Good morning, I would like to welcome everyone to Kennametal’s Fourth Quarter Fiscal 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions]. Please note, this event is being recorded. I’d now like to turn the conference over to Kelly Boyer, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Welcome, everyone, and thank you for joining us to review Kennametal’s fourth quarter and fiscal 2022 results. Yesterday evening, we issued our earnings press release and posted our presentation slides on our website. We will be referring to that slide deck on today’s call. I’m Kelly Boyer, Vice President of Investor Relations. Joining me on the call today are Chris Rossi, President and Chief Executive Officer; and Pat Watson, Vice President and Chief Financial Officer. After Chris and Pat’s prepared remarks, we will open the line for questions. At this time, I would like to direct your attention to our forward-looking disclosure statement. Today’s discussion contains comments that constitute forward-looking statements and, as such, involve a number of assumptions, risks and uncertainties that could cause the company’s actual results, performance or achievements to differ materially from those expressed in or implied by such forward-looking statements. These risk factors and uncertainties are detailed in Kennametal’s SEC filings. In addition, we will be discussing non-GAAP financial measures 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’ll turn the call over to Chris.

Thank you, Kelly. Good morning, everyone, and thanks for joining the call today. Before we get started, I’d like to recognize Pat Watson. This is his first call as our new Chief Financial Officer. Of course, many of you already know Pat from his most recent role as VP and Corporate Controller, and I’ve had the pleasure of working closely with him since I joined the company. I know he’ll do a fantastic job for us as CFO. In his tenure at Kennametal, he’s made significant contributions to the organization, and he’s held leadership roles that span from global finance and acquisitions to supply chain. And most importantly, his extensive knowledge of the company will continue to be instrumental in supporting our strategy to improve profitability and grow the company. Pat, welcome.

Thank you, Chris, and good morning, everyone. I’m excited to be named CFO at this pivotal time for Kennametal. We’ve had tremendous success transforming the company over the last several years, and I believe that there is significant potential for growth and margin expansion in our future too. I’m excited by our potential, and I look forward to meeting many of you on the call today in-person over the coming months.

Okay, thanks Pat. For today’s call, I’m going to start with a review of the year followed by an overview of the fourth quarter and our growth roadmap for our fiscal year 2023 and beyond, including some examples of recent customer wins. From there, Pat will review the quarterly financial results and our outlook. And finally, I’ll make some comments regarding our cash allocation strategy before opening the line for questions. Beginning on Slide 2. Fiscal year 2022 was a very good year as we continue to transform the company. Sales were up 9% on organic growth of 11% reflecting recovery in our end markets, pricing for value and to cover inflation and acceleration in our growth initiatives. Infrastructure reported 14% organic sales growth, and Metal Cutting 9%. All regions had positive growth with the Americas leading at 16%, EMEA at 10%, and Asia-Pacific at 2%. Operating leverage was particularly strong year-over-year, reflecting success achieved in both our commercial and operational excellence initiatives. Adjusted operating margin increased 340 basis points year-over-year, a significant improvement especially given the challenges, which included continuing supply chain issues, COVID-related lockdowns and absenteeism, the Ukraine conflict, high inflation, and the effect of $25 million of temporary cost actions in the first half of fiscal year 2021. Free operating cash flow for the year was $85 million; dampen by a higher cost of inventory and strategically holding additional safety stock to mitigate the effects of supply chain disruptions on our customers. In summary, we feel very good about delivering a solid year. We nimbly managed through many challenges, drove performance improvements and continue to advance our strategic initiatives. Let’s turn to Slide 3 to review the Q4 results. We ended the year with sales up 3% to $530 million in Q4, which was at the top…

Thank you, Chris, and good morning again, everyone. Let me begin on Slide 7 with a review of our fourth quarter operating results on both a reported and an adjusted basis. We continue to successfully execute our initiatives during the quarter in the face of headwinds from inflation, lockdowns in China, and foreign exchange. For the quarter, sales of $530 million improved 3% year-over-year and 7% on an organic basis from $516 million in the fourth quarter of last year. As a result of a strong U.S. dollar foreign currency had a significant negative effect of 4% on sales and there was no effect due to business days. Adjusted operating expenses decreased year-over-year to $102 million or 19.3% of sales. Adjusted EBITDA margin was relatively flat at 19.1% versus 19.2% in the prior year quarter. Maintaining our margin in this inflationary environment is a reflection of our focus on pricing for value and tight cost control. For a bit of perspective prior to the completion of simplification/modernization the last time EBITDA margin exceeded 19% was during the third and fourth quarters of FY 2019 when quarterly sales exceeded $600 million. This is another validation point of the structural cost improvements we have made over the last few years. The adjusted effective tax rate in the quarter was 27.6%, a more normalized level than the previous year due to higher pretax income this quarter. We reported GAAP earnings per share of $0.50 versus $0.41 in the prior year period. On an adjusted basis, EPS was $0.53, the same as in the prior year quarter. The main drivers of our adjusted EPS performance are highlighted on the bridge on Slide 8. The effective operations this quarter amounted to approximately $0.05. This reflects price offsetting raw material cost increases, Operational Excellence initiatives, volumes,…

