Good morning. I would like to welcome everyone to Kennametal's Third 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. [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 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 would 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'll turn the call over to you, Sanjay.

Thank you, Mike. Good morning, and thank you for joining us. I'll start the call today with some general comments on how we are advancing our key initiatives, and then provide a review of the quarter, end market conditions, followed by some key customer wins and finally an overview on the current tariff situation. Then, Pat will cover the quarterly financial results as well as the fiscal 2025 outlook. Lastly, I'll make some summary comments and then open the call for questions. Beginning on Slide 3, so let me start by saying that, I am pleased by how the team executed this quarter and focused on advancing our key initiatives. At the beginning of the third quarter, we announced a new restructuring action to lower structural costs, by reducing employment costs and consolidating manufacturing operations. To that end, in mid-April, we successfully finished operations in our Greenfield, Massachusetts, plant. Commercially, we continue to execute on our share capture initiatives across various end markets, despite overall market weakness. While we have recently seen a few positive macro data points on industrial production in The U.S., most of our markets have been modestly declining for over 30 months now. And while external factors are outside of our control, we remain focused on what we can control. The team continues to execute on our growth initiatives, including in aerospace and defense, and we believe our performance is broadly in line, if not better than, the competition. A bit later in the call, I'll cover some of our more notable commercial success stories for the quarter. Now let's walk through the summary of quarterly results. Sales decreased 6% year-over-year, with metal cutting sales declining 4% organically and infrastructure declining 2% organically. We saw broad yet modest weakness across our three regions, with EMEA as…

Thank you, Sanjay, and good morning, everyone. I will begin on Slide 7 with a review of Q3 operating results. The quarter's results show that we continue to execute our initiatives in the face of weak market conditions. Sales were down 6% year over year with an organic decline of 3% and unfavorable foreign currency exchange of 3%. The sales performance this quarter was slightly below the midpoint of the outlook we provided last quarter. Relative to those expectations and as you heard from Sanjay, we experienced continued pressure in EMEA and the Americas, which impacted our general engineering, transportation and earthwork end markets. Energy was in line with expectations. Year over year, we experienced modest weakness in all end markets and regions except for aerospace and defense. I will provide more color when reviewing the segment performance in a moment. Operating expense declined approximately $5 million, benefiting from restructuring savings and favorable foreign exchange despite year-over-year wage inflation. And adjusted EBITDA and operating margins were 17.9% and 10.3%, respectively, versus 14.2% and 8.1% in the prior year quarter. During the quarter, we had an approximate $10 million benefit from an advanced manufacturing production credit under the Inflation Reduction Act. We also achieved $6 million in savings from restructuring programs, $3 million of which is related to the employment actions announced in January of this year. Lastly, foreign exchange was $3 million headwind this quarter. The adjusted effective tax rate decreased year over year to 22.8%, primarily driven by a benefit from the advanced manufacturing, production credit and geographical mix. Adjusted earnings per share were $0.47 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 8. The year-over-year effect of operations this quarter was positive…

Thank you, Pat. Turning to Slide 13, let me take a few minutes to summarize. We remain focused on staying the course, despite the highly volatile macro environment and we're executing on our value-creation initiatives to deliver a strong finish to fiscal 2025. We're obviously in our fourth quarter right now, and we're actively planning for the new fiscal year, which begins July 1st. I'm looking forward to the conversation with you in August, where we will provide some color and context on several topics, including progress on my first year as CEO, our fiscal 2026 annual outlook and finally an update on portfolio, footprint and structural cost initiatives. And with that, operator, please open the line for questions.

[Operator Instructions]. Today's first question comes from Angel Castillo with Morgan Stanley. Please go ahead.

