Kennametal Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 11 speakers on the call.

Operator

Good morning.

Speaker 1

I would like to welcome everyone to Kennametal's First Quarter Fiscal 20 24 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Please note that this event is being recorded. I would now like to turn the conference over to Michael Pizzi, Vice President of Investor Relations.

Speaker 2

Thank you, operator. Welcome, everyone, and thank you for joining us to review Kennametal's Q1 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 during today's call. I'm Michael Pizzi, Vice President of Investor Relations.

Speaker 2

Joining me on the call today are Christopher Rossi, President and Chief Executive Officer Pat Watson, Vice President and Chief Financial Officer Sanjay Chiaobe, Vice President and President, Metal Cutting 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'd like to direct your attention to our forward looking disclosure statement. Today's discussion contains comments that constitute forward looking statements and as such involve a number of assumptions, risks and uncertainties that could cause the company's actual results, performance or achievements to differ materially from those expressed in or implied by such statements. These risk factors and uncertainties are detailed in Kennametal's SEC filings.

Speaker 2

In addition, we will be discussing non GAAP financial measures on the call today. Reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our Form 8 ks on our website. And with that, I'll turn the call over to you, Chris.

Speaker 3

Thanks, Mike. Good morning and thank you for joining us. I'll start the call today with a review of the quarter and some end market commentary as well as an example of the industry leading innovation we're bringing to market. Then Pat will cover the quarterly financial results and the fiscal year 'twenty four outlook. Finally, I'll make some summary comments at the end, then open the call for questions.

Speaker 3

Beginning on Slide 3. For the quarter, sales were flat year over year with flat organic growth and no meaningful effect from the net of negative workdays and positive foreign currency. Price realization was offset By anticipated seasonal volume declines, at the segment level, metal cutting grew 2% organically and infrastructure declined 3%. On a constant currency basis, EMEA posted 8% growth, driven primarily by Aerospace and Defense, General Engineering and Transportation. Americas declined 3%, mainly driven by Energy and General Engineering.

Speaker 3

Asia Pacific declined 8%, driven by general engineering, transportation and energy and reflects year over year and sequential declines in China. By end market, Aerospace and Defense reported 17% growth, energy declined 12%, General engineering declined 1%, transportation declined 1% and earthworks was flat. This performance was largely as expected with declines in general engineering, oil and gas and in the latter part of the quarter, China. Sequentially, as expected, Q1 sales declined 10%, which is below our historical average of approximately 8%, but generally in line with the 10% decline from the midpoint of our outlook. However, China was lower than anticipated.

Speaker 3

Now let me take a moment to provide some color on the end market conditions that led to the year over year decline in sales. In Aerospace and Defense, we once again reported strong year over year growth of 17%. Metal Cutting benefited from Continued execution of our growth initiatives and continued strength in Aerospace and Infrastructure growth was driven by defense order timing. General Engineering declined 1% versus prior year with metal cutting growth in the Americas and EMEA, offset by declines in infrastructure. Asia Pacific declined in both segments due to China.

Speaker 3

Transportation declined 1% this quarter which was driven by continued supply chain easing and new EV project wins, further improving our position in the hybrid and electric vehicle market. Our transportation results this quarter were not affected by the labor dispute between UAW and the big 3 U. S. Automakers. Energy declined 12%, driven by the lower year over year U.

Speaker 3

S. Land based rig counts and continued customer inventory adjustments. And Earthworks was flat during the quarter. Turning now to profitability. As mentioned earlier, price was offset by volume and product mix And the pricing actions taken in both business segments substantially covered all forms of inflation on a dollar basis.

Speaker 3

Metal Cutting's adjusted operating margins increased 170 basis points year over year, driven by improved price realization, Operational excellence productivity initiatives and restructuring savings. As anticipated, Infrastructure's operating margins were a headwind in the quarter. The year over year operating margin decline was driven by unfavorable price raw material cost timing and product mix, offset by restructuring benefits and operational excellence productivity improvements. Adjusted EPS increased to $0.41 compared to $0.34 in the prior year quarter. Cash from operating activities increased significantly to $26,000,000 from negative 11,000,000 the prior year quarter, driven mainly by lower inventory levels.