Thanks Pat. Please turn to Slide 14 for a summary of our capital allocation approach. In the left hand table, you can see the capital allocation for fiscal year 2016 through fiscal year 2021. Many of you know, this allocation approach quite well, dividends have been a consistent method by which we returned cash to shareholders. And I should note that we maintained a dividend throughout the downturn, which many companies were unable to do, but for the most part, our capital allocation during these years was focused on simplifying the company and modernizing our facilities. And in fact, we invested in incremental $300 million in CapEx and $200 million in cash restructuring costs during this timeframe. As I mentioned earlier, this capital allocation approach has served us well with margins increasing 660 basis points on approximately the same revenue level. Now that the simplification/modernization capital investments and restructuring are behind us, combined with our strong balance sheet and cash flow. We are executing on the capital allocation strategy shown in the right hand table. There are three fundamental priorities here. Capital investments, returning cash to shareholders and acquisitions. Capital investments will continue to focus on keeping our modernized facility state-of-the-art, driving further productivity and customer service improvements and advancing our digital customer experience platform. We will also remain committed to returning cash to shareholders through a quarterly dividend and continuation of our stock repurchase program. Finally acquisitions, which we see as a strategic lever to accelerate growth in core areas of expertise and underserved regions and markets and applications. Importantly, this capital allocation strategy works hand-in-hand with our growth roadmap and taken together. These reinforce our ability to invest in the company for growth. Now, please turn to Slide 15 for a brief summary, before we open the call for questions. We had a great year in fiscal year 2022. And I’d like to take this opportunity to congratulate the entire Kennametal team on the results. In fiscal year 2023, we expect the end market recovery to continue, but visibility remains limited. Regardless, we’ve proven our ability to operate successfully in an uncertain macro environment. We’ll continue to focus on the things we can control and executing our growth roadmap through our Commercial and Operational Excellence initiatives. And with that operator, please open the line for questions.

Thank you. [Operator Instructions] Today’s first question comes from Steven Volkmann at Jefferies. Please go ahead.

Hi. Good morning, everybody. Thanks for taking the question. If we could just lead off Chris, can you just talk a little bit about the supply chain issues that you’re seeing and I’m curious if you can kind of delineate between what’s impacting Kennametal directly and what is more indirect with respect to kind of your customers?

Sure. Steve, I would say that in general, the effects of the supply chain have been greater on our customers than us. So it manifests itself in a situation where they have, they seem to have a lot of backlog, and but they’re constrained by how much they can produce. So that consequently holds back our revenue from what I think, it would be higher if those supply chain constraints would go away. That being said, we do, especially in the infrastructure business, we have some forgings and castings and those type of things, but so far Steve, we’ve worked our way through those type of supply chain constraints. So again, mostly the effects Steve is on the customers. And of course, as you know, in transportation, that’s, what’s really holding transportation back seems to be plenty of demand, but they’re highly constrained because of the chip issue. And then they have the Ukraine conflict with wiring harnesses and those type of things.

Okay, great. Thanks for that. And then maybe just a quick follow up, you guys have said numerous times that you’re sort of covering inflation costs with price on a dollar basis, but I’m wondering how you look at that longer term, because obviously if we’re in an inflationary environment and this sort of continues, then covering it on a dollar basis is going to be kind of margin dilutive, in perpetuity per perhaps. So I’m wondering how this kind of plays out over time. Is there an opportunity to actually kind of recapture margin as well as the dollars?

Well, I think Steve, that – first of all, I hope this high inflation is not in perpetuity, right. So we’ll see what happens with the globe. But I think in the midterm as you know, our long-term targets, they were predicated on a typical inflationary environment. So the current inflationary environment, as you correctly pointed out, when you do the math will lower the margins with price, just covering the inflationary effect. But that being said, and what we try to help you with especially in the first quarter in terms of your modeling, is we can still be confident saying that the underlying operating leverage of the business that we would expect from the simplification/modernization investments, when there’s actually a volume increase that that equals piece volume to plants, we still feel very good that, that will lever at our typical – in the typical range that I think many of the analysts on the phone are using something around 50%. So, we’re going to continue to try to provide you information so you can sort through that. But the underlying operating leverage still is within the business. Now, other thing, is on pricing, we always pricing for value, and we’re going to continue to do that. And while we’ve been on that journey for a little while, I just think there’s still some more opportunity there, so that could help us it into the effect of the math, Steve, but that’s the way I’m thinking about it.

