Good morning. I would like to welcome everyone to Kennametal's First Quarter Fiscal 2024 Earnings Conference Call [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Michael Pici, Vice President of Investor Relations.

Thank you, operator. Welcome, everyone and thank you for joining us to review Kennametal's first quarter fiscal 2024 results. This morning, we issued our earnings press release and posted our presentation slides on our Web site. We will be referring to that slide deck during today's call. I'm Michael Pici, Vice President of Investor Relations. Joining me on the call today are Christopher Rossi, President and Chief Executive Officer; Pat Watson, Vice President and Chief Financial Officer; Sanjay Chowbey, 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. In addition, we will be discussing non-GAAP financial measures on the call today. Reconciliation to the 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 Web site. And with that, I'll turn the call over to you, Chris.

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 '24 outlook. Finally, I'll make some summary comments at the end then open the call for questions. 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. The Americas declined 3% mainly driven by energy and general engineering. 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 [Technical Difficulty]. 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…

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 initiatives in the face of challenging market conditions. Sales were flat year-over-year with flat organic growth and no meaningful effect from workdays or foreign exchange. 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 key strategic lever as we price for value and offset cost inflation. From a sales perspective, the favorable price mitigated the lower volumes we experienced this quarter. Operating expense as a percentage of sales increased 80 basis points year-over-year to 22.7% 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% and 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 million in savings from the restructuring program we started in June, and we remain on pace to achieve our stated run rate savings of $20 million annually by the end of FY24. Our results this quarter include a $5 million head 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 million from a onetime tax item, which was expected, partially offset by a settlement related to tax…

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 fourth 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. 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 million cost out margin expansion plan we discussed at Investor Day. And with that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from Julian Mitchell from Barclays.

Maybe just wanted to start with the second quarter 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 there lot of that to do with the Infrastructure margin assumption changing? And I just wanted to understand, when we think about that full year guide, are we sort of thinking Infrastructure margins are low to mid single digit in Q2 and then ending the year at sort of low double digit, helped by the material cost tailwind you just mentioned?

So yes, a couple of things. Just in terms of thinking about Q2, and then Patrick will 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. I think as we thought about Q2, I would say, 90 days ago, thought about that material headwind being around $10 million, our current estimate for that. So it's around $13 million, as we talked about in the prepared remarks and that primarily will affect Infrastructure. Progression of margin there as we get 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 at the current tungsten price level, we will see that flip to a tailwind for us by the time we get out to Q4.

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 second 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? 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 US next year. Just wondered what your perspective on that was vis-a-vis the Earthworks market?

I think from a Gen Eng 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 US industrial base is also expected to grow. And that was 90 days ago, those metrics were exactly the same. So that's the basis of why we think Gen Eng 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 to Q2. And we were encouraged in the latter part of September that our order intake started to increase, we started to see that. And in fact, I'll tell you, in October, it met our expectations in terms of our outlook for Q2. So there's some positive momentum there on that side. And then also Gen Eng 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 that they only had -- so the municipalities only having so much budget to spend, and they had to reduce the number of road milling miles because of inflation and the costs associated with road milling was up so significantly, 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, 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.

The next question comes from Tami Zakaria from JPMorgan.

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 levels?

The production rates are still below pre-Covid levels. I don't know, Mike, if we have that specific statistic, but we definitely see. I think the other thing is, Tami, is that Airbus and Boeing and the other OEMs are still projecting the second half production pace to actually increase. Now they're still experiencing some supply chain delays that are kind of limiting that. So I don't know that they get back to pre pandemic levels this year, and I think they're still below by what, Mike, what is that…

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

And then just on Energy, I know you spent some time talking about it. And you said in the second quarter, you expect a slight decline as destocking continues. Stepping back, what do you think is driving this weakness? Any specific categories within Energy, you're seeing the softness? And do you see sort of like a 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?

I think, Tami, the big driver for our particular business is the US land based rig count, and that has stepped down significantly year-over-year and declined sequentially in Q1 also, 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. So we do talk to the customers every quarter, and they now think that, that sort of inventory reduction is 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, Tami, 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 understocking. That can be a typical scenario that happens.

The next question comes from Mike Feniger from Bank of America.

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 on your contracts and whatever you have in the backlog? Just curious if you kind of help us understand the cadence of that and to achieve that full year number.

So I think, Mike, the way to think about that pricing, two things. Number one, we price for value and we do that all the time. And in particular, when we think 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 just to think about here as we think about the pricing for FY24, is we did put some price into selected markets here in the first quarter. And so those actions are underway and they will benefit us, obviously, throughout the entire fiscal year.

