Q1 2025 Kennametal Inc Earnings Call
Good morning. I would like to welcome everyone to Kenna Menel's first quarter in fiscal 2025 earnings conference call.
All lines have been placed on you to prevent any background noise. After the speakers' remarks, there will be a question in the 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 number two. Please note the event is being recorded. I would now like to turn the conference over to Michael Pici by President of Investor Relations.
Michael Pici: Thank you, operator. Welcome everyone and thank you for joining us through the Canada Mental's First Quarter Fiscal 2025 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.
Michael Pici: Joining me on the call today, or Sanjay Chowbey, President and Chief Executive Officer, and Pat Watson, Vice President and Chief Financial Officer.
Michael Pici: and Pastor Pedro Mox, we will open the line for questions.
At this time, I would like to direct your attention to our forward-looking disclosure statement.
Today's discussion contains comments that constitute forward-looking statements. And as such, involve a number of assumptions, risks and uncertainties that could cause the company's actual results, performance, or achievements to differ materially from those expressed in or implied by such statements.
These risk factors and uncertainties are detailed in Kenna Metal's SEC filings.
In addition, we will be discussing non-GAAP financial measures on the call today. Reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our Form 8K on our website. And with that, I'll turn the call over to Sanjay.
Sanjay: Thank you, Mike. Good morning, and thank you for joining us.
Sanjay: I'll start the call today with some in-market commentary, followed by a review of the quarter and examples of the industry-leading innovative solutions we are bringing to market.
Sanjay: Then Pat will cover the quarterly financial results, as well as the Fiscal 25 Outlook.
Sanjay: Finally, I'll make some summary comments and then open the call for questions.
Sanjay: Thank you.
Sanjay: Let me start on slide 3 by saying that from an industry and macroeconomic perspective, Fiscal 25 has started out pretty uneven, similar to what we saw at the end of Fiscal 24.
Sanjay: During our fiscal first quarter, market conditions worsened further in EMEA, and that is impacting several of our end markets.
In addition, industrial production in the U.S. has continued to be soft.
Sanjay: We also saw two major labor disputes, one in the shipping industry, which was resolved quickly, and the second one impacting aircraft production, which was resolved decently.
Sanjay: Despite these broader industry and market challenges, we remain focused on things that we can control.
We continue to make progress on initiatives to drive above-market growth, including innovative product launches and demonstrating our products and solutions at several key industry events.
Sanjay: I will elaborate more on these in a moment.
Sanjay: In addition, we remain focused on primary working capital, as shown by the strong free cash flow that will deliver this quarter.
Sanjay: Now let's turn to the results.
Sanjay: For the quarter, sales decreased 2% year-over-year.
Sanjay: At the segment level, infrastructure increased 1% organically, while metal cutting was down 4%.
Sanjay: On a constant currency basis, Asia-Pacific sales increased 2%.
Sanjay: However, EMEA declined 1% and the Americas declined 2%.
Moving to our end markets. Aerospace and defense grew 13%, energy grew 2%.
Sanjay: Our other markets experience declines.
Sanjay: Transportation was down 2%, general engineering declined 3%, and earthworks declined 6%.
Sanjay: I want to reflect for a moment on our results versus the expectations we outlined last quarter.
Sanjay: Our results were at the lower end of our expectations.
Sanjay: This was mostly due to challenging market conditions in general engineering and transportation in the EMEA and America's regions within metal cutting.
Now turning to profitability for the quarter.
Sanjay: Adjusted EBITDA margin was 14.3% compared to 16.6% in the prior year.
Sanjay: Adjusted EPS decreased to $0.29 compared to $0.41 in the prior year quarter.
Sanjay: Cash from operating activities year-to-date was $46 million compared to $26 million in the prior year period.
Sanjay: Free operating cash flow year-to-date was 21 million dollars, up significantly from negative 3 million in the prior year.
Sanjay: and we continued our share repurchase program with $15 million worth of shares bought back during the quarter.
Sanjay: Reflected in our EPS, and as noted last call, was a portion of the investment in third-party expertise to execute some of the initiatives related to our $100 million cost improvement plan.
Sanjay: The EPS results also include our participation in trade shows that take place every other year, including IMTS in the US and AMB in Germany.
Sanjay: We are encouraged by the level of interest during those shows. Our booths were very active, and we had a strong lead generation from both events.
Sanjay: Finally, we remain focused on generating strong cash flow and implementing operational initiatives to improve our overall performance.
