Kennametal Inc.

Good morning. I would like to welcome everyone to Kenna Metal's second quarter fiscal 2023 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'd like to ask a question during this time, simply press star then the number one on your telephone keypad. If you'd like to withdraw your question, please press star then the number two. Please note that this event is being recorded. I'd now like to turn the conference over to Kelly Boyer Vice President of Investor Relations.

Thank you, Operator. Welcome, everyone, and thank you for joining us to review Canon Metal's second quarter fiscal 2023 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 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 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 Metal'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, aka on our website. And with that, I'll now turn the call over to Chris.

Thanks, Kelly. Good morning and thank you for joining us. I'll start the call today with a review of the quarter and some recent strategic wins, as well as an example of the game-changing innovation we are bringing to our customers. Pat will then go over the quarterly financial results and the outlook. And finally, I'll make some summary comments before opening the call for questions. Beginning on slide two in the presentation, we posted strong year-over-year organic sales growth in the quarter, and continue the successful execution of our strategic initiatives, despite ongoing macroeconomic headwinds, such as high inflation, foreign exchange, and COVID-related disruptions in China. Sales increased double digits year over year at 11% organically, offset by negative foreign exchange of 8% and business days of 1%. As expected, price continues to be a significant part of the sales increase. On a constant currency basis, all regions and end markets grew year over year. The Americas and EMEA both posted double-digit growth. It's worth noting that the EMEA growth rate includes the negative effect of approximately 300 basis points due to our exit from Russia in Q3 of last year. The growth rate in Asia Pacific was 2% in the quarter and was negatively affected by approximately 550 basis points from COVID disruptions in China. The growth rates, however, in all other Asia-Pacific countries remain strong. By end market, aerospace, transportation, and earthworks all reported double-digit growth, while energy and general engineering grew mid to high single digits. So, overall, our end markets continue to demonstrate resiliency despite the unpredictable macroeconomic environment, and we expect this to continue through fiscal year 23. Of course, we recognize there are still risks in the global economy. However, as I said last quarter, we believe we are well positioned in all our end markets despite short-term uncertainties and challenges. Our strength in aerospace was evident again this quarter, and we expect to continue to take share as aircraft build rates improve. It was nice to see transportation at double digits this quarter, and we believe the end market will strengthen as supply chain disruptions continue to improve. We already have a strong position in traditional transportation and will benefit from the leadership position we are establishing in tooling for hybrid and electric vehicles. Earthworks continues to benefit from the immediate demand for coal. We also see it benefiting from the conversion to green energy and from increased government spending on infrastructure projects, including trenching for internet and electric grid expansion, and for road and bridge rehabilitation and construction. We expect general engineering to remain steady despite some moderation in industrial production as we reach new customers with our fit-for-purpose tooling portfolio and with the significantly improved functionality of our digital customer experience platform. And finally, in energy, while the growth trajectory slowed slightly this quarter, as our customers managed inventory levels for their fiscal year-end, we are optimistic that a long-term growth trend is underway based on customer feedback. Our products and solutions serve both renewables and traditional energy markets, which positions us well to benefit from increased demand in both. So while there are still some uncertainties in the current macro environment, we are working to ensure that we perform well in all scenarios. And right now, we feel quite good about the underlying long-term growth drivers in our end markets and believe we are well positioned in each. Turning now to profitability in the quarter, As I mentioned earlier, price was a significant portion of the year-over-year sales increase, and the pricing actions taken in both business segments substantially covered all forms of inflation on a dollar basis. Metal cuttings volume came through at the expected operating leverage. The effect on this leverage, however, was masked by the FX headwind, and operating margins remained flat year-over-year. Pat will go into more detail on metal cutting margins in his section. The infrastructure segment, as expected, accounts for the decline in company operating margin year over year. The principal driver of the decline was our intentional action to extend the planned shutdowns of our powder production operations in December, and we carried those extensions over into January. Remember, these