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spk01: Good morning. I would like to welcome everyone to Kenna Metal's fourth quarter fiscal 2022 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, this event is being recorded. I would now like to turn the conference over to Kelly Boyer, Vice President of Investor Relations. Please go ahead.
spk00: Thank you, Operator. Welcome, everyone, and thank you for joining us to review Canada Metals' fourth quarter and fiscal 2022 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 on 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 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 would like to direct your attention to our forward-looking disclosure statements. 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 forward-looking statements. These risk factors and uncertainties are detailed in Kenna Metals SEC filings. In addition, we will be discussing non-GAAP financial measures 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 turn the call over to Chris.
spk03: Thank you, Kelly. Good morning, everyone, and thanks for joining the call today. Before we get started, I'd like to recognize Pat Watson. This is his first call as our new Chief Financial Officer. Of course, many of you already know Pat from his most recent role as VP and Corporate Controller, and I've had the pleasure of working closely with him since I joined the company. I know he'll do a fantastic job for us as CFO. In his tenure at Kenna Metal, he's made significant contributions to the organization. He's held leadership roles that span from global finance and acquisitions to supply chain. And most importantly, his extensive knowledge of the company will continue to be instrumental in supporting our strategy to improve profitability and grow the company. Pat, welcome.
spk07: Thank you, Chris. And good morning, everyone. I'm excited to be named CFO at this pivotal time for Kenna Metal. We've had tremendous success transforming the company over the last several years, and I believe that there is significant potential for growth and margin expansion in our future, too. I'm excited by our potential, and I look forward to meeting many of you on the call today in person over the coming months.
spk03: Okay. Thanks, Pat. For today's call, I'm going to start with a review of the year. followed by an overview of the fourth quarter and our growth roadmap for fiscal year 23 and beyond, including some examples of recent customer wins. From there, Pat will review the quarterly financial results and our outlook. And finally, I'll make some comments regarding our cash allocation strategy before opening the line for questions. Beginning on slide two, fiscal year 22 was a very good year as we continue to transform the company. Sales were up 9% on organic growth of 11%, reflecting recovery in our end markets, pricing for value and to cover inflation, and acceleration in our growth initiatives. Infrastructure reported 14% organic sales growth and metal cutting 9%. All regions had positive growth, with the Americas leading at 16%, EMEA at 10%, and Asia Pacific at 2%. Operating leverage was particularly strong year over year, reflecting success achieved in both our commercial and operational excellence initiatives. Adjusted operating margin increased 340 basis points year over year, a significant improvement, especially given the challenges, which included continuing supply chain issues, COVID-related lockdowns and absenteeism, the Ukraine conflict, high inflation, and the effect of $25 million of temporary cost actions in the first half of fiscal year 21. Pre-operating cash flow for the year was $85 million, dampened by a higher cost of inventory and strategically holding additional safety stock to mitigate the effects of supply chain disruptions on our customers. In summary, we feel very good about delivering a solid year. We nimbly managed through many challenges, drove performance improvements, and continued to advance our strategic initiatives. Let's turn to slide three to review the Q4 results. We ended the year with sales up 3% to $530 million in Q4, which was at the top of our outlook range despite the effect of the lockdown in China and our exit from Russia. Together, these amounted to approximately $14 million in the quarter. The underlying organic growth rate was 7% year-over-year, offset by a 4% FX headwind from the strong US dollar. On a year-over-year basis, all regions and end markets grew, with aerospace, energy, and earthworks posting double-digit increases, and general engineering and transportation in the mid-single digits. It's important to note that pricing represented a large amount of the sales increase in the quarter, as we've been adjusting prices to mitigate the effects of higher inflation and based on the value delivered to customers. As we've discussed on previous earnings calls, the underlying operating leverage of the business is masked when price covering costs becomes a large portion of the year-over-year sales change. So, as expected, operating leverage in the fourth quarter was lower than the yearly average. Accordingly, Q4 adjusted EBITDA margin was relatively flat this quarter compared to the prior year at 19.1%, with net price offsetting raw material costs, operational excellence initiatives, higher volume and lower incentive compensation, mostly mitigating higher manufacturing costs, including costs from depreciation, COVID-19 absenteeism, supply chain constraints, and FX. Preoperating cash flow was $52 million for the quarter, and adjusted EPS was flat year-over-year at $0.53. Now I'd like to take a minute to reflect on our margin improvement over the last several years. Slide 4 compares the EBITDA margin in fiscal year 16, which was before we embarked on our transformation journey, versus fiscal year 22. The sales in these two years were