Good morning. I would like to welcome everyone to Kennametal's Third Quarter Fiscal 2023 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. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Michael Pici, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Welcome, everyone and thank you for joining us to review Kennametal's third quarter fiscal 2023 results. Yesterday evening, 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 Chris Rossi, President and Chief Executive Officer; and Pat Watson, Vice President and Chief Financial Officer. 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 discussions contain 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 slide deck and on our Form 8-K on our website. And with that I'll turn the call over to Chris.

Thank you, Mike. Good morning and thank you for joining us. I'll start the call today with a review of the quarter and a few recent customer wins as well as an example of the industry-leading innovations we're bringing to market. Then Pat will cover the quarterly financial results as well as the outlook. Finally, I'll make some summary comments and then open the call for questions. Beginning on slide 2 in the presentation. In the quarter we delivered year-over-year organic sales growth and continued the successful advancement of our strategic initiatives, while navigating various macroeconomic headwinds. Those headwinds included high inflation, foreign exchange and a slower reopening in China post the COVID-related disruptions in the prior quarter. Sales increased year-over-year at 8% organically with favorable business days of 1% offset by negative foreign exchange of 4%. At the segment level, Metal Cutting grew 10% and Infrastructure grew 5%. As expected price continues to be a significant part of the sales increase and is one of the strategic levers we are using to offset inflation. Additionally, we experienced strong volume growth driven by Metal Cutting, which was towards the high end of the volume range that was provided on our last call. Sequentially, sales grew 8% driven by increased volume and lower FX headwinds this quarter. On a constant currency basis, EMEA posted 14% growth which included a negative 150 basis point effect due to our Russia exit and the Americas grew 8% driven by Aerospace, General Engineering, Energy and Transportation end markets. Asia Pacific reported 1% growth reflecting a slower recovery from COVID disruptions in China as well as lower Transportation and Energy end market demand. By end market Aerospace reported 25% growth, Energy and General Engineering grew 9%, Transportation grew 5% and earthworks grew 1%. Overall, we expect…

Thank you, Chris, and good morning everyone. I will begin on slide 5 with a review for Q3 operating results. Before I begin, please note that like last quarter, we did not record any non-GAAP adjustments this quarter. Therefore, adjusted numbers are not presented for the current quarter and for today's discussion year-over-year comparisons will be against the prior year's adjusted results. The quarter's results show that we continue to execute our initiatives in the face of continued headwinds from inflation, foreign exchange and the lingering effects of COVID disruptions in China. Sales increased by 5% year-over-year with 8% organic growth and favorable workdays of 1%, partially offset by headwinds from foreign currency of 4%. As Chris pointed out, price remains a large portion of the sales increase. On a sequential basis from Q2, sales growth of 8% was above our normal Q2 to Q3 seasonal pattern of up 3% to 4%, driven by increased volume and more favorable foreign exchange. Operating expense as a percentage of sales increased 40 basis points year-over-year to 21.1%. Adjusted EBITDA and operating margins were 15.7% and 9.8%, respectively versus 18.3% and 11.4% in the prior year quarter. The year-over-year decrease in operating margin was mainly due to the following factors. As discussed last quarter, we were aggressively raising prices in the prior year ahead of experiencing the full effect of higher tungsten prices. Starting in Q2 for the Infrastructure segment, however, the favorability of price over material cost is negligible as raw material costs reflecting the current market price is flowing through the P&L. Approximately three-quarters of our metallurgical material costs are in the Infrastructure segment. We expect raw material costs to be relatively steady for the balance of fiscal year. As in prior quarters, higher pricing substantially offset higher raw material, wage…

Thanks Pat. Turning to slide 11, let me take a few minutes to summarize. Overall, we're pleased with our organic growth and strong free operating cash flow in the quarter. Although the operating environment remains challenging, we're encouraged by the continued resiliency of our end markets and the improvements we're seeing in the supply of materials, which allows us to draw down safety stocks. And we look forward to continued margin improvement in Q4 as we benefit from the inventory reduction actions we took in Q3. Looking beyond fiscal year 2023, we're encouraged by our market position. We're poised to benefit from the mega trends affecting our end markets and the opportunity we have to extract even greater operational efficiency from our modernized plants and our ongoing focus on optimizing for growth our investments in commercial excellence and technology. And we're confident in our ability to continue to return cash to shareholders, while investing in our strategic initiatives for growth and profitability improvement. And with that operator please open the line for questions.