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 that's ended. I'm just curious what you're seeing with your General Engineering, some of those customers, are there destocking you're seeing there on the rise and 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. I'm just curious how we should kind of think about that through the rest of the year?

So in terms of General Engineering, as we've talked about coming out of this pandemic recovery, our distributors and our customers 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 Gen Eng, there is a restocking that happens. And 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. So consequently, as things have softened around the globe in terms of general industrial production, we really haven't seen any destocking because in my theory is that really 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.

As you think about the inventory, I reflect back on the primary working capital outlook, we've got out there, it really implies that we'll get some improvement in 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 inventory position. As we talked about at Investor Day, this is going to be one of the areas of focus for us on an ongoing basis where we think we have opportunity to improve our working capital efficiency.

The next question comes from Chris Dankert from Loop.

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

I think as we think about Metal Cutting, there absolutely was an improvement, I'll say, an overall efficiency in Metal Cutting. And we think about the drivers in terms of what's going on from a margin perspective. Certainly, I would say, overall, they had a little bit of headwind from a -- a tailwind from FX. Obviously, a little bit of a tailwind from the restructuring program as well. And we're continuing to see some cost inflation, but we've been able to manage that from a pricing perspective as well. So overall, I'd say excellent operational performance from a construction perspective in Q1.

I think, Chris, the other thing I would add is, as we talked about in our Investor Day, we still have opportunity to drive higher operational efficiency from our modernized factories. And I think you're seeing that start to flow through in the Metal Cutting margins. 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 you're starting to see the benefits of that flowing through.

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 were saying was neutral on a dollar basis. Can you just kind of remind us what the impact was by segment, then you said headwind in Infrastructure, and was it an equivalent tailwind in Metal Cutting, Is that the way to think about it?

Yes, I think that's right. One of the things 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 tungsten come down, there's a natural repricing that occurs. And again, that's going to continue as we move through in Q2 here, but that's how that affected Infrastructure in the quarter.

The next question comes from Steve Barger from KeyBanc Capital Markets.

Chris, you've talked about some of the factors around reacceleration in the back half. But if I look at consensus 3Q 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.

I think, generally, I would say it's pretty even, but there are a couple of factors that -- one of which I talked about with Tami was on the earthworks side that road milling was very low and construction was low for us last year. And even if it just get back to normal seasonality, we think that that's going to drive a little bit higher fourth quarter. So I think it's generally even but there is a little bit of a ramp-up in the fourth quarter.

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

Yes, I don't think we broke out a win separately. But I can tell you that if you look at our Energy business in Asia for Metal Cutting, 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 straights. 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 of delay. But that -- according to our customers, that's what's driving it, they don't expect that to last forever, but that's put a little damper on that wind business in China.

The next question comes from Steven Fisher from UBS.

Just coming back to the second half improvement. I 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 -- I guess there was an 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?

Over the years, we have models that tie, for example, IPIs by region or light vehicle production and how that translates into business for us, Steve. So there is some math behind it but obviously, it starts with a forecast of what those IPIs are going to do, and I kind of laid out the third 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's what the customer sentiment is.

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 in the timing of what it's supposed to be?

I think, Steve, that's a good question. As we talked about at Investor Day, we've got $100 million of cost out actions and improvements. It's productivity based and we're moving some structural costs associated with plants and a number of other things. And the down payment on that was our project, we call it Project Rebalance, the restructuring, Pat just spoke of, which is $20 million. So the point is that we already have active projects that are in flight and we'll certainly look to -- we're always looking to 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.

The next question comes from Steve Volkmann from Jefferies.

So my question 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 others in Europe. 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 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?

I think in terms of Metal Cutting, Steve, Gen Eng was up. And that -- as you know, a big chunk of Gen Eng 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, 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. 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 of winning a good number of those projects. I think if I -- and then the other thing is we're focused on Aerospace and 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 [Technical Difficulty] I think that that was largely driven by our Aerospace and Defense business. And for obvious reasons, the Defense business is up in Europe.

And then fit for purpose, Chris, just an update there. Is that still adding to share as well?

Yes, it is. As you know, we brought the two segments together, WIDIA and the normal Metal Cutting business, we've put them both together. 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 custom solutions that the Kennametal brand brings. So we feel like that strategy is working and we are picking up share across the globe.

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

Thank you, operator. Thanks, everyone, for joining the call. We're committed to drive above market growth by leveraging our competitive advantages, expand margins, while generating strong free operating cash flow and 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.

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