approximately the same, But margins now are 660 basis points higher, thanks to the structural cost savings achieved from simplification modernization and the additional benefits from our operational and commercial excellence initiatives in fiscal year 22. This is a significant accomplishment for the company and our teams, with more margin expansion potential to come as volumes increase. As you know, modernization streamlined a lot of factory processes. For example, consider a factory that had 12 presses run by 12 operators before modernizing. Today, that same factory has three presses run by just one operator. Now, in a lower volume environment, perhaps only two of the three presses are currently running, but as volume increases, the third press will also be used, an increase in productivity on higher volume without adding any capital or labor. Beyond these volume-related simplification modernization benefits, our operational excellence initiatives, such as Smart Factory, will also drive further margin expansion and continued improvements in customer service levels. This improved operational performance, combined with our commercial excellence initiatives, is positioning us to win in our targeted end markets and applications. At its core, commercial excellence is about efficiently driving growth with new and existing customers. We're focused on flawless execution, using data to inform our commercial decisions, and value-based pricing to get paid for the value we deliver to our customers. So, our extensive work to simplify our products and structure, modernize our factories, and the early stage results from commercial and operational excellence are driving increased profitability and set us up well to deliver on our growth roadmap, which is shown on slide five. This is a new slide that lays out the megatrends, share gain initiatives, and other growth areas that are positioning us for continued commercial success. Panametal has long held a leadership position through innovative products and best-in-class customer support. Now, as I discussed, thanks to our modernization investments and ongoing operational excellence initiatives, we're in an even stronger position to drive improved customer service and greater productivity. And combined with our commercial excellence initiatives, we're driving a larger share of wallet with existing and new customers. In addition to growing our current base business in this way, there are several megatrends that are well aligned with our technical expertise and market exposure. For example, we're a leader in EV, aerospace, wind energy, and fossil fuel markets, and will continue to provide customers with products that provide productivity improvements in each of these growth areas. And for our many ESG-focused customers, we have solutions that will increase productivity while decreasing energy and resource consumption. We're also focused on segments of our end markets and application spaces that we've historically underserved. Here's an example. We're cost-effectively extending our reach, especially with small to medium-sized customers, through digital customer targeting and our digital customer experience platform. Also, there are certain applications, including medical, microparts, and fit-for-purpose, that we're expanding our product portfolio to serve through our existing channels. Similarly, we continue to gain share with aerospace customers, where we still have a relatively low share, and in EV applications where we've established an early leadership position. Finally, we have the opportunity to supplement our organic growth initiatives through acquisitions. Of course, we'll be disciplined and prudent in this pursuit, staying within our core areas of expertise. The targets will likely be both on size and in regions and markets or applications that we're underserving. So that's a high-level view of our growth roadmap. And now we can turn to slide six for some recent commercial wins that give us confidence in our ability to deliver this roadmap. As I mentioned, we're a leader in innovative tooling in the electric vehicle space. In this quarter, we secured our first major win with a supplier to an EV commercial van manufacturer in Europe. This new win was driven by the success of our innovative products designed specifically for electric vehicles that we've already demonstrated with other customers. Another success story this quarter was with a tool manufacturer that is diversifying into the semiconductor space. They needed a supplier with expertise in high metal removal rates, tight tolerances, and thin-walled machining, which is a difficult operation. This is a great example of how our technical and application engineering know-how benefits customers and positions us to win in challenging applications. Another major win this quarter, was with a large aerospace customer that was on-shoring titanium parts manufacturing. In this instance, we provided tooling that significantly improved their productivity by reducing cycle time 40% and tooling costs 50%. In the energy space, we continue to win with extrusion machining manufacturers applying our proprietary designs and consistent manufacturing techniques. These wins are opening doors for more opportunities globally. And finally, you may have seen GE Additive's press release earlier this quarter announcing we've joined their Beta Partner Program, leveraging our proprietary material expertise for serial production on GE's binder jet system. This partnership is further evidence of our leadership position in tungsten carbide additive manufacturing. Again, these are specific examples of recent wins that align with our growth roadmap and serve to highlight our customer-focused innovation capabilities. And with that, let me turn the call over to Pat, who will discuss the quarterly results and outlook in more detail.
