Good morning. I would like to welcome everyone to Kennametal Fourth Quarter and Fiscal 2024 Earnings Conference Call. Today, all participants will be in a listen-only mode to prevent any background noise. After the speakers’ remark, there will be a question-and-answer session. [Operator Instructions] Please note that today’s event is being recorded. I would now like to turn the conference over to Michael Pici, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. Welcome, everyone, and thank you for joining us to review Kennametal’s fourth quarter and fiscal 2024 results. This morning, we issued our earnings press release and posted our presentation slides on our website. We will be referring to that slide deck throughout today's call. I'm Michael Pici, Vice President of Investor Relations. Joining me on the call today are Sanjay Chowbey, President and Chief Executive Officer; Pat Watson, Vice President and Chief Financial Officer; and Franklin Cardenas, Vice President and President of Infrastructure. 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 statements. These risk factors and uncertainties are detailed in Kennametal's SEC filings. In addition, we will be discussing non-GAAP financial measures on the call today. Reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the deck and on our Form 8-K on our website. And with that, I'll turn the call over to you, Sanjay.

Thank you, Mike. Good morning and thank you for joining us today. It is an honor and privilege to lead this company and to work with our team members around the world. Before I get into the main portion of my remarks, let me say that it has been a very busy two months since I took on the CEO role. During that time, I visited numerous facilities around the world, talking to our team members, investors, customers, and other stakeholders. So much of what I'm hearing from them aligns with and reinforces what we are focused on by way of our value creation pillars. And I'll be speaking more about those in a minute. Earlier this week, we announced the hiring of our Metal Cutting President, Dave Bersaglini. He's a strong business leader with a growth mindset and results orientation. I'm very pleased to have Dave on our team. I've also established a team to implement value creation business systems and tools that will help us drive above-market growth, operating margin expansion, and free operating cash flow. In the spirit of True Lean, we are making this investment primarily through existing resources and some new talent, almost all of it funded by reallocation of funds. During these first couple of months, we also dealt with the aftermath of a tornado at our Rogers, Arkansas plant. The safe, speedy, and successful restart of that facility was made possible by our local Rogers team and experts from across our organization who came in to help. Those teams work nonstop to safely resume operations and meet customers' expectations. And I just want to take this opportunity to say thank you to them. Now let's turn to some of the details on the quarter on slide three. Overall, I'm very pleased with how…

Thank you, Sanjay, and good morning, everyone. I will begin on slide 7 with a review of the fourth quarter operating results. The quarter's results show that we continue to execute our initiatives in the face of continued headwinds from inflation, foreign exchange, and some market softness. Sales decreased by 1% year over year, with a 1% organic decline and headwinds from foreign exchange of 2%, partially offset by favorable workdays of 2%. Operating expense as a percentage of sales decreased 50 basis points year-over-year to 19.5% on an adjusted basis. Adjusted EBITDA and operating margins were 17.7% and 11.5% respectively versus 16.7% and 11.4% in the prior year quarter. During the quarter, we realized approximately $7 million in savings from the previously announced restructuring program. Time and delays caused a slight shift with some actions moving into July, and we continue to expect to achieve $35 million of run rate savings. As a result, in FY25, we expect approximately $14 million in rollover savings. Lastly, foreign exchange headwinds from the strong U.S. dollar were approximately 2% this quarter. The adjusted effective tax rate increased year-over-year to 29.3%, primarily driven by unfavorable geographical mix and prior year adjustments related to evaluation allowances against deferred tax assets that did not repeat in the current quarter. Adjusted earnings per share were $0.49 in the quarter versus $0.51 in the prior year period. As Sanjay mentioned, we also delivered the highest free operating cash flows since FY15 and cash flow from operations as the percent of sales was the highest in over 25 years. The main drivers of our EPS performance are highlighted on the bridge on slide 8. The positive year-over-year effect of operation reflects restructuring savings, timing of raw material costs, price, and operational excellence initiatives partially offset by lower sales…

Thank you, Pat. Turning to Slide 15, let me take a few minutes to summarize. Overall, we are pleased with our performance in Fiscal 24. Looking forward to Fiscal 25, market conditions are expected to be mixed, as you heard earlier. We are focused on what we can control and will work to improve our operating performance while monitoring and managing external factors. We'll build upon the momentum on growth and continuous improvement pillars to drive above-market growth, margin expansion, and continued progress on cash flow. In parallel, we'll take a systematic approach to improve portfolio performance over time. In summary, with steady performance, cash generation capabilities, sustainable competitive advantages, and a focused approach to value creation, Kennametal offers a compelling investment opportunity. And with that, operator, please open the line for questions.

