Q3 2025 Kennametal Inc Earnings Call
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Speaker Change: Good morning. I would like to welcome everyone to Kennametal's third quarter and fiscal 2025 earnings conference call.
Speaker Change: All lines have been placed on mute to prevent any background noise. 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.
Speaker Change: If you would like to withdraw your question, please press star from the number two. Please note, this event is being recorded.
Speaker Change: I would now like to turn the conference over to Michael Pici, vice president of investor relations. Please go ahead. Thank you operator. Welcome everyone. And thank you for joining us to review Kennametal's third quarter fiscal 2025 results.
Speaker Change: 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'm Michael Pici, Vice President of Investor Relations
Sanjay Chowbey: Joining me on the call today are Sanjay Chowbey, President and Chief Executive Officer and Pat Watson, Vice President and Chief Financial Officer.
Speaker Change: After Sanjay and Pat prepare to mark, we will open the line for questions.
Speaker Change: At this time I would like to direct your attention to our forward looking disclosure statement.
Speaker Change: 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.
Speaker Change: These risk factors and uncertainties are detailed in Kennametals FEC filings.
Speaker Change: In addition, we will be discussing non-GAAP financial measures on the call today. Reconciliation 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 Sanjay.
Sanjay Chowbey: Thank you, Mike. Good morning and thank you for joining us.
Sanjay Chowbey: I'll start the call today with some general comments on how we are advancing our key initiatives.
Sanjay Chowbey: and then provide a review of the quarter and market conditions.
Sanjay Chowbey: followed by some key customers and finally an overview on the current Sheriff's situation.
Sanjay Chowbey: Then Pat will cover the quarterly financial results as well as the fiscal 25 outlook.
Speaker Change: Lastly, I'll make some summary comments and then open the call for questions
Beginning on slide three.
Speaker Change: So let me start by saying that I am pleased by how the team executed this quarter.
and focused on advancing arcade initiatives.
Speaker Change: At the beginning of the third quarter, we announced a new restructuring action to lower structural costs by reducing employment costs and consolidating manufacturing operations.
Speaker Change: To that end, in mid April , we successfully seized operations in our Greenfield Massachusetts plant.
Speaker Change: Commercially, we continue to execute on our shared capture initiatives across various end markets despite overall market weakness.
Speaker Change: While we have recently seen a few positive macro data points on industrial production in the US, most of our markets have been modestly declining for over 30 months now.
Speaker Change: and while external factors that outside of our control, we remain focused on what we can control.
Speaker Change: The team continues to execute on our growth initiatives, including in aerospace and defense.
Speaker Change: And we believe our performance is broadly in line if not better than the competition.
Speaker Change: A bit later in the call, I'll cover some of our more notable commercial success stories for the quarter.
Now, let's walk through the summary of quarterly results [inaudible]
Speaker Change: Sales decrease 6% year-over-year with mental cutting sales declining 4% organically and infrastructure declining 2% organically.
We saw broad, yet modest weakness across our three regions. [inaudible]
with Emia as expected, in remaining the slowest market.
Down 4% on a constant currency basis. [inaudible]
Speaker Change: Overall sales were slightly below the midpoint of our outlook and below our normal sequential second quarter to third quarter sales improvement.
Adjusted EPS was above our expectations
Speaker Change: Fuel mainly from an advanced manufacturing tax credit, which Pat will discuss in more detail
Speaker Change: We also achieved approximately $6 million of restructuring savings in the quarter.
Speaker Change: We are on pace to achieve the $15 million rendered savings we committed to in January .
Speaker Change: Looking ahead, we tighten our sales outlook and raise the EPS outlook to reflect favorable
Speaker Change: Pat will provide more details on the outlook and his prepared remarks.
Speaker Change: From an in-market perspective, sales declines across all in-market, except aerospace and defense.
which increased 7% propelled by defense project winds in infrastructure.
Speaker Change: Transportation and General Engineering were largely impacted by market conditions in Emia and the Americas primarily within the metal cutting segment.
Speaker Change: Earthworks within the infrastructure segment was impacted by lower mining activity in the Americas and Asia Pacific.
Speaker Change: While we are seeing short-term pressures across our end markets, we remain confident in the long-term mega trends for industrial production.
Speaker Change: We expect to see positive trends from a growing middle class impacting general engineering and medical applications.
Speaker Change: We also expect increasing long-term demand for energy, including power generation for data centers.
Speaker Change: Opportunities for growth in hybrid vehicle applications and a strong order book for aerospace and defense customers.
Turning to profitability.
Adjusted EPS increased to $0.47 [inaudible]
compared to 30 cents in the prior year quarter. [inaudible]
for volume and lower than the prior year period.
Speaker Change: Restructuring Benefits, the absence of price-raught headmen which occurred in the prior year and the advanced manufacturing tax credit helped to increase profitability.
Speaker Change: As part of our capital allocation strategy, we continued our share repurchase program with $25 million of shares brought back during the quarter and we paid $15 million in dividends.
Speaker Change: In the quarter, we also saw the uncertainty surrounding tariffs take center stage globally.
Speaker Change: While the economic impact of recent threat policies is the main fluid, I will provide some insight on potential impact and mitigation actions in a few moments.
Speaker Change: Finally, let me say that we remain committed to executing on our value creation pillars to deliver above market growth and do us improvement to drive margin improvement and optimization across our product and business portfolios.
Speaker Change: We are more work to do in all these areas and I look forward to updating you on our progress as appropriate.
