quarter. During the quarter, we realized approximately $6 million of savings from the previously announced restructuring program and remain on pace to achieve run rate savings of $35 million annually by the end of FY24. The adjusted effective tax rate increased year-over-year to 26.5%, primarily driven by an unfavorable geographical mix, partially offset by a favorable return-to-provision adjustment. Adjusted earnings per share were $0.30 in the quarter versus EPS of $0.39 in the prior year period. The main drivers of our EPS performance are highlighted in the bridge on slide 6.

Patrick S. Watson: Adjusted EBITDA and operating margins were 14, 2% and eight 1%, respectively versus 15, 7% and nine 8% in the prior year quarter.

Patrick S. Watson: During the quarter, we realized approximately $6 million of savings from the previously announced restructuring program.

Patrick S. Watson: We remain on pace to achieve run rate savings of $35 million annually by the end of FY 'twenty four.

Patrick S. Watson: The adjusted effective tax rate increased year over year to 26, 5%.

Patrick S. Watson: Primarily driven by unfavorable geographical mix, partially offset by favorable return to provision adjustments.

Patrick S. Watson: Adjusted earnings per share were <unk> 30 in the quarter.

Patrick S. Watson: EPS of <unk> 39 in the prior year period.

Patrick S. Watson: The main drivers of our EPS performance are highlighted on the bridge on slide six.

Patrick S. Watson: The year over year effect of operations this quarter was negative seven.

Patrick S. Watson: The year-over-year effect of operations this quarter was negative 7 cents. This reflects lower sales and production volumes and higher wage and general inflation in both businesses, and Unfavorable Price in Raw Material Timing and Infrastructure. These items were partially offset by higher prices in metal cutting and restructuring savings in both businesses. You can also see the effects of the tax rate, foreign exchange, and lower share count on EPS. Slides 7 and 8 detail the performance of our segments this quarter.

Patrick S. Watson: This reflects lower sales and production volumes and higher wage and general inflation in both businesses and unfavorable price and raw material timing and infrastructure.

Patrick S. Watson: These items were partially offset by higher prices and metal cutting and restructuring savings in both businesses.

Patrick S. Watson: You can also see the effects of the tax rate foreign exchange and lower share count on EPS.

Patrick S. Watson: Slide seven and eight detailed performance of our segments. This quarter reported metal cutting sales were down 2% compared to the prior year quarter with flat organic sales.

Patrick S. Watson: Reported metal cutting sales were down 2% compared to the prior year quarter, with flat organic sales and an unfavorable foreign currency effect of 1% and unfavorable workdays of 1% by region on a constant currency basis. Sales in EMEA were flat, with the Americas and Asia Pacific each down 1%. EMEA's year-over-year performance reflects growth driven by transportation and aerospace and defense, offset by general engineering. In the Americas, we continue to execute our growth initiatives in aerospace and defense and general engineering.

Patrick S. Watson: Unfavorable foreign currency effect of 1% and unfavourable work days of 1% by region on a constant currency basis sales in EMEA were flat with the Americas and Asia Pacific each down 1%.

Patrick S. Watson: <unk> year over year performance reflects growth driven by transportation and aerospace and defense offset by General engineering.

Patrick S. Watson: In the Americas, we continue to execute our growth initiatives in aerospace and defense and in General Engineering growth. In these end markets were more than offset by lower sales in transportation and energy.

Patrick S. Watson: Growth in these end markets was more than offset by lower sales in transportation and energy. Sales growth in India was more than offset by market conditions in China and a few other countries. Looking at sales by end mark, Aerospace and Defense grew 9% year-over-year as our strategic initiatives continue to drive results in this end market.

Patrick S. Watson: In Asia Pacific sales growth in India was more than offset by market conditions in China and a few other smaller markets.

Patrick S. Watson: Looking at sales by end market.

Patrick S. Watson: Aerospace and defense grew 9% year over year as our strategic initiatives continue to drive results. In this end market General engineering declined 2% year over year.

Patrick S. Watson: General Engineering declined 2% year-over-year, with modest growth in the Americas and Asia-Pacific, offset by lower sales in EMEA. Energy declined 8% this quarter, with the majority of the effect in the Americas coming from continued slow conditions in oil and gas, and in Asia-Pacific from wind power project delays. Sales and transportation were flat, with EV and hybrid project wins and overall strength in EMEA, offset by project sales in the prior year that did not repeat in the Americas.

Patrick S. Watson: Modest growth in the Americas, and Asia Pacific offset by lower sales in EMEA.

Patrick S. Watson: Energy declined 8% this quarter with the majority of the effect in the Americas coming from continued slow conditions in oil and gas and in Asia Pacific from wind power project delays.

Patrick S. Watson: And lastly, sales and transportation were flat with EV and hybrid project wins and overall strength in EMEA offset by project sales in the prior year that did not repeat in the Americas.

Patrick S. Watson: The metal cutting adjusted operating margin of 10.8%, decreased 230 basis points year-over-year, lower sales and production volumes, higher wages and general inflation, and a gain on a property sale of approximately $1 million in the prior year period that did not require, were partially offset by higher prices and restructuring savings of approximately $5 million. We will continue to align variable cost to production levels over the next several months. Turning to slide 8 for infrastructure.

Patrick S. Watson: Metal cutting adjusted operating margin of 10, 8% decreased 230 basis points year over year, as lower sales and production volumes higher wages and general inflation and a gain on a property sale of approximately $1 million in the prior year period that did not repeat.

Patrick S. Watson: Partially offset by higher price and restructuring savings of approximately $5 million.

Patrick S. Watson: We will continue to align variable costs production levels over the next several months.

Patrick S. Watson: Turning to slide eight for infrastructure.

Patrick S. Watson: Reported infrastructure sales were down 7% year-over-year due to negative organic sales of 5% and unfavorable foreign exchange and fewer business days of 1% each. Regionally, on a constant currency basis, India sales increased by 1%, Asia-Pacific declined 2%, and America sales declined 9%. Looking at sales by end market on a constant currency basis, aerospace and defense sales increased 13% driven by market growth and executing on our growth initiative. General engineering declined 2% due to lower industrial activity year-over-year and ore inventory sales in the prior year, partially offset by ceramics growth in EMEA and Asia-Pacific. Earthworks declined 5% due to lower underground mining in China and lower sales of snowplow blades in the Americas due to a milder winter.

Patrick S. Watson: Reported infrastructure sales were down 7% year over year due to negative organic sales, 5% and unfavorable foreign exchange and fewer business days of one percentage.

Patrick S. Watson: Regionally on a constant currency basis.

Patrick S. Watson: Sales increased by 1% Asia Pacific declined, 2% and Americas sales declined 9%.

Patrick S. Watson: Looking at sales by end market on a constant currency basis, aerospace and defense sales increased 13% driven by market growth and executing on our growth initiatives.

Patrick S. Watson: <unk> engineering declined 2% due to lower industrial activity year over year, and <unk> inventory sales in the prior year, partially offset by ceramics growth in EMEA and Asia Pacific.

Patrick S. Watson: <unk> declined 5% due to lower underground mining in China, and lower sales of snow plow blades in the Americas from a milder winter.

