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.

Thank you, Chris, and good morning, everyone. I will begin on slide six with the review of the second quarter operating results. Before I begin, Please note that, like last quarter, we did not record any non-GAAP adjustments this quarter. Therefore, adjusted numbers are not presented for the current quarter, and for today's discussion, year-over-year comparisons will be against the prior year's adjusted results. The quarter's results show that we continue to execute our initiatives in the face of significant headwinds from inflation, foreign exchange, and the effects of COVID in China. Sales increased by 2% year-over-year, with 11% organic growth offset by headwinds due to foreign currency and workdays of 8% and 1%, respectively. As Chris pointed out, price remains a large portion of the sales numbers. On a sequential basis from Q1, sales were approximately in line with our normal Q1 to Q2 seasonal pattern of 1% to 2%. Operating expense as a percentage of sales decreased 60 basis points year over year to 21.3%. EBITDA and operating margins were 13.7% and 7.1% respectively versus 16.2% and 9.2% in the prior year quarter. The year over year decrease in operating margin was mainly due to the following factors. First, as discussed last quarter, we were aggressively raising prices in the prior year ahead of experiencing the full effect of higher tungsten prices. In Q2, for the infrastructure segment, however, the favorability of price over material cost is now negligible as raw material costs reflecting the current market cost is flowing through the P&L. We expect raw material costs to be relatively steady for the balance of the fiscal year versus total cost inflation Overall higher pricing substantially offset higher raw material costs, wage, and general inflation in the quarter. Further, there was a higher than anticipated mandated inflation bonus in Germany for all workers in the metal and electrical industries of approximately $2 million, which primarily affected the metal cutting segment. As Chris mentioned, we decided to extend the planned shutdowns of our powder production operations in December. Since our powder operations provide raw material feedstock for many of our plants, it has been essential to carry sufficient safety stock to cover the extended and uncertain supply of materials and other inputs to production post-pandemic. As the reliability of these supply chains has improved, it has enabled us to more aggressively manage our safety stocks in the quarter, resulting in approximately $5 million of unfavorable absorption in the infrastructure segment. As an added benefit, Our decision to extend planned shutdowns helped us minimize the financial effect of the temporary supply chain challenges we faced last quarter, including those from the force majeure, which remains in effect at a key supplier. We expect this under-absorption to abate by the fourth quarter. Lastly, foreign exchange headwinds from the strong U.S. dollar were $6 million. The effective tax rate decreased year-over-year to 17.8% primarily due to a final Swiss tax reform ruling this quarter and regional mix. The full-year effective tax rate is still expected to be in the mid-20s. Earnings per share were 27 cents in the quarter versus adjusted EPS of 35 cents in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on slide 7. The year-over-year effective operations this quarter was negative 3 cents due to the factors that I just discussed. You can also clearly see the effects of the tax rate, foreign exchange, and the reduction in pension income on EPS, with taxes contributing positive 4 cents in currency and reduced pension income, contributing negative 5 and 3 cents, respectively. Please note that our U.S. pension plan remains overfunded, and the change in pension income is non-cash and is driven by market factors, This change in assumptions is affecting each quarter this fiscal year. Foreign exchange is expected to remain a year-over-year headwind throughout this fiscal year, although, based on recent spot rates, the year-over-year headwind is expected to decline each quarter. Slides 8 and 9 detail the performance of our segments this quarter. Reported metal cutting sales were flat compared to the second quarter of fiscal 22, with a strong 11% organic growth offset by a foreign currency headwind of 10% and business days of 1%. We achieved growth in all regions and end markets on a constant currency basis. By region, the Americas led at 12%, followed by EMEA at 9% and Asia Pacific at 2%. EMEA's year-over-year growth this quarter was particularly impressive when you consider that it was negatively affected by approximately 380 basis points from our decision to exit Russia in the third quarter last year. Asia Pacific's growth, as Chris noted, was negatively affected by COVID in China. We achieved strong growth in other countries in Asia Pacific. Looking at sales by end market, aerospace led again with strong growth at 19% year-over-year as we continued to win new business. Transportation grew 13% year-over-year, benefiting from improving customer supply chains and hybrid EV business in EMEA. General engineering grew 6% year-over-year, Energy sales this quarter were relatively flat as customers focused on inventory at their fiscal year end. Adjusted operating margin remained constant at 8.8% on flat sales despite 120 basis point headwind from the strong U.S. dollar. Pricing and productivity offset cost increases such that margins were held constant despite the higher than anticipated wage inflation from the required inflationary bonus in Germany. Operating income in the quarter also includes an expense from the decision to scrap certain assets this quarter that was mostly offset by a gain on the sale of property. Turning to slide 9 for infrastructure. Organic