Hi. Good morning, and thank you for taking my question. Just wanted to talk about the outlook a little bit more, maybe particularly for the fourth quarter. So, I think at this point, you talked a little bit about some green shoots and still kind of, I think assuming a little bit of sequential improvement in some other organic growth. So, can you talk about quarter-to-date what you're seeing in terms of kind of demand trends as you think about April and May, particularly across some of the key end markets and how that's kind of progressing? And particularly, if you could also parse that out between what's kind of industry-specific versus share gain-related?

Yes. Angel, good morning. Yes. So, I think at this point, we have continued to see a steady improvement. And as I outlined in our overall, in the market trend slide, most of the things are staying about the same. As I had mentioned, that General Engineering, the IPI, other than Europe, I think U.S. and APAC basically staying relatively flat. EMEA continues to be slightly weak. Transportation same. EMEA is weak, rest of the market relatively flat. Energy, definitely, sentiments are cautious right now with the customers. But again, for what we have said three months ago, very similar sentiment right now. In Earthworks, again, same thing, sentiments are similar, softness in U.S., coal exports and then also demand in China versus capacity in our equation, putting price pressure there. Aerospace defense, slight improvement as things continue to get better with the OEM and the supply chain constraints. So, I think at this point, we haven't seen anything different with respect to either buy ahead or any kind of impact of tariffs. So, I think that we expect more or less a steady path for overall market at this point. In parallel, we'll of course now gain some market share as we are outperforming them in both segments.

Yeah. Let me just one thing to give some color there on Q4 sequentially, Angel, and that is as we think about just reference the midpoint of the outlook here, a couple of things to contemplate. Number one is we've got a pretty significant FX change from Q3 to Q4, so that's about a $13 million sales tailwind for us. Once you kind of pull that out, some of the incremental revenue associated with tariff surcharge, you're going to get right back to a number that's much more normalized in terms of sequential performance Q3 to Q4. And so, underlying the outlook is really normality from a progression of the business moving into Q4 here.

Got it. That's very helpful. And then maybe could you just talk a little bit more about kind of the specific buckets you talked about on tariffs, you laid them out in the slide, for mitigating the full kind of $80 million. Can you just maybe quantify each of those and just a little bit more kind of color as to maybe which of those are kind of fully underway, which might take a little bit more time or work and how we should think about them?

Yeah, I think, at this point, we will not go into the quantification of each of the category. But I can tell you on a high level first, repeating what I said in the prepared remarks, we are very confident that we'll fully mitigate the direct impact of tariffs. Now, first, there are three items on the list there. It talks about how we are utilizing our global footprint and our supply chain network and those things are in progress already. More than half or slightly more than half of our direct impact is related to what we do between U.S. and China and then China to U.S. And those things, we already have begun implementation of some of those product moves and tooling moves and things like that. Rest of that is in progress. We intend to complete those things as we go. We've already implemented tariff surcharges in U.S. for the metal cutting, and then we are also taking surgical actions on infrastructure business from a surcharge perspective. So, all in all, I will say the action implementation is coming along very well, and we are going to continue to implement rest of the actions in timely manner.

That's very helpful. And just to clarify that, because I guess the point of my what I was trying to get across is maybe there's a $0.05 headwind from tariffs I think in the fourth quarter, but is the implication therefore that by the first quarter you'd kind of be fully offsetting everything? And I'll get back in the queue. Thank you.

Yeah, I think at this point, as Pat mentioned, the $0.05 some of the activities obviously tariff was effective in the April. We started to make sure that things have been very fluid, as we all know. So, we started to take actions and notified our customers where we need to and also internal moves of tooling and production supply chain. So, some of those things were in place by the April, early May, and that's part of that. And then remaining actions will continue to be worked on. I think that's the reason for us to say that we do have risk in Q4. We expect to provide more detail when we talk in August exactly where we are. But like I said, we do intend to fully mitigate all the direct impact of tariff.

Thank you.

The next question is from Steven Fisher with UBS. Please go ahead.