Now turning to slide four
Speaker Change: I want to take a moment to provide commentary on our end markets for the funer [inaudible]
Speaker Change: As I stated earlier, we have tightened our fiscal 25 full-year sales outlook to reflect the latest forecasts of the specific market drivers in general market conditions.
Speaker Change: By end-market, the top section shows the assumptions we had in our prior outlook compared to the assumptions in our current outlook.
Speaker Change: The bottom section of the slide shows some of the key contributing factors by end-market.
First, General Engineering.
Speaker Change: The key factors that drive our expectations are external IPI forecasts for the US and [inaudible]
and PMI data in China.
Speaker Change: Design noted earlier, market conditions in Emia have been challenging this fiscal year.
Speaker Change: External Forecast for IPI in Emia also remained down for the first half of calendar year 2025.
Speaker Change: The U.S. IPI forecast is expected to be flat in the first half of calendar year 25, and China PMI remains unchanged as well.
Speaker Change: Taken together, at the midpoint, we anticipate general engineering to remain down slightly year over a year, as previously communicated.
Second is transportation.
Speaker Change: The key external indicator with track here is IHS light vehicle production.
Speaker Change: The most recent IHS estimate projects production to be down 1%.
which is consistent with the previous estimate.
Speaker Change: Once again, the pressure is primarily in Emia with a slight slowdown in the Americas.
Speaker Change: It has been well documented the pressure OEMs in EMEA are facing [inaudible]
Given these production forecasts and customer challenges.
Speaker Change: We continue to expect the end market to be down year-to-year
Speaker Change: Third, our expectations for energy and earthworks remain consistent with previous expectations.
Speaker Change: U.S. land-based rick counts of forecaster to decline in sentiment among our customers to remain cautious as the price of oil has fallen.
Speaker Change: We expect to see normal sys analogy in the construction market within artworks.
Speaker Change: while mining activity continues to decline in China and we expect lower US coal exports.
Finally, expectations for aerospace and defense are unchanged.
Speaker Change: with a slight increase year-over-year as the aerospace industry steadily recovers from supply chain and OEM production issues.
Speaker Change: and conversations with our customers and channel partners. There is a lot of discussion on the uncertainties surrounding
with that turning to slide five. [inaudible]
Speaker Change: I want to take some time to provide commentary on Joseph and how we are planning to mitigate the direct impacts.
Speaker Change: Let me start by saying that it is our intention to fully mitigate the cost implications of
Speaker Change: Near term, we expect headwinds as we implement the mitigation actions [inaudible]
Speaker Change: This slide provides a summary of how tariffs are projected to impact Kennametal globally and the actions underway to fully mitigate them.
As you can see, we have bilateral trade globally.
Speaker Change: The estimated annual impact of the additional costs associated with the tariffs that were in effect as of April 30th is approximately $80 million.
From a mitigation standpoint, our actions include
First, utilizing our global footprint to optimize product flow.
Speaker Change: Second, evaluating alternative supply options and opportunities to minimize the impact of shipments between regions
Third, Rebalancing Production Capacity
Speaker Change: Finally, while we are taking actions to minimize impact on our customers, we are implementing that is surcharges as appropriate.
Speaker Change: We are also seeing the opportunities across both our segments to capture market share, including powder sales utilizing our U.S. footprint.
Speaker Change: Collectively, through all the actions I've just outlined, we are committed to fully mitigating
Thank you.
Speaker Change: That said, the tariff landscape remains extremely fluid, and we continue to monitor the situation and will adapt and evolve our plans accordingly.
Speaker Change: Turning to slide six, I want to touch on some customer wins that demonstrate our continued focus on advancing our growth initiatives across both segments.
Let's start with the metal cutting.
Speaker Change: First, we secured an initial order within OEM within the aerospace and defense and market.
Speaker Change: Our tooling helped reduce manufacturing cycle time while meeting challenging specifications.
Next.
Speaker Change: Within the general engineering and market, we captured an order to provide indexable drills.
to an industrial pump manufacturer.
Speaker Change: Our solution exceeded the customer's expectations for lead time and performance.
Speaker Change: Within transportation, we provided a customized and differentiated solution to the manufacturer of high speed railway switches.
Now moving to our infrastructure segment
Speaker Change: In the energy and market, our conformal cloud corrosion resistance solutions improve the production process for our customer in the factory industry.
Speaker Change: With these artworks, we developed a custom solution for a trenching and mining equipment customer to meet their demanding needs.
Speaker Change: As you can see we provide innovative and effective solutions to a very diverse set of applications for customers around the world.
Speaker Change: Now let me turn the call over to Pat who will review the third quarter financial performance and the outlook.
Thank you, Sanjay, and good morning everyone.
Pat: I will begin on slide 7 with a review of Q3 operating results.
Speaker Change: The court's results show that we continue to execute our initiatives in the face of weak market conditions.
Speaker Change: Sales were down 6% year-over-year with an organic decline of 3% in unfavorable foreign currency exchange of 3%
Speaker Change: The sales performance this quarter was slightly below the midpoint of the outlook we provided last quarter.
Sanjay Chowbey: Relative to those expectations, and as you heard from Sanjay, we experienced continued pressure in Amia and the Americas which impacted our general engineering, transportation and earthwork and markets.
Energy was in line with expectations.
Sanjay Chowbey: Year of a year, we experienced modest weakness in all end markets and regions except for aerospace and defense.
Sanjay Chowbey: I will provide more color when reviewing the segment performance in a moment [inaudible]
Sanjay Chowbey: Operating expense declined approximately $5 million, benefiting from restructuring savings and favorable foreign exchange despite year-rear wage inflation.