sales increased by 12% year-over-year, offset by foreign exchange headwinds of 6%, and business days of 1%. All regions grew year-over-year, with EMEA leading at 23%, followed by Americas at 11% and Asia Pacific at 2%. We achieved double-digit sales growth in all end markets, with energy and earthworks growing 11% and general engineering at 10%. The strength in energy was driven mainly by improvement in the U.S. oil and gas market, as seen in the continued increase in the U.S. land-only rig count. As Chris mentioned, despite this strength, we did see some customers managing inventory levels heading into their fiscal year end. But based on customer feedback, we are optimistic that a long-term positive growth trend is underway. Earthworks was strong in all regions, driven by underground mining. And general engineering was driven mainly by strength in EMEA wear components. Operating margin declined year over year to 5.1%, primarily due to two factors. First, As discussed earlier in the call, the favorability of price over material costs we have been experiencing is negligible, as raw material costs reflecting the current market costs are now flowing through the P&L. Again, we expect raw material costs to be relatively steady for the balance of the fiscal year. The second significant factor affecting the margin this quarter was the previously discussed underabsorption from actively managing safety stock levels as supply chain reliability improves. We expect underabsorption to improve through the second half such that the operating margin will return to the Q1 fiscal 23 level by Q4. Now turning to slide 10 to review our free operating cash flow and balance sheet. Our second quarter free operating cash flow increased to $44 million from $22 million in the prior year quarter, despite an increase in our primary working capital. On a dollar basis, year-over-year primary working capital increased to $690 million, reflecting mainly higher raw material costs and year-over-year higher safety stock associated with extended supply chains. On a percentage of sales basis, primary working capital increased to 32.3%. We expect inventory levels to decrease in the second half as we manage inventory levels down now that our supply chain is beginning to improve. Net capital expenditures were $19 million, approximately the same as the prior year. In total, we returned $27 million to shareholders through our share repurchase and dividend programs. We repurchased $11 million of shares in Q2 for a total of $115 million, or 4 million shares, representing approximately 5% of outstanding shares since the inception of the program. And as we have every quarter since becoming a public company over 50 years ago, we paid a dividend to our shareholders. Our commitment to returning cash to shareholders reflects confidence in our ability to execute our strategy to drive growth and margin improvement. we continued to maintain a healthy balance sheet and debt maturity profile. At quarter end, we had combined cash and revolver availability of approximately $700 million and were well within our financial covenants. The full balance sheet can be found on slide 16 in the appendix. Now let's turn to slides 11 and 12 to review the outlook. Starting with the outlook for the third quarter, we expect sales to be between $520 to $540 million, which, on a sequential basis, and after considering the effect of a slightly weaker U.S. dollar, is in line with our normal seasonality of 3% to 4% increase. On a year-over-year basis, the sales range assumes a $20 million currency headwind and pricing actions of approximately 7%. Our forecast for sales assumes that underlying demand strength in all of our end markets continues. Regionally, in Q3, we have assumed that the COVID-related disruptions in China begin to improve and, like the second quarter, that the European manufacturing economy remains relatively unaffected by energy. We believe customers will continue to remain cautious in this environment and do not expect meaningful restocking or destocking at this time. Adjusted operating income is expected to be a minimum of $40 million, which reflects continuing inflation headwinds against our strong pricing actions and continued underabsorption in infrastructure due to extending the powder production shutdowns into January. Sequentially, from the second quarter, raw material costs are expected to be flat, but year-over-headwinds remain at approximately $23 million. Pricing actions continue as we work to cover not only this raw material cost headwind, but also higher wages and general inflation. Lastly, lower year-over-year pension income continues in Q3. Turning to slide 12 regarding the full year. We expect fiscal 23 sales to be between $2.05 billion and $2.1 billion, with volume flat to up 2%. price realization of approximately 7% and a headwind from foreign exchange of approximately $100 million. This sales outlook assumes that demand in China improves throughout the second half as the COVID effect debates and that there will be no significant energy disruptions in EMEA. On a full year basis, we expect to offset raw material, wage, and general cost increases on a dollar basis. The $100 million foreign exchange sales headwind is expected to translate into approximately $20 million on an operating income basis. Lower pension income will be a headwind each quarter for a total of $14 million for the year. Depreciation and amortization is expected to be approximately $135 million, and our outlook for EPS remains unchanged at $1.30 to $1.70. On the cash side, The full year outlook for capital expenditures remains unchanged at $100 to $120 million, and the outlook for primary working capital is unchanged at 31 to 33%. Taken together, we continue to expect free operating cash flow 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.