Speaker 3

And finally, we continued to repurchase shares this quarter with $14,000,000 of shares bought back, bringing the total amount of repurchased since the beginning of the program to $148,000,000 Our share repurchase program reflects the confidence we have in executing our strategic initiatives for long term value creation despite quarterly macroeconomic headwinds and Turning to Slide 4, I want to take a moment to provide some additional commentary on our end markets for the full year. As we talked about on our last call, there were several drivers for our expected second half growth acceleration. And despite continued uncertainty, these drivers remain intact. Overall, U. S.

Speaker 3

Land based rig counts are still forecasted to increase slightly during the second half of the year. In addition, public commentary from oilfield service customers indicate that they expect their North American revenues to grow in calendar year 'twenty four. General Engineering is expected to improve in the second half of fiscal year twenty twenty four as ISI's EMEA IPI forecast indicates gradual improvement starting in calendar And in the U. S, according to the National Association of Manufacturers survey, manufacturing production is expected to grow 2% through September of 2024. Additionally, we're also encouraged by the latest S and P Global Flash US PMI data, which shows an improvement from 47 in August to 50 in October.

Speaker 3

Earthworks is anticipated to improve during the second half of the year, In line with normal seasonality, and we continue to make progress on our growth initiatives to expand into underserved applications. For example, I want to highlight a win in infrastructure that demonstrates our focus on gaining share in underserved mining applications, which we discussed at our last Investor Day. Recently, the team secured an order for our KenCast wear protection solution, which typically is applied to coal mining applications to reduce maintenance downtime. This particular win, however, was for a gold mining customer in Brazil. This demonstrates our ability to leverage our existing solution portfolio to expand into new applications.

Speaker 3

In transportation, per IHS, light vehicle production is projected to grow globally low single digits in the second half of fiscal year And we anticipate Aerospace and Defense to continue its strong performance in both segments during the second Aircraft build rates still remain below pre pandemic levels and major OEMs are continuing to project second half build rates to increase over the first half of our fiscal year. And our strategic focus continues in this end market to drive As it relates to China, we're optimistic that we'll experience improvement as the PMI indices are approaching 50. So that's a bottom up view of the drivers for an improving end market environment in the second half. We know, of course, that there are an increasing number of risk factors that could affect our end markets. And as always, we'll be monitoring the end market conditions and we'll adjust if conditions differ from our expectations.

Speaker 3

Now on Slide 5, I'd like to highlight an example of our innovation advantage. This slide shows our latest Harvey 4 end mill for metal cutting. Notably, this end mill is used in applications with difficult to machine materials such as titanium, suspension parts and aerospace and surgical cutting guides for use in medical applications. The value proposition for customers is Now, let me turn the call over to Pat, who will review the Q1 financial performance and the outlook.

Operator

Thank you, Chris, and good morning, everyone. I will begin on slide 6 with a review of Q1 operating results. The quarter's results show that we continue to execute our As Chris pointed out, we performed as expected in our outlook, but for the lack of recovery in China. The decline in China pressured both segments, but had a much larger effect on metal cutting and sales in several end markets in the Asia Pacific region. Once again, price remains a key strategic lever as we price for value and offset cost inflation.

Operator

From a sales Favorable price mitigated the lower volumes we experienced this quarter. Operating expense as a percentage of sales increased 80 basis year over year to 22.7 percent as a result of wage inflation and the effects of foreign exchange, partially offset by our savings from our restructuring program. Adjusted EBITDA and operating margins were 16.6% and 9.9%, respectively, versus 15.9% 9.8% in the prior year quarter. As in prior quarters, higher pricing offset higher raw material, Wage and general inflation in the quarter on a dollar basis. Additionally, during the quarter, we realized approximately $4,000,000 in savings from the restructuring program, we started in June and we remain on pace to achieve our stated run rate savings of $20,000,000 annually by the end of FY24.