Sanjay Chowbey: and adjusted EBITDA and operating margins were 17.9% and 10.3% respectively versus 14.2 and 8.1% in the prior year quarter.
Sanjay Chowbey: During the quarter, we had an approximate $10 million benefit from an advanced manufacturing production credit under the Inflation Reduction Act. We also achieved $6 million in savings from restructuring programs, 3 million of which is related to the employment actions announced in January of this year.
Lastly, foreign exchange was 3 million dollar headwind this quarter.
Sanjay Chowbey: The adjusted effect of tax rate decreased year over year to 22.8%, primarily driven by a benefit from the advanced manufacturing, production credit, and geographical mix.
Sanjay Chowbey: I adjusted earnings for share were 47 cents in the quarter, versus 30 cents in the prior year period
Sanjay Chowbey: The main drivers or EPS performance are highlighted on the bridge on slide 8.
Sanjay Chowbey: The year-over-year effect of operations of this court was positive, six-hence [inaudible]
Sanjay Chowbey: This improvement reflects the absence of unfavorable price raw material which occurred in the prior year, higher price and incremental restructuring benefits, partially offset by lower sales and production volume, and higher wages and general inflation.
Sanjay Chowbey: We also had a 10 cent benefit from the advanced manufacturing production credit, approximately 8 cents of which is related to a cumulative catch-up of prior period material costs.
Sanjay Chowbey: Inclusive of the effect on the tax rate, the advanced manufacturing production credit had an approximate 13-cent impact on adjusted EPS.
Sanjay Chowbey: Unfavorable currency and pension effects on EPS were two cents and one cent respectively.
Sanjay Chowbey: Other reflex benefits lower share count and interest, which contributed two cents.
Sanjay Chowbey: Slides 9 and 10 provide an overview of our segment performance. Reported metal cutting sales were down 7% compared to the prior year quarter, with a 4% organic decline and unfavorable foreign currency exchange of 3%.
Sanjay Chowbey: By region, on a constant currency basis, the Americas and Asia Pacific declined 1% each and the media declined 6%.
Sanjay Chowbey: In the Americas, year-by-year performance was affected by lower industrial production activity in general engineering, partially offset by a modest improvement in the transportation and market.
Sanjay Chowbey: and Nature Pacific. We saw lower production volumes affect the general engineering end-market partially offset by project winds and transportation.
Sanjay Chowbey: Amia's year of year decline reflects weakness in the general engineering and transportation end markets, partially offset by strength and aerospace and defense.
Sanjay Chowbey: In our end markets, energy grew 2% this quarter from customer order timing and age specific.
Sanjay Chowbey: Aerospace and Defense was flat year over year. We saw easing supply chains and improved build rates in Amiga that were offset by lower production and age of Pacific from a customer quality issue and the slow ramp up from the strike in the Americas.
Sanjay Chowbey: Transportation decline 2% year-over-year from the overall slowdown in Amia, partially offset by project went in Asia Pacific and higher production volumes in the Americas.
Sanjay Chowbey: And lastly, General Engineering declined 5% year of year from lower production activity primarily in Amia and the Americas.
Sanjay Chowbey: Metal cutting adjusted operating margin of 9.6% decreased to 120 basis points year-over-year, primarily from lower sales and production volumes, unfavorable foreign exchange and higher wages.
Sanjay Chowbey: These factors are partially offset by improved pricing, incremental year-over-year restructuring savings of approximately $4 million and lower raw material costs.
Sanjay Chowbey: Additionally, as Sanjay previously mentioned, we ceased production at our Greenfield Massachusets facility mid April .
Turning to Slide 10 for Infrastructure
Sanjay Chowbey: Reported infrastructure sales, declining 4% year-over-year, with an organic decline of 2% in unfavorable foreign currency exchange of 2%.
Sanjay Chowbey: Regionally, on a constant currency basis, Amia sales increased by 5%, Asian Pacific declined by 1%, and in the Americas, sales declined 5%.
Sanjay Chowbey: Amia Growth was primarily driven by defense projects and higher activity in earthworks, partially offset by lower industrial activity and project timing affecting general engineering.
Sanjay Chowbey: Asia Pacific declined primarily from lower volume in underground mining as mine production is lower in response to lower coal prices which was partially offset by project timing and energy and general engineering.
Sanjay Chowbey: The decline in the Americas was primarily from lower underground mining activity and earthworks and lower production activity in general engineering, partially offset by aerospace and defense project winds and higher construction activity.
Sanjay Chowbey: Looking at sales by end market on a constant currency basis, continued execution of our growth initiatives drove a 28% increase in aerospace defense sales with good growth and execution in both Amia and the America's defense.
Sanjay Chowbey: While the project nature of this business can make it lumpy, it's an example of how our team is executing on commercial opportunities.
Sanjay Chowbey: Energy Declined 3% mainly in the Americas from lower U.S. land rig count and partially offset by project timing in Asia.
Sanjay Chowbey: General Engineering declined 4% from lower industrial activity in the Americas, [inaudible]
Sanjay Chowbey: And lastly, Earth works declined 7% from lower underground mining activity in the Americas and lower volume in Asia-Pacific, which was partially offset by higher activity in Amia.
Sanjay Chowbey: Adjusted operating margin increased 770 basis points year-over-year to 11.5% from the advanced manufacturing production credit of approximately $10 million and the absence of unfavorable price raw timing, which occurred in the prior year period.
