Good morning. I would like to welcome everyone to Kennametal's Second Quarter and Fiscal 2025 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. Please note that this event is being recorded. Now like to turn the conference over to Michael Pizzi. Vice President of Investor Relations. Thank you, operator.

Welcome, everyone, and thank you for joining us to review Kennametal's second quarter fiscal 2025 results. This morning, we issued our 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 Sanjay Chowbey, President and Chief Executive Officer and Pat Watson, Vice President and Chief Financial Officer. After Sanjay 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. 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 turn the call over to Sanjay.

Thank you, Mike. Good morning, and thank you for joining us. I'll start the call today with some remarks regarding our recent announcements followed by a review of the quarter and some end market commentary. Then Pat will cover the quarterly financial results as well as the fiscal 2025 outlook. Finally, I'll make some summary comments and then open the call for questions. Now let's start with the two announcements we issued in mid-January. The January fourteenth announcement highlighted actions we're taking to address our investor day commitments around plant closures and navigate current market conditions. In support of our commitment to long-term competitiveness, we announced actions to reduce our structural costs and our footprint. Within the metal cutting segment, we announced the closure of a facility in Greenfield, Massachusetts and the consolidation of two facilities near Barcelona, Spain into a single modern facility. The operations in Greenfield, Massachusetts are expected to cease in April 2025 and the plant closure is expected to be substantially complete by December 31, 2025. The consolidation of Barcelona and Spain facilities are expected to be substantially complete by June 30, 2025. Additionally, in an effort to mitigate the current market conditions, mainly in EMEA, we announced a global reduction in professional workforce. These combined actions are expected to deliver annualized run rate pretax savings of approximately $15 million by the end of fiscal 2025. We expect pre-tax charges of approximately $25 million in connection with the execution of these actions. The breakdown is as follows. Approximately $10 million is for cash-related facilities charges, approximately $5 million is for non-cash facilities charges, and approximately $10 million for severance-related cash expenditures. These facility closures and other cost actions keep us on track to deliver our commitment to close three to five plants and achieve $100 million…

Thank you, Sanjay. Good morning, everyone. I will begin on Slide five with a review of the second quarter operating results. Sales were down 3% year over year with an organic decline of 6% partially offset by favorable workdays of 3%. As Sanjay discussed, of the expectations we provided last quarter. Relative to those expectations, most notably in EMEA and the Americas, which impacted our general engineering, and earthworks end markets. Energy was a bit stronger than we had anticipated, due to project volume. Year over year, we experienced pressure in most end markets and regions, with the exception of aerospace and defense, and energy. Adjusted operating expense as a percentage of sales increased 100 basis points year over year to 22.7%. Adjusted EBITDA and operating margins were 13.9% and 6.9% respectively versus 12.4% and 6% the prior year quarter. During the quarter, we realized approximately $6 million in savings from previously announced restructuring program. This action has successfully delivered annualized run rate pretax savings of approximately $35 million. Lastly, foreign exchange was flat this quarter. The adjusted effective tax rate increased year over year to 26.9% primarily driven by discrete items recognized in the prior year quarter and unfavorable geographical mix, partially offset by an increase in the advanced manufacturing production credit under the Inflation Reduction Act. Adjusted earnings per share was $0.25 in the quarter, versus $0.30 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on Slide six. The year over year effect of operations this quarter was positive $0.06. This reflects the absence of unfavorable price raw in the prior year, and incremental restructuring benefits and two cents of an advanced manufacturing credit. Partially offset by lower sales and production volume higher wages, and general inflation. We also…