Sanjay: Now turning to slide 4.
Sanjay: I want to provide an update on the growth benchmarking that we introduced last year at Investor Day.
Sanjay: As you may recall, we provided a comparison of our metal cutting growth relative to publicly traded peers and data provided by industry trade groups in certain countries.
Sanjay: First on the left.
Sanjay: Once again, this quarter, metal cutting performance, while negative on a constant currency basis, matched the publicly traded peer set.
Sanjay: Over the last couple of years, as you can see here, we have been demonstrating our ability to compete and win.
Sanjay: On the right, you can see that we have performed relatively well in these key countries.
Sanjay: In the U.S., we deliver 3% growth.
Sanjay: very modestly below the overall market.
Sanjay: This is mostly driven by the timing of special projects in aerospace and defense and transportation.
Sanjay: In the countries listed, we continue to outpace or match market growth.
Sanjay: For example, in Germany, while the broader market there declined significantly, we achieved flat growth.
Sanjay: Our outperformance was due in large part to our growth initiatives.
Sanjay: Also of note, the broader peer group may have been impacted by lower export sales.
Sanjay: Finally, let me say that our innovative solutions
Sanjay: best-in-class customer service, application engineering support, and commercial excellence continue to position us for above-market growth.
Sanjay: Now, speaking of our innovative solutions, on slides 5 and 6, I would like to highlight examples of how innovation as a competitive advantage continues to deliver enhanced product offerings to our customers.
Sanjay: First on slide five.
Sanjay: is our new prime point long wall mining pick from our infrastructure portfolio.
Sanjay: Notably, this pick is equipped with a polycrystalline diamond tip.
Sanjay: which enables operators to run longer.
Sanjay: Thank you.
Sanjay: This innovative mining solution also provides reliability in the harshest and most abrasive conditions, and is ideal for coal, salt, and other soft mineral applications.
Speaker Change: and Ben.
Speaker Change: This is one of three mining products launched this quarter.
Sanjay: It is a great example of unique solutions that support customers who are operating in challenging environments.
Sanjay: Thank you. Thank you. Thank you.
Sanjay: On slide 6, we have our top Swiss micro machining solution from our metal cutting portfolio.
Sanjay: These high-precision turning tools focus on serving the micromachining needs of customers in the medical, aerospace, and transportation markets.
Sanjay: And this product suite has ultra-sharp cutting edges for longer tool life and superior surface finishes for use in titanium and stainless steel applications.
Sanjay: This launch is a great example of the progress we have made executing the strategy we discussed during Investor Day last year.
Sanjay: We identified these applications.
Sanjay: specifically medical and aerospace to help us fuel above-market growth.
Speaker Change: Now, let me turn the call over to Pat, who will review the first quarter financial performance and the outlook.
Pat Watson: Thank you, Sanjay, and good morning, everyone. I will begin on slide 7 with a review of Q1 operating results.
Pat Watson: The quarter's results show that we continue to execute our initiatives in the face of challenging market conditions.
Sanjay: Sales were down 2% year-over-year, with an organic decline of 2%, an unfavorable currency exchange of 1%, partially offset by favorable workdays of 1%.
Sanjay: Sales this quarter were at the lower end of the expectations we provided last quarter.
Sanjay: Relative to those expectations, we experience slower market conditions, most notably in the Americas and EMEA, in our general engineering, transportation, and earthworks end markets.
Sanjay: Energy was a bit stronger than we had anticipated due to project volume.
Sanjay: Year over year, we experience market headwinds in most end markets and regions, with the exceptions of aerospace and defense and energy end markets, and the Asia-Pacific region.
Sanjay: I will provide more color when reviewing the segment performance in a moment.
Sanjay: Adjusted EBITDA and operating margins were 14.3% and 7.6% respectively versus 16.6 and 9.9% in the prior year quarter.
Sanjay: During the quarter we realized approximately five million dollars in savings from the previously announced restructuring program. This action has successfully delivered annualized run rate pre-tax savings of approximately thirty five million dollars.
Sanjay: Lastly, foreign exchange headwinds from the strong U.S. dollar were approximately 1% this quarter.
Sanjay: The adjusted effective tax rate increased year-over-year to 25.1%, primarily driven by discrete items recognized in the prior year quarter, an unfavorable geographical mix.
Sanjay: Partially offset by a benefit of $1 million from the favorable resolution of a tax dispute in India.
