Q2 2025 Kennametal Inc Earnings Call
Good morning, I would like to welcome everyone to Kennametal second quarter in fiscal 2025 earnings Conference call.
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Speaker Change: I would now like to turn the call to Michael P C Vice President of Investor Relations.
Speaker Change: Thank you operator, welcome everyone and thank you for joining us to review Kennametal second quarter fiscal 2025 results. This morning, we issued our press release and posted our presentation slides on our website, we will be referring to that slide deck throughout today's call I am Michael P C Vice president of Investor Relations.
Sanjay childbirth: Joining me on the call today are Sanjay childbirth, President and Chief Executive Officer, and Pat Watson, Vice President and Chief Financial Officer after.
Sanjay childbirth: After Sanjay in past prepared remarks, we will open the line for questions.
Sanjay childbirth: 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.
Sanjay childbirth: These risk factors and uncertainties are detailed in Canada SEC filings. In addition, we will be discussing non-GAAP financial measures on the call today reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our form 8-K on our website and with that I will.
Sanjay childbirth: Turn the call over to Sanjay.
Sanjay childbirth: Thank you Mike Good morning, and thank you for joining us I'll start the call today with some remarks regarding our recent announcements followed by a review of the quarter and some end market commentary.
Sanjay childbirth: Then Pat will cover the quarterly financial results as well as the fiscal 'twenty five outlook.
Sanjay childbirth: Finally, I'll make some summary comments and then open the call for questions.
Sanjay childbirth: Now, let's start with the two announcements.
Sanjay childbirth: In mid January.
Sanjay childbirth: The January 14th announcement highlights the actions, we're taking to address our investor deck commitment around plant closures and navigate current market conditions.
Sanjay childbirth: In support of our commitment to long term competitiveness, we announced actions to reduce our structural cost in our footprint.
Within the metal cutting segment, we announced the close out of your facility and Greenfield, Massachusetts, and the consolidation of two facilities near Barcelona, Spain into a single modern facility.
Sanjay childbirth: The operations and Greenfield, Massachusetts, I'd expect it to seize in April 2025, and the plant closure is expected to be substantially complete by December 31st 2025.
Sanjay childbirth: Consolidation of Barcelona, Spain facilities are expected to be substantially complete by June 30 of 2025.
Sanjay childbirth: Additionally, in an effort to mitigate the current market conditions, mainly in EMEA, we announced a global reduction and professional workforce.
Sanjay childbirth: These combined actions are expected to deliver annualized run rate pre tax savings of approximately $15 million by the end of fiscal 2025.
Sanjay childbirth: We expect pre tax charges of approximately 25 million in connection with the execution of these actions.
Sanjay childbirth: The breakdown is as follows.
Sanjay childbirth: Approximately $10 million is forecast related facilities charges.
Sanjay childbirth: Approximately $5 million is for noncash facility charges and approximately $10 million for severance related cash expenditures.
Sanjay childbirth: These facility closures and other cost actions keep us on track to deliver our commitment the class three to five plants and achieved 100 million dollar cost savings by fiscal 'twenty seven that we committed to.
Sanjay childbirth: At our Investor Day in September 2022.
Sanjay childbirth: The second announcement was an organizational change within the infrastructure segment.
Sanjay childbirth: Effective January 20th appraisal Hammadi was named President of the infrastructure segment reporting to me.
Sanjay childbirth: Basil succeeded Franklin Cardenas, who served in that role for the past five years.
Sanjay childbirth: I want to thank Franklin for his contributions to kennametal and.
Sanjay childbirth: And wish him the best.
Sanjay childbirth: Basil has been with the company since July serving as the vice president of value creation and systems.
Sanjay childbirth: Prior to that he served in various roles with increasing responsibility at Eaton Corporation since July 2007.
Sanjay childbirth: His most recent role at Eaton was as the general manager for $600 million hydraulics and actuation portfolio.
Additionally, he held positions in finance sales and manufacturing operations.
Sanjay childbirth: Near to his general manager role.
Brazil: Brazil is a great addition to the infrastructure team, bringing a strong and well rounded business experience in commercial operations and general management.
Sanjay childbirth: He is a strategic thinker and tree collaborator.
Sanjay childbirth: And it's already hard at work with the team as they continue to grow and improve our infrastructure business.
Sanjay childbirth: Additionally, continuous improvement remains an important focus area for us so appraisal value, Chris and systems responsibilities will be integrated with existing roles that kind of middle of.
Sanjay childbirth: This will provide a strong alignment between business operations and continuous improvement efforts across the company.
Sanjay childbirth: Now turning to our results.
Sanjay childbirth: On slide three let me begin by saying this was a disappointing quarter.
Sanjay childbirth: From both a sales and profitability perspective.
Sanjay childbirth: Especially in metal cutting.
Sanjay childbirth: From an industry and macroeconomic viewpoint, our sales continued to be impacted by challenging market dynamics.