powder operations provide the raw material feedstock for many of our plants, so it was essential following the pandemic to carry sufficient safety stock to cover the extended and uncertain supply of raw materials and other inputs to production. The good news is that delivery lead times and reliability of supply are improving, such that we are comfortable taking action to reduce safety stocks. This action drove a large absorption variance year over year, as during Q2 of last year, we were building safety stocks. We expect the effect of underabsorption to abate in Q3, and infrastructure margins to significantly improve by year end. And Pat will go into more detail on the infrastructure margins in his section. Operating expense as a percentage of sales decreased to 21.3% this quarter. Customers continue to ease COVID restrictions for supplier partner visits. And this is good news for our commercial engineering teams as it affords them the opportunity to demonstrate our latest product innovations across our entire brand portfolio. While obviously an increased expense year over year, we see these costs as an investment in growth and gaining share. And I'll discuss on a later slide some examples of the returns we're getting on this investment. Adjusted EPS declined to 27 cents compared to 35 cents in the prior year quarter, with a decline largely driven by the factors I discussed and a favorable tax rate. Free cash flow this quarter increased significantly to 44 million from 22 million in the prior year quarter. despite a year-over-year increase in primary working capital driven mainly by higher raw material costs and safety stock. And finally, we continued the share repurchase program this quarter with $11 million of shares bought back, bringing the total amount repurchased since the beginning of the program to $115 million. Our share repurchase program reflects the confidence we have in our ability to execute our strategic initiatives for long-term value creation despite quarterly macroeconomic headwinds and uncertainties. Now let's turn to slide three for a summary of our growth roadmap. You've seen this slide before, so I'm not going to cover it in detail. However, at a summary level, I'd like to highlight that megatrends such as hybrid and electric vehicles, digitalization, and ESG align well with our technical expertise and market exposure. In addition, we have a significant opportunity to increase share of wallet with existing customers and add new customers as we reach into underserved markets, geographies, and application spaces. Now let's turn to slide four to review some recent commercial wins that resulted from successful execution of our growth roadmap. On this slide, we show a great win with a global structural pipe manufacturer in the fit-for-purpose application space. We delivered a solution that increased the customer's tool life by up to five times. And by outperforming in this application, we secured additional video business in a new facility. We also had a major win with a manufacturer that produces parts for aerospace, power generation, petrochemical, and general engineering. We secured this win by delivering a 50% benefit to the customer, and we expect to secure a larger share of this customer's business in the future. A great example of our ability to secure and sustain business is the renewal of our sole source supplier status for corrosion-resistant mixer paddles with a large U.S.-based global chemical company. In the food packaging materials industry, we furthered our leading market position with a win at a leader in flexible food packaging. We won the business by outperforming the entrenched competitor, reducing the customer's defects by 10% and energy consumption by 8%. And finally, we furthered our leadership position in the rapidly growing hybrid electric vehicle space. We secured preferred tooling supplier status with a U.S.-based leading global auto manufacturer by partnering with a customer on the manufacturing of an aluminum transaxle battery housing platform. And we expect this win will position us for further growth in this fast-growing application space. These are just some examples of wins that demonstrate our ability to gain a larger share of existing customers' business, as well as our new customers. Now on slide five, I'd like to highlight an example of a game-changing innovation we're bringing to our hybrid electric vehicle customers. This slide shows our tooling solution for a typical housing used on hybrid electric vehicles. In this case, the customer is looking for a solution with exceptional productivity, that can hold tight tolerances and be used on existing and standard machine tools to minimize capital investment. Each tool uses several kind of metal proprietary consumable inserts and achieves the lightweight and rigidity needed to machine the housing in a single pass by leveraging our proprietary additive manufacturing techniques. The net result for the customer is a 50% improvement in productivity and a 45% reduction in tool weight which enables the part to run on a standard machine tool and yield a 40% reduction in energy usage. It's these types of examples that give us confidence that the investments we are making in commercial excellence and innovation are paying off. Now let me turn the call over to Pat, who will review the second quarter financial performance and the outlook.