Thanks, Pat. Turning to slide 13, let me take a few minutes to summarize. Overall, we're pleased with the strong organic growth and free operating cash flow in the quarter. Although the operating environment remains challenging, we're encouraged by the continued resiliency of our end markets and the improvements that we are seeing in the supply of materials, which allows us to draw down safety stocks. And we look forward to margin improvement in the second half as we move past the inventory reduction actions we took in the quarter. Looking beyond fiscal year 23, We're encouraged by our strong market position. We're poised to benefit from the megatrends affecting our end markets and the opportunity we have to extract even greater operational efficiency from our modernization investments. And we're confident in our ability to continue to return cash to shareholders while investing in our strategic initiatives for growth and profitability improvement. And with that, operator, please open the line for questions.

Thank you. If you would 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. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Steven Volkman from Jefferies. Please go ahead.

Hi. Good morning, guys. Thanks for taking the question. Maybe just on the guidance here, maybe start maybe big picture. The range that you guys have for the year is pretty broad, and I might have thought you might have narrowed that a little bit as we get into the second half. But maybe just talk about what your view is of sort of the bookends there, what has to go right to get to the top end, and what would have to happen to get to the bottom end, just so we can think about how to level set there.

Sure, Steve. I would say at the high end, what we would need is a very strong recovery in China. We're expecting some kind of recovery more at our midpoint, so we'd have to have a stronger recovery in China. And we'd also have to sort of be operating at kind of the high end of our normal sequentials. And then, of course, we sort of need FX to stay about where it is. I'd say on the low end, you know, it's one of our risk areas. We just don't know. There's a lot of uncertainty just given the sheer number of absenteeisms and now with the Chinese New Year, even greater absenteeisms. It is possible that there could be a weaker China recovery. I don't think anybody knows for sure. We've tried to pick sort of a middle-of-the-road view of that, but it could certainly be weaker. And then we could also be, you know, just naturally at the low end of our sequentials. So that's how I would bookend it.

Okay. And maybe, I think you've talked about the interest margins getting back to kind of where we started by the fourth quarter. How should we think about metal cutting margins kind of sequentially?

I think, Steve, when you think about metal cutting, we're coming off of Q2, you know, moving into Q3. you're going to see some positive volume pick up there. Currency should be a help quarter over quarter, and obviously metal cutting has most of our foreign currency exposure. And also we'll just see some stabilization in the cost structure. So overall, quarter to quarter should be up slightly.

Okay, thank you.

Our next question comes from Julian Mitchell from Barclays. Please go ahead.

Hi, this is Kieran on for Julian. Morning. I just wanted to ask on the guide for Q3 in the fiscal year, it looks like there's a step up in terms of margins in Q4 versus Q3, and I get there's a step up with infrastructure there, but are there any other swinging items that we should be aware of improving Q4 versus Q3?

Yeah, a couple things to think about there. Number one, absolutely, absorption will go away. in terms of that drag in the fourth quarter. And then I would say normally when you think about infrastructure margins Q3 to Q4, that's generally a better, more profitable mixed quarter for us going into Q4.

Got it. That's helpful. And then just one follow-up for me. I know you said price realization was a large portion of organic sales in the quarter. Do you have the breakdown of price versus volume in Q2, just so we can kind of see what's embedded for volume for the for the back half. Thanks.

That was a Q2, Q3 question? I think it was Q2. Q2, we're on our expectations in terms of where the price came in in Q2 versus our outlook.