Sanjay childbirth: In our second quarter market conditions.
Sanjay childbirth: Worsened further in email and that is impacting several of our end markets.
Sanjay childbirth: Industrial production in the U S remained soft.
Sanjay childbirth: These factors led our sales to come in at the low end of our expectations for the quarter.
Sanjay childbirth: As we have said before.
Sanjay childbirth: While we cannot control external factors like these we do focus our efforts on things we can control.
Sanjay childbirth: For example, the announcement in mid January that I, just talked about not only aligned with our longer term objectives, but they also demonstrate our commitment to positioning the company for competitiveness and improve profitability.
Sanjay childbirth: Now for our quarterly results.
Sanjay childbirth: Sales decreased 3% year over year.
Sanjay childbirth: At the segment level infrastructure decreased 4% organically, while metal cutting was down 7%.
Sanjay childbirth: On a constant currency basis Americas sales were flat at zero percent Asia Pacific sales decreased 3% and EMEA declined 7%.
Sanjay childbirth: Organically this marked the fifth consecutive quarter of negative organic growth.
As a reference point historically cycles tend to last four to eight quarters.
Sanjay childbirth: While managing near term challenges, we remain committed to executing on our strategic priorities.
Sanjay childbirth: Drive above market growth continuous improvement initiatives targeting margin and working capital improvement and to optimize our product and business portfolio.
We have more work to do across all of these areas.
Sanjay childbirth: And look forward to updating you as we make progress on each.
Sanjay childbirth: Moving now to our end markets.
Sanjay childbirth: By end market Aerospace and defense grew 14% energy grew 1% General engineering declined 4% earthworks declined 7% and transportation declined 9%.
Sanjay childbirth: Transportation and general engineering were largely impacted by market conditions in EMEA.
Sanjay childbirth: And to a lesser extent the Americas.
Sanjay childbirth: Primarily within the metal cutting segment.
Sanjay childbirth: In EMEA, we have seen lower production volumes and realignment of investments.
Sanjay childbirth: Our customers in response to changes in EV subsidies in.
Sanjay childbirth: In addition, there are two other contributing factors impacting the transportation end market broadly consumer preference and EV infrastructure readiness.
Sanjay childbirth: But remember we remain very well positioned in this end market regardless of engine type with a strong product offerings and application support for internal combustion engine hybrid and full EV platforms.
Sanjay childbirth: Yeah.
Sanjay childbirth: And Infrastructure's artworks market, we saw lower mining capital investment in Asia.
Sanjay childbirth: While the Americas was impacted by lower mining activity.
Sanjay childbirth: Turning to profitability for the quarter adjusted EBITDA margin was 13, 9% compared to 12, 4% in the prior year.
Sanjay childbirth: Adjusted EPS decreased to 25 cents compared to 30 in the prior year quarter.
Sanjay childbirth: Cash from operating activities year to date was $101 million compared to $88 million in the prior year period.
Free operating cash flow year to date was $57 million up from 36 million in the prior year.
Sanjay childbirth: And finally, we continued our share repurchase program with $15 million swap shares bought back during the quarter.
Sanjay childbirth: These results were at the lower end of our revenue expectations and in line with our EPS midpoint, we provided last quarter.
Speaker Change: When looking at the current quarter results. If he was general comments regarding the end market performance.
Sanjay childbirth: First aerospace and defense continues to perform well.
Sanjay childbirth: We have seen slight improvement in aerospace as production moves forward after the resolution of the recent strike.
Sanjay childbirth: Although timing has driven the performance within defense mainly in EMEA.
Sanjay childbirth: Second growth initiatives in energy offset the impact of lower rig counts and the Americas.
Sanjay childbirth: Third mining activity in Asia, and Americas continued to be soft.
Sanjay childbirth: Finally, the worsening market conditions in EMEA and the continuation of low PMI and IPR levels in the U S put pressure on book Transportation and General Engineering.
Sanjay childbirth: Turning to slide four I wanted to take a moment to provide additional commentary on our end markets for the full year.
Sanjay childbirth: As a reminder, our updated outlook for the full year reflects the forecast of a specific market drivers and general market conditions, both of which have weekend.
Sanjay childbirth: These market drivers combined with strengthening U S dollar and associated higher foreign exchange impact were the main contributors to our lower full year outlook.
Sanjay childbirth: While the end market the top section shows the assumptions, we had in our prior outlook compared to our current outlook. The bottom of the slide shows some of the key factors and what has changed by end market.
Sanjay childbirth: Let me call your attention to the general Engineering transportation, and aerospace and defense end markets as those assumptions have changed.
Sanjay childbirth: First general engineering, the key factors that drive our expectation side external ipi forecasts for the U S and EMEA and PMI data in China.
Sanjay childbirth: As I noted earlier, we have seen conditions in EMEA continue to worsen since the start of our fiscal year.
Sanjay childbirth: Brian external forecast for Ipi in EMEA with a slight improvement in the first half of calendar year 2025.