Thanks. Good morning. I just wanted to bridge a little bit on the quarter itself relative to the guidance you had previously. And if we back out the IRA credit, and tax benefits related to that. Just kind of curious, what do you think were the kind of the biggest surprises relative to what you had thought before? It seems like it might have been price versus cost. And I guess on the cost side of things, with tungsten prices having gone up in the last few months, I'm just kind of curious how you expect that to flow through over the next few months and how much you think you might need to raise pricing here just to manage that higher cost and when that might hit?

Yes. So, let's start with that, Steve. As we just think about tungsten has moved up here, I think, as we think about like our second quarter, so the December quarter, we would have seen like an average tungsten price of like $335. As we got into Q3 here, February, it was up just slightly, just I think low $340s. As we sit here today, it's closer to like $395 from an average perspective. So, overall, I'll say the last 60, 45 days we've seen those prices come up. As we normally talk about from a pricing standpoint, we do have some contracts specifically in infrastructure. In the energy end market, they'll begin resetting. As that price rises, we'll see some favorable pricing come out of that as we move here into the fourth quarter. And then, depending on where tungsten rolls here over the next couple of months, we'll probably see some additional favorability come through as well. In general, we always talk about from a cost structure perspective, the cost that tend to flow through the P&L lag by about two quarters. And so, at the moment, we're still enjoying a cost base that's prior to the recent escalation here in prices. As we think about the third quarter and the margin performance, I'll just talk about EPS terms here. Obviously, the big driver for us in terms of versus our expectations at the outset of the quarter was the Advanced Manufacturing Tax Credit. So that in and of itself, sits at about $0.13 between the benefit of the tax credit itself and some favorability, that also pulls through the effective tax rate. And so, going into the quarter, we knew that, that was a I'll call it a known unknown in terms of how much we would actually qualify. The treasury regs for that were finalized in the December. We worked through that. And I think at this point in time, we'll continue to get an ongoing benefit from that. But the surplus from a catch-up perspective, getting caught up to the regs, that's all behind us here in the third quarter. I think the other elements in terms of overall performance and sales was pretty much aligned with where our expectations were. Our cost structure came in a little better. I'd say, a little bit of that was from restructuring, and we had a couple of things kind of break our way over the course of the quarter as well, that helped us deliver the number.

Very, very helpful. And I just wanted to ask a little bit about the competitive dynamics, and see if there's any tariff-related relevance here. You cited some competitive pressures in The Americas in infrastructure and I think it was specifically in Earthworks. I'm just curious kind of what's the source of that, and then sort of related potentially is to what extent the tariff regime is creating any competitive advantage that you might have in The United States? And do you think you need to prepare for kind of competitors to be reshoring up or moving operations to within The United States?

Yeah, Steve, first, let me address the issue of the earth cutting business, comment on competitive pressure in The U.S. and China. And then I'll come back to the overall competitive landscape and tariff. With respect to earthworks, as we have said before, the coal price, coal exports coming out of U.S. has been soft. And then in China itself, the demand versus capacity equation has been lopsided for some time. So, because of that, there has been price pressure, and we are able to compete and keep our business. But there is definitely some pressure on price from that. Now, we have not mentioned or we are not seeing anything from a price pressure perspective or any other business as such. Now, coming to the overall competitive landscape, as we have said in our prepared remarks also that we are definitely keeping up or most likely performing better than our peers, especially who have reported in the public domain and that has been there for several quarters now. And we believe our overall organic growth initiatives are working well. Our commercial initiatives, our sales, marketing team, operations team have been really able to do a good job in customer service and able to provide good application support and continue to win. We believe that work will continue, we'll build upon that. For the time being, now again talking back about the tariff situation. We do believe that as a company in our industry in cutting tool and web component business, we are better positioned than others based on our overall footprint that we have strongly in U.S., And also, we have a strong footprint in Europe and APAC. So, we believe that we'll be able to utilize that to make the moves we need to for mitigation actions, but we'll also be able to utilize our U.S. footprint to make sure that we are taking growth opportunities and winning some market share, especially when it comes to powder sales in rods and some cutting tool opportunities.