Thank you, Pat. Turning to slide twelve. Let me take a few minutes to summarize. As I discussed at the top of the call, we have clearly faced challenging market conditions so far this year and have been actively managing those challenges. That said, I'm still disappointed with our most recent results. And even though we didn't see progress this quarter, we remain committed to above-market growth and margin improvement. As it relates to growth, we are confident in our competitive position and are performing better or keeping pace with the overall market. We continue to advance initiatives targeting customer wins in all our focused growth areas. Now add it to list to margins. Continuous improvement is a key strategic lever to improving our profitability. For example, we recently hosted special Kaizen events in several of our large plants focused on process and efficiency improvements. Those events yielded tangible results and played an important role in the evolution of our culture to one that prioritizes continuous improvement in everything we do. We have also recently taken actions which will help us achieve the targets we laid out at our September 2023 Investor Day. Specifically, the $100 million structural cost improvement plan by the end of fiscal 2027. By the end of this fiscal year, we anticipate to be about 65% complete on achieving those run rate savings. We'll also continue to monitor market conditions and take appropriate mitigation actions as needed. These actions taken together demonstrate progress. But we certainly know we have more to do. We'll continue to work on actions within all three pillars and leverage our competitive advantages to deliver long-term shareholder value. With that, Operator, please open the line for questions.

Our first question will come from Julian Mitchell with Barclays. You may now go ahead.

Hi, good morning. Good morning. Maybe just the first question around the sort of current demand environment, I suppose, particularly in general engineering. It seems as if the sort of soft data and things like surveys have been better for a couple of months. You know, several short cycle industrial peers of yours have talked about improving customer sentiment and some distributors have mentioned that as well. Just wondered sort of what you're seeing in general engineering by region. You know, realize it's a pretty tough environment, but you didn't change your sales outlook much for that piece. So maybe just some update there and how demand has trended in the last couple of months in that piece.

Yeah. Hi. Good morning, Julian. Let me just first comment on overall what we are seeing right now. Definitely some improvement especially as we have gone to the second half of January. Our order incoming rates have improved and of course our billing rates also. So there is a definitely sequential improvement we are seeing. However, one of the things that you see in the outlook that was based on our assumptions, you know, early in the year in August when we talked. I had assumed much more improvement in the US and also in our compute improvement in China. India continues to grow. Europe at the time, you know, we were thinking that it will be challenges. Actually, no. We kind of pointed that out. But things have gotten a little bit more challenging in Europe. So I think that's why we reduced our overall outlook in terms of, like, second half. But we are seeing definitely things improving in the recent weeks.

That's great. Thank you. And then just my follow-up question. When you're thinking Sanjay, more broadly about the cost structure at Kennametal and you have the extra measure announced January fourteenth. But, you know, sort of overall, looks like operating margins this year for the total company, you know, maybe running around sort of, you know, eight eight and a half percent or so. Yeah. That's lower than the ten or twenty year average, and that's with a lot of restructuring actions in the past ten plus years. Realized demand is soft and, of course, that's pushing margins down a bit short term. But is there a sort of a view that maybe another much broader plan might be needed with sort of multiple plants to get the through cycle margins higher?

Yes, Julian. First, let me summarize again the things that we have done and also in process right now. As we mentioned, you know, that we laid out a $100 million cost structure type of actions in the Investor Day. The recent actions and announcement, we'll get to $65 million worth of that. And of course, like you said, when we have shortfall in volume, not all of that is gonna show up in the bottom line. But we know that these are the right things to do and we continue to do that. Along with what you see in the restructuring numbers and all that, we also have been managing what I will call, you know, non-headcount related actions, you know, where restructuring may not be involved. For example, short work week and other tools that we have at our disposal. So we continue to work on that. At this point, we will continue to monitor the market conditions and take necessary actions. But in parallel, like I've always talked about, that with continuous improvement pillar, we'll continue to improve our overall margin and working capital.

Our next question will come from Angel Castillo with Morgan Stanley. You may now go ahead.

Good morning and thanks for taking my question. Sanjay, I was hoping we could just go back to that first commentary around improvement that you've seen in orders in the second half of January. Was that specific to general engineering? Was it more broadly? If it was just specific to general engineering, could you talk about the order trends you're seeing and some of the other key end markets in January as well as same kind of question before regionally, was that order pickup in any particular region? Versus a broader trend you're seeing?

Yeah, Angel, first of all, yeah, that definitely consisted of both general engineering and also other industries that we serve and market we serve. One area where, you know, we have, again, continue to monitor more closely is the EMEA. There also we have seen improvement in the last couple weeks of January. But it is overall across the board.