Sanjay: Adjusted earnings per share were 29 cents in the quarter versus EPS of 41 cents in the prior year period.
Sanjay: The main drivers of our EPS performance are highlighted on the bridge on slide 8.
Sanjay: The year-over-year effect of operations this quarter was negative, reflecting lower sales and production volumes.
Sanjay: higher wage and general inflation, and the impact of temporary plant shutdowns.
Sanjay: These shutdowns were for routine maintenance and process improvements within the infrastructure segment and were partially offset by favorable timing of raw material costs and incremental restructuring benefits.
Sanjay: We also received a net benefit of four cents from insurance proceeds related to the tornado that damaged our Rogers facility in the fourth quarter of FY 24.
Sanjay: You can also see the effects of the tax rate and pension on EPS with taxes and pension costs of negative two cents.
Sanjay: Other reflects lower share count, which contributed one cent.
Sanjay: Slides 9 and 10 detail the performance of our segments this quarter starting with metal cutting.
Sanjay: Reported metal cutting sales were down 4% compared to the prior year quarter, with a 4% organic sales decline and an unfavorable foreign currency effect of 2%, partially offset by favorable workdays of 2%.
Sanjay: by region, on a constant currency basis, Asia-Pacific grew 3%, the Americas declined 1%, and the media declined 6%.
Sanjay: Asia-Pacific's growth was primarily driven by the transportation end market and reflects modest improvement in China and continued strength in India.
Sanjay: America's year-over-year decline this quarter was due to slower conditions in the transportation and general engineering and markets, partially offset by the execution of our growth initiatives in aerospace and defense.
Sanjay: AMIA's year-over-year performance reflects weakness in general engineering in transportation and markets, most notably in Germany.
Sanjay: Looking at sales by end market.
Sanjay: Aerospace and Defense grew 5% year-over-year as our strategic initiatives continue to drive results. These initiatives are partially offset by OEM production challenges.
Sanjay: Energy was flat with strength in EMEA from project work offset by the Asia Pacific region as we continue to experience a slower market and project delays.
Sanjay: Transportation declined 2% year-over-year due to EV and hybrid project wins in the prior year and an overall slowdown in EMEA and the Americas partially offset by Asia-Pacific project orders.
Sanjay: And lastly,
Sanjay: General engineering declined 4% year-over-year, with modest growth in Asia-Pacific, offset by lower production activity in EMEA and order timing in the Americas.
Sanjay: Metal cutting adjusted operating margin of 8.2% decreased 300 basis points year over year due to lower sales and production volumes.
Sanjay: higher wages and general inflation in foreign exchange of two million dollars
Sanjay: Partially offset by lower raw material costs, restructuring savings of $4 million, and price.
Sanjay: Turn to slide 10 for infrastructure.
Sanjay: Reported infrastructure sales are flat year-over-year with organic sales growth of 1% offset by unfavorable business days of 1%.
Sanjay: Regionally, on a constant currency basis, EMEA sales increased by 12%, Asia-Pacific increased 1%, and the America sales declined by 3%.
Sanjay: EMEA growth was primarily driven by order timing in aerospace and defense and general engineering.
Sanjay: Growth in Asia-Pacific reflects strength in general engineering, partially offset by slower demand in China, which impacted earthworks.
Sanjay: The Americas decline was due to lower mining activity in earthworks and project order timing in general engineering, partially offset by defense growth.
Sanjay: Looking at sales by end market on a constant currency basis, aerospace and defense increased 42% from our continued focus on growth initiatives in EMEA and the Americas.
Sanjay: Energy increased 2%, mainly in the Americas, driven by project timing, partially offset by lower U.S. land-based rig count.
Sanjay: Geoengineering was flattened due to temporary plant shutdowns in the Americas, offset by order timing in EMEA and Asia. And lastly, earthworks declined 6% due to customer mine consolidation and lower mining activity in the Americas and Asia Pacific in prior year orders.
Sanjay: Adjusted operating margin declined 110 basis points year-over-year to 6.9% primarily due to the following factors.
Sanjay: The previously mentioned plant shutdowns for maintenance and process improvements, higher wages, and general inflation.
Sanjay: These factors are partially offset by net insurance proceeds of $4 million, favorable price raw material timing, restructuring savings, and higher sales volume.
Sanjay: Now turning to slide 11 to review our free operating cash flow and balance sheet.
Sanjay: Net cash flow from operating activities was 46 million dollars compared to 26 million dollars in the prior year period.