Operator

Our results this quarter include a $5,000,000 headwind from pricing ahead of raw material costs in the prior year. The adjusted effective tax rate decreased year over year to 21%, primarily due to a benefit of approximately $6,000,000 from a one time tax item, which was expected, partially offset by a settlement related to tax litigation in Italy of approximately $3,000,000 Adjusted earnings per share were $0.41 in the quarter versus EPS of $0.34 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on slide 7. The year over year effect of operations this quarter was neutral. This reflects price, operational excellence initiatives and restructuring savings offsetting lower volumes, higher raw material costs and wage and general inflation headwinds.

Operator

You can also clearly see the effects of the lower tax rate, which reflects the one time benefit and the Italian tax settlement of $0.05 in total. Foreign exchange and a lower share count contributed $0.01 each. There was no material change in pension income compared to last year and our US pension plan remains overfunded. Slides 89 detail the performance of our segments this quarter. Reported metal cutting sales were up compared to the prior year quarter with 2% organic growth and a favorable foreign exchange effect of 1%.

Operator

This marks the 4th consecutive quarter where we have demonstrated growth that outperformed the market when compared to select peers on a constant currency basis. We achieved growth in EMEA and the Americas with Asia Pacific The transportation and energy end markets performance on a constant currency basis was also the result of the slowdown in China. By region, EMEA led at 8%, followed by the Americas at 3%, while Asia Pacific was negative 13%. EMEA's year over year performance reflects growth driven by general engineering and OEM supply chain improvements and EV wins in transportation. America's year over year growth this quarter was driven by the execution of our growth initiatives in aerospace and defense and the general engineering end market.

Operator

Asia Pacific's decline, as Chris noted, was primarily from market conditions in China included lower auto build rates. Looking at sales by end market, aerospace and defense grew 7% as our strategic initiatives continue to drive results in this end market. General Engineering grew 1%, with the strongest growth in EMEA and the Americas, partially offset by market softness in China. Energy declined 3% this quarter, driven by the Asia Pacific region due to lower activity in wind energy. And lastly, Transportation declined 1% year over year with improving customer supply chains in EMEA more than offset by weaker conditions in Asia Pacific.

Operator

As Chris noted earlier, we did not experience any effect this quarter from the UAW strike. Metal Cutting took a meaningful step forward in profitability this quarter, while operating in a weak volume environment, with adjusted operating margin increasing 170 basis points year over year. Adjusted operating margin improvement was due to higher price realization, operational and restructuring savings. These factors were partially offset by higher wages, general inflation, and lower sales volumes. Turning to slide 9 for infrastructure.

Operator

Reported infrastructure sales were down year over year due to an organic sales decline of 3% with foreign exchange headwinds and unfavorable business days contributing negative 1% each. Regionally, EMEA grew 11%, Asia Pacific was flat and Americas sales declined by 10%. Looking at the sales by end market, on On a currency basis, energy declined 17%, mainly in Americas due to lower US land rig counts and destocking of inventory across all regions. End earthworks was flat, with underground mining growth offset by lower construction volume in the Americas. Lastly, aerospace and defense increased 67% due to defense order timing when compared to the prior year.

Operator

Adjusted operating margin declined year over year to 8%, primarily from 2 factors. 1st, lower sales volume, primarily in the energy and general engineering end markets in the Americas. The second significant factor affecting the margin this in addition to higher wages and general inflation. These headwinds were partially offset by operational excellence initiatives. Now, turning to slide 10 to review our free operating cash flow and balance sheet.

Operator

Our Q1 cash from operating activities was $26,000,000

Speaker 4

up from

Operator

negative $11,000,000 in the prior year. Our free operating cash flow increased to negative 3,000,000 from negative $40,000,000 in the prior year quarter, a significant improvement year over year. Primary working capital this quarter was flat to the prior year. The company continues to focus on optimizing inventory levels and remains focused on driving improved working capital. On a percentage of sales basis, primary working capital increased to 32.7%.