Got it.

Thank you.

Our next question comes from Tammy Zacharia from JP Morgan. Please go ahead.

Hi, good morning. Thanks for taking my question. Morning, how are you? So I wanted to understand the EBIT guidance for the quarter a little bit better. So sequentially your sales are going up, call it 30 to 35 million-ish. But then for your EBIT, you're guiding to at least 40 and up. So can you sort of help me understand why EBIT would only go up by about $5 million. What's sort of the bridge from 2Q to 3Q for the EBIT guide?

Yeah, so if we work from Q2 to Q3, a couple things to think about there. Number one is we will have an uptick in volume. We have some favorability in FX coming in from Q2 to Q3. You can think of that number probably in the $15 million range. Part of that will be There's some additional price realization. Of course, the cost structure will go up just a little bit as well. So those are your main bridging elements between Q2 to Q3.

Got it. Okay. Okay, understood. And then just following up on the previous question, does the low end of your guide for the year assume China thinks negative year over year, or you still expect growth in China, but could be at a slower pace than what you are currently expecting?

Yeah, the low end of the guide from a China perspective would assume that China in the back half is down year over year. And if you think about the total growth number, you know, where our guide is from a volume perspective and for the quarter, That's a significant chunk of that low end in terms of what the negative is there for the negative two to positive two.

Got it. Okay. Thank you so much.

Our next question comes from Mike Fenninger from Bank of America. Please go ahead.

Good morning, everyone. Can you help us understand? You made some comments about customer inventory adjustments into year end. I think it was an energy comment. I don't know if it was more broad-based with other verticals, but I'm hoping you kind of fleshed that out, what you're kind of seeing there on the inventory adjustment.

Yeah, I think just sort of broadly, in general, we're not seeing much restocking or destocking. But what we talked about in our opening remarks was really related to oil and gas services companies. You know, it's their fiscal year end, and they were, I think, managing their inventories down. They still believe, and we talked to their leadership as part of our SNOP process, they still believe that the long-term trends are there, and they want us to continue to support them. But they did pull back on inventory a little bit, and that gave us the opportunity to, since we were doing these planned shutdowns anyway, it gave us the opportunity to extend those and try to draw safety stocks down, which we were planning on doing anyway, but this gave us certainly the impetus to do it in the quarter.

And how do you feel about your inventory levels with distributors and the distribution side and at the company level today? Are you going to be producing in line with demand? Are you going to be producing lower maybe than demand to try to draw down some of your own inventories? I'm just curious about that. how Canada feels currently with its own position there?

Yeah, I think from a customer inventory perspective, they've been, distributors in particular, I think they've been cautious to not get out over their skis. So that's why we don't think there's going to be a significant destocking or increase in stocking. For us, we believe we can largely, based on our outlook, produce in line with demand. And beyond that, Normally in metal cutting, for example, we did carry a little bit more safety stock just because of supply chain disruptions. But that's the kind of thing that based on the current outlook, we feel we can bleed down. And we're not expecting to see a kind of a major absorption hit like we just did in infrastructure because we literally shut down processing plants.

Understood.

The next question comes from Steve Barger from KeyBank Capital Markets. Please go ahead. Thanks.

I want to start with volume growth guidance of basically flat for the year versus the 2Q recap, which says you're winning share of wallet with existing customers, securing new ones, and driving share in underserved geographies. My question is, if all that's happening but volume is flattish, Does it mean other customers are rolling off, or why isn't unit volume up more than 0% to 2% for the year?

I think, Steve, just to talk about, again, some more on Russia and China, if we think about those two drags, those two drags alone for the full fiscal year are probably 200 base points of growth based on where we think our current outlook is. So you kind of got to think about that because those two things are relatively idiosyncratic. Christian and dad.

Yeah. And I would also say that, um, you know, we, uh, as I think Steve pointed out in the first question, we do have quite a, quite a large range there. There is, there is a lot of uncertainty and, um, you know, so we may be a little bit conservative on the, on the low end of the sales, the sales range there. Uh, we do have, you know, moderating, um, gen edge demand in, in, in the Americas and, and, uh, in EMEA. So there could be some conservative at the low end, Steve, just to, uh, just to cover ourselves for things that we can't really control. And there is still some uncertainty around those things.