Terrific, congratulations. Thank you.

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

Hi, good morning. This is Jacob Moore on for Steve. Thanks for taking our questions. First one for me kind of just staying on tariffs. I'm curious if you're seeing any pull forward or wait and see type demand pauses. It feels like component manufacturers have been more victims of pull forward while larger more complex goods are more wait and see. Just curious what your experience has been so far and maybe that's an opportunity for you to expand on specific mitigation efforts you'd like to call out as well?

Yeah. First of all, in terms of pull forward, we have really not seen much, just in the couple million-dollar type of range. So, for all realistic purpose, nothing much. And we don't expect that as such, even in the coming weeks and months here. I believe that in our customer base, there has been definitely discussions about some production moves. As in the public domain, you have seen some of the automotive transportation OEMs, they have talked about some production moves, but some of those things will take time. In the meantime, we're staying very close to our customers and supporting them as they need to manage through this situation. We look forward to overall utilizing this opportunity to definitely gain some new business.

Great. That's helpful. And it kind of leads into my second question here, which is do you think that any of this rapidly changing trade situation is an opportunity to look at M&A or portfolio optimization? I'm thinking about if there's lines of product you could consolidate or divest, or assets that are getting closer to your M&A criteria, just how are you thinking about those types of actions in the absence of a robust demand environment?

Yes. We have definitely been working on our strategic priorities and to see how those things are aligned with our inorganic portfolio actions. Now, with the tariff, definitely, it did bring a new front on this discussion, because we bring some things to the table. So, of course, there are discussions, and we will share more information when we get to a certain point on that. But, yes, there will be definitely some implications on that.

Okay. Thank you, very much.

The next question comes from Julian Mitchell with Barclays. Please go ahead.

Hi, good morning. I just wanted to focus on the guide changes first off. So, I suppose the EPS guide increase is sort of a composition largely of the production credit, and then, you've also $0.1 in the operating line, and then it seems like sort of $0.05 each coming from tax and FX versus the prior guide. Just wondered, if there was anything else kind of moving around within that guide and put a finer point on the net tariff headwind that's dialed in for this year as a whole in EPS. And sort of tied to that, trying to understand organic sales, doesn't seem like there's many surprises, but just wanted to confirm, if in recent weeks you've seen anything moving around versus normal seasonality?

Just in terms of outlook I'd say, the thumbnail version there, Julian, in terms of the approach we took on the outlook, because we obviously outperformed the expectations here in the third quarter that got rolled into the full year. We do have some benefits from the surcharge, but we've got costs associated with the tariff. That's the net exposure we've talked about. That's been rolled in, FX. As we move through the quarter here. We're sitting at $1.13 versus we're closer to $1.08 So we've got some benefit on the weaker dollar. And then I would say lastly, just based on where we think sales and the business will perform here, just tightened up the range, right, and narrowed it down given that we're in the fourth quarter of the year. When I think about where we're at here from a sales performance in the month of April, and again, this is kind of how the outlook is built as well, pretty normal progression, right? And so, we've not seen from a demand perspective at this point in time anything that's out of the ordinary. Obviously, as we think about the March and April timeframe from year to year, you've got an Easter holiday effect in there, predominantly in Europe, that can be a little wonky. But again, the business seems to be performing, and demand levels seem to be pretty normal.

That's helpful. Thank you. And then, just when we're thinking about the sales recovery whenever that comes, I assume it's sometime, in fiscal '26. Just wondered, really, for Sanjay, I suppose, given you've almost been in the job for 12 months now as CEO, what kind of operating leverage are you kind of aiming for in that recovery? We can see the historic record and the restructuring efforts more recently, for example, since January that have been announced. But rolling everything together, what's the sort of operating leverage, kind of entitlement Kennametal should have when your sales start to grow again?