[Operator Instructions] And today's first question comes from Angel Castillo with Morgan Stanley. Please proceed.

Hi, this is Grace Song for Angel. Thank you for the question. So you had a solid quarter in aerospace and defense and further indicated that you expect fiscal 25 to be upped moderately. So can you elaborate on how much of that improvement you see in fiscal 25 is driven by market share gains or project wins versus underlying industry growth? And I know it can be lumpy, so any comment on that, you know, what might expect from a quarterly cadence on that? Thank you.

Good morning, Grace. First of all, let me just comment on what we had in fiscal 24. We had continued strategic wins and also market helped us. Along with that, we saw that OEMs have been adjusting their bill rates. Most likely you have noticed that Airbus took it down from 800 to 770. And Boeing's bill rate has been a little bit uncertain. So we looked at that and that's how we projected what we expect in fiscal 25. It will include all three components. It will have market, which we expect to continue to grow, but slightly at a lower rate. It will have strategic wins, which we have talked about in the investor day that we have gone beyond the engine, which used to be our main focus. We have gone in components and structures. And also new customers at the tiered level we have gotten. So and finally, there will be, of course, a little bit of price component to it. So a combination of those three, that's how we are looking at aerospace next year.

Got it. That's very helpful. And can you also talk about the implied reacceleration in growth throughout the remainder of the year based on lower 1Q base? What gives you confidence in 1Q marking the bottom? Thank you.

Yes, thanks, Grace. So if we just think about the sales cadence, I'll say throughout the year, we're actually anticipating a pretty normal year after we get through Q1. If we think about the normal cadence, certainly Q1 is down, perhaps down a little bit harder this year, as we just got some more seasonality coming out of that, anticipating flat to up slightly in Q2, and then the normal acceleration we would have in the back of the year. So overall, from a sales cadence perspective, a pretty normal year, I would describe it as.

Thank you.

And the next question comes from Joe Ritchie with Goldman Sachs. Please proceed.

Hey, good morning, everyone.

Hey, Joe.

Hey, so Sanjay, pretty cool to see, like, fairly early in your tenure, talking about the value creation pillars. And I want you to maybe double-click a little bit on this portfolio optimization piece. Maybe just give us a little bit more color what you're thinking around that piece of it and the ability to potentially continue to right-size the portfolio.

Good morning, Joe, again. Yes, so as I talked about the three value creation pillars, these will work in unison. Of course, we will do a lot of things to grow from an organic perspective. We have laid out some of the key work streams in that area, continuous improvement where we'll continue to apply lean principles across all parts of business. That will help us with margin expansion and also continue our momentum on inventory and working capital improvements. Now, moving to third pillar, portfolio, like you said, this generally takes time. And we are, as I mentioned earlier, this is going to be something that, over the time we'll work on it while primary focus will be on organic growth and continuous improvement. Even the portfolio piece, the way I look at it, there are three steps to it. First step is just putting a process in place so that we do proper assessment. And the assessment will include, how much money we're investing in a business, what is the resource allocation, what is the working capital allocation, what kind of return we're getting at that. And even if, let's say, we find that there are businesses which are not performing to desired level, the first step of that, the next step of that is not immediately talk about divestment or any kind of inorganic action. The first step will be still organic actions. We're going to go look at what we need to do to improve that business from all perspectives, growth, working capital, new CapEx, and also organizational capability perspective. If suppose we do get to a conclusion that there are parts of business that will be served better with a bigger scale with some other party, then we will look at that. But that is not our number one focus. In parallel, of course, I've talked about inorganic growth helping us. From a growth perspective, we will continue to look at ideas for bolt-on acquisition to support our strategic areas like medical, ceramics, aerospace, and defense, where we believe that we can bring more growth synergy and also generate better return for investors.