Thank you. [Operator Instructions] Our first question comes from Julian Mitchell from Barclays. Please go ahead.

Hi, good morning. I just wanted to home in for a second on the Metal Cutting margins. So a good sort of operating leverage, I think 45% year-on-year in the third quarter. I just wanted to check, is this sort of the guide implying that steps up a bit in the fourth quarter? So you're getting a sort of mid-teens operating margin in Metal Cutting in Q4. And then, as we think about the year ahead, is that sort of mid-40s incremental margin in Metal Cutting a sort of a good placeholder?

Yes. Good morning, Julian. So, a couple of things to think about there. Obviously, as we think about FY '24, we're going through our annual planning process now. And so that's something obviously we'll update you on when we get to our call in August. As we think about the margin performance of the Metal Cutting segment in the fourth quarter, as we look, I'll say sequentially Q3 to Q4 and normally, we would see a slight uptick in volume Q2 to -- excuse me Q3 to Q4. Obviously, that will lever. And as we've talked about before Metal Cutting generated leverage is, a little bit above where our normal run rate is on a consolidated basis. So, we'd expect with volume coming through slightly higher margin performance.

Thanks very much. Yes. And that's a higher margin -- operating margin sequentially I suppose. Yes. That makes sense. Thank you. And then just my second quick one would be, I wondered what you're seeing in terms of sort of distributor behavior, any customers or channel partners kind of looking to slow down orders or destock a little bit in the last couple of months? Has there been any change in customer behavior in the Americas in particular? And then on China, as you said, it's a below plan recovery to date. I think in areas like Transportation, you're assuming an improvement understandably. So, maybe any more color on kind of what you're seeing real time in China please?

Yes. I would say, Julian, on the Metal Cutting side, ever since we came out of the pandemic, the distributors have been really pretty cautious about just how much inventory they had. So for example, if they're supporting aerospace customers, they tend to be adding inventory there, because they want to make sure that, they can serve those customers and there's also a pretty good trajectory on growth there. But those that are serving more general engineering, I think they've been cautious. So we're not really seeing a destocking, but I don't think Julian, we ever really saw a restocking if you will. And then, I think we've talked about on the Infrastructure side, we did see oil and gas customers and even some of the construction customers taking some inventory reduction actions as the supply chain problems start to abate, they needed less safety stock and less stock. So, there's kind of been adjustments throughout the whole supply chain in that regard. As it relates to China, yes, Transportation is as we know we have a lot of exposure to Transportation especially in Metal Cutting, the recovery has been slower and I think that's -- in our mind, that's been driven by actually reduction in demand for the sale of cars over there. That is expected to begin to improve, but we have to watch that one, Julian.

That’s great. Thank you.

Our next question comes from Dillon Cumming from Morgan Stanley. Please go ahead.

Great. Good morning, guys. Thanks for the question. I realize this is probably a bit more of a difficult one to answer. But just kind of curious, if you had any kind of data points or feedback from your kind of distribution channel around impacts from the tighter financing environment, maybe there's a lot of concern out there with regards to the potential impacts on the broader industrial complex, but just curious that's the sentiment you're hearing from your customers as well.

Yes. We haven't really heard very much from our distributors or our smaller customers if you will about the potential banking crisis. So it's nothing that has -- that we've seen. We keep an eye on it and we're monitoring the situation. We do have a lot of our customers are actually quite small. And certainly the deposit limits that they would have in any banks are probably covered by the FDIC and those kind of thing. So, we think that there's not going to be much of an effect, but it is something that we have to watch.