spk07: Thank you, Chris, and good morning again, everyone. Let me begin on slide seven with a review of our fourth quarter operating results on both a reported and an adjusted basis. We continue to successfully execute our initiatives during the quarter in the face of headwinds from inflation, lockdowns in China, and foreign exchange. For the quarter, sales of $530 million improved 3% year-over-year and 7% on an organic basis from $516 million in the fourth quarter last year. As a result of the strong U.S. dollar, foreign currency had a significant negative effect of 4% on sales, and there was no effect due to business days. Adjusted operating expenses decreased year-over-year to $102 million, or 19.3% of sales. Adjusted EBITDA margin was relatively flat at 19.1% versus 19.2% in the prior year quarter. Maintaining our margin in this inflationary environment is a reflection of our focus on pricing for value and tight cost control. For a bit of perspective, prior to the completion of simplification modernization, the last time EBITDA margin exceeded 19% was during the third and fourth quarters of FY19 when quarterly sales exceeded $600 million. This is another validation point of the structural cost improvements we have made over the last few years. The adjusted effective tax rate in the quarter was 27.6%, a more normalized level than the previous year due to higher pre-tax income this quarter. We reported gap earnings per share of 50 cents versus 41 cents in the prior year period. On an adjusted basis, EPS was 53 cents, the same as in the prior year quarter. The main drivers of our adjusted EPS performance are highlighted on the bridge on slide 8. The effective operations this quarter amounted to approximately 5 cents. This reflects price offsetting raw material cost increases, operational excellence initiatives, volumes, and lower incentive compensation, mostly mitigating higher manufacturing costs including costs from depreciation, COVID-related absenteeism, and supply chain constraints. Taxes and currency both amounted to 3 cents this quarter. Detailed full-year results and a full-year EPS bridge can be found on pages 17 and 18 in the appendix. Slides 9 and 10 detail the favorable performance and continuing progress we have achieved in our segments this quarter. Metal cutting sales increased 7% organically. FX affected sales by a negative 6% in the quarter, and there was no effect from business days. The Americas and EMEA posted year-over-year sales increases, with the Americas increasing at 12% and EMEA at 6%. Asia-Pacific declined by 1%, due in large part to the COVID-19 lockdowns, which lasted approximately two-thirds of the quarter. From an end-market perspective, on a year-over-year basis, strength and demand is broad-based. Aerospace led again this quarter with strong double-digit growth of 21%. Energy was up 9%, followed by general engineering up 6%, and transportation at 4%, despite ongoing supply chain challenges. Adjusted operating margin decreased slightly to 40 basis points year-over-year to 11.3%, compared to 11.7% in the prior year quarter. Price offsetting raw material cost increases, operational excellence initiatives, volume and lower incentive compensation mostly mitigated higher manufacturing costs, including costs from depreciation, COVID-19 absenteeism, supply chain constraints, and FX. Referring to infrastructure on slide 10, organic sales increased 7% year-over-year in the quarter, with FX a negative 2% effect and no effect due to business days. All regions grew with the largest increase year-over-year in Asia Pacific at 9%, the Americas at 7%, and EMEA at 5%. All end markets were positive, with energy and earthworks up double digits at 12% and 10% respectively, and general engineering up 1%. Adjusted operating margin decreased slightly by 50 basis points to 14% from 14.5% in the prior year quarter. reduced incentive compensation, and the benefits from operational excellence initiatives partially mitigated manufacturing performance challenges due mainly from supply chain constraints and inflation. Price continues to cover raw material cost increases on a dollar basis. Now turning to slide 11 to review our balance sheet and free operating cash flow. We continue to maintain a strong liquidity position, healthy balance sheet, and debt maturity profile. During the quarter, we amended and extended our $700 million revolver, pushing the maturity out five years and removing the interest coverage covenant. At fiscal year end, we had combined cash and revolver availability of approximately $767 million. Primary working capital increased year over year to $638 million, due mainly to increases in inventory, partially offset by higher payables. As Chris mentioned, The increase in inventory was due mainly to higher raw material costs and a strategic decision to increase safety stocks of both raw materials and finished