That's helpful. Thank you. And then maybe just in terms of the implied kind of fourth quarter guide, I think the EPS pickup is a little bit more substantial than you would normally see based on your 3Q guide. And I think if I'm reading this correctly, the bridge would just be some of the savings that you start to get, you know, in the fourth quarter. So just could you just help us understand maybe how much of it is just these savings starting to flow through versus any kind of, you know, assumed start kind of a rebound in end market demand?

Yeah. Angel, I would say a lot of that is going to be the savings from the additional restructuring program that really drives that improvement. I would say beyond what we would normally experience in Q4. As you know, Q4 is normally our strongest profitability quarter. In particular, just overall sales volumes tend to be higher, and as well as in the infrastructure business, that tends to be the heavy quarter for construction season, which drives some additional volumes from the infrastructure business.

Very helpful. Thank you.

Our next question will come from Steve Barger with KeyBanc Capital Markets. You may now go ahead.

Thanks. Sanjay, you've replaced both segment heads in the past six months. Can you just give us some specifics for each of their plans for what they expect to do differently going forward? Just trying to get a sense for how that management change should result in broader changes.

Yeah. Thank you, Steve. I think the focus areas will be pretty much aligned with what I have laid out in the slides, like the last slide, which talks about our delivering growth. They both bring very good commercial and strong experience, you know, in product management, sales, marketing. And also, you know, in continuous improvement because they have both been practitioners of that. So we expect, you know, to continue to see improvements in margin and working capital through that. And then on portfolio, in terms of overall, in portfolio, we'll look at all different things, you know, like we have talked before, our product SKU optimization and all of that along with, you know, what we need to do in terms of pruning the portfolio we have and along targeted M&A that really, really clear shareholder value. So I think over and the foundational element in building further strengthen our talent, those will be the focus areas.

So to that point, we've been talking about commercial excellence for years now. Do you have product lines that are consistently breakeven or loss-producing? That are dragging on new product wins and if so, why not start to divest those or shut them down?

Steve, as we have mentioned that we do not disclose by product line margin and all that. But just to give you a directional, you know, answer here, yes, we are looking at that. And we are taking some actions. And there are more things, you know, in the works right now and we'll communicate as we go forward, you know, when we get to a point, we have a little bit more solid action and, you know, date, but I can assure you that our overall goal here is to definitely improve our portfolio mix with both, you know, pruning of current portfolio that we have and also in building and diversifying our overall revenue mix.

Got it. Now, but if I could just get one last one. We've talked a lot over the years about the footprint potentially being too big, just too many rooftops. Sales have been flat for quite a few years now. Is there any thought to accelerating that process and consolidating plans at a faster rate?

We are working very diligently on that, Steve. I think, you know, we have to balance between making sure that we maintain customer service and not lose business because of that. So I think overall, we'll continue to work on it as you said. Yeah. With lower volume, that definitely has been one of the focus areas for us also.

Understood. Thanks.

Our next question will come from Michael Feniger with Bank of America. You may now go ahead.

Hey, guys. Thanks for good morning, everyone. Thank you for taking my question. Just on the tariff side, I understand it's a very fluid situation. You know, we're seeing some short cycle suppliers kind of starting to already think about the China piece. Just any color you could kind of help us on when we think of the China piece, but also, you know, Mexico, Canada, you know, how we kind of think about where your footprint fits and how much gets imported to the US. Is there any color there in how that would change your view on the pricing side versus the cost side, as we kind of monitor this dynamic situation?

Yeah, Mike. A couple of things, that I think are worth going over there. I think, you know, everyone's aware in terms of our absolute China exposure runs about 10% of the total portfolio. Canada is about half of that, and Mexico is around, you know, $40 million. Right? So in terms of the size of all three of those. You know, I think a couple of things that are important as you put those numbers in context, and that is on any of those trading relationships, you know, that's tends bilateral. So we tend to import some products we export some product from the U.S. as well. You know, one of the things that as we think about potential responses, to, you know, any tariff regimes that would be put in place would be we do have footprint, our ability to leverage that global footprint to offset potentially some of the cost of that. As well as in terms of what's happened here over the last couple of days, you know, obviously, looking for you know, where are the exclusions? Are they gonna be broad-based? Are they gonna be more targeted? And then lastly, you know, what's the competitive environment for the product? So, you know, we're monitoring that situation. Those are kind of all the factors that we're taking into consideration. You know, obviously, we service global customers globally. We want to be able to remain and do that and to do that responsibly to their needs, and that good pricing and good cost for us. And so we'll try to balance all those operational considerations out as this landscape evolves.