Sanjay childbirth: That forecast has now shifted to down slightly.
Sanjay childbirth: The U S. IPO forecast was also previously expected to be up slightly in the first half of this calendar year.
Sanjay childbirth: And that has not happened in fact, the latest data indicates a flat U S market.
Sanjay childbirth: China Ipi remains unchanged.
Sanjay childbirth: Taken together at the midpoint, we now anticipate this end market to be down slightly year over year as compared to flat previously communicated.
Sanjay childbirth: Second transportation.
Sanjay childbirth: The key external indicators would track out of IHS light vehicle production.
Sanjay childbirth: The prior IHS forecast was for vehicle production for increased 1% versus prior year.
Sanjay childbirth: And the most recent estimate for.
Sanjay childbirth: For production to be down 1%.
Sanjay childbirth: Once again, the pressure is primarily in EMEA with a slight slowdown in the Americas.
Sanjay childbirth: It has been well documented the pressure Oems in the EMEA region are facing.
Sanjay childbirth: Given these production forecast and the customer challenges, we now anticipate that end market to be down year over year compared to up slightly as previously anticipated.
Sanjay childbirth: Aerospace and defense is anticipated to increase slightly now as the aerospace supply chain and OEM production issues have been steadily improving.
Sanjay childbirth: The forecasted production levels are expected to increase slightly compared to a moderate assumptions previously.
Sanjay childbirth: Defense continues to benefit from our growth initiatives. The order patterns with these customers tend to be lumpy period to period, but we do continue to see the benefits of our efforts.
Sanjay childbirth: Finally, our expectations for energy remained relatively consistent with previous expectations.
Sanjay childbirth: U S land based rig counts are forecasted to decline and sentiment remains cautious while earthworks continues to experience normal seasonality in construction and mining continues with decline in China and lower U S exports.
Sanjay childbirth: Now, let me turn the call over to Pat who will review the second quarter financial performance and the outlook.
Thank you Sanjay and good morning, everyone.
Pat: I will begin on slide five with a review of the second quarter operating results.
Pat: Sales were down 3% year over year with an organic decline of 6%, partially offset by a favorable workdays of 3%.
Sanjay childbirth: As Sanjay discussed sales this quarter were at the lower end of the expectations, we provided last quarter.
Sanjay childbirth: Relative to those expectations, we experienced continued pressure most notably in EMEA, and the Americas, which impacted our general engineering transportation and earthworks and markets.
Sanjay childbirth: <unk> was a bit stronger than we had anticipated due to project volume.
Sanjay childbirth: Year over year, we experienced pressure in most end markets and regions with the exception of aerospace and defense and energy.
Sanjay childbirth: I'll provide more color when reviewing the segment performance in a moment.
Sanjay childbirth: Adjusted operating expense as a percentage of sales increased 100 basis points year over year to 22, 7%.
Sanjay childbirth: Adjusted EBITDA and operating margins were $13, nine and six 9%, respectively versus 12, 4% and 6% in the prior year quarter.
Sanjay childbirth: During the quarter, we realized approximately $6 million in savings from the previously announced restructuring program.
Sanjay childbirth: This action has successfully delivered annualized run rate pre tax savings of approximately $35 million.
Sanjay childbirth: Lastly, foreign exchange was flat this quarter.
Sanjay childbirth: The adjusted effective tax rate increased year over year to 26, 9%, primarily driven by discrete items recognized in the prior year quarter and unfavorable geographical mix, partially offset by an increase in the advanced manufacturing production credit under the inflation reduction Act.
Sanjay childbirth: Adjusted earnings per share was 25 cents in the quarter versus <unk> 30 in the prior year period.
Sanjay childbirth: The main drivers of our EPS performance are highlighted on the bridge on slide six.
Sanjay childbirth: The year over year effect of operations this quarter was positive <unk>.
Sanjay childbirth: This reflects the absence of unfavorable price raw in the prior year and incremental restructuring benefits and and.
Sanjay childbirth: And <unk> of an advanced manufacturing credit, partially offset by lower sales and production volume higher wages and general inflation.
Sanjay childbirth: We also received a net benefit of <unk> of insurance proceeds related to the tornado that damaged our Rogers facility in the fourth quarter of FY 'twenty four.
Sanjay childbirth: You can also see the effects of the tax rate on our results.
Sanjay childbirth: The year over year change as we noted on our prior call was anticipated to be 12 set headwind and this was the largest driver impacting our EPS performance.
Sanjay childbirth: Currency and pension impacts on EPS or negative <unk>, <unk> and negative <unk>, respectively.
Sanjay childbirth: Other reflects a lower share count, which contributed one set.
Sanjay childbirth: Slides seven and eight detail the performance of our segments this quarter.
Sanjay childbirth: Reported metal cutting sales were down 4% compared to the prior year quarter with a 7% organic decline, partially offset by favorable workdays of 3%.