Operator

Net capital expenditures were flat at $29,000,000 $14,000,000 of shares in Q1 for a total of $148,000,000 or 5,000,000 shares, representing approximately 7% of outstanding shares since the inception of the program. And as we have every quarter since becoming a public company over 50 years ago, we paid a dividend to our shareholders. Our commitment to returning cash to shareholders reflects our confidence in our ability to execute our strategy to drive growth and margin improvement. We continue to maintain a healthy balance sheet and debt maturity profile. At quarter end, we had The full balance sheet can be found on slide 17 in the appendix.

Operator

Turning to slide 11, regarding the 2nd quarter outlook. We expect Q2 sales to be between $490,000,000 $515,000,000 with volume ranging from negative 5% to flat, Price realization of approximately 3%, and we expect foreign exchange to be about a 1% tailwind. Let me share some detail on the sales assumptions and trends in the Q2 outlook. Our Q2 range at the midpoint reflects growth that is generally General engineering declined slightly, but will remain at a similar level to Q1. Transportation increases, however, generally flat with Q1 As we monitor the lingering UAW effects in North America, Earthwork experiences modest growth and we anticipate a slight improvement In China, we began to see order intake improving late in Q1.

Operator

We expect a sequential price raw material headwind approximately $13,000,000 compared to Q1. This headwind will primarily affect infrastructure and is slightly more than the previous estimate Due to some favorability timing experienced in Q1, foreign exchange is expected to be neutral on an operating income basis. We expect adjusted EPS in the range of $0.20 to $0.30 Turning to slide 12, regarding the full year outlook. For the full year, We are maintaining our outlook as we continue to expect growth to accelerate as the year progresses. With the second half Growth outpacing the first half.

Operator

We continue to expect FY 'twenty four sales to be between $2,100,000,000 $2,200,000,000 With volume ranging from negative 2% to positive 3%, net price realization of approximately 3%, with our inflationary pricing actions partially offset by lower prices for customers with index pricing. Aerospace and Defense volume remained strong, Earthworks and Transportation increased slightly, and we anticipate general engineering and energy to be flat. From a cost perspective, we expect the current inflationary environment to persist, but it is assumed to moderate. In the second half of fiscal twenty twenty four, we will begin to see a benefit from lower material costs in the 4th quarter. This will largely affect our infrastructure segment.

Operator

Foreign exchange and non cash pension income is expected to be neutral on an operating income basis. Approximately $15,000,000 of savings from our previously announced restructuring initiative has been included. We remain on target to achieve an annualized run rate of approximately $20,000,000 at the end of FY24. And we expect interest expense of approximately $28,000,000 and effective tax rate of approximately 24% for the full year. We expect adjusted EPS in the range of $1.75 to $2.15 On the cash side, the full year outlook for capital expenditures $100,000,000 to $110,000,000 and the outlook for primary working capital is between 30% 32%.

Operator

Taken together, we continue to expect free operating cash flow at approximately 100% of adjusted net income, in line with our long term target. And with that, I'll turn the call back over to Chris.

Speaker 3

Thank you, Pat. Turning to Slide 13, let me take a few minutes to summarize. Overall, although the operating environment continues to be challenging, we remain focused on executing our strategic initiatives to drive long term value. For example, metal cutting delivered a 4th consecutive quarter of above market growth when compared to select peers. Also, our operational excellence initiatives contributed to driving improved margins in metal cutting despite lower volumes and in infrastructure to mitigate the market driven volume declines we experienced.

Speaker 3

These results give us confidence in our ability to Drive above market growth through our innovation advantage and commercial excellence initiatives and to extract even greater operational efficiency from our modernized plants. As part of the $100,000,000 cost out margin expansion plan we discussed at Investor Day. And with that, operator, please open the line for questions.

Speaker 1

Thank you. Our first question comes from Julian Mitchell from Barclays. Please go ahead.