Sanjay: The change in net cash flow from operating activities was driven primarily by working capital changes and the $5 million received from the favorable resolution of a tax dispute in India, partially offset by lower net income compared to the prior year period.
Sanjay: Our free operating cash flow increased to 21 million dollars from negative 3 million dollars in the prior year.
Sanjay: Primary working capital this quarter was down from the prior year. The company continues to focus on optimizing inventory levels and remains focused on driving improved working capital.
Sanjay: On a dollar basis, year-over-year, primary working capital decreased to $624 million and on a percentage of sales basis, primary working capital decreased to 31.8%.
Sanjay: Net capital expenditures decreased to $25 million compared to $29 million in the prior year quarter.
Sanjay: In total, we returned $31 million to shareholders through our share repurchase and dividend programs.
Sanjay: We repurchased 600,000 shares for $15 million in Q1 under our new $200 million authorization. And, as we have every quarter since becoming a public company over 50 years ago, we paid a dividend to our shareholders.
Sanjay: Our commitment to returning cash to shareholders reflects our confidence and our ability to execute our strategy to drive growth and margin improvement.
Sanjay: We continue to maintain a healthy balance sheet and debt maturity profile with no near-term refunding requirements.
Sanjay: The full balance sheet can be found on slide 17 in the appendix.
Sanjay: turning to slide 12 regarding our second quarter outlook.
Sanjay: We expect Q2 sales to be between $480 and $500 million, with volume ranging from negative 5 to negative 1 percent.
Sanjay: Let me share some detail on the sales assumptions impacting the Q2 outlook.
Sanjay: Our Q2 range at the midpoint reflects growth that is generally in line with our historical norms.
Sanjay: On a year-over-year basis, aerospace and defense growth continues, albeit moderately, as North American OEM production, disrupted by the strike, will impact the second quarter.
Sanjay: Energy is anticipated to be flat.
Sanjay: General engineering declined slightly, but similar to Q1 levels.
Sanjay: Transportation is expected to climb mainly due to prior year project winds and lower volumes in EMEA and earthworks is anticipated to be flat.
Sanjay: Non-cash pension expense is expected to have a negative impact of approximately one million dollars on a pre-tax basis.
Sanjay: Interest expense is assumed to be approximately seven million dollars and an effective tax rate of approximately twenty seven and a half percent.
Sanjay: Lastly, we expect adjusted EPS in the range of 20 to 30 cents.
Sanjay: The EPS range reflects the year-over-year change in the Q2 tax rate, which at the midpoint is approximately a 13-cent headwind to EPS.
Sanjay: Now on slide 13, regarding our full year outlook.
Sanjay: We continue to expect FY25 sales to be between $2 billion and $2.1 billion, with volume ranging from negative 3 to positive 2 percent.
Sanjay: net price realization of approximately 2% and we anticipate an approximate 1% year-over-year headwind from foreign exchange.
Sanjay: Our EPS outlook remains $1.30 to $1.70 and free operating cash flow remains at greater than 125% of adjusted net income.
Sanjay: The other assumptions embedded in our outlook also remain unchanged.
Speaker Change: As Sanjay noted in his prepared remarks, there have been some developments over the last quarter that have placed some additional pressure on our end markets.
Sanjay: namely the strike in aerospace and defense and macro challenges in EMEA.
Sanjay: To get to the top end of our sales outlook would require a quick rebound in aircraft production from the just resolved strike as well as a turnaround on EMEA.
Sanjay: From a macro perspective in the U.S., we would need industrial production growth to resume.
Sanjay: These types of events would give us sequential sales growth a bit above our recent seasonality.
Sanjay: The midpoint of our outlook reflects seasonality in line with our historical averages.
Sanjay: As such, we expect year-over-year aerospace and defense to have moderate growth, transportation to increase slightly, general engineering to be flat, and earthworks and energy to decline slightly.
Sanjay Chowbey: And with that, I'll turn it back over to Sanjay.
Sanjay Chowbey: Thank you, Pat. Turning to slide 14. Let me summarize.
Sanjay Chowbey: Overall, although macro conditions remain challenging in the short term, the global megatrends that drive market growth over the long term remain intact.
Sanjay Chowbey: As always, we remain committed to driving growth and managing costs in line with market conditions.
Sanjay Chowbey: And in all cases, we will be guided by our value creation pillars of growth, continuous improvement, and portfolio optimization while strengthening our foundation so that we can deliver long-term shareholder value.
