Kennametal Inc. Q4 FY2025 earnings call

• Fourth quarter: Infrastructure team secured a $25 million multi-year award with a U.S. defense customer; Metal Cutting secured wins in Aerospace & Defense and project wins in Power Generation. Successfully executed tariff mitigation actions, including rerouting supply chain and implementing surcharges. - Cost front: In January, announced plans to lower structural costs, ceased operations in Greenfield, Massachusetts, and consolidated facilities in Spain; realized $6 million in restructuring savings in the fourth quarter, with run rate savings of approximately $65 million by the end of fiscal '25 and expected $90 million by the end of fiscal '26. - Portfolio optimization: Completed the sale of the Goshen facility in early June.

In the fourth quarter, organic sales of Metal Cutting decreased by 4% and Infrastructure decreased by 5%. For the full year, Metal Cutting declined by 5% and Infrastructure by 2%. Aerospace & Defense had mid-single-digit growth, Energy was flat. Regionally, all regions experienced low single-digit declines on a constant currency basis. Adjusted EBITDA margin dropped from 17.7% in the prior year quarter to 14.8%, and adjusted EPS fell from $0.49 to $0.34.

For fiscal '26, sales are expected to be between $1.95 billion and $2.05 billion, with volume ranging from negative 5% to flat, price and tariff surcharge realization of approximately 4% combined and an approximate 2% tailwind from foreign exchange. Adjusted EPS is expected to be in the range of $0.90 to $1.30. Capital expenditures are approximately $90 million, and free operating cash flow is approximately 120% of adjusted net income. Restructuring savings of approximately $35 million is included, with 40/60 weighted first half to second half for these benefits.

• Market softness impacting multiple end markets, including weak global production volume, declining U.S. land-based rig counts, and slowing light vehicle production especially in EMEA. - Supply chain disruptions in certain end markets. - Uncertainty around tariffs and their potential effect on global production.

Q: Can you provide just a little bit more color on kind of what you're seeing maybe fiscal 1Q to date and just how that kind of informs your views on the segment outlook for the full year?

A: First, we have taken a balanced view on our outlook for '26. As we looked at the market indicators -- we cite industrial production index, PMI, and also we talk to customers, we look at the all rig counts and all that. So overall, what we see, like I've said before, mid-single-digit declines in Transportation, Oil & Gas and Earthworks, Aerospace & Defense growing into low double digit. So I think we are kind of seeing similar start to the year, like what we are projecting here for the full year. So at this point, pretty much on track to what I will say a midpoint.

Q: Maybe just wanted to start with the fiscal '26 outlook. So maybe help us if you can with any kind of seasonality of earnings first half, second half and what's embedded on the top line? And also when I'm looking at that Slide 10, which is very helpful, on the EPS bridge, maybe put a finer point on, I'm not sure, maybe tariff headwinds, because it looks like your guidance embeds no operating margin expansion. Or perhaps operating margin is down in fiscal '26. Perhaps tariffs are a part of that. I think that was a $0.04 headwind in the June quarter. Maybe help us understand what's embedded for the full year ahead?

A: Maybe the best place for us to start -- I think I'll hit all of your kind of questions here, Julian -- is if we just think about the business, I'll say, starting from a sales volume perspective. As you think about where we ended Q4 at about $516 million worth of revenue, you kind of have to normalize that for the divestiture that we had during the quarter. And if you do that, you'll get to a number that's closer to a $510 million. And then from that point, right, we would see, I would say, normal seasonal sequential development volumetrically. And you know we generally talk about being down 8% to 10% Q1 to Q2 -- or excuse me, Q4 to Q1. And so we expect that volumetric decline. But layered in on top of that, we're going to have some tailwinds coming from pricing and tariff surcharges as well as favorability from an FX perspective. And so that kind of sets you up from a seasonality perspective in Q1. And on that basis, you kind of roll forward. We're anticipating the year pretty much rolling out in a normal sequential pattern throughout the year. Now I think it's important to kind of think about that. Obviously, we've talked about having some unfavorable volume as we move throughout the year. But on the other side of that, we've had a pretty significant uptick in tungsten costs over the last probably 4 or 5 months. There's a significant amount of pricing that will come about as part of that as we move through the year. And I would say from an earnings perspective as well, we're going to see a pretty normal cadence of about 40% of EPS in the first half, about 60% of EPS in the back half. And so while you got a lot of toing and froing going on here, some big things going on, I'd say at the top level it looks like a pretty normal pattern for the entire year. Getting back to your question with respect to tariffs, we did have a $0.04 headwind as we expected. I think we had talked about a potential $0.05 headwind in Q4. Moving into Q1 and then for the balance of the year, either through operational ways or through our surcharge, we are covered on tariffs as they stand right now at the beginning of August in terms of what's been announced and in place at this point in time. And so obviously, that's a coverage issue. So yes, you're going to see a little bit of margin compression relative to the tariff situation.