Patrick S. Watson: And lastly, energy declined 16 percent, mainly in the Americas, due to lower U.S. land rate counts and drilling efforts. Adjusted operating margin declined year-over-year to 3.8%, primarily due to a few factors. First, lower sales volume, primarily in the energy and earthwork end markets; higher wages and general inflation; and unfavorable price raw material timing.

Patrick S. Watson: And lastly, energy declined 16%, mainly in Americas due to lower U S land rig counts and drilling activity.

Patrick S. Watson: Adjusted operating margin declined year over year to three 8% primarily due to a few factors first lower sales volume primarily in the energy and the earthwork and markets higher wages and general inflation and unfavorable price raw material timing. These headwinds were partially offset by restructuring savings of approximately.

Patrick S. Watson: These headwinds were partially offset by restructuring savings of approximately $1 million. As we discussed last quarter, provided that tungsten prices remain relatively steady as they have, Q3 was the last quarter we expected to experience unfavorable raw material effects. Accordingly, we continue to expect infrastructure's fourth-quarter margins to be approximately at the same level as last year's fourth quarter. Now, turning to slide 9, we review our free operating cash flow and balance sheet.

Patrick S. Watson: <unk> $1 million.

Patrick S. Watson: As we discussed last quarter provided the tungsten prices remained relatively steady as they have Q3 was the last quarter, we expected to experience unfavorable price raw material effects.

Patrick S. Watson: Accordingly, we continue to expect infrastructures fourth quarter margins to be approximately at the same level as last year's fourth quarter.

Patrick S. Watson: Our year-to-date free operating cash flow increased to $84 million from $60 million in the prior year. The increase in free operating cash flow was driven primarily by working capital changes, including improved inventory levels, partially offset by higher capital expenditures and lower net income compared to the prior year period. Quarter was down from the prior year, the company continues to focus on optimizing inventory. On a dollar basis, year-over-year, primary working capital decreased to $658 million, down from $712 million at the end of the third quarter of fiscal 23. On a percentage of sales basis, primary working capital decreased to 32.7%. Year-to-date, net capital expenditures increased to $79 million compared to $66 million in the prior year.

Patrick S. Watson: Now turning to slide nine to review, our free operating cash flow and balance sheet.

Patrick S. Watson: Our year to date free operating cash flow increased to $84 million from $60 million in the prior year.

Patrick S. Watson: Increase in free operating cash flow was driven primarily by working capital changes, including improved inventory levels, partially offset by higher capital expenditures and lower net income compared to the prior year period.

Patrick S. Watson: Primary working capital this quarter was down from the prior year.

Patrick S. Watson: Company continues to focus on optimizing inventory levels and remains focused on driving improved working capital.

Patrick S. Watson: On a dollar basis year over year primary working capital decreased to 658 million.

Patrick S. Watson: Down from $712 million at the end of the third quarter of fiscal 'twenty three.

Patrick S. Watson: On a percentage of sales basis primary working capital decreased to 32, 7%.

Patrick S. Watson: Year to date net capital expenditures increased to $79 million compared to $66 million in the prior year.

Patrick S. Watson: In total, we returned $31 million to shareholders through our Share Repurchase and Dividend Program. Under our $200 million share repurchase program that ends in June, we bought $15 million of shares in Q3 for a total of 178 million, or 6.5 million shares, representing approximately 8% of outstanding shares since the inception of the program. We had no activity under the new $200 million 3-year share repurchase program authorized by our board in February.

Patrick S. Watson: In total we returned $31 million to shareholders through our share repurchase and dividend programs.

Patrick S. Watson: There are $200 million share repurchase program that ends in June.

Patrick S. Watson: $15 million of shares in Q3 for a total of $178 million or $6 5 million shares representing approximately 8% of outstanding shares since the inception of the program.

Patrick S. Watson: We had no activity under the new $200 million three year share repurchase program authorized by our board in February.

Patrick S. Watson: And, as we have done 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 reflects confidence in our ability to execute our strategy to drive growth and margin improvement, continue to maintain a healthy balance sheet, and debt maturity profile. At quarter end, we had combined cash and revolver availability of approximately $785 million and were well within our financial covenant. The full balance sheet can be found on slide 15 in the appendix.

Patrick S. Watson: And 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 reflects confidence in our ability to execute our strategy to drive growth and margin improvement.

Patrick S. Watson: You need to maintain a healthy balance sheet and debt maturity profile at quarter end, we had combined cash and revolver availability of approximately $785 million and were well within our financial covenants.

Patrick S. Watson: The full balance sheet can be found on slide 15 in the appendix.

Patrick S. Watson: Turning to slide 10, regarding our full-year outlook. Since we are now in the fourth quarter, we are narrowing our sales and EPS outlays. We now expect FY24 sales to be between $2.03 billion and $2.05 billion, with volume ranging from negative 4 to negative 3 percent, and net price realization of approximately 2 percent, with our inflationary pricing actions partially offset by lower prices for customers with index pricing due to higher material content and a neutral effect from foreign exchange.

Patrick S. Watson: Turning to slide 10 regarding our full year outlook.

Patrick S. Watson: Since we are now in the fourth quarter, we are narrowing our sales and EPS outlook.

Patrick S. Watson: We now expect FY 'twenty for sales to be between $2.0 billion to $3 billion and $2.05 billion.

Patrick S. Watson: With volume ranging from negative four to negative 3% net price realization of approximately 2% with our inflationary pricing actions, partially offset by lower prices for customers with index pricing due to higher material content in a neutral effect from foreign exchange. However.

Patrick S. Watson: However, reflected in the annual outlook is an anticipated fourth quarter foreign exchange headwind of approximately 1% year-over-year. As a result, our adjusted EPS outlook is now $1.40 to $1.55. The last notable change to our outlook is an increase in our free operating cash flow to be greater than 125% of adjusted net income, up from greater than 100%. The other elements of our outlook shown on the slide are unchanged from the prior quarter. And with that, I'll turn it back over to Chris.

Patrick S. Watson: Reflected in the annual outlook is an anticipated fourth quarter foreign exchange headwind of approximately 1% year over year.

Patrick S. Watson: Our adjusted EPS outlook is now $1 40 to $1 55.

Patrick S. Watson: The last notable change to our outlook is an increase in our free operating cash flow to be greater than 125% of adjusted net income up from greater than 100%.

Patrick S. Watson: The other elements of our outlook shown on this slide are unchanged from the prior quarter and with that I'll turn it back over to Chris.

Christopher Rossi: Thanks, Pat. Turning to slide 11, let me take a few minutes to summarize. Although macro conditions remain a headwind in the short term, the global megatrends that should drive market growth over the long term remain intact. We've successfully navigated similar macro headwinds before and will stay focused on what we can control to improve margins and drive share gains throughout the economic cycle. As you know, I announced my decision to retire effective May 31st.

Chris: Thanks, Pat turning to Slide 11, let me take a few minutes to summarize.

Christopher Rossi: Although macro conditions remain a headwind in the short term the global Mega trends that should drive market growth over the long term.

Christopher Rossi: Intact.

Christopher Rossi: We have successfully navigated similar macro headwinds before and we will stay focused on what we can control to improve margins and drive share gains throughout the economic cycle.

Speaker Change: As you know I announced my decision to retire effective may 31.

