Kennametal Inc.

Good morning. I would like to welcome everyone to Kenna Meadows' third quarter fiscal year 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star then the number two. Please note that this event is being recorded. I would now like to turn the conference over to Kelly Boyer, Director of Investor Relations. Please go ahead.

Thank you, Operator. Welcome, everyone, and thank you for joining us to review Canada Metals' third quarter fiscal 2021 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 Kelly Boyer, Vice President of Investor Relations. Joining me on the call today are Chris Rossi, President and Chief Executive Officer, and Damon Audia, Vice President and Chief Financial Officer. After Chris and Damon'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 Kenna Metals 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, aka on our website. And with that, I'll now turn the call over to Chris.

Thanks, Kelly. Good morning, everyone, and thank you for joining us today. I'll begin today's call with some general comments and a brief review of the quarter and Q4 expectations. Damon will then review the quarterly financial results and Q4 assumptions for modeling purposes in more detail. Finally, I'll make some summary comments before opening the call for questions. beginning on slide two in the presentation. I'm encouraged by our third quarter results, which reflect strong sales and operating leverage driving solid cash flow generation. Q3 sales increased 10% sequentially, outpacing our mid- to high-single-digit expectations, reflecting both market improvement and growth from our strategic initiatives. On a year-over-year basis, organic sales declined 1%, on top of a 17% decline in the prior year. Transportation and general engineering continue to lead the end markets with positive year-over-year growth for the first time in 10 and 7 quarters, respectively. Energy and aerospace continue to be challenged, but both are showing signs of improvement. Regionally, we saw Asia Pacific return to growth, while EMEA and the Americas are still negative on a year-over-year basis, However, all regions improved sequentially. Our margins improved 330 basis points sequentially on stronger sales and improved manufacturing productivity, despite the continued lifting of temporary cost control actions, which Damon will discuss in more detail. Improvement in margins sequentially is really a testament to the structural cost savings we've made through simplification and modernization. Operating expense as a percentage of sales remained flat, sequentially at 22%, but was up year over year as costs continued to come back into the business. Our target for operating expense remains at 20%. Adjusted EPS was $0.32 versus $0.46 in the prior year quarter, reflecting the factors I just named. Overall, we are pleased with our execution as market conditions have improved. and we expect markets to continue strengthening. However, the effects of COVID-19 restrictions in some regions and customer supply chain challenges may temporarily suppress the recovery trajectory from what we saw in Q3. Therefore, because of these uncertainties, we have estimated sequential sales growth in the mid-single digits, recognizing that our end markets may strengthen even more in Q4 if these uncertainties do not materialize. But regardless of the shape of the recovery, we will stay focused on executing our operational and commercial excellence initiatives aimed at driving share gain and improving profitability throughout the cycle. For operational excellence, we continue to execute simplification modernization, posting $63 million in incremental savings year-to-date, on track for $80 million this fiscal year and $180 million since program inception, which is in line with the target originally set, despite much lower sales volumes. For commercial excellence, I'm encouraged again this quarter by the results of our Fit for Purpose and other growth initiatives and believe progress will continue accelerating as COVID-19 restrictions are lifted and markets recover further. In addition, we continue to execute a disciplined pricing process to reflect pricing based on value added, as well as changes in commodity costs. So our teams in both business segments are planning pricing actions in the fourth quarter, reflecting the changes in raw material costs expected as markets recover. We do not expect the recent increases in raw material costs to affect us until early fiscal year 22. As you know, historically, we have demonstrated an ability to offset raw material cost increases with price and expect to do so for this current economic cycle. Finally, as I mentioned at the outset of the call, free operating cash flow was strong this quarter, particularly when compared to adjusted net income, reflecting improved productivity, strong working capital management, and lower capital spending. Now let's turn to slide three for an update on how we have performed this downturn relative to past downturns. As a reminder, the last time the company experienced a sales decline close to the current one was during the Great Recession in 2009. The slide shows trailing 12-month sales on the left chart and the corresponding adjusted operating margin on the right chart. Starting with the left chart, you can see that the trough level of trailing 12-month sales is similar at approximately $1.7 billion for the current and 2009 downturns. Also of note is that the current downturn is more elongated, and we've been hovering around the $1.7 billion level for two quarters. Now, looking at the profitability chart on the right, you can see that we have been able to maintain significantly higher levels of profitability throughout this downturn. This quarter, there's roughly 600 basic points of adjusted operating margin improvement compared to the 2009 downturn due to the structural improvements we've made and the timely aggressive cost control actions taken last year. With regard to Q4 margins, we expect our adjusted operating margin to improve modestly both year over year and sequentially, which Damon will provide more detail on later. In summary, I'm encouraged by our Q3 results and the underlying leverage demonstrated this quarter. We've maintained higher profitability levels and are well positioned to outperform as markets recover further because of the initiatives we executed over the last several years. With that, I'll turn the call over to Damon who will review the third quarter and Q4 outlook in more detail.