Sanjay Chowbey: And with that, operator, please open the line for questions.
Speaker Change: 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 the number 2. Our first question comes from Stephen Fisher with UBS. Please go ahead.
Stephen Fisher: Thanks. Good morning. I'm wondering if you can...
Stephen Fisher: for the second quarter.
Stephen Fisher: sequentially compared to the first quarter, excluding the benefit from the insurance proceeds. I think typically, seasonally, they should be lower, but I'm just curious.
Stephen Fisher: kind of what you're embedding in there in your assumptions and maybe you could just kind of bridge the key items for us.
Speaker Change: Yeah, certainly. So I would say we think going Q1 to Q2
Speaker Change: you know, more or less flattish from a margin perspective. A couple things to think about. There's certainly, you know, going from Q1 to Q2, pull out the benefits from the insurance proceeds we had in Q1. Non-operating item, but obviously we've got a little bit of benefit from the resolution of that Indian tax dispute in there as well. We'll see a little bit of pick up, because as we talked about some of those plant shutdowns, that'll go away.
Speaker Change: and some of the expense we had around some trade shows goes away as well. On the other side of that, you know, we'll see a modest tick up in compensation as compensation normally goes up for us here on October the 1st. That's generally when a lot of our employees on a global basis...
Speaker Change: received their annual salary adjustment. So those are kind of the major puts and takes but overall flat margins.
Speaker Change: Okay that's very helpful and then you know the guidance does imply a nice recovery and organic growth in the the second half.
Speaker Change: Please talk about where you have the most confidence in that recovery, or is perhaps the bias at this point, absent any other information, that we should be kind of gearing towards the lower end of the range.
Sanjay Chowbey: Yes, Steve, Sanjay here. First of all, as we said last quarter also
Speaker Change: that we assumed slight recovery in the second half of the calendar year 25.
Speaker Change: in the industrial production.
Speaker Change: As of right now, the SPHERES outlook is that it's going to stabilize around 590-600.
Speaker Change: And then when you start to look at the auto production, that also assumes slight improvement globally, especially like in the U.S. and China. EMEA, at this point, we continue to see some pressure on auto production and auto sales.
Speaker Change: But, and then you start to move into oil and gas, I mean, sorry, the earthworks.
Speaker Change: relatively stable in that.
Speaker Change: And aerospace defense at this point, our assumption includes slight improvement. We know that there were some issues, but slight improvement in that also. It depends on how much supply constraints, you know, they can resolve. But that's the way we are looking at it. Slight improvement in the second half of the year. Long-term, obviously, much better outlook for aerospace and defense.
Speaker Change: Terrific. That's very helpful. I appreciate it.
Speaker Change: And the next question comes from Julian Mitchell with Barclays. Please go ahead.
Speaker Change: Hi, good morning. Hi, Julian.
Julian: Hi, maybe just the first question if you could elaborate a little bit on China and I suppose broader Asia-Pacific, you know, you had decent low single-digit growth there year on year in the first quarter
Julian Mitchell: But we have very mixed things on industrial demand in China versus, say, construction, where the news is uniformly more negative. So maybe help us understand kind of what you're assuming.
Speaker Change: for the balance of the year in terms of Asia-Pac or China revenue trends, please.
Speaker Change: Julian, first of all, let me start with China. As you said, construction and mining, you know, continue to be under pressure. And beyond that, we have seen stable and slightly improving markets in other major in the end markets that we serve.
Speaker Change: India continues to be stable and improving, or not only improving, it has been strong I should say. So overall AIPAC, the way I will describe here, despite pressure on construction and mining, we think it's going to be stable and slightly improving.
Speaker Change: That's helpful, thanks very much. And then just wanted to circle back, you know, when we think about that, I suppose we'll look half-on-half, but you have a, you know, a fairly typical
Speaker Change: second half increase in operating margins, total company in the back half versus the first half normally. Pretty similar I suppose this year seems to be dialed in. So any color you could provide as we think about kind of the the weighting of that margin ramp maybe.
Speaker Change: Third versus fourth quarter, you know, anything to bear in mind in that sense, and understanding that I think second quarter margins are kind of flattish sequentially, so we know that base, and then you have kind of a couple of points of back half step up, I think.
Speaker Change: Yeah, a couple things I'd reflect on. You know, what drives a lot of that margin performance in the second half is just the seasonal uptick in volumes. That is the primary driver.