Thanks guys, that’s great color. Appreciate that. And then just a couple quick ones. Pat, just on this particular quarter, what did you see from – what was the impact? I know it was price cost was a positive impact, and it's embedded in that $0.08. I'm just curious, what was the impact specifically this quarter for those two items? And then as you think about the first quarter guidance that you gave, what's embedded in that 1Q number?

Yes. In terms of price cost, the big driver, Joe, you're going to see for that is Q4, obviously, in infrastructure, which is the big driver of margin improvement as that, price raw material timing of that is now past us, which was in Q2 and Q3. As we think about, I'll say, Q1, I'll just set some framework in terms of a full year, and then we'll place Q1 inside that framework. From a full year perspective, overall, when we talk about EBITDA margins at the midpoint, we talk about that being up 100 basis points, and that's really a function of, improved operations, the lack of the price raw headwinds we had last year, the restructuring benefits we've had, the productivity we've got in place. Now, on top of that, we've got a couple items in terms of some unfavorable effects based on where rates sit today. Obviously, it's a relatively minor amount, but it could move around on us throughout the year. We've got some non-cash pension costs coming through about $0.04 there, and then the tax rate's a little bit higher than where we would have it on a long-run basis. So, we're at 27.5% this year versus 25% in the long run. Now, taking that annual framework and then thinking about Q1, Q1, you've got all the same things going on there. And then from a Q1 profitability perspective, a couple just discrete things going on. Number one, we've got some trade shows. So, we've not been at, for example, IMTS, which is our principal Metal Cutting show here since pre-COVID. That will be occurring this quarter, so that's naturally an expense this quarter. Sanjay talked about reallocation of resources. We'll see some of that move around, but we think that's an important opportunity for us to get in front of our customers. I'd say the last component of that is we've really got, as well, just a little bit of compensation moving around throughout the year. You're going to see a little bit of that hit in Q2, excuse me, Q1. And then as we just think about, I'll say the earnings cadence now throughout the year, I think you're going to see earnings step up in a pretty normal fashion. So, Q1 to Q2 come up along with the volume and then accelerate in the back half. If we look at the last couple of years, Joe, in terms of, I'll say the front half, back half split, and last year was a little lumpy because of the tax benefits we received in the first half. But if you kind of levelize tax, you're going to get to around 38%, 40% of earnings in the front half of the year and about 60%, 62% in the back half. And so I think that's pretty normal for the businesses right now, and that's about what we would expect this year too.

Yes, Pat, I'll just add that we also prepared remarks that we have third-party assistance in helping us from productivity and other improvements. So, some of that expense will also hit Q1, but we'll see bigger part of the benefits of that as the year progresses.

Okay. Thank you. Appreciate all the color.

Our next question comes from Julian Mitchell with Barclays. Please proceed.

Hi. Good morning. Maybe just wanted to start on the kind of demand cadence. Because I suppose, what we've heard from some other companies in the industrial world, even just this morning, is, destocking in a bunch of markets, particularly sort of general engineering, discrete automation, and so forth, off highway. That's continued in the last month or two, consistent with sort of six, 12 months ago. And then maybe what you're seeing is kind of more pressure on the CapEx or project side of things. And so, it sounded from the prepared remarks that the demand environment from your standpoint there has been very steady in recent months and kind of in line with what you'd thought. I just wondered if that was a fair characterization or maybe help us understand, how have you seen the demand environment trending just the last kind of couple of months? What's moving around?

Julian, first of all, we have seen market being soft. And also, as we talked about the projection in the first half of fiscal 25, we see continued softness and then some recovery in the second half of our fiscal year, which will be calendar year 25. If you look at the recent quarter, as we talked about even in Metal Cutting, we did perform slightly better than market, which we have been, you know, for last several quarters. So, I do believe that plays into role. With respect to what we are seeing with our channel partners and customers, we are not seeing any major shift in stocking or destocking. I think for all practical purposes, our energy customers, they were very cautious some time ago. They made the adjustments, you know, I think even more than a year ago. And from industrial perspective, we are also not seeing any major stocking or destocking. Our overall delivery performance has improved. Lead time has improved in some areas. And as a result, we also think that our channel partners have adjusted inventors. We are not going to see any major destocking in coming months.