goods to meet customer needs in the current challenging supply chain environment. On a percentage of sales basis, primary working capital decreased to 31.2%. Our fourth quarter free operating cash flow was $52 million, down from $65 million in the prior year quarter, due mainly to higher inventory and higher capital spending. Net capital expenditures for the quarter were $37 million, an increase of $7 million from the prior year, bringing the total net capital spending for the year to $96 million. Capital was slightly lower than expected in the quarter, mainly due to supply chain constraints and the associated challenges with equipment delivery. While we continue to invest in the business, we also continue to return cash to the shareholders We paid a dividend to $17 million in the quarter and continued to execute our $200 million share repurchase program. In the quarter, $35 million of shares were repurchased, bringing the total to $85 million for the year. A full balance sheet can be found on slide 19 in the appendix. Now, let's turn to slide 12 and review the outlook. Starting with the first quarter, we expect sales to be in the range of $480 to $500 million. At the midpoint, this implies a sequential decline of approximately 7.5%, slightly better than the normal seasonality of negative 8 to 10%. As a reminder, we normally see a sequential drop Q4 to Q1 due to the seasonality of the construction business and infrastructure and the summer holiday season in EMEA. FX is expected to be approximately a $30 million year-over-year revenue headwind in the quarter and a corresponding approximate $6 million operating income headwind. At the midpoint of this sales outlook, we have assumed there will be no significant change in the supply chain challenges in transportation. We have assumed that demand will not be adversely affected from further lockdowns associated with COVID-19. And lastly, We are planning for the typical EMEA first quarter extended vacation and summer shutdowns for our customers. Assuming our current market outlook, we expect adjusted operating income to be a minimum of $45 million, reflecting the inflationary environment that we are in. We expect our pricing actions of approximately $30 million to offset raw material, salary, and general inflation on a dollar basis. Engine income remains positive, unlike most companies. but is expected to decline approximately $4 million due to lower return assumptions for our primary U.S. pension portfolio. It is important to note that our primary U.S. pension plan remains overfunded with no cash contributions expected to be needed. The adjusted effective tax rate is expected to be in the range of 26 to 28 percent, and depreciation and amortization will increase $3 to $4 million year over year. we expect free operating cash flow to be neutral, slightly better than the normal seasonal pattern. For the full year outlook, let's turn to slide 13. Visibility, particularly in the second half, remains limited, but it is our assumption that underlying demand will continue to improve, albeit at a low rate. Energy, aerospace, and earthworks are likely to lead our end markets, and transportation is expected to continue to be challenged by supply chain constraints. General engineering will be affected by transportation and the general economy. With regard to the quarterly sequence, we expect our sales to approximate the normal sequential growth patterns throughout the year. We have also assumed that the Ukraine conflict will continue to affect our customers, mainly in Europe, but that the availability and price of natural gas will not materially affect our business. Also, as Chris mentioned, In this highly inflationary environment, the underlying operating leverage of the business is masked by significant price increases that are offsetting cost inflation on a dollar basis. Moving on to other variables for the full year, we expect an adjusted effective tax rate of 26 to 28 percent. Depreciation and amortization is expected to increase 15 to 20 million dollars year over year to a range of 140 to 145 million dollars. Pension income for the full year is expected to drop by approximately $14 million due to the lower return assumptions on the portfolio. Capital expenditures will be in the range of $100 to $120 million since supply chain disruption and logistical constraints are expected to continue in the near term. Over the long term, we still expect the capital investment needs will be approximately $120 million per year. Primary working capital is expected to be between 31% and 33% this year, reflecting our higher inventory strategies to mitigate supply chain risk. Together, these assumptions and forecasts are expected to translate to free operating cash flow generation at approximately 100% of adjusted net income in line with our long-term target. And with that, I'll turn it back over to Chris.