Speaker 5

Hi, good morning. Maybe just wanted to start with the Q2 guide. So I think before you talked about Q2 looking very similar to Q1 and then now we have this decent sized sequential step down in EPS. So is a lot of that to do with the infrastructure margin assumption changing? And just wanted to understand, When we think about that full year guide, are we sort of thinking infrastructure margins low to mid single digit in Q2 And then ending the year as sort of low double digit helped by the material cost tailwind you just mentioned?

Operator

Yes, Julien. Good morning. So yes, a couple of things just in terms of thinking about Q2 and in particular we'll just talk through infrastructure here for the year. Absolutely. As we think about the margin progression throughout the year, Q2 is going to be our trough and that's Really driven by what is happening from a material cost perspective.

Operator

I think as we thought about Q2, I'll say 90 days ago, thought about that Material headwind being around $10,000,000 our current estimate for that sits around 13 as we talked about in the prepared remarks. That primarily will affect infrastructure, progression of margin there as we get to the back through the back half of the year, will come up for both segments. And we'll see that not only from a volume perspective at the midpoint as we move throughout the year, But also as long as those material costs hold, the current tungsten price level, we will see That flip to a tailwind for us by the time we get out to Q4.

Speaker 5

That's helpful. Thank you. And then just my second question is around the, I suppose, general engineering Segment and also earthworks. So general engineering, maybe help us understand sort of what gets better there in the 2nd half, I realize it's tricky given it's called general. It can be hard to be specific, but Any impression of kind of regionally, what you expect to get better in the back half?

Speaker 5

And then for Earthworks, you've talked about a sort of flattish 2024 sales, I think a lot of other companies get excited about stimulus and so on in the U. S. Next year. Just wondered what your perspective on that was visavis the earthworks market? Thank you.

Speaker 3

Yes, Julien, good morning. I think from a GenEng perspective, I went through a number of sort of the bottoms up metrics That would drive that. So we largely touched on the European IPI, which is expected to improve in the second half of our year. And the National Association of Manufacturers sentiment for growth in the U. S.

Speaker 3

Industrial base is also And that was 90 days ago, those metrics were exactly the same. So That's the basis of why we think GenEngine is going to improve. China is also a situation where as Pat talked about, It was weaker than we thought in Q1 because we were expecting this improvement to start in Q1, but it's looking like now that that's moving out Q2 and we were encouraged in the latter part of September that our order intake started to increase. We started See that? And in fact, I'll tell you in October, it met our expectations in terms of our outlook for Q2.

Speaker 3

So there's some positive momentum there on that side. And then also, GenEng is also affected by transportation and light vehicle production First half versus second half is still expected to increase. So those would be the big drivers there. I think from an Earthworks perspective, If you remember last year Q4, our road milling business was actually below what we would normally Expect and talking to our customers, the main driver for that was They only had the municipalities only had so much budget to spend and they had to reduce the number of road milling miles because Because of inflation and the costs associated with road milling was up so significantly, they could they had to limit the number of road milling miles. And so this year, we expect to see actually greater than seasonal growth, in particular in Q4 for Earthworks, Because our feeling is that the to your point, first, via the infrastructure bill is that a lot of those municipal budgets have been replenished Or certainly backstopped by some funding from the infrastructure bill.

Speaker 5

That's great. Thank you.

Speaker 1

The next question comes from Tami Zakaria from JPMorgan. Please go ahead.

Speaker 6

Hi, good morning. Thank you so much for taking my questions and good quarter. So on Aerospace and Defense, another very impressive growth quarter. Can you remind us where you are in terms of volume in that Segment versus pre COVID level?

Speaker 3

Yes, the production rates Are still below pre COVID levels. I don't know, Mike, if we add that specific statistics. Yes. But we definitely see I think The other thing is Tammy is that Airbus and Boeing and the other OEMs are still projecting the second half Production pace to actually increase. Now there is still a They're still experiencing some supply chain delays that are kind of limiting that.

Speaker 3

So I don't know that they get back to pre pandemic levels this year. I think still below by what, Mike, what is it?

Speaker 2

About 10% or so percent and you've got 17% growth in the second half build rates based on the OEMs.