That's clear. Thanks, Sanjay. And just maybe one for you more strategically. So, say slide number five is sort of a good starting point. I guess a couple of things. One would be versus that investor day late last year. Are there any points of increased emphasis, let's say, from your viewpoint or areas of nuance perhaps for you personally as CEO versus that framework late last year? And then on the sort of outgrowth or trying to rejuvenate Kennametal’s organic sales growth, can you do that while increasing margins? Or do you think we need some period of sort of higher reinvestment? The margins suffer for a bit, but you get the fruits of that on sales and margins kind of down the line.

On the investor day targets, Julian, we, as I said earlier, that the things we control, we feel very confident about those things. Like the above market growth, we talked about 1% to 2%. Price, we believe that we'll be able to price for inflation and also price for value. Market obviously stays unknown. But at the same time, we believe in the fundamentals of the industries we serve for the long-term. I think we have several megatrends that will continue to help us. But there could be some shift in the market assumptions, as we all know. Now, with respect to the $100 million cost out that we also talked about at investor day, we are on track, as you heard from Pat, that we are going to exit the year after $33 million runs it from a fiscal 24 perspective. And then we'll exit fiscal 25 at $35 million from the restructuring type of benefits. And then on top of that, we have $15 million worth of improvement roughly on cost of sales. So by the end of fiscal 25, we'll be hitting halfway mark of what we mentioned about the $100 million. And with the additional focus on continuous improvement, which we need to make sure that we deliver on $100 million. So we do feel very comfortable with overall those targets. Now, coming to your question, if we do have to do some bolt on acquisitions and take any other inorganic investment, will that affect margin? At this time, our goal is that we will do things from an inorganic perspective only when we see attractive ROIC potential and where we see growth synergies and margin synergies. So I don't expect that to be a negative factor in our decision.

Great. Thank you.

The next question is from Tami Zakaria with JPMorgan. Please proceed.

Hey, good morning. Thank you so much. So could you comment on the down 3% to up 2% volume expectation for the year by segment? Should we expect this range to hold for both the segments or there's some differences there?

There's not a market difference in terms of the segments, in terms of the volume for the year.

Got it. So as we think about the down 3% and plus 2%, can you sort of give us some color what end markets we should be looking at or focused on to get to the down 3% or get to the up 2% for the year? I'm trying to ask which end markets do you think will be the decider of whether it goes to the low end or the high end?

Yes. So, Tami, to start with, I will say general engineering because, again, about half of our revenue comes from that. So what happens in general with industrial production, IPI? And in general, when you look at even the PMI sentiment, besides India, all the other major markets are either flat type of sentiment or negative sentiment. So if that improves, we will see definitely moving us to the higher side of our range. And then the other piece I will say, in terms of like EMEA, transportation industry is quite better down. And I think we expect that even couple next quarters will be like that. And as the transition from hybrid and electric and all that continues to work through, where we did win more projects in last couple of years than our traditional rate that we had in the transportation, as that transition is happening, if that moves a little faster, that will also help us. And then finally, on aerospace, one of the OEM, which is having quality issues and other things, and if that production improves, that will also help us. But overall, in our outlook, we did consider where we can win market share. And that's how we have adjusted. So that initiative will continue. So at this point, that's how we're looking at the range.

Understood. Thank you.

And the next question is from Steven Fisher with UBS. Please proceed.

Thanks. Good morning. So thanks for all the color that you've provided on the Q1 comparison so far. But I guess depending on how big that conference spending is, it seems like it's still the handful of items you mentioned, maybe accounts for a handful of cents. But it seems like there's still maybe another $0.05, $0.10 that we need to account for. So I'm just wondering if there's anything else you can help quantify in EPS terms in the bridge items for Q1 and maybe included in that a little help on what you're thinking about the margins for each of the segments in Q1.