Christopher Rossi: I've been fortunate to lead a strong team of employees dedicated to improving the company and continuously improving our ability to serve customers. Through reciprocation and modernization, we've streamlined the organization and improved sales effectiveness. We have improved customer service, made our factories more efficient, and enabled the development of new products. We successfully navigated the challenges of COVID and embarked on a cultural transformation to drive accountability across the enterprise for gaining share and improving profitability. I'm exceptionally proud of the work our teams have done to make Kennemetal stronger over the last seven years.

Speaker Change: I've been fortunate to lead a strong team of employees dedicated to improving the company and continuously improving our ability to serve customers.

Christopher Rossi: With simplification and modernization, we've streamlined the organization and improved sales effectiveness improve customer service later factories more efficient and enable the development of new products, we successfully navigated the challenges of Covid.

Christopher Rossi: And embarked on a cultural transformation to drive accountability across the enterprise, we're gaining share and improving profitability.

Christopher Rossi: I am exceptionally proud of the work our teams have done to make kennametal stronger over the last seven years.

Christopher Rossi: Finally, I'm especially proud to turn leadership of the company over to my chosen successor, Sanjay Chaubey. I'm confident that the company will continue to improve under his very capable leadership. Sanjay, is there anything you'd like to add?

Speaker Change: Finally, I am, especially proud to turn leadership with the company over to my chosen successor.

Sanjay Chaubey: Sanjay <unk>.

Sanjay Chaubey: I am confident that the company will continue to improve under his very capable leadership signs.

Sanjay Chaubey: Sanjay is there anything you'd like to add.

Christopher Rossi: Chris.

Sanjay Chaubey: First, on behalf of all of us at Kennametal, let me just say thank you for everything you have done for the company over the last seven years. I also want to personally thank you for your support and coaching, especially during this transition period.

Sanjay Chaubey: First on behalf of all of Us at Kennametal.

Sanjay Chaubey: Let me just thank you for everything you've done for the company over the last seven years.

Sanjay Chaubey: I also want to personally thank you for your support and coaching.

Sanjay Chaubey: Especially during this transition period.

Sanjay Chaubey: Now a quick update from my side.

Sanjay Chaubey: Now a quick update from my... Over the last couple of months, I have continued to run metal cutting, along with taking time to learn more about the infrastructure business and the enterprise as a whole. Looking ahead, we'll work on the following top three priorities while living our values of safety, respect, integrity, and accountability. First, above-market growth through innovation advantage, best-in-class customer service, and commercial excellence. Second, Margin Expansion through Operational Excellence and Applying Lean Principles.

Sanjay Chaubey: Over the last couple of months.

Sanjay Chaubey: Continue to run metal cutting along with taking time to learn more about the infrastructure business.

Sanjay Chaubey: The enterprise as a whole.

Sanjay Chaubey: Looking ahead well.

Sanjay Chaubey: And third, executing a balanced capital allocation strategy. In closing, I'm really excited to step into the CEO role on June 1st, and I'm looking forward to connecting with all of you in August to cover our full year results and fiscal 25 outlook.

Sanjay Chaubey: On the following top three priorities, while living our values of safety respect integrity and accountability.

Sanjay Chaubey: First above market growth through innovation advantage best in class customer service and commercial excellence.

Sanjay Chaubey: Second margin expansion through operational excellence and applying lean principles.

Sanjay Chaubey: And third executing a balanced capital allocation strategy.

Sanjay Chaubey: In closing I'm really excited to step into the CEO role on June 1st and I'm looking forward to connecting with all of you in August.

Sanjay Chaubey: Our full year results and fiscal 'twenty five outlook.

Unknown Executive: Thanks Sanjay, and with that operator, please open the line for questions. Yes, sir.

Speaker Change: Thanks, Sanjay and with that operator, please open the line for questions.

Unknown Executive: Yes, sir. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, please press star, then 2, and we'll pause momentarily while we assemble our roster.

Unknown Executive: Yes, Sir if you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question. Please press Star then two and we will pause momentarily, while we assemble roster.

Unknown Executive: And the first question will come from Steve Volkmann with Jefferies. Please go ahead.

Unknown Executive: And the first question will come from Steve Volkmann with Jeffries. Please go ahead. Morning Steve, are you there? Perhaps you're muted, Mr. Volkmann. We'll move on to our next question from Ms. Angel Castillo with Morgan Stanley. Please go ahead.

Angel Castillo: Good morning, Steve you there.

Angel Castillo: Perhaps you're muted Mr Volkmann.

Unknown Executive: We'll move on to our next question from MS Angel Castillo with Morgan Stanley. Please go ahead.

Christopher Rossi: Hi, thanks for taking my question. And Chris, it's been a pleasure working with you and I wish you all the best. And Sanjay, looking forward to working with you going forward. So maybe just, you know, to dive into a little bit more of kind of the outlook and what you're seeing, you know, under the surface and the fundamentals, the quarter kind of shook out as you expected, but it looks like the mix of it in terms of end markets might have been a little bit different.

Angel Castillo: Hi, Thanks for taking my question.

Christopher Rossi: Chris it's been a pleasure working with you and wish you all the best.

Christopher Rossi: And Sanjay looking forward to working with you going forward.

Christopher Rossi: So maybe just.

Christopher Rossi: To dive into a little bit more of kind of the the outlook on what youre seeing under the surface and the fundamentals in order the quarter kind of shook out as you expected, but it looks like the mix of it in terms of end markets might have been a little bit different.

Christopher Rossi: Can you just walk through the major end markets and maybe some of the pivots or changes that you've seen, you know, in terms of the underlying trends in the third quarter, and then maybe kind of bolster that with some of the underlying trends that you're seeing thus far in the fourth quarter across those end markets?

Christopher Rossi: Can you just walk through the major end markets and maybe some of the pivots or changes that you've seen.

Christopher Rossi: In terms of the underlying trends in the third quarter and then maybe you can kind of bolster that with some of the underlying trends that youre seeing thus far in the fourth quarter across most end markets.

Speaker Change: Yes sure.

Christopher Rossi: Yeah, sure. Let me start with metal cutting first.

Speaker Change: Let me start with metal cutting first.

Christopher Rossi: We would expect to general engineering to be flat with industrial activity remained soft in the Americas and EMEA.

Christopher Rossi: You know, we had expected general engineering to be flat, with industrial activity remaining soft in the Americas and EMEA, and then Asia Pacific. The question of the IPIs, they were going to slightly improve, and that's basically what we saw. The build rates on aerospace, they deteriorated slightly, I think because of the quality issues that one of the major OEMs had. And energy was pretty much flat. The recount was flat.

Christopher Rossi: And then Asia Pacific.

Christopher Rossi: Sequentially the Ipi is.

Christopher Rossi: They were going to say, we're going to slightly improve and thats basically what we saw the bill rates on aerospace.

Christopher Rossi: They deteriorated slightly I think because of the quality issues that one of the major Oems had an energy was pretty much flat the rig count was was flat.

Christopher Rossi: And.

Christopher Rossi: And as we said on our prepared remarks, it was down year over year.

Christopher Rossi: And as we said in our prepared remarks, it was down year over year. But if I look at Q3 to Q4 sequentially, I'd still say general engineering, again, relatively flat. America is an EMEA, and Asia-Pacific is improving, that's driven primarily by India.