Helpful. And just inventories, it did seem like there was a little progress on the inventory side for your own inventories. Just can you help us understand as you go to the end of the year and we kind of go and think about Q3 in the back half. Or you think your inventories are gonna end up for the year you still take some out? And then just a follow-on question with that. Given some of the reset on the end market commentary, how you feel like your customers' own inventories or distributors are kind of feeling right now as we're kind of heading into, you know, the first half of 2025 or for you guys to come back half of your fiscal year.

Yeah. So just in terms of inventory, I'll put this in the context, you know, I'll so Mike, in terms of the outlook. So, yeah, I'd say, you know, given where sales developed here in the quarter, you know, our inventory levels are probably a little bit elevated where we would like them to be. We're gonna take some action here as we move through the balance of the fiscal to constrain production a bit and bring inventory levels back to where we would want them to be. Again, I'd say our objective as we think of total working capital is to drive that primary working capital to approximately 30% by the end of the year. Now obviously in doing that, you know, we're prioritizing generating the cash from inventory efficiency. You know, overall, say, the noncash benefit associated with some fixed cost absorption. So that's kind of how we'll think about that. Over the course of the year, you'll see a little bit of that happen in Q3 from an inventory reduction perspective. And then some additional happened here in Q4 as well. As we think about inventory that's out there in the channel, I don't think at this point in time, based on what we're hearing from customers, the inventories are misaligned to where demand is. I think inventory at the customer level is, you know, pretty well controlled. Even in spite of some of the changing market conditions.

Our next question will come from Steven Fisher with UBS. You may now go ahead.

Thanks. Good morning. Just wanted to follow-up on a comment I think you made about competitive dynamics in Earthworks. Sounded like there was some additional pressures there. Can you just provide a little more color on that? Is this a new source of competition? Is it new dynamics that you hadn't been seeing before? Can you just talk a little bit more about that, please?

Yeah. It's not necessarily something new. I mean, there are two parts of the equation here. One is in China. I think overall capital investment has been down. So when that happens, you know, that puts a little bit more pressure because the market has excess capacity. And also some of the things that we supply including our drums products, you know, those are more expensive, you know, almost falls in the CapEx type of category. So we are seeing some pressure there, but we are, you know, holding our own and competing quite well. In the US, you know, there is definitely some reduction in production and also construction. That's where we have seen some of the price pressure. And we compete at times, you know, we have actually also, you know, lost some business, but in many cases, customers have come back to us because of our overall value proposition. So we do see some dynamics there.

Okay. That's helpful. And I apologize if you covered this earlier in the call, but just in the context of your broader guidance, for this year that's now updated, in terms of the organic growth. Thinking back to your investor day, framework of contributions from new products and market penetration. Can you just update us on how you're thinking about that contribution for this year embedded within your organic growth targets?

Yeah. I think what we discussed during the investor day roughly, let's just say 2% market, 2% strategic growth, and 2% price. At this point, we still feel very confident about, you know, approximately 2% on price. And approximately 2% on organic growth, but the market has been a bigger headwind. So as we see, the unit volume definitely is affected by that. So I think we're still thinking that way. And overall, when you look at the peer data and all that, you know, that will also indicate that we are maintaining or performing slightly better.

Okay. Thank you very much.

This concludes our question and answer session. I'd like to turn the conference back over to Sanjay Chowbey for closing remarks.

Yes. Thank you, operator, and thank you everyone for joining the call today. As always, we appreciate your interest and support. Please don't hesitate to reach out to Mike if you have any questions. Have a great day. Thank you.

A replay of this event will be available approximately one hour after its conclusion. To access the replay, you may dial toll-free within the United States. 877-344-7529. Outside of the United States, you may dial 412-317-0088. You will be prompted to enter the conference ID. 7754490. Then the pound or hash symbol. You will be asked to record your name and company. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.