We also achieve year-of-year restructuring savings of approximately $2 million and $2 million.
Sanjay Chowbey: These factors were partially offset by lower sales and production volumes.
Sanjay Chowbey: Now, turning to Slide 11 to review our free operating cash flow and balance sheet [inaudible]
Sanjay Chowbey: Our third quarter year-to-date cashflow for mock breeding activities was $130 million, compared to $163 million in the prior year period.
Sanjay Chowbey: The change in net cash flow from operating activities was driven primarily by working capital changes, mainly increased inventory as a result of lower demand. Our third quarter year-to-date free operating cash flow decreased to $63 million from $84 million.
Sanjay Chowbey: On a dollar basis, year-over-year, primary working capital fell to $654 million, and on a percentage of sales basis decreased the 31.6%.
Sanjay Chowbey: Net capital expenditures decreased to $67 million compared to $79 million in the prior year. In total, we returned $40 million to our shareholders through our share repurchase and dividend programs.
Sanjay Chowbey: During the quarter, we repurchased 1.1 million shares or $25 million under our $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 Chowbey: We remain committed to returning cash to our shareholders. This commitment reflects our continued confidence in our ability to drive long-term growth and margin improvement to create shareholder value.
Sanjay Chowbey: Our balance sheet remains healthy, and we have no near term debt refinancing requirements.
Sanjay Chowbey: At quarter end, we had a combined cash and a revolver availability of approximately $787 million and were well within our financial covenants.
Sanjay Chowbey: The full balance sheet can be found on slide 16 in the appendix [inaudible]
Now on slide 12, regarding our full-year outlook.
Sanjay Chowbey: We now expect FY25 sales to be between $1.97 billion and $1.99 billion with volume ranging from negative 5 to negative 4% and net price realization of approximately 2%.
Sanjay Chowbey: Asanjay noted, the expected market conditions in Amia and the continued stagnation of industrial production in the U.S. remain unchanged.
Sanjay Chowbey: We now anticipate an approximate 1% year-over-year headwind for foreign exchange based on the recently overall weaker U.S. dollar.
Sanjay Chowbey: The foreign exchange sales henwin is now expected to be approximately $20 million at the midpoint of our updated outlook.
Sanjay Chowbey: Specifically, as it relates to Q4, however, we anticipate a foreign exchange sales tailwind of our approximately $13 million sequentially.
Sanjay Chowbey: Year over year, we expect aerospace and defense to have slight growth, transportation to decline, general engineering, birth works and energy to decline slightly.
Sanjay Chowbey: From a cost perspective, we expect to offset raw material, wage and general cost increases on a dollar basis, and tungsten prices are assumed to be stable at current levels.
Sanjay Chowbey: Foreign exchange and non-cash pension expense are expected to be headwinds of $4 million each.
Sanjay Chowbey: Approximately $14 million of roll-over savings from our previously announced restructuring initiatives have been included.
Sanjay Chowbey: Our outlook also includes the impact of the FY-25 announced plant closures and restructuring actions, which combined or anticipated to generate approximately $15 million of annualized run rate savings by June 30.
Sanjay Chowbey: For fiscal 25, we have included approximately $7 million in savings related to these actions.
Sanjay Chowbey: At the end of the fiscal year, we expect to have achieved a $65 million savings run rate against our $100 million savings target.
Sanjay Chowbey: Depreciation and amortization is expected to be approximately $135 million, and we expect interest expense of approximately $27 million in an effective tax rate now of approximately 25%
Sanjay Chowbey: As a result of our performance in Q3, inclusive of the IRA tax credits and our current estimate of the impact of tariffs, we now expect adjusted EPS to be in the range of $1.30 to $1.45
This includes an approximate five-cent negative effect from tariffs.
Sanjay Chowbey: As Sanjay outlined earlier regarding tariffs, we have several mitigation actions either implemented or in progress to fully mitigate the effects.
Sanjay Chowbey: We will provide an update on any impacts for FY26 on our August earnings call.
Sanjay Chowbey: On the cash side, the full year outlook for capital expenditures is now anticipated to be approximately $90 million and the outlook for primary working capital is now 32% by fiscal year end.
Sanjay Chowbey: Taken together, we continue to expect free operating cash flow to be greater than 125% of adjusted net income and with that I'll turn it back over to Sanjay. Thank you Pat. Turning to slide 13, let me take a few minutes to summarize.
Sanjay Chowbey: We remain focused on staying the course, despite the highly volatile macro environment.
Sanjay Chowbey: and we are executing on our value creation initiatives to deliver a strong finish to fiscal 25.
Sanjay Chowbey: We are obviously in our fourth quarter right now and we are actively planning for the new fiscal year which begins July 1st.
I am looking forward to the conversation with you in August .
Sanjay Chowbey: where we will provide some color and context on several topics.
including progress on my first year at CEO .
Sanjay Chowbey: R-Friskel 26, Enwell Outlook, and finally an update on Portfolio, Footprint, and Structural Cost
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 one on your telephone keypad. If you would like to withdraw your question, please press star then the number two. At this time we will pause momentarily for questions.
Thank you. Thank you.
and many more. Thank you. Thank you.
Angel Castillo: Today's first question comes from Angel Castillo with Morgan Stanley . Please go ahead.
Angel Castillo: Good morning, and thank you for taking my question. I just wanted to talk about the outlook a little bit more maybe particularly for the fourth quarter.
Speaker Change: I think assuming a little bit of sequential improvement in some of the organic growth.