Christopher Rossi: But if I look at Q3 to Q4 sequentially I would still say general engineering again relatively flat Americas and EMEA and.

Christopher Rossi: In Asia Pacific would be improving that's.

Christopher Rossi: That's driven primarily by by India, and then also China. There is a normal seasonality that we would see there that would drive some improvement aerospace that segment continues to improve.

Christopher Rossi: And then also China, there is a normal seasonality that we would see there that would drive some improvement. Aerospace, you know, that segment continues to improve and be strong, but it is dependent on the production issues stabilizing for one of the major OEMs. But generally, the long-term trends for that are still very positive. Energy, we expect, again, to be flat.

Christopher Rossi: And be strong.

Christopher Rossi: But it is dependent on the production issues stabilizing for for one of the major Oems.

Christopher Rossi: But generally that the long term trends for that are still very positive.

Christopher Rossi: Energy, we expect again to be flat the rig count in Q4 is expected to go up a couple of rigs, but essentially angel is pretty much flat and then power Gen remains stable in EMEA and Asia Pacific.

Christopher Rossi: The rig count in Q4 is expected to go up a couple rigs, but essentially, Angel, it's pretty much flat. And then PowerGen remains stable in EMEA and Asia Pacific. For transportation, we think that America is going to continue to improve again sequentially due to strike recovery and also seasonality. EMEA will probably be flat, and Asia Pacific will improve also due to seasonality. I can go then to infrastructure. I would say

Christopher Rossi: For transportation, we think that America is going to continue to improve again sequentially due to the strike recovery and also seasonality.

Christopher Rossi: We will probably be flat and Asia Pacific will improve also due to seasonality.

Christopher Rossi: Triangle then to infrastructure.

Christopher Rossi: I would say that.

Christopher Rossi: You know, the quarter played out about what we said; my comments that I made for metal cutting and general engineering will be the same for infrastructure. And energy, as I said, was flat, with the root counts being stable. And then our customer sentiment in terms of an outlook for energy, in North America anyway, is that they seem to have been done with their, completed their inventory adjustments, and we think things will pretty much be flat for the fourth quarter.

Christopher Rossi: The quarter played out about what we said my comments that I made for metal cutting in general engineering will be the same for infrastructure.

Christopher Rossi: And energy as I said was flat with the rig counts.

Christopher Rossi: Stable.

Christopher Rossi: And then our customer summit in terms of an outlook for energy in North America anyway as they.

Christopher Rossi: They seem to have been done with their completed their inventory adjustments and.

Christopher Rossi: We think things are pretty much be flat for us for the fourth quarter.

Christopher Rossi: Mining, that activity was lower than we expected. It was driven primarily by lower coal demand in the U.S., largely due to the milder winter and a slower Chinese recovery. And then in construction, that followed the normal seasonal pattern. Pat mentioned the snow blades that were down slightly due to the mild winter.

Christopher Rossi: On mining that activity was lower than we expected there was driven primarily by lower coal demand in the U S.

Christopher Rossi: Largely due to the milder winter and <unk>.

Christopher Rossi: A slower China, China recovery.

Christopher Rossi: And then in construction that followed the normal seasonal pattern Pat mentioned, the snow blades that were down slightly due to the mild winter.

Christopher Rossi: If I look at infrastructure going forward... Again, general engineering, the same comments apply as we have with metal cutting. It's basically flat, with some continued strength in India driving growth in Asia-Pacific. Energy, as I said, will probably be flat from Q3 to Q4. Mining is expected to sort of stabilize at the current levels. In general, there are softer market conditions in China. In terms of thermal coal, the milder winter obviously created an excess supply of coal, so that will also probably continue to be a bit of a headwind. And then construction, we expect that to follow the normal seasonal pattern. Except in China, again, due to lower economic activity, it looks like construction is slowing down a little bit.

Christopher Rossi: If I look at infrastructure going forward.

Christopher Rossi: Again General engineering same comments apply to as we have with metal cutting is basically flat with some continued strength in India driving growth in Asia Pacific Energy as I said, it will probably be flat Q3 to Q4.

Christopher Rossi: Mining is expected to sort of stabilize at the current levels.

Christopher Rossi: In general there are softer market conditions in Chile, and China and.

Christopher Rossi: In terms of the thermal coal.

Christopher Rossi: The milder winter obviously.

Christopher Rossi: Created.

Christopher Rossi: Excess supply of coal so that will probably.

Christopher Rossi: We will also probably continues to be a bit of a headwind.

Christopher Rossi: And then construction, we expect that to follow the normal seasonal pattern.

Christopher Rossi: Except in China again, due to the lower economic activity. It looks like construction is slowing down a little bit.

Unknown Executive: That's a very helpful thing. So that will be my commitment to Angel. Thanks.

Speaker Change: Okay helpful. Thanks.

Joel: Hey, Joel.

Unknown Executive: I appreciate it. No, that's very thorough and helpful. Thank you.

Speaker Change: I appreciate it that's very thorough and helpful. Thank you.

Unknown Executive: Maybe switching over to the stronger free operating cash flow that you talked about, can you just maybe give us a bit of a sense of what you're kind of expecting there in terms of some of the absolute value and then the use of that cash in terms of the buyback? What kind of cadence should we anticipate in terms of potential buybacks in the following quarters? And do you kind of expect that to pick up from current levels given where the stock price is? Or how are you kind of seeing that? Yeah, Angel.

Speaker Change: Switching over to the stronger free operating cash flow that you talked about can you just maybe give us a bit of a sense of what youre kind of expecting there in terms of some of the absolute value and then the use of that cash in terms of the buyback what kind of cadence.

Speaker Change: Should we anticipate in terms of <unk>.

Unknown Executive: Potential buybacks in the following quarters and do you kind of expect that to pick up from current levels, given where the stock prices or how are you kind of seeing that.

Unknown Executive: Yeah, Angel, a couple thoughts just overall on the development of free operating cash flow. You know, as you know, our strongest quarters from a cash flow perspective are Q3 and Q4. You know, we would expect that to be the case here, as well in FY 24. From a capital structuring perspective, and the way we have thought about our share repurchase program, always at a minimum to offset the dilution that comes from management compensation programs, as well as return cash to shareholders and, you know, working on that balanced capital allocation strategy.

Unknown Executive: Yeah Angel a couple of thoughts just overall on free operating cash flow development as you know our strongest quarters from a cash flow perspective, our Q3 and Q4.

Unknown Executive: We would expect that to be the case here as well in FY 'twenty for now from a capital structuring perspective, and the way we have thought about our share repurchase program of has been always at a minimum to offset the dilution that comes from management compensation programs as.

Unknown Executive: As well as to Opportunistically buy back shares when we've got the cash.

Unknown Executive: And when it's appropriate given other potential calls on cash like bolt on M&A.

Unknown Executive: And the like as well as we think about our cash position I will say going throughout the year as we close out Q4.

Unknown Executive: Always on our mind is the fact that as we enter into the new fiscal year normally our worst cash flow quarters do you want.

Unknown Executive: And so those are always thoughts that are on our mind in terms of how we size and.

Unknown Executive: The share repurchase program, obviously as well right be concluding here our first three <unk>.

Unknown Executive: Repurchase program of $200 million it will terminate here at the end of the fiscal year and our board has already authorized the second tranche of that repurchase program starting in February an additional three year $200 million.