Sanjay childbirth: By region on a constant currency basis, the Americas were flat Asia Pacific declined, 1% and EMEA declined 10%.
Sanjay childbirth: Americas year over year performance. This quarter was driven by the execution of our growth initiatives and aerospace and defense.
Sanjay childbirth: Offset by declines in the general engineering and transportation end markets.
Sanjay childbirth: Asia Pacific's decline was primarily driven by lower production in the aerospace and defense end market and reflects a slight decline in China.
Sanjay childbirth: EMEA is year over year decline reflects weakness in the transportation and general engineering end markets, partially offset by strength in aerospace and defense.
Sanjay childbirth: Looking at sales by end market aerospace.
Sanjay childbirth: And defense grew 7% year over year as our strategic initiatives continued to drive results along with easing supply chain challenges and improved bill rates in EMEA.
Sanjay childbirth: Energy declined 1% this quarter due to customer order timing in EMEA.
Sanjay childbirth: General Engineering declined 4% year over year due to lower production activity, primarily in EMEA and project timing in the Americas and.
Sanjay childbirth: And lastly, transportation declined 9% year over year due to an overall slowdown in EMEA and the Americas, partially offset by Asia Pacific Project orders.
Sanjay childbirth: Metal cutting adjusted operating margin of 6% decreased 240 basis points year over year, primarily from lower sales and production volumes and higher wages and general inflation.
Sanjay childbirth: These factors were partially offset by pricing.
Sanjay childbirth: Lower raw material costs and incremental year over year restructuring savings of approximately $4 million.
Sanjay childbirth: Turning to slide eight for infrastructure.
Sanjay childbirth: Reported infrastructure sales were flat year over year with favorable business days of 3% and favorable foreign currency exchange of 1% offset by an organic decline of 4%.
Sanjay childbirth: Regionally on a constant currency basis, EMEA sales increased by 5% the Americas were flat and Asia Pacific declined by 6%.
Sanjay childbirth: Growth in EMEA was primarily driven by defense order timing and higher activity in earthworks, partially offset by general engineering.
Sanjay childbirth: The decline in the Americas was primarily from lower mining activity and mine closures in earthworks offset by defense and energy project timing.
Sanjay childbirth: The decline in Asia Pacific, primarily reflects lower volume and order timing and underground mining.
Sanjay childbirth: Looking at sales by end market on a constant currency basis, we grew our aerospace and defense sales by 35% by continuing to execute on our growth initiatives in both EMEA and the Americas.
Sanjay childbirth: Energy increased 2%, mainly in the Americas, driven by project timing, partially offset by lower U S land rig count.
Sanjay childbirth: General Engineering declined 2% from lower industrial activity in EMEA, partially offset by ceramics in Asia.
Sanjay childbirth: And lastly, earthworks declined 7% from a customer of mine closure and lower mining activity in the Americas lower mining capital investment levels in Asia Pacific, partially offset by higher activity in EMEA.
Sanjay childbirth: Adjusted operating margin increased 670 basis points year over year to eight 6% primarily due to a few factors.
Sanjay childbirth: The absence of unfavorable price raw in the prior year.
Sanjay childbirth: Net benefit of $2 million from insurance recoveries related to the tornado that struck Rogers, Arkansas facility in late fiscal 'twenty for the.
The advanced manufacturing production credit under the inflation reduction act of approximately $2 million and incremental year over year restructuring savings of approximately $2 million.
Sanjay childbirth: These factors were partially offset by lower production volumes and higher wages and general inflation.
Sanjay childbirth: Now turning to slide nine to review, our free operating cash flow and balance sheet.
Sanjay childbirth: Our second quarter year to date net cash flow from operating activities was $101 million compared to $88 million in the prior year period.
Sanjay childbirth: The change in net cash flow from operating activities was driven primarily by working capital changes, partially offset by lower net income compared to the prior year period.
Sanjay childbirth: Our year to date free operating cash flow increased to $57 million from $36 million from the prior year.
Sanjay childbirth: 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 childbirth: On a dollar basis year over year primary working capital decreased to $592 million and on a percentage of sales basis primary working capital decreased to 31, 3%.
Sanjay childbirth: Net capital expenditures decreased to $44 million compared to $52 million in the prior year quarter.
Sanjay childbirth: In total we've returned $31 million to shareholders through our share repurchase and dividend programs.
Sanjay childbirth: We repurchased 525000 shares for $15 million in Q2 under our $200 million authorization.
Sanjay childbirth: And as we have every quarter since becoming a public company over 50 years ago, we paid a dividend to our shareholders.
Sanjay childbirth: Our commitment to returning cash to shareholders reflects confidence in our ability to execute our strategy to drive growth and margin improvement.
Sanjay childbirth: We continue to maintain a healthy balance sheet and debt maturity profile with no near term refunding requirements.
Sanjay childbirth: At quarter end, we had combined cash and revolver availability of approximately $821 million and were well within our financial covenants.