Speaker Change: So when you talk about quarterly date, what you're seeing in terms of kind of demand trends, as you think about April and May particularly across some of the key and markets and how that's kind of progressing. And particularly if you could also parse that out between, you know, what's kind of industry specific versus share getting related.
Yeah, Angel, good morning.
Angel Castillo: Yes, so I think at this point we are continuing to see a steady improvement as I outlined overall in the market trend slide.
Speaker Change: Most of the things I was staying about the same, as I had mentioned that general engineering
Speaker Change: The IPI, you know, other than Europe , I think US and Iraq basically staying relative to the flat, India continues to be slightly weak, transportation is same, India is weak, rest of the market relatively flat.
Energy, definitely sentiments are cautious right now with the customers [inaudible]
but again
Speaker Change: for what we have said three months ago, very similar sentiment right now.
Speaker Change: In earthworks, again, same thing, sentiments are similar, softness in US, coal exports, and then also demand in China versus capacity in a equation putting price pressure there.
Speaker Change: Aerospace defense, slight improvement as things continue to get better with the OEM and the supply chain constraints so I think at this point we haven't seen anything different in the event.
Speaker Change: with respect to either, you know, by-a-head or any kind of impact of charity so I think that we expect more or less a steady path for overall market at this point. In parallel we'll, of course, know again some market share as we are out performing them in our both segments.
Angel Castillo: Yeah, let me just, just one thing to get some color there on the Q4 sequentially angel. And that is as we think about, you know, just reference the midpoint of the outlook here. A couple things to contemplate. Number one is we've got a pretty significant FX change from Q3 to Q4. So that's about a $13 million sales tailwind for us. And that's what we're talking about. And that's what we're talking about. And that's what we're talking about.
Angel Castillo: You know, once you kind of pull that out, some of the incremental revenue associated with tear of surcharge, you're going to get right back to a number that's much more normalized in terms of sequential performance.
Angel Castillo: Q3 to Q4, and so underlying the outlook is really normality from a progression of the business moving into Q4 here.
Angel Castillo: That's very helpful. And then maybe could you just talk a little bit more about kind of the specific buckets you talked about on tariffs. You laid them out in this slide for mitigating the full kind of 80 million. Can you just maybe quantify each of those and just a little bit more kind of color as to maybe which of those are kind of fully underway which might take a little bit more time or work and how we should think about them? [inaudible]
Angel Castillo: Yeah, I think at this point, you know, we will not go into the quantification of each other category, but I can tell you on a high level first repeating what I said in the prepared remarks.
Angel Castillo: Now, first, the three items on the list there, it talks about how we are utilizing a global footprint.
Angel Castillo: and our supply chain network. And those things are in progress already. More than half or slightly more than half of our direct impact is related to what we do between the US and China and then China to US.
Angel Castillo: And those things, we already have begun implementation of some of those product moves and tooling moves and things like that.
Angel Castillo: The rest of that is in progress. We intend to complete those things as we go.
Angel Castillo: We've already implemented tariffs surcharges in U.S. for the metal cutting and then we are also taking surgical actions on infrastructure business from a surcharge perspective.
Angel Castillo: So all in all I will say the action implementation is coming along very well and we are going to continue to implement rest of the actions in timely manner.
Speaker Change: That's very helpful and just to clarify that because I guess the point of my what I was trying to get across is maybe there's a five-cent headwind from terrace I think in the fourth quarter but it's the implication therefore that by the first quarter you're gonna be fully offsetting everything and I'll get back in the queue thank you.
Speaker Change: Yeah, I think at this point, as Pat mentioned, the five cents, some of the activity is obviously tearing for the first part of April .
Speaker Change: We started to make sure things have been very fluid as we all know, you know.
Speaker Change: So we took started to take actions and notified our customers where we need to and also you know internal moves of tooling and production supply chain
Speaker Change: So some of those things were influenced by the end of April , early May.
Speaker Change: and that's part of that. And then remaining actions will continue to be worked on. I think that's the reason for us to say that we do have risk in Q4. We expect to provide more detail when we talk in August exactly where we are, but like I said, we do intend to fully mitigate all the direct impact of tariffs.
Thank you.
Speaker Change: The next question is from Steven Fisher with UBS. Please go ahead.
Stephen Fisher: Thanks. Good morning. I just wanted to bridge a little bit on the morning on the the quarter itself relative to the the guidance you had previously. Good morning. Good morning. Good morning. Good morning.
Speaker Change: I know if we back out the IRA credit and tax benefits related to that.
Speaker Change: Just kind of curious, what do you think were the kind of the biggest surprises relative to what you had thought before? It seems like it might have been price versus cost.
Speaker Change: And I guess on the the cost side of things, you know, with tungsten phrases having gone up in the last few months and just kind of curious [inaudible]
Speaker Change: How do you expect that to flow through over the next few months and how much you think you might need to raise pricing here, just to manage that higher cost and when that might hit?
and many more. Thank you. Thank you.
Speaker Change: Yeah, so let's start with that, Steve, as we just think about, you know, tungsten has moved up here. You know, I think as we think about like our second quarter, so the December quarter, you know, we would have seen like an average tungsten price like $3.35, you know, as we got into Q3 here February , it was up just slightly, just I think low $3.40.
Speaker Change: As we sit here today, it's closer to like $3.95 from an average perspective so overall I'll say the last, you know, 60, 45 days we've seen that those prices come up.
Speaker Change: As we normally talk about from a pricing standpoint, we do have some contracts, you know, specifically in infrastructure.