Unknown Executive: This program that we all we get started on the future here as well so we remain committed to returning cash to shareholders.

Unknown Executive: Working on that balanced capital allocation strategy.

Angel: Very helpful. Thank you.

Unknown Executive: The next question will come from Julian Mitchell with Barclays. Please go ahead.

Unknown Executive: The next question will come from Julian Mitchell with Barclays. Please go ahead.

Unknown Executive: Hi, good morning, and I wish you all the best, Chris, and thanks for all the help down the years. Maybe just to start off with the question perhaps on that price sort of rose dynamic, understand it was a headwind in the third quarter. I just wondered, perhaps, Pat, if you could sort of flesh that out a little bit, you know, what kind of tailwind, particularly the infrastructure segment, should get in Q4 from Tungsten and any sort of way of sizing the effect into the first half of next year?

Julian C.H. Mitchell: Hi, good morning.

Unknown Executive: I wish you all the best Chris.

Unknown Executive: Chris Thanks for the help down the years.

Speaker Change: Julian maybe.

Unknown Executive: Just to start off with the question perhaps on that.

Unknown Executive: Price sort of rules dynamic understand it was a headwind in the third quarter.

Unknown Executive: Year on year should be a tailwind I think right now in the fourth quarter.

Unknown Executive: Sure.

Unknown Executive: The next year. So I just wanted to perhaps Pat if you could sort of flesh that out a little bit.

Unknown Executive: What kind of tailwind, particularly the infrastructure segment should get in Q4 from from tungsten and any sort of way of sizing.

Pat: The first half of next year.

Patrick S. Watson: Yeah, so as we think about the, we'll go through the general dynamics here, you know, in that infrastructure segment, we do see price lead raw material costs a little bit. That's what drives part of this dynamic for us as we move from, you know, Q1 into Q2, we did see a sequential headwind of about $13 million at the enterprise level that was predominantly in the infrastructure segment. As we, you know, move from Q2 to Q3, that headwind was basically, I'll say, equal in size.

Pat: Yeah. So as we think about who will go through the general dynamics here.

Patrick S. Watson: In that infrastructure segment, we do see price lead raw material costs, a little bit that's what drives part of this dynamic for us as we move from <unk>.

Patrick S. Watson: Q1 into Q2, we did see a sequential headwind of about $13 million at the enterprise level that was predominantly in.

Patrick S. Watson: In the infrastructure segment as we move from Q2 to Q3 that headwind was basically I'll say equal in size and then as we get into Q4, we'll see that headwind abate alright, and so at this point in time in Q4, I'll say, we're simply pricing on the same level the cost is flowing.

Patrick S. Watson: And then as we get into Q4, we'll see that headwind abate, right? And so at this point in time in Q4, I'll say we're simply pricing at the same level that cost is flowing through the P&L. Again, in general, as we think about how that structurally works for us, we have visibility, I'll say, into the cost structure going forward from a tungsten perspective about cost structure into the, I'll say at this point in time, the second quarter, more or less, of FY25. And so that's kind of where we're at right now.

Patrick S. Watson: Through the P&L.

Patrick S. Watson: Again in general as we think about how that structurally works for us and we have visibility I'll say into the cost structure going forward from the tungsten perspective.

Patrick S. Watson: About two quarters and as we've seen tungsten prices here over I'd say, the last 45 days or so.

Patrick S. Watson: A recent low again, probably about 45 days ago sitting around $323 13 per M to you. Most recently last week were about $3 30 to $3 33.

Patrick S. Watson: So we have seen a little bit of an uptick in the cost of tungsten.

Patrick S. Watson: That I'll say continues at that level, we will see that as time moves on we will get more and more stability into the cost structure into the I'll say at this point in time in the second quarter more or less of.

Patrick S. Watson: FY 'twenty five.

Patrick S. Watson: And so thats kind of where we're at right now.

Unknown Executive: Thanks very much. And then, just my second question. You've talked about demand a little bit already. And, you know, I just want to follow up on that.

Speaker Change: Thanks, very much and then just my second question.

Speaker Change: You've talked about demand a little bit already.

Speaker Change: I just wanted to follow up on that so I think China is an area, where clearly you took down the outlook a little bit.

Unknown Executive: So I think China's an area where you took down the outlook a little bit. I just wondered, sort of beyond China, have you seen any change in demand patterns, particularly in areas like general engineering, in the last couple of months, or your business selling into kind of, say, off-highway machinery OEMs? You know, listening to other companies in the last two or three weeks, there has been some softness in orders or sales in those types of markets. Just wondered if you'd seen a similar pattern, or else, outside China, things have actually been very steady.

Unknown Executive: I just wanted to sort of beyond China.

Unknown Executive: Have you seen any change in demand patterns, particularly in areas like <unk>.

Unknown Executive: General Engineering.

Unknown Executive: In the last couple of months or your business setting into the kind of say off highway.

Unknown Executive: Machinery OEM.

Unknown Executive: It seems like listening to other companies in the last two or three weeks there has been some.

Unknown Executive: Softness in orders or.

Unknown Executive: Sales.

Unknown Executive: And those types of markets, just wondered if you'd see a similar pattern or else.

Unknown Executive: Slide China things have actually been very steady for us.

Christopher Rossi: I think in general, you know, general engineering, for example, if you look at the eurozone. You know, I think that PMI has been below 50 now, Julian, for like 21 months. For the last several months, it's just kind of been bouncing just below the 50 mark, in between, I think, 45 and 50. So it hasn't really changed much.

Unknown Executive: Yes, I think in general.

Christopher Rossi: General Engineering for example, if you look at if you look at the Euro zone.

Christopher Rossi: I think that PMI has been below 50, now Julian for like 21 months and.

Christopher Rossi: <unk>.

Christopher Rossi: For the last several months. It is just kind of been bouncing just just below the 50 mark in between I think $45 50, so it hasn't really changed much and the same thing with the with the U S is that we seem to be in this mode, where it's at.

Christopher Rossi: And the same thing with the U.S., we seem to be in this mode where it's... It's in contraction territory, but it's kind of stabilizing at about the same level. Now recently, if you look at April's IPI for industrial production, which is a good metric for general engineering, it ticked up a little bit in April, but we've seen that happen before, so I don't know that we can call it a trend. But we still see, at least through the fourth quarter, I think things are sort of stable at these maybe softer levels, is how I'd characterize it.

Christopher Rossi: In the contraction territory, but it's kind of it's kind of stabilizing.

Christopher Rossi: At about the same level.

Christopher Rossi: Now recently, if you look at April Ipi is for industrial production, which is a good good metric for general engineering.

Christopher Rossi: It ticked up a little bit in April, but we've seen that happen before so I don't I don't know that we can call it a trend.

Christopher Rossi: But we still see at least through the fourth quarter I think things are sort of stable at these.

Christopher Rossi: It may be softer levels is how it how I'd characterize it.

Unknown Executive: That's helpful. Thanks very much.

Speaker Change: That's helpful. Thanks very much.

Unknown Executive: The next question will come from Tami Zakaria, with J.P. Morgan. Please go ahead.

Unknown Executive: The next question will come from Tami Zakaria with Jpmorgan. Please go ahead.