Speaker Change: of what's going on from a margin perspective. So as you think about what the normal cadence is, Q3 to Q4, you know, Q4 typically is our higher margin quarter, just, again, based on margins.
Speaker Change: The only other thing I would layer in on that is, you know, as we continue to work on operational excellence and productivity and those things, that stuff will ramp.
Speaker Change: as we move throughout the year as well. And then lastly, and just in terms of lapping type of restructuring things, again, this is more of a year-over-year, but you'll see more of that restructuring benefit come in first half, and you're gonna see come in the second half again on a year-over-year basis.
Speaker Change: Great, thank you.
Speaker Change: And the next question comes from Steve Barger with KeyBank Capital Markets. Please go ahead.
Speaker Change: Morning, Steve.
Speaker Change: Steve, your line might be on mute.
Steve Barger: Sorry about that. Yeah, Pat, starting with the slide 8, that bridge, you show the negative impact of lower production volumes. Working cap as a percentage of sales looks pretty flat over the last few years and you've had negative volume growth over the past year.
Speaker Change: Can you just talk about where you are now for inventory relative to demand? Do you need to continue to take production days out or how are you positioning relative to the, you know, potential back half improvement that Sanjay talked about?
Speaker Change: Overall, I would just reflect on the general trajectory of what we're trying to do in particular
Speaker Change: Steve, is we're trying to take inventory out of the system and so I would say
Speaker Change: Simply over the long run that implies the production would be slightly below
Speaker Change: where demand is. You saw inventory come up from Q4. I think there's a little bit of FX in there, I think about $11 million sequentially. So after you kind of pull that, I would say pretty normal seasonal adjustment in terms of inventory in Q1.
Speaker Change: You know, our objective here really is to get primary working capital as a percent of sales down to about 30% as our outlook is by the end of the fiscal year. That will require us, again, as part of our long-run strategy here, to kind of constrain production in a reasonable way to get that down and, you know, get the benefit of higher sales volumes over time and on lower inventories.
Speaker Change: Let me just add one more thing to Steve on to that.
Speaker Change: We have been making, as part of the overall continuous improvement, a lot of basic improvements in ours.
Speaker Change: Sales Operations Planning.
Speaker Change: and the supply chain network, like what we move from where in the world and all that. And we've been making, you know, sustainable progress on that, and that will continue. So to Pat's point, we will very closely monitor markets, but at the same time, we expect that we'll continue to improve our overall working capital.
Speaker Change: Understood, thanks. And then on that same slide, is there an opportunity around the temporary shutdowns for maintenance and process improvement?
Speaker Change: Meaning that you can use those shutdowns and just a generally softer environment right now to move some product lines and Accelerate plant closures to lock in structural cost savings for when we do see that the markets improve
Speaker Change: Yeah Steve, the thing that we have mentioned there about the temporary plant shutdown, these are relatively short, targeted at very specific assets, preventive maintenance, and you know
Speaker Change: overall
Speaker Change: process improvements. That's what we have done here. These are not long enough to make major change in terms of footprint. We are working on footprint as a separate initiative.
Speaker Change: and we will come back to all of you at the appropriate time when we are ready to discuss more of that. But as we have said, at Investor Day, those actions will be a little bit more back half loaded of our timeline horizon on that.
Speaker Change: Just to add to that, Sanjay, I think over time, Steve, and we did this I think two years ago in the December quarter, you know, I think our ability from a sales and operations planning perspective is
Speaker Change: is as market conditions change and as we think about what we need to do to be responsive to the customers, you know, being able to more finely dial in where we can add production and take advantage of opportunities.
Speaker Change: when they present themselves in terms of, you know, again, managing production in a thoughtful manner.
Speaker Change: Appreciate the detail. Thanks.
Speaker Change: And the next question comes from Angel Costello with Morgan Stanley. Please go ahead.
Angel Costello: Hi, thanks for taking my question. I just wanted to talk about maybe put a finer point on kind of the near-term trends. What are you seeing kind of September, October versus, you know, what you saw in the first kind of full fiscal 1Q, just general kind of trends across the end markets, please.
Speaker Change: Yeah, Angel, overall industrial production and oil and gas, as I mentioned earlier, these are going to stay relatively stable.
Speaker Change: flattish, you know, like as Pat talked about the Q2 outlook. Where we see continued pressure right now, which we already have built in our outlook, is transportation industry and market in Europe.