Speaker Change: in the energy end market, they'll begin resetting, you know, as that price rises, we'll see some favorable price income out of that as we move here into the fourth quarter. And then depending on where tungsten rolls here over the next couple of months, we'll probably see some additional favorability come through as well. In general, we always talk about, you know, from a cost structure perspective. [inaudible]
Speaker Change: but cost the tend to flow through the P&L, lagged by about two quarters. And so at the moment, we're still enjoying a cost-based that's prior to the recent escalation here in prices.
Speaker Change: As we think about the third quarter and the margin performance, I'll just talk about EPS terms here. Obviously the big driver for us in terms of versus our expectations.
Speaker Change: at the outset of the quarter was the Vance Manufacturing Tax Credit, so that in and of itself.
Speaker Change: sits at about 13 cents between the benefit of the tax credit itself.
Speaker Change: and some, and some favorability that also pulls through the effective tax rate. And so going into the quarter we knew that that was a I'll call it a known unknown in terms of how much we would actually qualify the treasury regs for that worst.
Speaker Change: We're finalized in the December quarter, we worked through that and I think at this point in time we'll continue to get an ongoing benefit from that but the
Speaker Change: The surplus from a catch-up perspective, getting catch-up cut up to the regs, that's all behind us here in the third quarter. I think the other elements in terms of overall performance and sales was...
Speaker Change: Pretty much aligned with where our expectations were, a cost structure came in a little better. I'd say a little bit of that was from restructuring. And we had a couple things kind of break our way over the course of the quarter as well that helped us don't deliver the number.
Speaker Change: Very, very helpful. I just wanted to ask a little bit about the competitive dynamics and see if there's any tariff related relevance here. You cited some competitive pressures.
Speaker Change: in the Americas, in the infrastructure, and I think it was specifically in Earthworks, I'm just curious kind of what's...
Speaker Change: The source of that and then sort of related potentially is to what extent the tariff regime is creating any competitive advantage that you might have in the United States.
Speaker Change: Do you think you need to prepare for kind of competitors to be reshoring operations to within the United States?
Speaker Change: Yes, first let me address the issue of the earth cutting business, comment on comparative pressure in the US in China, and then I'll come back to the overall comparative landscape and charity.
Speaker Change: With respect to artworks, as we have said before, you know, the coal price, coal exports coming out of US has been soft.
Speaker Change: And then in China itself, the demand versus capacity equation has been lost either for some time.
Speaker Change: So because of that there has been price pressure and we are able to compete and you know keep our business But there is definitely some pressure on price from that now we have not mentioned or we are not seeing anything you know from a price perspective or price pressure perspective for any other business as such
Speaker Change: Now, coming to the overall competitive landscape, as we have said in our prepared remarks also that we are definitely keeping up our most likely in a performing better than our peers.
Speaker Change: Especially who I have reported in the public domain and that has been there for several quarters now [inaudible]
Speaker Change: and we believe our overall organic growth initiatives are working well. Our commercial initiatives, our sales marketing team, our operations team have been really good job in customer service.
and able to provide good application support and computer win.
We believe that that work will continue, we will build upon that.
Speaker Change: For the time being, you know, now again talking about the terrorist situation.
Speaker Change: We do believe that as a company in our industry, in cutting tool and well component business, we are better position than others based on our overall footprint that we have in strongly in U.S. and also we have strong footprint in Europe and AFAC.
So we believe that won't be able to utilize that.
to make the moves we need to for mitigation actions.
Speaker Change: But we'll also be able to utilize our US footprint to make sure that we are taking growth opportunities and winning some markets especially when it comes to powder sales in rods and some cutting tool opportunities.
Terrific. Congratulations. Thank you.
Speaker Change: The next question comes from Steve Barger with Keybank Capital Market. Please go ahead.
Speaker Change: Good morning, this is <expletive> and Moore, I'm for Steve, thanks for taking our question.
of a platform for me kind of just staying on tariffs.
Speaker Change: I'm curious if you're seeing any pull forward or wait and see type demand pauses, it feels like component manufacturers have been more victims of pull forward while larger more complex goods are more wait and see. Just here's what your experience has been so far and maybe that's an opportunity for you to expand on specific mitigation efforts you'd like to call out as well.
Go to Beadaholique.com for all of your beading supply needs!
Speaker Change: Yeah, first of all, in terms of pool forward, we have really not seen much, you know, just in the couple million dollar type of range. So for all realistic purpose, nothing much.
Speaker Change: and we don't expect that as such even in the coming weeks and months here. I believe that in our customer base there has been definitely discussions about some production moves. As in the public domain you have seen some of the automotive transportation OEMs.
Speaker Change: They have talked about some production moves, but some of those things will take time. In the meantime, we're staying very close to our customers and supporting them as they need to manage through this situation.
Speaker Change: Great. That's helpful. And it kind of leads into my second question here, which is, do you think that any of this rapidly changing trade situation is an opportunity to look at M&A or portfolio optimization? I'm thinking about if there's lines of products you can consolidate or divest or assets that are getting closer to your M&A criteria? Just how are you thinking about those types of actions in the absence of a robust demand environment?
Speaker Change: We have definitely been working on our strategic priorities and to see how those things are aligned with our
inorganic portfolio actions.
Speaker Change: Now, with the tariff, definitely it did bring a new, you know, front on this discussion because we bring some things to the table. So, of course there are discussions and we will, you know, share more information when we get to a certain point on that. But, yes, there will be definitely some implications on that.
Okay, thank you very much.
Speaker Change: The next question comes from Julian Mitchell with Barkley. Please go ahead.