Unknown Executive: Hi, good morning. Thank you so much. And Chris, thanks for all the help and wish you the best of luck and welcome aboard Sanjay. So my first question is around modeling. Can you remind us, is the fourth quarter similar from a workday perspective year over year, or do we have a different comparison?

Tami Zakaria: Hi, good morning, Thank you so much and Chris Thanks for all the help and wish you the best of luck and welcome aboard to Sanjay.

Unknown Executive: So my first question is.

Unknown Executive: Around modeling.

Unknown Executive: Can you remind us is the fourth quarter.

Sanjay Chaubey: Similar from a workday perspective year over year, we have a.

Unknown Executive: Different compare.

Patrick S. Watson: You know, from a workday perspective, it is fractionally higher. I don't think it's even a full workday.

Sanjay Chaubey: From a workday perspective, it is fractionally.

Patrick S. Watson: Higher I don't think it's even a full full workday Tammy.

Patrick S. Watson: Got it, okay. We've had, I'll say, for the most part, an Easter holiday shift. Third Quarter Phenomenon for us this year in the Americas and Europe, last and the prior year. Got it. That's very helpful.

Speaker Change: Got it okay.

Patrick S. Watson: Just.

Patrick S. Watson: Embedded in that obviously, we've had I'll say for the most part of the Easter holiday shift where Easter was more of a third quarter phenomenon for us this year in the Americas, and Europe and last in the prior year it would've been a fourth quarter phenomenon.

Unknown Executive: And my second question is around aerospace and defense. I think one of the major OEMs just had a new investigation open on a different aircraft model. This is more from a medium to long-term perspective. How are you thinking about build rates over the next few years? Do you expect aerospace and defense to grow nicely over the next few years? And also, can you comment on the mix between commercial aero versus defense within your portfolio?

Patrick S. Watson: Got it that's very helpful.

Unknown Executive: And my second question is around aerospace and defense.

Unknown Executive: I think one of the major Oems.

Unknown Executive: Just had an UN investigation open on a different.

Unknown Executive: Aircraft model.

Unknown Executive: How are you thinking this is more from a medium to long term perspective, how are you thinking about bill.

Unknown Executive: Build rates over the next year do you expect aerospace and defense to grow.

Unknown Executive: Nicely over the next few years and also can you comment on the mix between commercial arrow versus defense within your portfolio.

Christopher Rossi: Yeah, I'd say on the commercial versus defense front, it's mostly mostly commercial, but there is a portion that is certainly defense. And, you know, our view for Aerospace and commercial air production long-term is that the demand is solid. If you look at the major OEMs, yes, there are quality issues, which we think are certainly inhibiting demand in the short term. And we've kind of reflected that in our fourth quarter forecast.

Speaker Change: Yes, I would say on the commercial versus defense, it's mostly mostly commercial but there is.

Christopher Rossi: A portion of it is certainly defense related.

Christopher Rossi: And.

Christopher Rossi: Our view for.

Christopher Rossi: For aerospace in the commercial air production long term is that the demand is demand is solid if you look at the major Oems, yes, there's there's quality issues, which we think.

Christopher Rossi: Nor are certainly inhibiting demand in the short term and we've kind of reflected that in our fourth quarter forecast, but even if you look at the other major Oems there are still there's still constrained by supply chain.

Christopher Rossi: But even if you look at the other major OEMs, they're still constrained by the supply chain. And we know that that supply chain, because we're also active in that, those suppliers are actively working on increasing production. So I think it's just a matter of time where the supply chain will no longer be a constraint, especially when you are talking about the midterm. But the demand is very solid. There is definitely a need for more aircraft.

Christopher Rossi: And we know that that supply chain because we're also active in that those suppliers are actively working on improving increasing production. So I think it's just a matter of time, where the supply chain will no longer be a constraint, especially when you were talking about in the mid in the mid term timing.

Christopher Rossi: But the demand is very solid there's definitely a need for more aircraft.

Christopher Rossi: So we feel we feel very good about that. But there are some constraints right now that are holding things back, and I still don't think I don't believe production build rates are still what they were prior to the pandemic.

Christopher Rossi: And so we feel we feel very good about that but there are some constraints right now theyre holding things back and I still think I don't believe production build rates are still what they were prior to the.

Christopher Rossi: The pandemic Tammy.

Unknown Executive: Got it. Thank you so much.

Speaker Change: Got it thank you so much.

Unknown Executive: The next question will come from Steve Barger with KeyBank. Please go ahead.

Unknown Executive: The next question will come from Steve Barger with Keybanc. Please go ahead.

Unknown Executive: Good morning. This is Christian Zilon on behalf of Steve Barger.

Christian: Good morning. This is Christian dialogue for Steve Barker. Thank you for taking the question. So we just like to echo previous comments, it's been a pleasure working with you Chris and we look forward to working with you Sanjay.

Unknown Executive: Thank you for taking the questions, and we'd just like to echo previous comments. It's been a pleasure working with you, Chris, and we look forward to working with you, Sanjay. First question.

Christian Zilon: First question.

Unknown Executive: I know you guys continue to put your focus on your commercial excellence and product innovations. Can you just give us some idea of how the new product contributions relate to growth? And then, in a production upcycle, how much do you think you would outgrow the market given your efforts on these fronts?

Christian Zilon: I know you guys continue to focus on your commercial excellence in product innovations can you just give us some idea of how the new product contribution as relates to growth and then in a production up cycle. How much do you think you would outgrow the market given your efforts on these fronts.

Christopher Rossi: Yeah, I think it's a really good question. Because, as I talked about in my opening remarks, prior to modernization, I think it was fair to say that we were lagging in terms of our ability to release new products, position ourselves to take share. And that's now changed with modernization. You know, the example I gave in my prepared remarks was that this is the fifth product innovation that's been released.

Speaker Change: Yes, I think it's a really good question because as I talked about in my opening remarks.

Christopher Rossi: Prior to modernization I think it was fair to say that we were.

Christopher Rossi: We are lagging in terms of our ability to release new products.

Christopher Rossi: And and position ourselves to take share.

Christopher Rossi: And that has now changed with modernization. The example, I gave.

Christopher Rossi: In my prepared remarks, we're this is the fifth.

Christopher Rossi: <unk> innovation, that's been released.

Christopher Rossi: Since modernization, that's just in this coding area; that's not all products, of course. But I think if we look back prior to modernization... It may have been 7 or 8 years before we had released anything along those lines because we simply lack the manufacturing capability to make these new products with this new coating technology.

Christopher Rossi: Since modernization that's just on this and this coding error, that's not all products of course, but I think if we look look back prior to modernization.

Christopher Rossi: <unk>.

Christopher Rossi: So it may have been it may have been seven or eight years before we had released anything along those lines because we simply lack the manufacturing capability to to me.

Christopher Rossi: This new these new products with this new coating technology.

Christopher Rossi: So, for me, it's very significant that we... We finished this modernization in sort of 2022. We're leveraging these examples. And so most of that growth is still ahead of us. You know, if you look at the adoption rate and how people are looking at these new products, they feel very good about them. But clearly, that's a change from where we were before modernization, where we were not releasing new products as quickly.

Christopher Rossi: So for me, it's very it's very significant.