Speaker 6

Got it. That's helpful. And then just on energy, I know you spent some time talking about it. And you said in the Q2 you expect a slight decline as destocking continues. Stepping back, What do you think is driving this weakness?

Speaker 6

Any specific categories within energy you're seeing this softness? And Do you see sort of like light at the end of the tunnel where you think after 2Q it's going to be largely done or do you think it can linger a little bit longer?

Speaker 3

Yes, I think Tammy that the big driver for our particular business is the U. S. Land based rig count And that has been that has stepped down significantly year over year and declined sequentially in Q1 So from Q4 to Q1. Now the other thing that was happening simultaneous to that is that as supply chains began to mitigate The oilfield service companies started to reduce their safety stock inventories. So we've been talking about that for a number of quarters.

Speaker 3

We do talk to the customers every Quarter and they have now they now think that that sort of inventory reduction It's behind us in Q2 and they're optimistic that that will start to recover in the second half of our year. The other thing that I would say, Tammy, with some of the oilfield service customers is that when they go through this destocking effort, It's not uncommon that they overdo it and there is a pickup on the back end where they have to do Some recovery because they may be under or be under stocking. That can be a typical scenario that happens.

Speaker 6

Got it. Very helpful. Thank you.

Speaker 1

The next question comes from Mike Feininger from Bank of America. Please go ahead.

Speaker 4

Hey, guys. Yes, thank you for taking my question. Just with the pricing guidance of plus 3%, I believe This quarter you probably did something similar to that number. Just to get to that full year number, just help us do you have to Put in price increases in Q2 or in the back half to achieve that full year. Is that kind of already set based Your contracts and whatever you have in the backlog, just curious if you can kind of help us understand the cadence of that and to achieve that full year number?

Operator

Yes. So I think, Mike, the way to think about that pricing, 2 things. Number 1, we price for value and we do that all the time. And in particular, when about the custom solutions portfolios in both businesses, the things we get to quote live, we get to adjust those prices, I'll say relatively dynamically. The other thing is to think about here as we think about pricing for FY 'twenty four is we did put some price into selected markets here And so those actions are underway and they will benefit us obviously throughout the entire fiscal year.

Speaker 4

Helpful. Thank you. And just my second question, the follow-up is just, I'm curious, you talked about oilfield services, the destocking there and that seems like That's ended. I'm just curious what you're seeing with your general engineering, some of those customers are there The destocking you're seeing there on the horizon other inventories you feel like okay? And then maybe just if you could touch on your own inventories you guys have been working through that.

Speaker 3

Okay, Mike. So in terms of general engineering, As we've talked about coming out of this pandemic recovery, Our distributors and our customers, it seems to me, have been fairly disciplined about not getting out over their skis in terms of adding inventory. So normally when there's a recovery in these type of markets, in particular in GenEng, there is a restocking that happens. We really did not see a strong restocking. We saw a lot of caution and where the restocking happened was in areas to support customers like aerospace, where clearly The growth was there.

Speaker 3

So consequently, as things have softened around the globe in terms of general industrial production, We really haven't seen any destocking because my theory is they never really got over the ski. So that's still our view is that we're not seeing significant destocking Other than what we talked about in oil and gas. And then I think you had a question on our particular inventory situation, which I'll let Pat take.

Operator

Yes. As you think about the inventory, I was to reflect back on the primary working capital outlook we've got out there, it really implies that we'll get some Improvement working capital as we get throughout the year, that's really that improvement is going to be driven primarily at this point in time from our As we talked about at Investor Day, this is going to be one of the areas of focus for us on an ongoing basis. We think we have opportunity to improve our working capital efficiency.

Speaker 1

The next question comes from Chris Dankert from Loop. Please go ahead.

Speaker 7

Hey, morning everyone. Good

Operator

morning, Chris.

Speaker 7

Wondering if you could kind of help us triangulate what the impact of operational excellence was in the quarter. I know it's a lot of factors, but it Seems like that was the majority of the Metal Working operating income improvement. Is that correct? And if you could just kind of give us some signpost or what the impact was?

