KENNAMETAL INC Q1 FY2025 earnings call

• End-market commentary: Fiscal '25 started uneven, with market conditions worsening in EMEA, soft industrial production in the U.S., and labor disputes. - Quarter review: Sales decreased 2% year-over-year; Infrastructure up 1% organically, Metal Cutting down 4%; Aerospace and Defense grew 13%, Energy 2%, others declined. - Innovative solutions: Highlighted PrimePoint longwall mining pick from Infrastructure and TopSwiss micro machining solution from Metal Cutting. - Financial results: Adjusted EBITDA margin 14.3%, adjusted EPS $0.29, cash from operating activities $46M, free operating cash flow $21M, $15M share repurchased. - Trade shows: Active booths at IMTS and AMB with strong lead generation. - Growth benchmarking: Metal Cutting performance matched publicly traded peers, performed well in key countries.

For the quarter, sales decreased 2% year-over-year. At the segment level, Infrastructure increased 1% organically, while Metal Cutting was down 4%. On a constant currency basis, Asia Pacific sales increased 2%, EMEA declined 1%, and the Americas declined 2%. For Metal Cutting, reported sales were down 4% year-over-year with a 4% organic sales decline and unfavorable foreign currency effect of 2%, partially offset by favorable workdays of 2%. Its adjusted operating margin was 8.2%, decreasing 300 basis points year-over-year due to lower sales and production volumes, higher wages, general inflation, and foreign exchange, partially offset by lower raw material costs, restructuring savings, and price. For Infrastructure, reported sales were flat year-over-year with organic sales growth of 1%, offset by unfavorable business days of 1%. Its adjusted operating margin declined 110 basis points year-over-year to 6.9% due to plant shutdowns for maintenance and process improvements, higher wages and general inflation, partially offset by net insurance proceeds, favorable price, raw material timing, restructuring savings, and higher sales volume.

• Second quarter: Expected sales to be between $480 million and $500 million, with volume ranging from negative 5% to negative 1%, price realization of approximately 2%, and neutral effect from foreign exchange; adjusted EPS in the range of $0.20 to $0.30. - Full year FY '25: Expected sales to be between $2 billion and $2.1 billion, with volume ranging from negative 3% to positive 2%, net price realization of approximately 2%, and approximate 1% year-over-year headwind from foreign exchange; EPS outlook remains $1.30 to $1.70, and free operating cash flow remains at greater than 125% of adjusted net income.

• Broader industry and market challenges, including soft industrial production, labor disputes, and impact of U.S. dollar strength on foreign exchange. - Tax uncertainties and potential impact of macroeconomic factors on end markets.

Q: Frame margin assumptions for Q2 vs Q1 excluding insurance proceeds?

A: Pat Watson said margin likely flattish, with factors like insurance proceeds, plant shutdowns, and compensation adjustments.

Q: China and Asia Pacific revenue trends?

A: Pat Watson said APAC stable with slight improvement despite construction and mining pressure.

Q: Near term trends in end markets?

A: Sanjay Chowbey said industrial production and oil and gas stable, transportation in Europe under pressure, mining construction soft.

Q: Impact of rate cuts?

A: Pat Watson said lower rates constructive but lag period variable, customer sentiment not yet turned.

Q: Restructuring savings and Metal Cutting margins?

A: Pat Watson explained $5M discretely in quarter, Metal Cutting margin decrementals due to volume reduction and other factors.

Q: Implications of election and tariffs?

A: Sanjay Chowbey said need to watch industrial production and tariffs' impact on sentiments and material costs.