Christopher Rossi:

Christopher Rossi: We finished this modernization is sort of 2022, we're leveraging this these examples and so most of that growth is still ahead of us. If you look at the adoption rate and how people are looking at these new products. They feel they feel very good about it but clearly that's a change from where we were before modernization where we.

Christopher Rossi: We were we were not releasing new products as quickly. So it is innovation advantage is very key to driving share gain.

Christopher Rossi: So innovation advantage is very key to driving share gains. It is one of the major levers we have, along with, of course, customer service levels. And that's also improved through modernization, because typically before, we were challenged in terms of consistency and quality before modernization, and also I think our on-time performance and ability to respond within the proper lead times was also constrained. So we feel very good about it. It is a major driver. And, you know, we haven't differentiated Christianity in terms of how much.

Christopher Rossi: It is one of the major levers we have along with of course customer service levels and Thats also improved through modernization.

Christopher Rossi: Because typically before we we were challenged in terms of consistency and quality.

Christopher Rossi: Before monetization and also I think our on time performance and.

Christopher Rossi: Ability to respond within the proper lead times was also constrained so we feel very good about it as a major driver and.

Christopher Rossi: We haven't we haven't differentiated Christian in terms of how much.

Christopher Rossi: You know how much of a driver of ShareGain that is, other than I would say it's a big piece of it. And then I would comment on our investor day that we plan on getting one to two percent growth from the markets based on the long-term megatrends. We used about two percent growth from price, and that's pretty consistent with what we've done historically. And then ShareGain, again, driven as one of the big levers on innovation, that's also one to two percent.

Christopher Rossi: How much of a driver of.

Christopher Rossi: Of share gain that is other other than I would say, it's a big big piece of it and then I would comment on our Investor day that we plan on getting 1% to 2% growth from.

Christopher Rossi: The markets based on the long term megatrends, we used about 2%.

Christopher Rossi: Growth from price and Thats pretty consistent with what we've done historically and then the share gain again driven is one of the big levers on innovation, that's also 1% to 2%.

Christopher Rossi: Over the long term.

Christopher Rossi: Yeah.

Christopher Rossi: Great, very helpful. Thanks for that color.

Speaker Change: Great very helpful. Thanks for that color if I could just follow up on that which markets do your innovation wins allow you to take share in or I guess do they enable upside to the range that your margins seem like they've been in for the past few years.

Unknown Executive: If I just follow up on that, which markets do your innovation wins allow you to take share in? Or do they enable upside to the range that your

Speaker Change: Yes, I think.

Unknown Executive: Maybe the example that I gave in my prepared remarks, if you noticed that had a broad range of applications. So.

Unknown Executive: I think maybe the example that I gave in my prepared remarks, if you notice, that had a broad range of applications. We do customize some tools that are specific, for example, more for titanium machining which happens in aerospace more than anywhere else. But for the most part, a lot of these products, while they may be designed with a specific application, for example, in aerospace, in mind, they have broad application across many So that's a good thing about our products is that they have broad application. There was another part to your question, Christian, but I forgot what it was. Can you repeat that?

Unknown Executive: We do customize some tools that are specific for example example, maybe more on titanium machining that happens in aerospace more than anywhere else, but for the most part a lot of these products while they may be designed with a specific application for example in aerospace in mind.

Unknown Executive: Have broad application across many industries. So that's a good thing about our products as they have broad application.

Unknown Executive: There was another part to your question Christian but I forgot what it was can you repeat it.

Unknown Executive: Just on the upside, if the product innovation wins, enable upside to the range that your margins seem like they've been in over the past few years. Thank you. I appreciate the time.

Christian: Just on the.

Unknown Executive: Product innovation wins enable upside to the range that your margins seem like they've been in over the past few years. Thank you I appreciate the time.

Speaker Change: Yes, I think that.

Unknown Executive: You know, the innovations apply to... sort of higher-end, challenging applications, and in those applications, we price for value anyway. So as long as we've now been focused on that element of commercial excellence, I don't know that they're necessarily going to drive improved margins in that process, but they are an enabler to winning new business and having the opportunity to make higher margins on those types of products anyway. And then they also apply to, you know, our fit for purpose type applications, and those help to improve our competitiveness. I'm not sure that there's necessarily a specific group that is going to necessarily drive more margin improvement specifically because they're used over such a broad range of competition across our end market.

Unknown Executive: The.

Speaker Change: <unk> apply to.

Unknown Executive: So sort of higher end.

Unknown Executive: Challenging applications and in those applications, we price for value anyway. So.

Unknown Executive: As long as we've now been focused on that element of commercial excellence I don't know that theyre going to drive necessarily improve margins to that process, but they are an enabler to winning new business.

Unknown Executive: And having the opportunity to make higher margins on those type of products anyway, and then they also apply to.

Unknown Executive: Our fit for more fit for purpose type applications and those helped to improve our competitiveness.

Unknown Executive: I'm not sure that there is necessarily a specific specific group that is going to necessarily drive more margin improvement.

Unknown Executive: Specifically, because they are used to over such a broad application of.

Unknown Executive: Across our end markets.

Speaker Change: Thanks again.

Unknown Executive: The next question will come from Michael Feniger with Bank of America. Please go ahead.

Unknown Executive: The next question will come from Michael Feniger with Bank of America. Please go ahead.

Unknown Executive: Hey, gentlemen, thanks for taking my question. I'm just curious.

Michael J. Feniger: Hey, gentlemen, thanks for taking my question I'm just curious.

Unknown Executive: I appreciate, obviously, the guide for the fourth quarter. Just seasonally, when you head into your next fiscal year, I think sales are typically down a certain range, quarter over quarter. Just based on the current environment today, should we expect that normal seasonality heading into next year? Could we see better than normal seasonality, or are there still some headwinds that would make us feel like that normal seasonality might have a little bit more pressure than we look at in prior years?

Michael J. Feniger: Appreciate obviously the guide for the fourth quarter.

Unknown Executive: Seasonally when you head into your next fiscal year I think sales are typically down a certain range.

Unknown Executive: For over a quarter.

Unknown Executive: Just based on the current environment today should we expect that normal seasonality heading into next year.

Unknown Executive: Better than normal seasonality or are there still kind of headwinds that would make us feel like that normal seasonality might have a little bit more pressure than we look at in prior years.

Patrick S. Watson: Yeah, you know, obviously, I'll, you know, I'll start off by saying, Mike, that we're in the planning process right now for FY 25. All right, but just a couple things to think about.

Speaker Change: Yes, obviously.

Patrick S. Watson: I'll start off by saying, we're in the planning process right now for FY 'twenty five alright, but just a couple of things to think about I will say to answer your question from a sales perspective going into Q1 as well as just some cost structure items to think about relative to 'twenty five as well.

Patrick S. Watson: I'll say, you know, to answer your question from a sales perspective, going into Q1, as well as some cost structure items to think about relative to 25. First off, we would see our expectations on normal seasonality going from Q4 to Q1 would be down about 8 to 10%. All right.

Patrick S. Watson: First off we would see our expectations on normal seasonality going from Q4 to Q1 would be down about 8% to 10% alright, and so that would be our normal expectations beyond that as we just think about the framework I'll say for FY 'twenty five.