Operator

Yes. I think as we think about metal cutting there absolutely was an improvement, I'll say in overall efficiency in metal cutting. We think about the drivers in terms of what's going on from a margin perspective. Certainly, I would Overall, they had a little bit of headwind from excuse me, a tailwind from FX, obviously

Speaker 5

a little bit of a

Operator

tailwind from Restructuring program as well and we're continuing to see some cost inflation, but we've been able to manage that from a pricing So overall, I'd say excellent operational performance from a cost structure perspective in Q1.

Speaker 3

I think, Chris, the other thing I would add is, as we talked about in our Investor Day, we still have opportunity to Derived by our operational efficiency from our modernized factories and I think you're seeing that start to flow through in the metal cutting margins. As it's one thing to modernize and get all the equipment put in, but as we ramp that up and now are getting better at operating it and Putting in smart factory applications to try to do data analytics to improve the factory processes, I think starting to see the benefits of that flowing through.

Speaker 7

Got it. Thanks. And then forgive me if I'm a little bit slow on the uptake, but just the price Cost impact for the full company you're saying was neutral on a dollar basis. Can you just kind of remind us what the impact was by segment earnings? The headwind in infrastructure, was it an equivalent tailwind in metal cutting, is that the way to think about it?

Operator

Yes, I think that's right. One of the things again, As we think about the margin and the price dynamic relative to raw materials and infrastructure, we do have these contracts that are indexed. We have seen the price of tons come down. There is a natural re pricing that occurs. Again, that's going to continue as we move through in Q2 here, but That's how that affected infrastructure in the quarter.

Speaker 7

Yes. Thanks for the color guys.

Speaker 1

The next question comes from Steve Barger from KeyBanc Capital Markets. Please go ahead.

Speaker 8

Thanks. Good morning.

Speaker 4

Chris, you talked about some of

Speaker 8

the factors around reacceleration in the back half. But if I look at consensus 3Q Q revenue relative to the midpoint of your 2Q guide, it implies about a 9% increase, which is above seasonal, which is like 6% ex the pandemic. So when you think about timing of back half improvement, does that seem reasonable or should we assume more Normal seasonality and then maybe you exit the year a little bit better. Just trying to get a sense for cadence.

Speaker 3

Yes. I think generally, I would say It's pretty even, but there are a couple of factors that I one of which I talked about with Tammy was on the earthworks side that Road milling was very low and construction was low for us last year. And even if it just gets back to normal seasonality, We think that it will that's going to drive a little bit higher Q4. So I think it's generally even, but there is a little bit of a ramp up in the Q4.

Speaker 8

Got it. Thanks. And you mentioned energy declined from both slower oil and gas and then delays in wind energy products. And think we've all seen the stories around how the economics of some wind projects are less favorable due to inflation and interest rates. Can you just remind us how big that business is for you?

Speaker 3

Yes, I don't think we broke out a win, but I separately, but I can tell you that if look at our energy business in Asia for metal cutting, that's the preponderance of that is wind. There is some power gen and stuff in there, but the preponderance is wind. And the other thing about the China wind, it seems to us that what's happening is That a lot of these wind farms are to be located in Taiwan Straits. And what we've seen is that given the dynamic between China and Taiwan, there's been some uncertainty about continuing investing in those wind farm fields. And so we've seen a little bit Delay, but that according to our customers, that's what's driving it.

Speaker 3

They don't expect that to last forever, but that's put a little damper on that wind business

Speaker 9

The

Speaker 1

The next question comes from Steven Fisher from UBS. Please go ahead. Thanks. Good morning. Just coming back to the second half improvement, I

Speaker 9

mean, you gave some of the factors again. I'm just curious how you actually translate Some of those indicators you talked about into the magnitude of the growth forecast That you have, how much science is there in it? Are you sort of just using historical seasonality percentages? I mean, I know because there was And automotive forecast that you could apply, just curious how you get to the actual magnitude of what's implied in the second half growth rates?