spk03: Thanks, Pat. Please turn to slide 14 for a summary of our capital allocation approach. In the left-hand table, you can see the capital allocation for fiscal year 16 through fiscal year 21. Many of you know this allocation approach quite well. Dividends have been a consistent method by which we return cash to shareholders, and I should note that we maintain the dividend throughout the downturn, which many companies were unable to do. But for the most part, our capital allocation during these years was focused on simplifying the company and modernizing our facilities. And, in fact, we invested an incremental $300 million in CapEx and $200 million in cash restructuring costs during this timeframe. As I mentioned earlier, this capital allocation approach has served us well, with margins increasing 660 basis points on approximately the same revenue level. Now that the simplification, modernization, capital investments, and restructuring are behind us, combined with our strong balance sheet and cash flow, we are executing on the capital allocation strategy shown in the right-hand table. There are three fundamental priorities here, capital investments, returning cash to shareholders, and acquisitions. Capital investments will continue to focus on keeping our modernized facilities state-of-the-art, driving further productivity and customer service improvements, and advancing our digital customer experience platforms. We will also remain committed to returning cash to shareholders through a quarterly dividend and continuation of our stock repurchase program. Finally, acquisitions, which we see as a strategic lever to accelerate growth in core areas of expertise and underserved regions and markets and applications. Importantly, this capital allocation strategy works hand in hand with our growth roadmap and taken together, these reinforce our ability to invest in the company for growth. Now, please turn to slide 15 for a brief summary before we open the call for questions. We had a great year in fiscal year 22, and I'd like to take this opportunity to congratulate the entire Kenna Metal team on the results. In fiscal year 23, we expect the end market recovery to continue, but visibility remains limited. Regardless, we've proven our ability to operate successfully in an uncertain macro environment. We'll continue to focus on the things we can control and executing our growth roadmap through our commercial and operational excellence initiatives. And with that, operator, please open the line for questions.
spk01: Thank you. To ask a question, if you'd 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. Today's first question comes from Stephen Volkman at Jefferies. Please go ahead.
spk04: Hi. Good morning, everybody. Thanks for taking the question. If we could just lead off, Chris, can you just talk a little bit about the supply chain issues that you're seeing? And I'm curious if you can kind of delineate between what's impacting Kenna Metal directly and what is more indirect with respect to kind of your customers.
spk03: Sure, Steve. I would say that in general, the effects of the supply chain have been greater on our customers than us, so it manifests itself in a situation where they seem to have a lot of backlog, but they're constrained by how much they can produce. That consequently holds back our revenue from what I think it would be higher if those supply chain constraints would go away. That being said, we do, especially in the infrastructure business, we have some forgings and castings and those type of things, but so far, Steve, we've worked our way through those type of supply chain constraints. Again, mostly the effect, Steve, is on the customers. Of course, as you know, in transportation, that's what's really holding transportation back. Seems to be plenty of demand, but they're highly constrained because of the chip issue, and then they had the Ukraine conflict with wiring harnesses and those type of things.
spk04: Okay, great. Thanks for that. And then maybe just a quick follow-up. You guys have said numerous times that you're sort of covering inflation costs with price on a dollar basis, but I'm wondering how you look at that longer term, because obviously if we're in an inflationary environment and this sort of continues, then covering it on a dollar basis is going to be kind of margin dilutive, you know, in perpetuity perhaps. So I'm wondering how this kind of plays out over time. Is there an opportunity to actually kind of recapture the margin as well as the dollars?
spk03: Well, I think, uh, Steve, first of all, I hope this high inflation is not in perpetuity. So we'll see what happens with the globe. But I think in the midterm, as you know, our long-term targets, they were predicated on a typical inflationary environment. So the current inflationary environment, as you correctly pointed out, when you do the math, will lower the margins with price just covering the inflationary effect. But that being said, And what we try to help you with, especially in the first quarter in terms of your modeling, is we can still be confident in saying that the underlying operating leverage of the business that we would expect from the simplification and modernization investments, when there's actually a volume increase that equals piece volume for plants, we still feel very good that that will leverage in the typical range that I think many of the analysts on the phone are using something around 50%. So, you know, we're going to continue to try to provide you information so you can sort through that. But the underlying operating leverage still is within the business. Now, the other thing is on pricing, we always are pricing for value. And, you know, we're going to continue to do that. And while we've been on that journey for a little while, I think there's still some more opportunity there. So that could help us, you know, that could help us eat into the effect of the math, Steve. But that's the way I'm thinking about it.
spk04: Okay, I appreciate it. I'll pass it on.
spk01: And our next question today comes from Joe Ritchie at Goldman Sachs. Please go ahead.
spk05: Thanks. Good morning, guys, and congratulations, Pat, on the new opportunity. I look forward to working with you. Can you maybe just kind of start by just, you guys have given a lot of good details on some of the puts and takes for 2023. Can you maybe just give us a little bit more on just like how you expect the cadence of the year to go? And if you could provide any commentary, particularly around like, you know, tungsten pricing, how that's impacting the business today and how you'd expect it to impact that going forward, that'd be helpful.