Sanjay childbirth: The full balance sheet can be found on slide 15 in the appendix.
Sanjay childbirth: Turning to slide 10 regarding our third quarter outlook.
Sanjay childbirth: We expect Q3 sales to be between $480 and $500 million with.
Sanjay childbirth: With volume ranging from negative six to negative 2%.
Sanjay childbirth: Price realization of approximately 2% and a 3% negative impact from foreign exchange.
Sanjay childbirth: Let me share some details on our sales assumptions and trends impacting the Q3 outlook.
Sanjay childbirth: Our Q3 range at the midpoint reflects growth that is slightly below our historical norms due to the current market conditions.
Sanjay childbirth: High end of our range remains in line with our normal sequential trends.
Sanjay childbirth: On a year over year basis, Aerospace and defense growth continues, albeit at a slower pace as North American OEM production takes time to recover.
Sanjay childbirth: Energy and general engineering are anticipated to be down slightly.
Sanjay childbirth: Transportation is expected to decline mainly from lower volumes in EMEA and earthworks declined slightly due to continued competitive market conditions.
Sanjay childbirth: Foreign exchange and noncash pension expense is expected to have a negative impact of approximately $3 million and $1 million, respectively on a pre tax basis.
Sanjay childbirth: Interest expense is assumed to be approximately $7 million and an effective tax rate of approximately 27, 5%.
Sanjay childbirth: Lastly, we expect adjusted EPS in the range of 20 to 30 per share.
Sanjay childbirth: Now on slide seven regarding our full year outlook.
Sanjay childbirth: We now expect FY 'twenty five sales to be between $1 95 billion and $2 billion with.
Sanjay childbirth: With volume ranging from negative five to negative 2% net.
Sanjay childbirth: Net price realization of approximately 2% and we anticipate an approximate 2% year over year headwind from foreign exchange.
Sanjay childbirth: As Sanjay noted in his prepared remarks, the worsening market.
Sanjay childbirth: Market conditions in EMEA and the continued stagnation of industrial production in the U S. Coupled with the strengthening U S. Dollar are the key factors behind the updated outlook.
Sanjay childbirth: Foreign exchange sales headwinds are approximately $40 million at the midpoint of our updated outlook.
Using the euro as a proxy for U S. Dollar strength, we've seen the dollar strengthen from approximately a dollar rate to the euro in the first and second quarters.
Sanjay childbirth: Range of $1 three to $1 five in January.
Sanjay childbirth: Year over year, we expect aerospace and defense to have slight growth transportation to decline general engineering to slightly decline in earthworks and energy declined slightly from a cost perspective, we expect to offset raw material wage and general cost increases on a dollar basis and that foreign exchange and <unk>.
Sanjay childbirth: Noncash pension expense are expected to be headwinds of $8 million and $4 million, respectively on a pre tax basis.
Sanjay childbirth: Approximately $14 million of rollover of savings from our previously announced restructuring initiatives has been included and is anticipated to have a slight impact in the second half of the fiscal year.
Sanjay childbirth: Our outlook also includes the effects of the plant closures and the new restructuring actions.
Sanjay childbirth: Which combined are anticipated to generate approximately $15 million of annualized savings for fiscal 'twenty. Five we've included approximately $6 million in savings related to these actions from a timing perspective, we anticipate a significant majority of the savings to be recognized in the fourth quarter.
Sanjay childbirth: Our current outlook includes the <unk> associated with the advanced manufacturing credits as part of the inflation reduction Act, we anticipate that we will be eligible for similar credits in the future assuming there are no changes to the existing legislation.
Sanjay childbirth: Depreciation and amortization is expected to be approximately $135 million.
Sanjay childbirth: We expect interest expense of approximately $27 million and an effective tax rate of approximately 27, 5%.
Sanjay childbirth: We expect adjusted EPS to be in the range of $1 five to $1 30 on.
Sanjay childbirth: On the cash side, the full year outlook for capital expenditures is now approximately $100 million and the outlook for primary working capital was approximately 30% by fiscal year end.
Sanjay childbirth: Taken together, we continue to expect free operating cash flow to be greater than 125% of adjusted net income.
Sanjay childbirth: Lastly, as it relates to the outlook I do want to comment on the developing trade situation.
Sanjay childbirth: The outlook, we provided today does not consider any additional costs.
Sanjay childbirth: Or unfavorable market developments that may occur as a result of the changing international trade landscape.
Sanjay childbirth: And with that I'll turn it back over to Sanjay.
Sanjay childbirth: Thank you Pat turning to slide 12.
Speaker Change: Let me take a few minutes to summarize.
Speaker Change: As I discussed at the top of the call we have clearly faced challenging market conditions.
Speaker Change: So far this year and have been actively managing those challenges.
Speaker Change: That said I am still disappointed with our most recent results and.
Speaker Change: And even though we didn't see progress this quarter, we remain committed to above market growth and margin improvement.