Speaker Change: Production Credit, and then you've also, you know, ten cents in the operating line, and then it seems like sort of five cents each coming from tax and effects versus the prior guide. Just wondered if there was anything else kind of moving around.
Speaker Change: We're within that guide and put a finer point on the net tariff headwind that's dialed in for this year as a whole in EPS. And sort of tied to that trying to understand organic fails.
Speaker Change: It doesn't seem like there's many surprises but just wanted to confirm if in recent weeks you've seen anything moving around versus normal seasonality.
Speaker Change: Yeah, just in terms of the outlook, I would say that the thumbnail version there, Julian, in terms of the approach we took on the outlook is obviously outperforming the expectations here in the third quarter that got rolled into the full year.
Speaker Change: We do have some benefits from the surcharge, but we've got costs associated with the tariff. That's the net, the net exposure we've talked about. That's been rolled in. FX.
Speaker Change: as we move through the quarter here. We're sitting at $1.13.5 euro versus we're at closer to $1.8. So we got some benefit on the week of dollar. And then I would say lastly, just based on where we think sales and the business will perform here, just tightened up the range. So we're going to do a little bit more, just a little bit more, just a little bit more, just a little bit more.
Speaker Change: and narrowed it down, given that we're in the fourth quarter of the year. You know, when I think about where we're at here, you know, from a sales performance in the month of April , you know, and again this is kind of how the outlook is built as well.
Pretty Normal Progression
Speaker Change: Right, and so we've not seen from a demand perspective at this point in time anything that's out of the ordinary, you know obviously as we think about you know the March and April timeframe from year to year you've got an Easter holiday effect in there, commonly in Europe .
Speaker Change: that can be a little wonky, but again the business seems to be performing at the man level seem to be, you know, pre-normal.
Speaker Change: That's helpful. Thank you. And then just when we're thinking about the sales recovery whenever that comes, you know, assume it's some time, let's say in fiscal 26, just wanted really for Sanjay, I suppose, given you've almost been in the job for 12 months now as CEO , what kind of operating leverage are you kind of aiming for in that recovery?
that have been announced. But rolling everything together, what sort of operating leverage kind of entitlement, Kennametal should have when your sales start to grow again.
Speaker Change: Yeah, Julian, we'll start with a simple answer of mid 40s, okay?
Speaker Change: That for sure we expect. As we have been working on our cost structure and we'll share more details on overall portfolio analysis and cost structure footprint in those actions.
Speaker Change: We do believe that we are continue to improve our fixed cost but at this point you can definitely go with the mid-40s in terms of leverage and leverage.
That's great. Thank you.
Thanks, Julian.
Speaker Change: The next question comes from Michael Feniger with Bank of America. Please go ahead.
Michael Seneger: Hey guys, thanks for taking my questions. Just on inventories. I think your inventories if I look at the quote are actually increased sequentially.
Speaker Change: Revenue was a little flat. I'm just kind of curious how you feel with your inventory position. The quarter have a benefit.
Michael Seneger: From that absorption, are you carrying a little bit more inventory that's strategic going into this type of environment now? You know as we enter the back half of this year? That's my first question.
Michael Seneger: from Q2 at December and the bigger up tech will be in Whip.
Michael Seneger: and Powder Inventory. And so that's where you've seen it. I would say a couple things about it. Number one, you know, just given the change in demand that we've seen here and projected over the last couple of months, apply change.
Speaker Change: Fair enough. And if I just ask it, did you guys
Speaker Change: to provide a breakdown of your cogs from from from to drastically from an area like China. I'm just trying to get a sense of
Speaker Change: Is the impact mostly that China tariff? Is it that 10% for the rest of the world? Maybe Europe to US?
Speaker Change: and I guess with what you guys are factoring it, is it based on those rates from April 4th Liberation Day? If we wake up in a few weeks and we see a deal struck, is that upside to that 80 million just any help there would be helpful for us?
Speaker Change: Yes, sure, Michael. Yes, we are using all the Tariots which were of con-effect on April 30th.
Speaker Change: So as negotiations happen and things like that, that 80 million itself will come down. But what we're also telling you, regardless of whether 80 million becomes 60 or 50, we have action plans in place to fully mitigate direct impact of tariff cost.
Speaker Change: and we are also in parallel definitely looking at opportunities for growth capitalizing on a footprint and supply chain network.
[inaudible]
Speaker Change: To your comment, the risk will come down as the negotiations happen.
Speaker Change: Fair enough, Sanjay, if I could just sneak one more in just to follow on with Julian's comment, I...
Joseph Ritchie, Steven Fisher, Steven Fisher, Michael Feniger, Steven Fisher
Speaker Change: Nality Standpoint from FQ4, FQ1 on the top line or bottom line that we should kind of be thinking about as we kind of turn the page.
Speaker Change: Yeah, no, obviously, yes, the normal seasonality going into Q1, right? And we'll give an update on end markets and where we think that will precisely be obviously in about 90 days. I would say from a cost structure perspective, just a couple things to be mindful out there as you guys put together your expectations for 26. Next.
Speaker Change: We have had some benefits flow through this year in terms of the PNL that are non-repetitive in nature and so that's going to be, we've got about $6 million of proceeds from tornadoes [inaudible]
Speaker Change: Insurance Proceeds on a tornado that was a year ago in May, June , in excess of costs. So obviously that's not going to repeat. That's within the infrastructure segment we talked already about on this call.