Yes, certainly. So from an overall EPS perspective, we just talk about some of the items that we go through. Obviously, tax is going to be a fairly large drag there because you're talking about moving from, I think, a 21% tax rate to the 27.5%. We've guided in the quarter at the midpoint. You're looking at $0.04 or $0.05 there. And then you can prorate the pension item FX as well. You're going to get a couple of cents from that. From an overall perspective as well, you're going to have a volume decrement in there that drives that down as well. And you're talking $0.05, $0.06 from an overall volume perspective. Again, at the midpoint, on top of that, you're going to layer in some favorability in terms of got a few cents from restructuring coming in year-over-year. And then, yes, you're layering in some of these cost timing elements that we talked about as well. That's pretty much the full picture there in terms of what's driving differential.

Okay. That's helpful. And then just to follow up on Julian's question about going back to the investor day kind of framework, just trying to think about the fiscal 25 guidance in that context where you have your 2% price that's consistent. And Sanjay, it sounds like the 1% to 2% market share gains you feel good about. Is that 1% to 2% market share gain embedded in your volume work for the year, meaning basically it's a couple of percentage points lower than that because it's got a positive 1% to 2% share gain embedded in there?

Yes. So first of all, let me just clarify that 1% to 2%. We're not implying we gain 1% to 2% market share. What we're saying is 1% to 2% growth will come through market share. That is embedded in the model. Of course, the bigger factor obviously right now is market in terms of percentage moves that we have seen. There are several markets which are down in mid-single digit or high single digit. So that's where despite the fact that we are performing better than market, net numbers are definitely affecting our fiscal 25. But like I said earlier, the things we're doing today and have been doing for the last couple of years in terms of driving growth initiatives, driving productivity, driving quality, inventory reduction, the things we're doing will continue to help us in the business. And one of these days we'll see the market also turn a little bit positive. So we are very well positioned to capitalize on what we can do even now and also when the markets improve.

If I may add to that, and Sanjay, you mentioned this earlier in terms of where we're going to be at on the $100 million cost takeout program as well. So expecting to be about $50 million when we exit this year. So halfway through the program, halfway through the cost takeout, as well as, the progress we've made on working capital. And, as we think about where we're at in FY25 here from an outlook perspective, driving that primary working capital as a percent of sales to 30%. And, that is consistent with what our objective was, in terms of 27 from a primary working capital perspective as well. So we're driving on all fronts here towards, achieving our goals in terms of, growing the business, what we can do as well as improving the profitability.

Very helpful. Thanks a lot.

And our next question is from Steve Barger with KeyBanc Capital Markets. Please proceed.

Thanks. Good morning. Sanjay, for the portfolio optimization, I hear you about wanting to put a process in place to better understand what's happening. But, you, Pat, and the team have been there quite a while. So there shouldn't be too many surprises. So first, can you tell us what perspective you're looking at? One, if the percentage of revenue is generating margin that you consider unacceptable, and second, if there are parts of the business that have been a persistent drag on margin, why not exit?

Yes, okay. Morning again, Steve. First of all, yes, we do have experience in running the business for a few years. And we do have our ideas. But look, first, like I said, our focus is not to immediately jump to conclusion that divestment may be the answer. I think the first area that we are going to continue to work on is what we need to do in terms of growing and also continuous improvement and working capital allocation, resource allocation. That's where we are. And I will share more information as the, time goes and we take some, you know, actions. But at this point, it's too early for me to give you prognosis on this from an action perspective. And for all different reasons, some of those will be shared only when that happens. But at this point, my main message here is that we are going to improve overall performance of our portfolio, one way or the other, either through organic actions or if we have to take inorganic actions, we are also ready to do that.

Can you tell us what percentage of revenue is generating a margin that you consider unacceptable?

Yes, that detail, Steve, we are not going to be able to share at this point.

Okay. And then, Pat, on slide 13, the outlook walk, you show higher price, favorable timing of price versus raw material, and then restructuring. Are those listed in order of magnitude or are they more equally weighted in terms of the benefit they'll drive?

I would say they're a bit more equally weighted, Steve.

How much confidence do you have in what raw material prices will do in the back half of the fiscal year? Because it seems like that often kind of sneaks up and affects quarters.