Speaker Change: As it relates to growth, we're confident in our competitive position.
Speaker Change: And are performing better are keeping pace with the overall market.
Speaker Change: We continue to advance initiatives targeting customer wins in all our focused growth areas.
Speaker Change: Now as it relates to margins.
Speaker Change: Continuous improvement is a key strategic lever to improving our profitability.
Speaker Change: For example, we recently hosted a special kaizen events and several of our large plants.
Speaker Change: <unk> on process and efficiency improvements.
Speaker Change: Those events yielded tangible results and played an important role in the evolution of our culture. The one that prioritizes continuous improvement in everything we do.
Speaker Change: We have also recently taken actions to improve our cost structure.
Speaker Change: Which will help us achieve the targets we laid out at our September 2023 Investor day the.
Speaker Change: Specifically, the $100 million structural cost improvement plan by the end of fiscal 2027.
Speaker Change: By the end of this fiscal year, we anticipate to be about 65% complete on achieving those run rate savings.
Speaker Change: We will also continue to monitor market conditions and take appropriate mitigation actions as needed.
Speaker Change: These actions taken together demonstrate progress.
Speaker Change: But we certainly know we have more to do.
Speaker Change: We'll continue to work on actions within all three pillars and leverage our competitive advantages.
Speaker Change: To deliver long term shareholder value.
Speaker Change: 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 one on your telephone keypad.
Speaker Change: If you would like to withdraw your question. Please press Star then the number two.
Speaker Change: Our first question will come from Julian Mitchell with Barclays. You May now go ahead.
Julian Mitchell: Hi, good morning.
Speaker Change: Hey, good morning Julien.
Speaker Change: Maybe just a first question around the sort of current.
Speaker Change: The demand environment, I, suppose, particularly in general engineering.
Speaker Change: Does it seem as if the sort of.
Speaker Change: All data and things like surveys have been better for a couple of months.
Speaker Change: Several short cycle industrial peers of yours have talked about improving customer sentiment and some distributors have mentioned that as well.
Speaker Change: Just wondered sort of what youre seeing in general engineering by region.
Speaker Change: I realize it's a pretty tough environment, but you didn't change your sales outlook in March for that piece. So maybe just some update there and how demand has trended in the last couple of months in that piece.
Speaker Change: Hey, good morning Julien.
Speaker Change: So let me just first comment on.
Speaker Change: Overall, what we're seeing right now definitely some improvement, especially as we have gone to the second half of January.
Speaker Change: Our order incoming rates have improved and of course higher billing rates also so there is a definitely a sequential improvement we are seeing however, one of the things that you've seen the outlook that was based on our assumptions earlier in the year in August when we talked that ahead assumed much more improvement in the U S and also in our compute improvement.
Speaker Change: In China, India continued to grow Europe at the time, we were thinking that it will be challenges actually no we kind of pointed that out.
Speaker Change: But things have gotten a little bit more challenging in Europe. So I think that's why we reduced our overall outlook.
Speaker Change: In terms of like second half, but we are seeing definitely thinks improving in recent weeks.
Speaker Change: That's great. Thank you and then just my follow up question.
Speaker Change: When youre thinking Sanjay more broadly about the cost structure at kennametal.
Speaker Change: The extra measure announced January 14th but sort of overall looks like operating margins. This year for the total company.
Speaker Change: Maybe running around sort of.
Speaker Change: Eight 8.5% or so.
Speaker Change: Yes.
Speaker Change: Lower than the 10 or 20 year average and that's with a lot of restructuring actions in the past 10 plus years.
Speaker Change: Realize demand is soft and of course, that's pushing margins down a bit short term, but.
Speaker Change: Is there sort of a view that may be not the much broader plan might be needed with sort of multiple plants to get the through cycle margins.
Speaker Change: Higher.
Julian Mitchell: Yes, Julian first let me summarize again one of the things that we have already done and also in process right now.
Julian Mitchell: As we've mentioned that we laid out $100 million cost structure.
Julian Mitchell: Type of actions in the Investor day, with the recent actions and announcement and I will get to $65 million worth of that and of course like you said.
Julian Mitchell: When we have shortfall in volume not all of that is going to show up in the bottom line, but we know these are the right things to do and we continue to do that but along with what you see in the restructuring numbers and all of that we also have been managing what I would call non head count related actions restructuring may not be involved for example short work week.
Julian Mitchell: And other tools that we have at our disposal. So we continue to work on that at this point.
Julian Mitchell: We will continue to monitor the market conditions and taking the necessary actions, but in parallel like I've always talked about that with continuous improvement pillar will continue to improve our overall margin and working capital.
Speaker Change: Great. Thank you.
Speaker Change: Our next question will come from Angel Castillo with Morgan Stanley.
Speaker Change: Now go ahead.
Angel Castillo: Hi, good morning, and thanks for taking my question.
Speaker Change: Sanjay I was hoping we could just go back to that first commentary around.