Speaker Change: and then mining construction also continue to stay soft in our opinion in the second quarter. But overall like I said globally our view is that things will be more in the stable range.
Speaker Change: And maybe switching over to price-cost, can you talk about what you're seeing in terms of both Tungsten and just general kind of cost inflation, and then your kind of degree of confidence around kind of getting the 2% realization and just broader kind of price-cost thoughts would be helpful.
Speaker Change: Yeah, so just a little start with Tungsten. So Tungsten's been in a range of about, let's call it 305 to 325, so it's been, you know, relatively steady here over the past couple quarters, you know, as we've talked about in the past.
Speaker Change: that, you know, we generally get then visibility about two quarters out. So I would say as we think about price, cost, in particular in the infrastructure.
Speaker Change: segment, you know, we've got reasonable stability here. I would not anticipate a significant price cost tailwind or headwind at this point in time. Again, looking out.
Speaker Change: this quarter and then the following quarter.
Speaker Change: Overall, I think from an inflation perspective, there are main pockets where there is some additional price being pushed on by the supply base.
Speaker Change: But I would say in general, we've seen this trend of continued moderation in terms of inflation rates pretty much across the board. And so that's kind of what we're looking at there. Sanjay, do you want to comment on anything on the price then?
Sanjay Chowbey: Yeah pricing wise at this point we continue to we did implement the metal cutting price in July.
Sanjay Chowbey: and we had some strategic pricing on this infrastructure side. Our goal is obviously to make sure that we are offsetting inflation on that.
Speaker Change: And, Angel, I would like to also go back to your broader question on the market. I didn't talk about aerospace and defense. I want to just give you a little bit more color on it in the near term, which is Q2 for us.
Speaker Change: We don't expect major change, even though the labor dispute has been resolved. We think some of those improvements will come in the calendar year 25.
Angel Costello: Very helpful. Thank you.
Speaker Change: And the next question comes from Tammy Zachariah with JP Morgan. Please go ahead.
Tammy Zachariah: Hi, good morning. Thank you so much. Hi, Tammy. Hi. So my first question is,
Tammy Zachariah: Historically, how does Fed rate cuts impact you? Do you see a pickup in demand maybe at a one or two quarters lag?
Tammy Zachariah: rate scenario.
Speaker Change: Yeah, I think overall, lower rates will be constructive. I think, you know, as always the case with monetary policy, that lag period is variable, right? And so, you know, I would think if you look back historically, it's probably several quarters before that really starts turning around.
Speaker Change: Obviously, the Fed's not going to take action here in the near term on that. I think from an overall customer perspective, there's a customer belief that's out there as well that rate cuts are constructive to the long term.
Speaker Change: growth potential. That being said, if we balance that against current period indicators like PMI here in the U.S., you really haven't seen that turn from a customer sentiment yet.
Speaker Change: Got it, that's helpful. And my other question is, just to clarify, can you tell us how to model any business days impact for the next...
Speaker Change: for the remainder of the year for the next three quarters.
Speaker Change: Yeah, it's in Q2.
Speaker Change: Yeah, in Q2, there's basically about a half a day
Speaker Change: half a day up year over year. I think Q3 is about a half a day in the other direction down and about I think it's about a half a day again in Q4 it should be down. So it's it's kind of be a watch for the most for the most part.
Speaker Change: Got it. Thank you.
Speaker Change: and many more. Thank you. Thank you.
Speaker Change: And the next question comes from Chris Dankert with Loop Capital Markets. Please go ahead.
Chris Dankert: Hey, morning. Thanks for taking the questions.
Chris Dankert: First off, just a quick housekeeping item and apologies if I missed it, but did you delineate what the realized restructuring savings were in the quarter?
Speaker Change: Yeah it's five million dollars discreetly in the quarter year over year since inception of the program it's you know run rates thirty five million dollars on the annual basis so if you think about in the quarter from baseline that's you know thirty five to about over four so
Speaker Change: Okay, perfect, perfect. Thanks for that. And I guess just to drill down a little bit more on the margin at metal cutting, I guess...
Speaker Change: It's a pretty hefty decremental, it seems like it's 2x typical, I think typically you call it 40% decremental on volumes despite some of the cost actions. Maybe, can you just help us understand, is it mixed, kind of what else is going on under the hood there in terms of margins for metal cutting here?