spk03: Yeah, I think the cadence in terms of revenue is, We expect to follow the normal sequential pattern, Joe. And, you know, if you listen to Pat in his opening remarks, you know, that's based on a view or an outlook of the year that's, you know, sort of flat to maybe some growth, right? So we're assuming, for example, that transportation is sort of flattish and we're not expecting any major improvement in their supply chain. But they are working on the problem, and it is expected to get better. So that could be an opportunity in terms of doing something with revenue that's higher than the sequentials. We also know that energy continues to be strong. And then same thing with aerospace. That continues to recover. The real question is general engineering, and that's certainly affected by transportation issues. But we've kind of tried to assume that it's linked to sort of the general manufacturing indices, which are tied to GDP and those kind of things. And so we're assuming that that is still kind of flat. If you look at a lot of the manufacturing indices, they have moderated, but they're still in positive territory. So, you know, our feeling is that – that things could actually get better based on our underlying assumption that we're going to simply follow the normal seasonal trend, right? And then your next question was what? I'm sorry. Can you repeat it?
spk05: Sure. Yeah, no problem. Just the impact of tungsten, what impact that's having on your business today. You know, I know that – you tend to benefit in a rising tungsten environment, but then there is some margin pressure as tungsten starts to come down. So just curious to see how that's expected to impact 2023.
spk03: Yeah, so given our outlook, what I basically said is that, you know, volumes will be sort of flat to maybe slightly increasing. And in that environment, we expect the tungsten prices to be stable. But you are right. If volume does dramatically reduce, that's when, especially in infrastructure where the APT price comes down, there is an adjustment in prices that we have to factor in. But we're not expecting that to be the case in FY23, but, you know, you've got the right modeling thought process in your head. Got it. No, no. Frankly, it took a lot of, you know, a lot of the inventory increase was just purely on the paying for higher material costs, which was driven by the tungsten.
spk05: Got it. That's helpful. If I could sneak one more in. So in kind of like a flat volume environment, clearly you guys have made a lot of improvements behind the scenes, and you referenced some of those on the modernization initiatives. How do you think about then like the I know there's no there's there's not a perfect way to measure drop through in a flat environment. But how do you think of like the potential margin improvement that we should still see in a flat environment as we head into next year?
spk03: Yeah, I think I guess what I would tell our investors is that we're. we clearly, based on our modernization investments, will benefit as higher piece volume runs through the factory. But your question is in a scenario where that's just kind of flat. And so that's one of the reasons why we teed up this operational excellent initiative we've been talking about is we still are expecting our plants to drive productivity, even in flat volume, year over year. That's just what good companies do. And And now that we've got a modernized footprint, we've got sort of a good baseline to build off of that. So our expectation is we're still going to drive productivity improvement. And as I mentioned, we'll try to, as we go through the year, we'll try to highlight that. But given the high inflation and the price covering inflation, that tends to dampen the math. So we're going to try to sort that out for you, Joe. But there is an expectation that we drive improved margins even in a flat environment.
spk05: Okay, great. Thank you.
spk01: And our next question today comes from Julian Mitchell at Barclays. Please go ahead.
spk02: Hi, good morning, and I look forward to working more with you, Pat. In terms of, I guess, the My first question, really on that margin point. So in the current or first fiscal quarter, you've got sort of flat to slightly up volumes year on year, operating margin down year on year, maybe 100, 150 bps. So just trying to understand in light of your previous comment around trying to sort of work to get margins up. you know, if we do see that sort of similar, you know, very low single-digit volume growth for the year as a whole, like you're seeing in Q1, when do you think the margins might be able to turn up year on year, you know, based on current sort of price initiatives and the cost outlook?