Angel Castillo: The improvement that you've seen in orders in the second half of January.
Angel Castillo: And was that specific to general engineering was it more broadly and if it was just specific to John and Dan could you talk about the order trends youre seeing in some of the other key end markets in January as well as.
Angel Castillo: Same kind of question before recently was that order pickup in any particular region.
Angel Castillo: This broader trends you are seeing.
Angie: Yes, Angie first of all yes definitely.
Angie: Definitely a consistent both general engineering and also other industries that we serve end markets we serve.
Angie: One area, where we have again continue to monitor most closely the EMEA.
Angie: There also we have seen improvement.
Angie: Last couple of weeks of January but it is overall across the board.
Angie: That's helpful. Thank you and then maybe just in terms of the implied fourth quarter guide.
Angie: I think the EPS pick up is.
Angie: A little bit more substantial than you would normally see based on your <unk> guide and I think if I if I'm reading this correctly. The bridge would just be some of the savings that you start to get.
Angie: In the fourth quarter. So just could you just help us understand maybe how much of it is just these savings starting to flow through versus any kind of.
Angie: Assumed start kind of a rebound in end market demand.
Angie: Yeah. So I would say a lot of that is going to be the savings from the additional restructuring program that really drives that improvement I would say beyond what we would normally experience in Q4 as you know Q4 is normally our strongest profitability quarter in particular.
Angie: Just overall sales volumes tend to be higher and as well as in the infrastructure business that tends to be the heavy quarter for construction season, which drive some additional volume through the infrastructure business.
Angie: Very helpful. Thank you.
Moderator: Our next question will come from Steve Barger with Keybanc capital markets.
Speaker Change: You May now go ahead.
Speaker Change: Thanks, Sanjay you replace both segment heads in the past six months can.
Can you just give us some specifics for each of their plans.
Speaker Change: For what they expect to do differently going forward.
Speaker Change: Just trying to get a sense for how that management change should.
Speaker Change: Should result in broader changes.
Speaker Change: Yeah. Thanks, Steve I think the focus areas will be pretty much aligned with what I have laid out in the slides like the last slide which talks about our.
Speaker Change: Delivering growth.
Speaker Change: Both bring very good commercial with strong experience in product management sales marketing.
Speaker Change: And also continuous improvement because they have both been our practice none of that.
Speaker Change: So we expect to continue to see improvements in margin and working capital through that and then on portfolio in Trump's up overall in the portfolio and we'll look at all different things you know like we've talked before our product and SKU optimization and all of that along with what we need to do in terms of pruning the portfolio we have an additional.
Speaker Change: Targeted M&A that really really clear shareholder value. So I think and then foundational element in our building further strengthen our talent those will be the focus areas.
Speaker Change: So to that point, we've been talking about commercial excellence for for years now.
Speaker Change: Do you have product lines that are consistently breakeven or loss producing that are dragging on new product wins and if so why not start to divest those or shut them down.
So Steve.
Steve Barger: We have mentioned before that we do not disclose in our byproduct line margin and all that but just to give you a directional answer here. Yes. We are looking at that and we are taking some actions and there are more things.
Steve Barger: In the works right now and we'll communicate as we go forward when we get to a point, we have a little bit more solid action and you know that but I can assure you that our overall goal here is to definitely improve our portfolio mix.
Steve Barger: Both you know pruning of current portfolio that we have and also in our building and diversifying our overall revenue mix.
Speaker Change: Got it now, but if I could just get one last one.
Speaker Change: Talked a lot over the years about the footprint potentially being too big too many rooftops.
Speaker Change: Sales have been flat for quite a few years now is there any thought to accelerating that process and consolidating plants at a faster rate.
Speaker Change: We are working very diligently on that Steve I think we have to balance between making sure that we maintain customer service and not lose business because of that so.
Speaker Change: So I think overall, we'll continue to work on it as you said, yes, lower volume that definitely has been one of the focus area for us also.
Steve Barger: Understood. Thanks.
Steve Barger: Our next question will come from Mike Feniger with Bank of America.
Speaker Change: You May now go ahead.
Speaker Change: Hey, guys. Thanks for.
Speaker Change: Good morning.
Good morning, everyone. Thank you for taking my question just on the tariff side I understand it's a very fluid situation. We're seeing some short cycled suppliers kind of starting to already think about the China piece, just any color you can kind of help us on when we think of the China piece, but also Mexico, Canada.
Speaker Change: How we kind of think about where your footprint fits and how much gets imported to the U S. So any color there and how that would change your view on on the pricing side versus the cost side as we kind of monitor this dynamic situation.
Speaker Change: Yes, Mike a couple of things that I think are worth going over there I think.
Speaker Change: Everyone's aware in terms of our absolute China exposure runs about 10% of the total portfolio.
Speaker Change: Canada is about half of that and in Mexico is around $40 million right. So in terms of the size of all three of those.