Okay. That's clear. Thanks, Chris. And then just one question on kind of broader price cost and pricing trends. I think Pat, you mentioned in your prepared remarks that you were expecting a bit less of a benefit from overall price cost positivity as we move through the end of the year here. How are you guys thinking about pricing going into next fiscal year? I mean, are you planning to put through further price increases? Do you feel like we're hitting upper bound? Any color on how that progression should progress into next year would be helpful.

Yes. I mean, as we think about pricing going ahead into next year, obviously, we'll just talk about strategically as we think about pricing, we're committed to making sure that we price for the value of the product number one. Number two, being mindful of the environment we're in and the inflation that we see in the business from a cost perspective being sure that we're pricing not just for value, but the cost that's going into the product. So, again, as we kind of complete our FY 2024 planning process here and get a good grip on what the cost inflation in the business will be, we will make sure that we have pricing actions across both businesses that are in place that are responsive to again the value proposition of the product and the cost structure that we think we'll be having.

Very helpful. Thank you.

The next question comes from Joe Ritchie from Goldman Sachs. Please go ahead.

Thanks. Good morning guys.

Good morning. Joe.

Can you -- I want to just understand China maybe a little bit further. I know that you guys have talked about EV being a big opportunity for you guys going forward. I'm just curious just in China, are you typically selling into Western OEMs? Are you selling into the Chinese OEMs? Just help us understand your penetration of the EV market in China?

Yes. We're selling into both, but it's interesting, Joe, that the traditional OEMs are recognizing them with this EV that a lot of the Chinese players are they are the ones to watch out for. And so while we're selling into both we have a strategic focus on the new -- I'll call the new players that are important for EV and even hybrids going forward. So we have to tackle both. We feel like we're in a good position on both, but the traditional OEMs if you will they're going to see some competition from the Chinese.

Okay. Great. That's helpful. And I guess maybe just my follow-on question and thinking about Infrastructure specifically, you talked about the powder production shutdown. Is that continuing at all into the fourth quarter? It sounds like that's done at this point, but you also made a comment around inventory levels continuing to be reduced into 4Q as well. So I just want to make sure I square those two things.

Yes. I think the inventory question was more about from our customers' perspective and they had taken some significant actions in Q2 and Q3 and that situation seems to have stabilized. We don't expect -- that the powder plants are running in the fourth quarter. So we're not having to make an adjustment there. So I think I answered both parts of your question but let me know if I didn't.

Yes. No, no that's perfect. Maybe I'll just ask one more just longer-term question. You guys talked about KENGold and highlighted at this quarter. I'm just curious like how long had that particular range of products been in development. And it seems like there's some really good opportunity here. I just want to understand the opportunity a little bit better.

Yes. It's been in the works for a while and like a lot of the product innovations that our technology team have come up with we were limited primarily by our ability to produce the product. The precision which you have to place these coatings in the case of KENGold required modern equipment and actually new processes. And so Joe what really enabled the release of that product was the completion of the modernization at some of our insert facilities. So I would say in this case, it was modernization that was a pacing item. And we expect there is more of that to come because one of the major reasons to modernize was not only to improve our cost and our quality and delivery performance, but it was also to enable our innovation folks to bring to market some of the great products they got and KENGold is a great example of that.

Okay. Sounds good. Thanks guys.

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

Hi. Good morning. Thanks so much for taking my questions. Most of my questions have actually already been asked. I just have a couple of quick ones, and I'm sorry, if you already disclosed it. But do we know what price versus volume growth was in each segment in the most recent quarter that you just reported?

Yeah. We -- as we talked about in the prepared remarks as well as the press release, we've had strong price realization across both businesses. From a volume perspective, we did see volume growth in Metal Cutting on a year-over-year basis, and we had a slight negative volume in the Infrastructure segment in the quarter.

Got it. And as we look into the fourth quarter, do you expect volume to be positive in both segments?