Yeah, Julian, we'll start with a simple answer of mid-40s, okay? That for sure we expect. As we have been working on our cost structure, and we'll share more details on overall portfolio analysis and cost structure footprint and those actions. We do believe that we are continuing to improve our fixed cost. But at this point, you can definitely go with the mid-40s in terms of leverage.

That's great. Thank you.

Thanks, Julian.

The next question comes from Michael Feniger with Bank of America. Please go ahead.

Hey, guys. Thanks for taking my questions. Just on inventories, I think your inventories, if I look at the quarter, actually increased sequentially, revenue was a little flat. I'm just kind of curious how you feel with your inventory position the quarter have a benefit from that absorption? Are you carrying a little bit more inventory, is that strategic going into this type of environment now as we enter the back half of this year? That's my first question.

Yeah. A little bit of absorption there. When you look at finished goods inventory, it's up quite modestly sequentially from Q2 at December, and the bigger uptick will be in WIP and powder inventory. And so that's where you've seen it. I would say a couple of things about it. Number one, just given the change in demand that we've seen here and projected over the last couple of months, supply chain is relatively long. It does take a little bit of time to adjust the supply chain. I would also say at the moment, given that a lot of that is WIP and raw material related with the elevation of the tungsten prices, that's not necessarily a bad thing to have more inventory acquired at the lower cost either, so.

Fair enough. And if I just ask, did you guys provide a breakdown of your COGS from geographically from an area like China? I'm just trying to get a sense of is the impact mostly that China tariff, is it that 10% for the rest of the world, maybe Europe to U.S? And I guess with what you guys are factoring in, is it based on those rates from April 4 Liberation Day? If we wake up in a few weeks and we see a deal struck, is that upside to that $80 million? Just any help there would be helpful for us?

Yeah, sure, Michael. Yes, we are using all the tariff rates, which were on effect on April 30. So as negotiations happen and things like that, that $80 million itself will come down. But what we're also telling you, regardless of whether $80 million becomes $60 million or $50 million we have action plans in place to fully mitigate direct impact of tariff cost. And we are also in parallel definitely looking at opportunities for growth, capitalizing on our footprint and supply chain network.

Understood.

Yeah, to your comment, the risk will come down as the negotiations happen.

Fair enough, Sanjay. And if I could just sneak one more in just to follow on with Julien's comment. I hear the point on 2026 with the incrementals. Just when we think of where you're going to end up in FQ4, when we think of that normal seasonality to start the year for FQ1, normally seasonally, we see sequentially revenues go down anywhere high single digit to double digit. Is there anything that you guys are looking at now that you would say into next year, the seasonality standpoint from FQ4, FQ1, on the top-line or bottom-line that we should kind of be thinking about as we kind of turn the page?

Yes. Obviously, yes, the normal seasonality going into Q1, right, and we'll give an update on end markets and where we think that will precisely be obviously, in about 90 days. I would say from a cost structure perspective, just a couple things to be mindful out there, as you guys put together your expectations for '26. We have had some benefits flow through this year in terms of the P&L that are non-repetitive in nature. And so that's going to be we've got about $6 million of proceeds from tornadoes -- insurance proceeds on the tornado that was a year ago in May, June in excess of cost. So obviously, that's not going to repeat. That's within the Infrastructure segment. We've talked already about it on this call. The tax credit, although that will continue forward at this point in time based on tax legislation indefinitely until Congress changes the tax law. As we talk about the '25 to '26 progression, there's about $8 million of benefit in 2025 that's not going to repeat in 2026 because that's the catch-up amount. And then the last thing I would just reflect upon would be in terms of restructuring programs, what will end -- the run rate will end this year and what we already have in the pipeline to pick up about another $8 million of benefit in the first half of fiscal '26 as that annualizes out throughout the year. So, from a cost structure perspective, I think those are the three big things that are worth thinking about.

The next question is from Tami Zakaria with JPMorgan. Please go ahead.

