Kennametal Inc. (KMT) Earnings

Management highlights

Good morning. Welcome to Kenna Metals Q3 Fiscal 2026 Earnings Conference Call. Michael Pisi, Vice President of Investor Relations, introduces the call. Sanjay Chaubey, President and Chief Executive Officer, begins with an overview of the quarter, including end market commentary, unit volume trends. Pat Watson, Vice President and Chief Financial Officer, covers quarterly financial results and fiscal year 26 outlook. Global commercial teams advanced strategic growth initiatives. Infrastructure had solid growth, metal cutting increased share of wallet, general engineering won new customers. Tungsten prices increased, creating challenges and opportunities. Prioritizing growth opportunities over restructuring. Quarterly results exceeded sales and EPS outlook. Raising sales and EPS outlook for fiscal 26. End market update with transportation and energy slightly improved. Unit volume trends improved, second consecutive quarter of year-over-year trailing 12-month unit volume growth. Aerospace and defense remains strong, early signs of stabilization in general engineering and energy.

Guidance

Now expect FY26 sales to be between $2.33 and $2.35 billion, with volume ranging from 2% to 3%, net price and tariff surcharge combined of approximately 16%, and approximately 2% tailwind from foreign exchange. Adjusted EPS in the range of $3.75 to $4. Full-year outlook for capital expenditures is approximately $85 million. Free operating cash flow is expected to be approximately negative 30% of adjusted net income. Current assumption is tungsten prices will remain elevated for some period, carryover pricing will diminish as FY27 progresses. Performance-based compensation reset to provide $20 million tailwind, additional savings from restructuring continuous improvement of $10 million. Details for FY27 to be provided in August.

Segment performance

Reported metal cutting sales were up 18% compared to the prior year quarter, with 12% organic growth and favorable foreign currency exchange of 6%. Regionally, excluding currency exchange, Asia Pacific increased 18%, the Americas increased 17%, and EMEA increased 3%. Infrastructure reported sales increased 29% year over year, with organic growth of 30% and favorable foreign currency exchange of 4%, partially offset by a divestiture effect of negative 5%. Regionally, on a constant currency basis, America sales increased 42%, Asia Pacific increased 35%, and EMEA sales were flat. Metal cutting adjusted operating margin of 11.2% increased 160 basis points year-over-year. Infrastructure adjusted operating margin increased 680 basis points year-over-year to 18.3%.

Risks & headwinds

Tungsten price and supply environment create challenges, highly competitive market for material. Uncertain nature of tungsten pricing places pressure on working capital. Middle East conflict not included in current outlook. Some competitors having problems in getting raw material and putting longer lead times.

Analyst Q&A

• Q: What was the incremental margin on the volume in the quarter?

  A: Steve Volkman asks, Pat Watson responds that volume incremental margin was pretty normal, with factors like price raw timing benefit, prior year manufacturing tax credit, variable compensation, and restructuring benefits affecting it.

• Q: Are we where we need to be today in terms of price or will there be more price that sort of flows through in the fourth quarter and maybe even later into the summer?

  A: Sanjay Chaubey says it's a dynamic situation, monitoring market variables, goal is to fully offset cost implication of tungsten, price put in various states by region in April-May.

• Q: Differences between metal cutting and infrastructure in terms of price passing?

  A: Steve Fisher asks, Sanjay Chaubey says metal cutting is list price business with 3-6 month lag, infrastructure sees pricing quicker, different product tungsten content affects growth numbers.

• Q: Color on energy and its evolution?

  A: Sanjay Chaubey says AI power generation related energy demands strong in metal cutting, other energy like oil and gas has cautiously optimistic view with rig count projection and steady improvement expected.

• Q: Clarity on tungsten-related tailwind to EPS?

  A: Julian Mitchell asks, Pat Watson says can back into EPS terms with Q2 16 cents, Q3 39 cents, rest from Q4.

• Q: Cash flow, year-ending leverage, share repurchase?

  A: Pat Watson talks about cash flow driven by tungsten price and volume, balance sheet healthy, share repurchase on hold until tungsten stabilization.

• Q: Competitors turning away orders and share gains durability?

  A: Steve Barger asks, Sanjay Chaubey says competitors having raw material and lead time issues, opportunity to capture business, need to convert to permanent share capture.

• Q: Tariffs and refunds?

  A: Tammy Zachariah asks, Pat Watson says monitoring tariffs, no hasty action yet.

• Q: Fourth quarter volume growth?

  A: Tammy Zachariah asks, Pat Watson says full year range, low to mid-single digits, considering price and FX.

• Q: Market share gains, stickiness?

  A: Angel Castillo asks, Sanjay Chaubey says mix of market improvement, strategic growth initiatives, tungsten dynamics, strategic about sustainable opportunities.

• Q: Tungsten sourcing, supply demand, implications?

  A: Angel Castillo asks, Sanjay Chaubey says diversified supply base, integrated supply chain, assumption of stable tungsten prices, new mine projects to moderate prices.

• Q: FY27 volume demand cadence?

  A: Steve Barger asks, Pat Watson says midpoint outlook, additional restructuring, first half benefits of price raw, back half normal profitability.

• Q: Volume demand base performance?

  A: Julian Mitchell asks, Sanjay Chaubey says chart is 12 trailing months, Q4 confident in market improvement and share gain opportunities, details on FY27 in August.