Speaker Change: The Tax Credit, although that will continue forward at this point in time based on tax legislation indefinitely and until Congress changes the tax law as we talk about the 25 to 26 progression.
Speaker Change: 25 that's not going to repeat in 26 because that's the catch up amount. And then the last thing I would just reflect upon would be in terms of restructuring programs, you know, the run rate will end this year and what we already have in the pipeline to pick up about another eight million dollars of benefit. Thank you very much.
Speaker Change: in the first half of fiscal 26, as that, you know, the annualize is out throughout the year. So, some cost structure perspective, and those are the three big things that are worth thinking about.
Thank you, Patrick. Yep
Speaker Change: The next question is from Tami Zakaria with JP Morgan. Please go ahead.
Tammy Zaccaria: Okay, good morning. Thank you so much. I have two follow-up questions. Hi, with someone first question, just wanted a bit of clarity on the pricing outlook. I think you kept it unchanged at 2% for the year.
Tammy Zaccaria: and it seems like you're already taking some pricing action for tariffs. So, is 2% pricing still the right number to think about for the final quarter of the year? [inaudible]
Tammy Zaccaria: Timmy, yes, I think excluding tariff impact, approximately 2% is what we have said, so yes, that will be the right number.
So, it could be higher if it's-
If the current price increases slow-through
Tammy Zaccaria: Yeah, if you're adding the tariff on surcharge, yes, but I'm excluding the tariff surcharge that I'm saying that is like on top of tariff surcharge is simply to offset the tariff direct impact.
Got it. Okay.
Tammy Zaccaria: And so my follow-up question is, are you able to share what price and price cost was in the third quarter?
Sanjay Chowbey: Now, the only thing I would say there Tami is as we think about the business performance on a year-over-year basis
Sanjay Chowbey: All right, and this is where, there's just given the timing elements that can move through the PNL, you know, a year ago, third quarter in infrastructure, you know, they would have been on the wrong side of the price raw cycle, and so you would have seen operating income margin and infrastructure about, I think, 3.8% last year, 3Q.
Sanjay Chowbey: and as we got to this year, price were off from an infrastructure perspective and balancing Q3, and so neither a headwind or a tailwind were quite frankly to note there.
Got it. Okay. Thank you.
Thank you.
Thank you.
Speaker Change: The next question is from Joe Ritchie with Goldman Sachs. Please go ahead
Thank you. Good morning, everybody.
Good job.
Speaker Change: So just just my first question and this is just a higher level question for Sanjay.
Speaker Change: Some of these tariff actions that you're taking in place on slide 5
Speaker Change: and expectations at some point, this number is going down, that these actions are kind of more structural in nature, outside of maybe like the surcharges, they'll be structural movements to your supply chain that will continue. Thank you.
Speaker Change: Yes, for most part, that will be correct assumption. I think if things went back to the way it was before, in that case there could be some regrouping of production in terms of getting the economy up a scale because there are certain types of specialty products.
Speaker Change: that we make today in one part of the world or the other and we ship around but we are very capable of producing our general product, standard products in all three regions.
Speaker Change: So those kind of moves we have already enacted very quickly in April but there are some specialty products. We will revisit that depending on where the tariff levels go back but assuming that there is some sort of tariff in place I think these will be more in like a little bit more permanent shape.
Speaker Change: And we'll definitely in parallel, you know, we're working on, we're always looking for improvement as we are even doing this and as part of continuous improvement mindset, we're not just saying that let's just do this to manage tariff.
Speaker Change: When we're moving any of these things around, we are looking for cycle time improvement, uptime improvement and overall yield improvement. So, our idea here is that we come out stronger from this situation.
Speaker Change: Found it, that's helpful. And look, not that the current environment is supporting this.
Speaker Change: But if for some reason we were to see some like real acceleration in the demand backdrop.
I'm curious, is there risk to being able to? [inaudible]
Speaker Change: Supply the market if we do see an inflection point in your business.
geosirpically when you see these types of moves.
Speaker Change: You know, sometimes you run into like this, like kind of like taking a Python problem and I'm just curious like how you're managing and how much capacity you have, if things were to reflect from a revenue perspective. [inaudible]
Speaker Change: Yeah, on a high level, we do not anticipate any risk. I think we have definitely, you know, like if you go back few years ago, we as a company and the industry, you know, we have seen 30 months of, you know, slow down in industrial production. So if you go back to even five years ago, we have more capacity to support aerospace and defense in our demands, same way for transportation. [inaudible]
Speaker Change: General Engineering, so on, so forth, energy. So we can definitely handle, we will be happy to handle some recovery in the market.
Speaker Change: And in parallel, you know, as Pat also mentioned, you know, we have definitely worked on our cost structure. We'll be exiting this year. In January , we announced the $15 million. We're well on track to complete that.
Speaker Change: So I do believe that we will be able to handle in terms of demand, but also in terms of getting coming out with this better cost structure too.
Speaker Change: I got to create one last one. I know we'll get the guidance next quarter, but just maybe you can comment any changes to how you will guide, like terms of the information you'll provide, versus, you know, versus how you got it last year. Either any incrementally new or less information when you do give the guidance. You'll be able to get the guidance next year, but you'll be able to get the guidance next year.
Joe: No, I think that's a question we'll answer Joe in about 90 days
All right, fair enough. Thank you
Speaker Change: Thank you. This concludes our question and answer session. I would now like to hand the call back over to Mr. Chowbey for closing remarks.
Sanjay Chowbey: 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.
Thank you.
Speaker Change: The conference has now concluded. Thank you for your participation. You may now disconnect your lines.