Okay. I appreciate it. I’ll pass it on.

And our next question today comes from Joe Ritchie at Goldman Sachs. Please go ahead.

Thanks. Good morning guys. And congratulations, Pat, on the new opportunity. I look forward to working with you. So, can you maybe just kind of just start by just, and you guys have given a lot of good details on some of the puts and takes for 2023, can you maybe just give us a little bit more on just like how you expect the cadence of the year to go, and if you could provide any commentary particularly around like, tungsten pricing, how that’s impacting the business today? And how would you, you would expect it to impact that going forward? That’d be helpful.

Yes, I think the cadence in terms of revenue, we expect to follow the normal sequential pattern, Joe. And, if you listen to Pat in his opening remarks, that’s based on a view or an outlook of the year that’s sort of flat to maybe some growth, right? So, we’re assuming for example, that transportation is sort of flattish and we’re not expecting any major improvement in their supply chain constraints, but they are working on the problem and it is expected to get better. So that could be an opportunity in terms of doing something in with revenue that’s higher than the sequentials. We also know that energy continues to be strong. And then same thing with aerospace that continues to recover. The other, the real question is general engineering, and that’s certainly affected by transportation. But we’ve kind of tried to assume that it’s linked to sort of the general manufacturing indices, which are tied to GDP and those kind of things. And so we’re assuming that is still kind of flat. If you look at a lot of the manufacturing indices, they have moderated, but they’re still in positive territory. So, our feeling is that things could actually get better based on our underlying assumption that we’re going to simply follow the normal seasonal trend. Right. And then your next question was what, I’m sorry, can you tell – can you repeat it?

Sure. Yes, no problem. Just the impact of tungsten, what impact that’s having on your business today, I know that you tend to benefit in a rising tungsten environment, but then there is some margin pressure, as tungsten starts to come down. So just curious to see what, how that’s expected to impact 2023?

Yes. So given our outlook, what I basically said is that, volumes would be sort of flat to maybe slightly increasing. And in that environment, we expect the tungsten prices to be stable. But you are right, if volume does dramatically reduce that’s when, especially in infrastructure where the APT price comes down, there is an adjustment in prices that we that we have to factor in, but we’re not expecting that to be the case in FY 2023, but you’ve got the right modeling thought process in your head. And then the other, it was frankly it took a lot of a lot of the inventory increase was just purely on the paying for higher material costs, which was driven by the by the tungsten.

Got it. That’s helpful. If I could sneak one more in, just so in kind of like a flat volume environment, clearly you guys have made a lot of improvements behind the scenes and you referenced some of those on the modernization initiative. How do you think about then, like the, I know there’s no, there’s not a perfect way to measure drop through in a flat environment, but how do you think of like the potential margin improvement that we should still see in a flat environment as we head into next year?

Yes. I think I guess what I would tell our investors is that we’re – we clearly based on our modernization investments will benefit as higher piece volume runs through the factory. But your question is in a scenario where that’s just kind of flat. And so that’s one of the reasons why we teed up this operational excellence initiative. We’ve been talking about is there, we still are expecting our plants to drive productivity, even in flat volume year-over-year, that’s just what good companies do. And now that we’ve got a modernized footprint, we’ve got sort of a good baseline to build off of that. So, our expectation is, we’re still going to drive productivity improvement. And as I mentioned, we’ll try to, as we go through the year, we’ll try to highlight that. But given the high inflation and the price covering inflation, that tends to dampen the math. So, we’re going to try, we’ll try to sort that out for you, Joe, but there is an expectation that we drive improved margins even in a flat environment.

Okay, great. Thank you.

And our next question today comes from Julian Mitchell at Barclays. Please go ahead.

Hi, good morning. And look forward to working more with you Pat. In terms of, I guess the, my first question really on that margin point. So in the current or first fiscal quarter you’ve got sort of flat to slightly up volumes year-on-year. Operating margin down year-on-year, maybe a 100 bps to 150 bps . So just trying to understand, in light of your previous comment around trying to sort of work to get margins up, if we do see that sort of similar, very low single-digit volume growth for the year as a whole, like you’re seeing in Q1, when do you think the margins might be able to turn up year-on-year based on current sort of price initiatives and the cost outlook?