Patrick S. Watson: And so that would be our normal expectations. But beyond that, as we just think about the framework, I'll say for FY 25, there are a couple things just to touch on. Number one is, and we talked about this a little bit earlier on the call, raw material costs, you know, where tungsten sits today, slightly up from the lows. Again, as we continue to have stability in that tungsten price, you know, that would be a favorable thing as we think about, you know, price raw phenomena going into the first half of FY 25.

Patrick S. Watson: Things just touch on number one is and we've talked about this a little bit earlier on the call would be raw material cost were tungsten sits today slightly up from the lows again as we continue to have stability in that tungsten price.

Patrick S. Watson: That would be a favorable thing as we think about <unk>.

Patrick S. Watson: Raw.

Patrick S. Watson: Domino going into the first half of FY 'twenty five.

Patrick S. Watson: And I said the second thing in terms of just the overall cost structure of things we've been working on is obviously we've got our existing restructuring program that's out there that we intend to hit a run rate here of $35 million on an annual basis at the end of the year. You'll see some, some I'll call it a rollover benefit as we move from 24 to 25, as we achieve that full rate throughout FY 25.

Patrick S. Watson: The second thing in terms of just the overall cost structure of things we've been working on so obviously, we've got our existing restructuring program that's out there.

Patrick S. Watson: That we intend to hit a run rate here of $35 million on an annual basis at the end of the year Youll see some some I'll call. It rollover benefit as we move from 'twenty to 'twenty five.

Patrick S. Watson: <unk> achieved that full rate throughout FY 'twenty five.

Patrick S. Watson: But again, we're right in the planning process now. The management team is, you know, digging into all the market and cost phenomena, and we'll report back to you with a holistic outlook on FY 25 in about 90 days.

Patrick S. Watson: But again, we're right in the planning process now management team is digging into all the all the marketing cost phenomena and.

Patrick S. Watson: Report back to you with a holistic outlook on FY 'twenty five in about 90 days.

Speaker Change: Great and just on.

Patrick S. Watson: On metal cutting the flow through in the quarter or the 2% to 30 bps of margin degradation I believe there was a onetime gain on the prior year.

Speaker Change: Wanted to flesh it out with the decremental margin on your your I think it was a flat organic growth there was that in line with kind of what you guys were thinking just trying to understand.

Patrick S. Watson: What do you guys kind of saw in that quarter, how would you kind of think about it in terms of your sensitivity to volumes.

Patrick S. Watson: Yeah, I think the first thing, certainly, there was about a million dollar gain in the prior year in the metal cutting business that was related to a property sale that did not repeat, right? So you got to factor that in. I think the other thing is that we think about margins and decrements in terms of the quarter, right? Two things.

Patrick S. Watson: Yes, I think the first thing certainly there was about $1 million gain in the prior year in the metal cutting.

Patrick S. Watson: Business that was related to a property sale that did not repeat right. So you got to factor that in I think the other thing as we think about margins and Decrementals in terms of the quarter right two things number one as you know.

Patrick S. Watson: Number one is, you know, yeah, your comments in terms of the total sales change are accurate, but don't forget in there there's positive price embedded in the quarter as well. And if you think about the price realization of the quarter, that would imply volumes obviously being negative. You know, I'd say that the other piece of that volume being negative in terms of what's happening in Q3 in particular, from a decremental perspective, going into Q3, we saw a slowdown in markets in the December timeframe.

Speaker Change: Yes, your comments in terms of the total sales changes accurate, but don't forget in there theres positive price embedded in the quarter as well and as you think about the price realization in the quarter that would imply volumes, obviously being negative.

Patrick S. Watson: I'd say the other piece of that volume being negative in terms of what's happening in Q3 in particular from a decremental perspective is going into Q3, we saw a slowdown in markets in December timeframe, and Thats, just simply causes us to react to what that demand is in the quarter and.

Patrick S. Watson: And that just simply causes us to react to what that demand is in the quarter and, you know, reset production and, you know, adjust the cost structure. Those things just simply don't happen instantaneously. They happen over time as we put the axis in place to constrain the cost relative to where volume demand is from an end market perspective and production as well.

Patrick S. Watson: Reset production and adjust the cost structure of those things just simply don't happen instead.

Patrick S. Watson: Instantaneously they happen over time as we put the actions in place to constrain the cost relative to where volume demand is from an end market perspective and production as well.

Unknown Executive: Great, and I'll just, if I could have one more, excuse me, more in there, just the stable, the commentary in general engineering, the stable at software levels, I'm just curious, do you, are you guys... Are your inventory levels with your customers, your customer inventory levels, are they reflective of those stable software levels? Do they have a little bit more progress to go? Any comment on that would be helpful. Thanks, everyone. Yeah, I would say that the

Speaker Change: Great and I'll, just if I could add one more excuse me more in there just the stable commentary in general engineering, Steve at softer levels I'm, just curious do you.

Unknown Executive: Are you guys is your inventory levels with your customers your customer inventory levels are they reflective of that stable at softer levels do they have a little bit more progress to go.

Unknown Executive: And any color on that would be helpful. Thanks, everyone.

Christopher Rossi: Yeah, I would say that the, um... The customers have it in terms of de-stocking. They were already very cautious about how much inventory they were holding anyway, and I think they still maintain that. So I would say that their current stocking levels reflect... That forecast that I provided, that outlook on the... So no more, no significant destocking that we're looking at to be ahead of us. And then I think they're also cautious on the restocking, and they'll probably need to see some... Demand signals before they get into that moment.

Speaker Change: Yes, I would say that the.

Christopher Rossi: The customers have in terms of Destocking.

Christopher Rossi: They were already very cautious.

Christopher Rossi: About how much inventory, they're holding any way and I think they still maintain that so I would say that.

Christopher Rossi: Our current stocking levels reflect.

Christopher Rossi: That forecast that I provided that outlook on.

Christopher Rossi: The conditions, so no more no significant destocking that we're looking at to be ahead of us.

Christopher Rossi: And then I think Theyre also cautious on the restocking and they'll probably need to see some.

Christopher Rossi: Some demand signals before they get into that mode.

Christopher Rossi: This concludes our question and answer session. I would like to turn the conference back over to Mr. Chris Rossi for any closing remarks.

Christopher Rossi: This concludes our question and answer session I would like to turn the conference back over to Mr. Chris Rossi for any closing remarks.

Christopher Rossi: Thanks, Operator, and thanks, everyone, for joining the call today. As always, I appreciate your interest and support, and please don't hesitate to reach out to Mike if you have any questions. Have a great day.

Christopher Rossi: Thanks, operator, and thanks, everyone for joining the call today.

Christopher Rossi: As always I appreciate your interest and support and please don't hesitate to reach out to Mike. If you have any questions have a great day. Thanks.

Unknown Executive: A replay of this event will be available approximately one hour after its conclusion. To access the replay, you may dial toll-free within the United States, 877-344-7529, and outside of the United States, you may dial 412-317-0088. You will be prompted to enter the conference ID, 101-86947, then the pound or hash symbol. Then, you will be asked to record your name and company. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator: A replay of this event will be available approximately one hour. After its conclusion to access the replay you may dial toll free within the United States. Eight 700, 734, 475 to nine and outside of the United States You May dial four one to 317.

Unknown Executive: 0088, you will be prompted to enter the conference I'd 10186, $94. Seven then the pound or has symbol you will be asked to record your name and company. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Unknown Executive: [music].