Hi, good morning. Thank you so much. I have two follow-up questions. So, my first question, just wanted a bit of clarity on the pricing outlook. I think you kept it unchanged at 2% for the year. And it seems like you're already taking some pricing action for tariffs. Is 2% pricing still the right number to think about for the final quarter of the year?

Tami, yes. I think excluding tariff impact, approximately 2% is what we have said. So that yes, that will be the right number.

So, it could be higher if the current price increases flow through?

Yes. If you're adding the tariff on surcharge, yes, but I'm excluding the tariff surcharge. And I'm saying, that is like on top of tariff surcharges simply to offset the tariff direct impact.

Got it. Okay. And so, my follow-up question is, are you able to share what price and price cost was in the third quarter?

No. The only thing I would say there, Tami is, as we think about the business performance on a year over year basis, all right, and this is where this is given the timing elements that can move through the P&L. A year ago, third quarter in infrastructure, they would have been on the wrong side of the price raw cycle. And so, you would have seen operating income margin in infrastructure of about, I think, 3.8% last year, 3Q. And as we got to this year, price were off from an infrastructure perspective and balance in Q3. And so, neither a headwind or a tailwind quite frankly to note there.

Got it. Okay. Thank you.

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

Thank you. Good morning, everybody.

Hi, Joe.

Just my first question, and this is just a higher-level question for Sanjay. Some of these tariff actions that you're taking in place on Slide 5, is it fair to presume regardless of what happens, with the tariff situation? Because, I guess, there's an expectation that at some point, this number is going down, that these actions are kind of more structural in nature outside of maybe like the surcharges, there'll be structural movements to your supply chain that will continue?

Yeah, Joe. For most part, that will be correct assumption. I think if things went back to the way it was before, in that case, there could be some regrouping of production in terms of getting the economy up to scale. Because there are certain types of specialty products that we make today in one part of the world or the other and we ship around. But we are very capable of producing our general product, standard products in all three regions. So those kind of moves we have already enacted very quickly in April, but there are some specialty product. We'll revisit that depending on where the tariff levels go back. But assuming that there is some sort of tariff in place, I think these will be more in like a little bit more permanent shape. And we'll definitely, in parallel, we're working on, we're always looking for improvement as we are even doing this. And as part of continuous improvement mindset, we're not just saying that let's just do this in a managed tariff. When we're moving any of these things around, we are looking for cycle time improvement, uptime improvement and overall yield improvement. So, our idea here is that, we come out stronger from this situation.

Got it. That's helpful. And look, not that the current environment is supporting this, but if for some reason we were to see some, like, real acceleration in the demand backdrop, I'm curious, like, is there a risk to being able to supply the market if we do see an inflection point in your business? Typically, when you see these types of moves, you know, sometimes you run into, like kind of, picking a Python problem. And I'm just curious, like, how you're managing and how much capacity you have if things were to inflect from a revenue perspective?

Yeah. On a high level, we do not anticipate any risk. I think we have definitely -- like, if you go back a few years ago, we as a company and the industry, we have seen 30 months of slowdown in industrial production. So, if you go back to five years ago, we have more capacity to support aerospace and defense demand, same way for transportation, general engineering, so on and so forth, energy. So, we can definitely handle we'll be happy to handle some recovery in the market. And in parallel, as Pat also mentioned, we have definitely worked on our cost structure. We'll be exiting this year. In January, we announced the $15 million. We're well on track to complete that. So, I do believe that we will be able to handle in terms of demand, but also in terms of getting coming out with this better cost structure too.

Got it. Great. One last one. I know we'll get the guidance, next quarter. But just maybe you can comment any changes to how you will guide, like in terms of the information you'll provide, versus how you guided last year? Either any incrementally new or less information, when you do give the guidance?

No. I think that's a question we'll, we'll answer Joe in about 90 days.

Thank you. This concludes our question-and-answer session. I would now like to hand the call back over to Mr. Chowbey for closing remarks.

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.

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.