Yes, I think when we look at that outlook Julian, because there’s so many moving pieces here, one of the big ones is obviously, we’ve taken pricing actions, and the timing in which those begin to flow through that the P&L along with our assumptions on covering inflation. And it’s not the exact sciences to how the costs are going to roll in. We feel that pretty good on an annualized basis, the price will cover the inflation on a dollar basis. But in any given quarter where we exactly are in that process is has something – has some risk to it. And I think frankly, that as we did the roll up from the various segments, there might be a little conservatism in there in terms of where we’re going to be on that curve, that would just be natural for them. And then I think the – I think as I talked about the revenue, I think we’re being pretty conservative on where we are with revenue. And I think the strength of our end markets are there, but there’s some issues on a regional basis. Like just how quickly China will recover from all their lockdowns. And then of course, everyone is watching Europe to see what will happen there. So, I think there’s some potential versus what the outlook would say in terms of driving higher margins. It’s just naturally doing, there’s so many moving pieces that I think our guys, frankly, might be a little bit conservative because some of the stuff they just don’t know, we’re in a little bit of a different environment than we’ve ever operated before.

That’s fair, but I guess, that the point would be Chris that even when the margins are turning it’s sort of second half of the fiscal year is, is when you’re likely to see margins expand. Is that fair?

Yes, I think that that’s that would be a reasonable assumption, because that’s when volumes will start to as we said, we sort of forecasted flat to increasing volumes, and that would happen in the second half of the year, assuming based on the assumptions that Pat had laid out.

That makes sense. And then just a quick follow up, on the, sort of the price and the cost commentary. So, I think you’ve talked about that price tailwind of $30 million in the current quarter. Just to understand so that I think you said that’s covering the raw material wage and general inflation cost. Is that right? That $30 million covers all those kind of three cost buckets? And just to understand, is it apples-to-apples when you’re talking about the $22 million raw material cost increase in Q4? Is that just roadmaps [ph] excluding wages, and general inflation, just trying to understand those numbers a bit better.

Yes Julian so, yes, when we think about that the $30 million in the first quarter, absolutely that is covering I’ll call it all three sources of inflation material wage in general, and yes, as we’re talking about the $22 million in the fourth quarter, that is purely just raw material.

That’s helpful. Thank you.

Thanks Julian.

And our next question today comes from Chris Dankert at Loop Capital. Please go ahead.

Hey morning guys. Thanks for taking the question. I guess, Chris, any explicit cost savings goals, you’d tie to kind of the Smart Factory, and productivity initiatives or fiscal 2023? Or is this really more ended offsetting wage and other manufacturing cost increases here?

Yes. On the productivity, well, as we talked about, we’re – we believe that, that the environment, and so far the competitor’s reaction to prices that we should be able to cover those three sources of inflation with price. So on the productivity side, we kind of look at that as what is best-in-class sort of driving productivity. And those are the expectations we set for our factories. So, it’s more of a, it’s more of a goal based on what we think is operation. What equals operational excellence versus we backed into a cost number and say, you got to go for that productivity. That makes sense.

Yes, that does make sense. Okay. Thanks for that. And then I guess thinking about the midpoint of margin guidance [ph], well, low-end midpoint, however you guys want to frame it up on the margin guidance or fiscal 1Q, I mean that’s down meaningfully year-over-year, I assume tungsten, and price cost is the key headwind there, but anything else you could kind of unpack in terms of the moving parts around the margin guidance?

Yes, I think we unpacked that the margin first quarter, a couple drivers, number one is, we talk about the FX and the $6 million headwind from an operating income perspective. And then on the price piece, basically just simply offsetting the cost inflation that we have in the business, and as Chris comment a little bit earlier, there’s probably a little bit of conservatism in there as well as we think about, that – where that number sits from the outlook perspective.

Okay. Well I guess trying to understand that piece though, as we look at the full year in terms of what the implication is for margin, I mean $30 million in the first quarter for pricing. What are you kind of assuming in terms of full year price at this point, just based on what you’ve announced, I suppose.

In terms of when we think about the full year, obviously we’ve given some color here for the first quarter. What we would expect over the course of the year is that, it will still cover the raw material. And so you’re not going to see from a margin perspective margins expanding based on pricing.

All right. Fair enough. Thank you. And ladies and gentlemen, this concludes the question-and-answer session. I’d like to turn the conference back over to Chris Rossi for closing remarks.

Thanks operator, and thanks everyone for joining the call today. As I said, we feel very good about FY 2022, despite the challenging environment that we are operating in. And I’m really looking forward to FY 2023. I’m confident that we’re going to make great progress on our initiatives, which include executing and delivering on that growth map through our Commercial and Operational Excellence initiatives. As always appreciate everyone’s interest and support and reach out to Kelly if you have any follow up questions. Thank you.

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