Speaker 3

Yes. Over the years, we have models that tie, for example, IPIs by region or light vehicle production and how what that And I kind of laid out the 3rd party prognosticators and their view of that. But then we always have the ability to balance that with Customers, so in the infrastructure business where that's a lot of project business, we do rely heavily on what our customers are telling us. But those are so there is math behind part of it and then certainly there is what the customer sentiment is.

Speaker 9

Okay. That's helpful. And then in the event that some of that doesn't play out to the extent that you hope, What's the potential to accelerate any restructuring benefits that you might have for going forward? Could you pull that forward or would you just sort of Let that play out and in the timing of what it's supposed to be.

Speaker 3

Yes. I think, Steve, that's a good question. As we talked about at Investor Day, we've got $100,000,000 of cost out actions and improvements. That's productivity based And removing some structural costs associated with plants and a number of other things. And the down On that was our project, we call project rebalance, the restructuring Pat just spoke of, which is $20,000,000 So the point is that we have we already have active projects that are in flight and we'll certainly look to we're always looking accelerate those anyway, but if the environment worsens, the good news is we're not starting flat footed because we've already got some things moving forward.

Speaker 9

Perfect. Thank you.

Speaker 1

The next question comes from Steve Volkmann from Jefferies. Please go ahead.

Speaker 10

My question is on Europe.

Speaker 2

Can't really hear you there, Steve.

Speaker 10

All right. Is this better? Sorry about that.

Operator

Yes, much better, much better.

Speaker 10

Helps to speak into the mic, I guess. So my question is about Europe and it seems like you have really strong growth over there in both segments and sort of contrary to a lot of what we're hearing from So I'm curious why you think that is the case. And I guess you're probably seeing Some share gains over there, but maybe there's a different mix, maybe you have a little more aerospace over there or something, I don't know. Just any commentary on why that is sort of the standout growth area?

Speaker 3

Yes, I think the in terms of metal cutting, Steve, GenEng was up and that as you know a big chunk of GenEng is actually transportation. And if you think about The light vehicle production in Germany, in particular, last year versus the Q1 this year, they were way down. They were producing at very low levels. And so what we attribute the improvement is that there was a year over year improvement off a low baseline. The good news is that their supply chain issues are behind them and they're still trying to fill some of the backlog.

Speaker 3

And so then the other thing that I think is equally important and a big driver is that their transformation to EV is happening and we're winning those EV projects. So as you pointed out, Some of this is also just share gain and winning a good number of those projects. I think if I and then the other thing is we're focused on aerospace Defense and that certainly was up in Europe and that's a combination of just continued strong markets there, but we also feel like we're picking up Share. For Infrastructure, it was I think that that was largely driven by our Aerospace and Defense business. And for obvious reasons, the defense business is up in Europe.

Speaker 10

Okay, great. That's helpful. And then Fit for purpose, Chris, just an update there, is that still adding to share as well?

Speaker 3

Yes, it is. We as you know, we brought the 2 segments together, WIDIA and The normal metal cutting business, we've put them both together. We've now we're now going to market with a strategy where We offer the broad portfolio to our distributors and our customers that have need for both fit for purpose applications and sort of the higher end So we feel like that strategy is working and we are picking up share

Speaker 1

This concludes the question and answer session. I would like to turn the conference back to Chris Rossi for closing remarks.

Speaker 3

Thank you, operator. Thanks everyone for joining the call. We're committed to drive above market growth by leveraging our Our competitive advantages expand margins while generating strong free operating cash flow and increasing shareholder value. As always, we appreciate your interest and support and don't hesitate to reach out to Mike if you have any questions. Have a great day everyone.

Speaker 1

A replay of this event will be available approximately 1 hour after its conclusion. To access the replay, you may dial toll free within the United States, 877-344-7529. Outside of the United States, you may dial 412 3,170,088. You will be prompted to enter the conference ID 7,000,000,728 61 then the pound or hash symbol. You will be asked to record your name and company.

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Earnings Conference Call
Kennametal Q1 2024
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