Speaker Change: A couple of things that are important as you put those numbers in context.
Speaker Change: And that is on on any of those trading relationships.
Speaker Change: Thats tends to bilateral so we tend to import some products, we export some product from the U S as well.
Speaker Change: And one of the things that as we think about potential responses to.
Speaker Change: Any tariff regimes that will be put in place would be we do have a global footprint, our ability to leverage that global footprint to offset potentially some of the cost of that as well as you know in terms of what's happened here over the last couple of days.
Speaker Change: Obviously looking for where are the exclusions are they going to be broad based or are they going to be more targeted.
Speaker Change: And then lastly, you know what's the competitive environment for the product so.
Speaker Change: So we're monitoring that situation those are kind of all the factors that we're taking into consideration obviously.
Speaker Change: We service global customers globally, we want to be able to remain and do that and to do that responsibly to their needs and that at good pricing.
Speaker Change: And good cost for us and so we'll try to balance all of those operational considerations out as this landscape evolves.
Speaker Change: Helpful and just inventories it did seem like there was a little progress on the inventory side for your own inventories just can you help us understand as you go to the end of the year and we kind of go and think about Q3 in the back half.
Your inventories are going to end up for the year do you still takes them out and then just a follow on question with that given some of the reset on the end market commentary how do you feel like your customers' inventories are at distributors are kind of appealing right now.
Speaker Change: As we're kind of heading into.
Speaker Change: The first half of 'twenty five or for you guys are kind of back half of your fiscal year. Thank you Paul.
Speaker Change: Yeah. So just in terms of inventory all I can put this into context so.
Speaker Change: Mike in terms of the outlook, so yeah, I'd say, given where sales developed here in the quarter.
Speaker Change: Our inventory levels are probably a little bit elevated where we would like them to be.
Speaker Change: We're going to take some action here as we move through the balance of the fiscal year, two constrained production a bit and bring inventory levels back to where we would want them to be again I would say our objective as we think of total working capital is to drive that primary working capital to approximately 30%.
Speaker Change: By the end of the year now obviously in doing that we're prioritizing.
Speaker Change: <unk> generating the cash from from inventory efficiency overall say the the non cash benefit associated with some fixed cost absorption. So that's kind of how we'll think about that over the course of.
Speaker Change: The year, I think youll see a little bit that happened in Q3 from an inventory reduction perspective, and then some additional happen here in Q4 as well as we think about inventory that's out there in the channel I don't think at this point in time based on what we're hearing from customers that inventories are misaligned to where demand is.
Speaker Change: Inventory at the customer level is pretty well controlled.
Speaker Change: Even in spite of some of the changing market conditions.
Speaker Change: Okay.
Speaker Change: Our next question will come from Steven Fisher with UBS you May now go ahead.
Steven Fisher: Hi, Thanks. Good morning, just wanted to follow up on a comment I think you made about competitive dynamics in earthworks sounded like there was some.
Steven Fisher: Some additional pressures there can you just provide a little more color on that is this a new source of competition is it new dynamics that you haven't been seen before can you just talk a little bit more about that please.
Steven Fisher: Yes, it is not necessarily something new new I've been there are two parts of the.
Steven Fisher: A question he had one is in China.
Steven Fisher: Overall capital investment has been down so when that happens that pushed a little bit more pressure because market has excess capacity.
Steven Fisher: And also some of the things that we supply, including our drums products. Those are more expensive almost falls through the capex type of categories. So we are seeing some pressure there, but we are holding our own in competing quite well.
Steven Fisher: In the U S.
Steven Fisher: There is definitely some reduction in production and also construction, that's where we've seen some of the price pressure and we compete at times. We have actually also lost some business, but in many cases customers have come back to us.
Steven Fisher: Because of our overall value proposition. So we do see some dynamics there.
Speaker Change: Okay. That's helpful and I apologize if you covered this earlier in the call, but just in the context of your broader guidance for this year. That's now updated in terms of the organic growth thinking back to your Investor day.
Steven Fisher: Framework of <unk>.
Steven Fisher: Contributions from new products in.
Steven Fisher: Market penetration can you just update us on sort of what how youre thinking about that contribution.
Steven Fisher: For this year embedded within your organic growth targets.
Steven Fisher: Yes, I think what we discussed during the Investor day, roughly let's just say, 2% market, 2% strategic growth and 2% price at this point, we still feel very confident about approximately 2% on price and approximately 2% of our organic growth, but market has been a bigger headwind. So as we see the unit volume definitely is effect.
Steven Fisher: By that so I think we're still thinking that way.
Steven Fisher: And overall when you look at the peer data and all of that that will also indicate that we are maintaining our performing slightly better than that.
Steven Fisher: Okay. Thank you very much.
Steven Fisher: This concludes our question and answer session I would like to turn the conference back over to Sanjay childbirth for closing remarks.
Speaker Change: Yes. Thank you operator, and thank you everyone for joining the call today.
Speaker Change: 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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