Yes. As we've said previously, we generally have visibility about two quarters out at any point in time. So I'd say as we think about the first half, we have very good visibility. As time progresses here, we'll start moving into having visibility in Q3. Overall, if we think about where Tungsten prices have been, they were flat for a period of time. We did see them ramp up, spring into, I'll say, early summer and then have trailed off here back to their prior level, more or less. So, in general, I think we're in decent shape again at this point in time for the first half.

Got it. So that would be the swing factor that you can't control in the back half of the three?

Yes, as you get to the back half, that's something we'll have to take time to see.

Got it. Thank you.

The next question is from Mike Feniger with Bank of America. Please proceed.

Hey, guys. Thanks for taking my questions. Just on the pricing guidance, the plus two for Q1 and the plus two for the full year, obviously there's some signs now of price deflation kind of playing out even across industrials. I'm just curious, how would you think about that plus two and Q1? Clearly, you have visibility for that. And how you go out and keep that plus two kind of stable for the full year?

Yes, I think, if you think about the pricing action, so our pricing framework, we've taken some pricing actions here recently. So they're out there in the marketplace now. We'll have some continued, I'll say, pricing that we'll achieve this year on a year-over-year basis for other actions we've implemented. And the last piece I would just say is, we continue to look at pricing across the portfolio based on value throughout the year and make adjustments where we can. And so, we feel pretty good about where the prices are and what the plan is for pricing over the course of the year. Again, an underlying assumption in the conversation we just had with Steve was really around, tungsten and the index pricing. Our assumption at this point in time is tungsten is relatively flat, and therefore the index pricing is flat. But that's a fact that could swing us as we move through time.

Also, Mike, I'll just add, there are pockets where we are going to experience excess capacity, like in wind energy. We've talked about that. So, there will be places where we will be very close to the market and be competitive. So, if we have to take some price reduction to maintain business or win new business, we'll be definitely engaged in that.

Helpful. And you guys gave great color on the end markets and kind of think about the top line for Q1 and the full-year, first half, second half. Those ranges are really helpful. Anything we should think about in terms of the operating margin range in Q1 and for your full-year guide, any differences as you think about those decrementals on the volume side in Q1 versus how that plays out through the second half?

Yes, and obviously, as you think about the EBITDA margin at the midpoint, we talked about being up 100 basis points for the full year. As we think about decrementals, particularly here, I'd say in Q1, we would normally think about long-term incremental decrementals being in the mid-40s. I think where we're sitting from a volume perspective and capacity today, that's going to probably be a little bit higher from a decremental perspective. But again, that mid-40s is a better long-term number than what we would experience from quarter-to-quarter. And again, I go back to just from an earnings cadence perspective, as we talked about a little earlier on the call, a pretty normal earnings cadence here as well.

Really helpful. And just lastly, guys, the cash flow conversion stepping up in 2025, that's greater than 125%. Is that—I'm just curious if you can kind of flesh that out -- is that inventory reduction for—I know we talked about inventory to the customers. Just curious about at the tenamental level, is that the tailwind to cash flow conversion in 2025? Just hoping you can kind of unpack that a little bit. Thanks, everyone.

Mike, first of all, let me just -- as Pat said earlier, the majority of that was driven by inventory improvement. And I just want to give you a little bit more color than beyond the numbers. We started to add some new processes, brought some new talent, and also made some internal appointments with respect to talent. Through that, we have really made quite a bit of process improvement in how we do our sales, production, inventory management planning. We did overall global network of where we produce, what we produce, how many times we ship through the week, and how much inventory we keep in the warehouses. We have been continuing to optimize that, and that's one of the things that we -- that's showing up in the numbers. And good thing is those are sustainable. So that's why what you see that we're building on what we did in 2023 and 2024, and then on top of that now 2025. So we feel pretty comfortable that we'll be able to deliver next-level improvement in fiscal 2025. Pat, anything else to add?

Yes, so that's -- to be really pointed on the answer to your question, so that's one of the things that's driving that cash flow conversion in the year.

At this time, we are showing no further questioners in the queue, and this does conclude our question-and-answer session. I would now like to turn the conference back over to you Sanjay Chowbey for any closing remarks.

Thank you operator, and thank you everyone for joining the call today. And as always, I appreciate your interest and support. Please don't hesitate to reach out to us if you have any questions. Have a great day.

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