Got it. So for the parts of the business where you are having success in new customers and wallet share, can you compare unit volume changes through direct sales versus distribution or digital if that's become more meaningful? I'm just trying to understand where you are growing units and what's happening there that's different versus other channels. where there's less unit growth?

Yeah, I think the unit growth for, you know, sort of the direct sales force, these project bids, that continues to be strong, especially in transportation, EV, and also aerospace, which is no surprise because that's where we're actually, we have a targeted initiative to focus on there. The distribution channels, that is driving some volume. We are seeing an increase in volume there. So I think it's kind of coming from both, but they're two different animals. The project stuff is definitely a focused effort, mostly in transportation and aerospace. And then I think also even in the infrastructure business, you know, we've been in business a long time as Kenna Metal, but there's still many regions and areas and even customers that have more of a global presence that we have a good share of in the U.S. But, for example, oil field service customers, a lot of activity is happening now in Saudi Arabia, and we're leveraging our relationships with those oil field service companies in the U.S. to start to gain traction and share in that part of the world.

I guess if I can get a quick follow-up. I think part of your transformation process was skilling up the sales team, for lack of a better word, maybe helping them understand areas to target or where you haven't maximized the opportunity. Where are you in that process?

Yeah, I think that was definitely part of the simplification effort. And so, for example, we've done a much deeper dive in segmentation of, let's say, general engineering. And what we found is that, you know, over half of that business is small machine shops. Companies with less than 50 to 75 people. And we We weren't necessarily reaching those folks, Steve, with distribution and certainly not direct sales. But that was the impetus to start to make our investments in our digital customer platform. And we're still improving that platform. We've done a lot of investment over the last few years, and we're starting to see the fruits of that. I think also we've done a lot of sales training and a lot of detailed strategic marketing analysis on where to target growth and to focus those resources where we got the best opportunity for profitable growth. And, you know, as I always tell my presidents of both metal cutting and infrastructure, The sales force is an investment just because it's an expense each quarter. We look at it like a capital investment, and it needs to generate a proper return. So that's the way we're running that business. And so I think in terms of our journey, you know, I'm now in my sixth year here. I think we're in, if I could use a baseball analogy, we're in the sort of late innings in terms of that. And I look forward to that sort of revved up sales organization and processes going generating more growth in the future.

Great. Thanks. Our next question comes from John Joyner from BMO. Please go ahead.

Good morning. Thank you. Just following up on Steve's question, Chris, you talk a lot about share gains and definitely give nice detailed examples. But what, I guess, what do these wins mean for KennaMetal's top line and margin potential longer term? I mean, maybe it's something, I can't wrap it around my head a bit. But, I mean, I guess, how has your addressable market expanded since embarking on your modernization journey and these kind of commercial X limit initiatives? Any thought there would be helpful.

Yeah, I think the, you know, we're very cautious about, you know, taking business just for the sake of growth. And I think there was a little bit of that in the old tenemental where, for example, in transportation, we were picking up share, but I remember when I came into the company, I'm not sure that some of that business we were making much money at. So we're very careful about the business that we are taking that's got the right profitability. Just to comment on some of these EV projects, customers are not in full production yet. So a lot of these projects are the initial sort of set up and prove out. So they'll generate more revenue maybe a year from now as they start to ramp up their production lines. And then certainly they generate a consumable tooling spend after that. So aerospace is a little more immediate effect. As we win more share and greater machining percentage on these large projects, it means that as the As the Boeings of the world and Airbuses ramp up their production and their supply chain constraints start to abate, we look forward to more growth coming from those opportunities. So it's like we're kind of setting the stage with some of these major wins, and then as the customers' volumes pick up, that's going to certainly be a benefit for us.

Okay, excellent. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Chris Rossi for closing remarks.

Thanks, operator, and thanks, everyone, for joining us on the call today. I think this quarter is another data point that demonstrates our ability to advance the strategic initiatives and definitely position ourselves for future growth and secure that market-leading position. And I am confident in the full-year outlook. There still is... uncertainty out there, but as we talked about on the phone, I think we've got the proper ranges out there, and we feel good that we're going to be able to execute to that outlook. So with that, if you have any questions, please follow up with Kelly, and have a great day.

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