spk03: Yeah, I think, you know, when we look at that outlook, Julian, because there's so many moving pieces here, one of the big ones is obviously We've taken pricing actions, and the timing at which those begin to flow through the P&L, along with our assumptions on covering inflation, it's not an exact science as to how the costs are going to roll in. We feel that pretty good on an annualized basis, the price will cover the inflation on a dollar basis. But in any given quarter, where we exactly are in that process is – has some risk to it. And I think, frankly, that as we did the roll-up from the various segments, there might be a little conservatism in there in terms of where we're going to be on that curve. That would just be natural for them. And then I think as I talked about the revenue, I think we're being pretty conservative on where we are with revenue. I think the strength of our Our end markets are there, but there's some issues on a regional basis, like just how quickly China will recover from all their lockdowns. And then, of course, everyone is watching Europe to see what will happen there. So I think there's some potential versus what the outlook would say in terms of driving higher margins. It's just naturally, Julian, there's so many moving pieces that I think our guys, frankly, might be a little bit conservative about. because some of the stuff they just don't know. We're in a little bit of a different environment than we've ever operated before.
spk02: That's fair, but I guess, you know, the point would be, Chris, that, you know, even when the margins are turning, it's sort of second half of the fiscal year is when you're likely to see margins expand. Is that fair?
spk03: Yeah, I think that that's... That would be a reasonable assumption, because that's when volumes will start to, you know, as we said, we sort of forecasted flat to increasing volumes, and that would happen in the second half of the year, assuming, you know, based on the assumptions that Pat had laid out.
spk02: That makes sense. And then just a quick follow-up, you know, on sort of the price and the cost commentary. So I think you've talked about that price tailwind of $30 million in the current quarter. Just to understand, I think you said that's covering the raw material wage and general inflation cost. Is that right, that $30 million covers all those kind of three cost buckets? And just to understand, is it apples to apples when you talk about the $22 million raw material cost increase in Q4? Is that just raw, Matt, excluding wages and general inflation? Just trying to understand those numbers a bit better.
spk07: Yeah, Julian. So, yes, when we think about that, the $30 million in the first quarter, absolutely that is covering, I'll call it, all three sources of inflation, material, wage in general. And, yes, as we talked about the $22 in the fourth quarter, that is purely just raw material.
spk02: That's helpful. Thank you. Thanks, Julian.
spk01: And our next question today comes from Chris Danker at Loop Capital. Please go ahead.
spk06: Hey, morning, guys. Thanks for taking the question. I guess, Chris, any explicit cost savings goals you'd tie to kind of the smart factory and productivity initiatives for fiscal 23, or is this really more aimed at offsetting wage and other manufacturing cost increases here?
spk03: Yeah, on the productivity, well, as we talked about, we believe that – the environment and so far the competitors' reaction to prices that we should be able to cover those three sources of inflation with price. So on the productivity side, we kind of look at that as what is best in class sort of driving productivity, and those are the expectations we set for our factories. You know, it's more of a goal based on what we think is – what equals operational excellence versus we back into a cost number and say you've got to go for that productivity. Does that make sense?
spk06: Yeah, that does make sense. Okay, thanks for that. And then I guess thinking about the midpoint of margin guidance – low end midpoint, however you guys want to frame it up on the margin guidance for fiscal 1Q. I mean, it's down meaningfully year over year. I assume tungsten and price costs is the key headwind there, but anything else you could kind of unpack in terms of the moving parts around the margin guidance?
spk07: Yeah, I think we'll unpack that, the margin first quarter, a couple drivers. Number one is we talk about the FX and the $6 million headwind from an operating income perspective. And then on the price piece, basically just simply offsetting the cost inflation that we have in the business. And as Chris commented a little bit earlier, there's probably a little bit of conservatism in there as well as we think about where that number sits from the outlook perspective.
spk06: Okay. Well, I guess trying to understand that piece, though, as we look at the full year in terms of what the implication is for margin here, I mean, $30 million in the first quarter for pricing. What are you kind of assuming in terms of full-year price at this point, just based on what you've announced, I suppose?
spk07: In terms of when we think about the full year, obviously we've given some color here for the first quarter. What we would expect over the course of the year is that it will still cover the raw material, and so you're not going to see, from a margin perspective, margins expanding based on price.
spk06: All right, fair enough.
spk01: Thank you. And ladies and gentlemen, this concludes the question and answer session. I'd like to turn the conference back over to Chris Rossi for closing remarks.
spk03: Thanks, Operator, and thanks, everyone, for joining the call today. As I said, we feel very good about FY22, despite the challenging environment that we are operating in. And I'm really looking forward to FY23. I'm confident that we're going to make great progress on our initiatives, which include executing and delivering on that growth map through our commercial and operational excellence initiatives. As always, appreciate everyone's interest and support, and reach out to Kelly if you have any follow-up questions. Thank you.
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