Speaker Change: Yeah, well, first off, when we think about margin decrementals from metal cutting, we talk about average being in the mid-40s there, and I've always said metal cutting is north of that, right? And so metal cutting will tend to have higher incremental decrementals than, you know, the average of the business.
Speaker Change: As we think about what the performance of the segment was here in the first quarter,
Speaker Change: big reduction in volume, right, that's coming through both on the sales side and on a production basis as well, right? And on top of that, you know, you've got a couple other things. Obviously, you've got the restructuring benefits coming through in the quarter.
Speaker Change: However, on the other side of that, and we talked about this going into the quarter, we would see some temporary costs flow through Q1 as well that would kind of suppress the margin a little bit here on some of the trade shows we went to and the like. And so a couple of cross currents there, but the big story is almost always the case in metal cutting is what's going on from a volume perspective.
Speaker Change: Yeah, I think on top of that, we had one event of one time gain last year that we let out last quarter.
Speaker Change: Yeah, we'll take it forward to the utility. There, guys.
Speaker Change: And the next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.
Joe Ritchie: Hey guys, good morning.
Speaker Change: Morning. How you doing, Joe?
Joe Ritchie: Hey, really helpful slide on the metal cutting share gains. I guess in Europe specifically, I guess the question I have is if you kind of think about, you know, hopefully a potential recovery in that end market.
Joe Ritchie: Do you expect to keep these types of share gains if the market were to recover?
Joe Ritchie: And then just, what are you kind of looking at?
Joe Ritchie: as maybe leading indicators, and maybe just focusing on the German market, that, you know, could maybe give you some confidence once that market starts to turn.
Speaker Change: Yeah Joe, I think as I mentioned earlier, based on the IHS data and publicly available information from the OEMs, we think that the near-term pressure will be there.
Speaker Change: Thank you.
Speaker Change: In the meantime, like we also said earlier in the prepared remarks, that our gap versus the trade group, it might also be driven by the fact that the other partner, other parties were impacted by lower export sales.
Speaker Change: So, I wouldn't say that we will see any major deviation from what we see here, but the market overall is going to be under pressure.
Speaker Change: And in the meantime, of course, you know, we continue to do things.
Speaker Change: with respect to new project wins, as customers are also going through the mixed change in terms of...
Speaker Change: You know they were going a little bit
Speaker Change: strong on electric vehicles. That adjustment is happening where the shift is going to happen a little bit more towards hybrid.
Speaker Change: So there's going to be some of those comp issues because of that, but we believe that we are very well positioned to support our customers, whether they go for ICE engine or hybrid or battery.
Speaker Change: We are there to support them. So overall, we will continue to do above-market growth there.
Speaker Change: Thank you for your time.
Speaker Change: Okay, helpful and then...
Speaker Change: Sanjay, you're going to be my first election question, so, you know, post yesterday, how are you thinking about just potential implications for your business?
Speaker Change: Also, with the prospect of potential tariffs on the come, how does that potentially change your either competitive dynamics here or abroad? Any thoughts, if you have broad thoughts, on the outcome from yesterday?
Sanjay Chowbey: Yeah, I think we know we have to learn more in coming, you know, months to see how the overall policies, you know, come out.
Speaker Change: But what we will expect is that the industrial production is going to be one thing that we want to watch to see how that affects because that has the biggest effect on our overall business.
Speaker Change: With respect to tariff, I'll let Pat also add his opinion, but we are a global business. We do business in all different continents, and in a lot of cases, we are making things where we sell.
Speaker Change: There is not going to be a lot of direct effect on it, but how does it affect overall sentiments? That we have to watch, and then on the material cost, it might have some impact, but too early for us to tell much detail at this point.
Pat Watson: Yeah, I would just say, I would reiterate that, Sanjay, in the sense that, like, you know, we...
Pat Watson: From a manufacturing footprint perspective, we're global. We aim to support customers locally with production where we can. And so that tends to minimize some of the effect of tariffs on the business.
Pat Watson: You know, that being said, the big feedback loop there is based on any government policy that affects overall consumer confidence and therefore industrial production is going to have a feedback loop on us, positive or negative.
Speaker Change: Okay, guys, thank you.
Speaker Change: and many more. Thank you. Thank you.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back to Sanjay Chowbey for closing remarks.
Sanjay Chowbey: Thank you, operator, and thank you, everyone, for joining the call today. As always, we appreciate your interest and support. Please don't hesitate to reach out to Mike if you have any questions. Have a great day, thank you.
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