Yeah. Overall, volume will be positive in both segments as we go into the fourth quarter on a year-over-year basis as well as sequentially.

Got it. Thank you so much.

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

Hey, good morning, guys.

Hey, Steve.

Hi, Steve.

Happy to hear your commentary around continued end market resilience. Can you square that up with ISM being sub-50 for six months and the Metalworking index having been sub-50 for six of the last seven months? I think in the past your organic growth has tracked those to some degree. Do you think there's anything about your mix or this cycle that suggests that could decouple going forward?

Yeah. I think it's -- maybe it's particular to this cycle in that with all the supply chain constraints a lot of our customers had they built huge backlogs. And so even coming out of the pandemic, many of them have never returned to pre-pandemic production levels. So they've got that backlog. So normally, Steve if you to have that type of -- those indices are below 50, we would probably start to see a little softening in our business more than we've seen. So we've used the word resilience in that, there's an expectation that that might happen, but it really hasn't shown yet. And my theory is that, a lot of our customers are operating with large backlogs and it never really because of whether it be labor shortages, chip shortages, or other supply chain constraints never really ramped their production back up to pre-COVID levels in many of the markets that we're at.

Yeah. That makes sense. I think that's a good theory. Price is running maybe four times ahead of volume this year. So if inflation moderates next year will you be able to drive incremental price based on the value proposition? And given your commercial excellence initiatives do you just have a general algorithm for your growth versus the market?

Yes, in terms of price I think Pat said, it we're always trying to price versus value. Now, in the case of the high inflationary environment we also had to factor that in and all our competitors did the same. But if we return to a more normal inflationary environment, we really don't have to necessarily change anything because we're already sort of pricing based on value. And so we'll continue to do that and that's actually a business process you have to have. It's a discipline with the salespeople. It's an education. And so we've been at this now for several years prior to the hyperinflation. So, we'll continue to push price as much as we can. Recognizing it's a competitive environment, but you do have to sell value and we're getting much better at than we were even a few years ago. Sorry, what was the second part of your question?

You've done a lot on commercial excellence over the past couple of years. Do you have an internal kind of algorithm or expectation for what your organic growth should look like relative to whatever the market does in an up cycle or a down cycle?

Yes. I would say in general, we don't – for competitive reasons, I don't want to give you the target but we – our expectation is that if the market is expanding, we're gaining share and we're growing faster. And that's the way we compensate our sales force and our business leader executives is it's not enough just to ride the market up or ride the market down, we expect you to do better than the market.

How do you define the market for them? Is it based on the Metalworking index or something like that?

Yes. It can be – unfortunately in this business, you have to use several indices. It kind of depends on where you are in the world. But if you take for example a country like Germany, there is a lot of metal cutting companies that report their metal cutting revenues into an association and the association then gives you what the metal cutting market is and you can compare yourself to how you grow there. You can do something a little bit similar to that in the US and other countries. So we have to have several metrics but those are the kinds of things that we looked at that tell us directionally are we gaining share. And then beyond that you can also look at with specific customers, you have a good sense for how much metal cutting business that they're buying in total versus what you're actually getting. And so we can also set entitlement models and targets based on specific customers and say "Hey we should have x percent of these people's business and we only have y". So that's how we set the targets.

Got it. Thank you.

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

Thanks, operator and thanks everyone for joining the call today. The results this quarter reinforce our ability to advance our strategic initiatives and secure market-leading positions and I'm really very confident we'll deliver our full year outlook. Finally, we look forward to speaking with you next quarter and I also hope that you'll be able to join us at our upcoming Investor Day on September 8, at the New York Stock Exchange. More details about that event will be forthcoming from Mike. We're excited for you to hear from our executive management team, as we share our growth and innovation plans and provide an update on our long-term targets that really reflect where we're taking the company. As always, appreciate your interest and support. Don't hesitate to reach out to Mike, if you have any questions. Everyone have a great day. Thanks.

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