Kennametal Inc.

Good morning. I would like to welcome everyone to Kenna Metals' third 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 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 Michael Pisi, Vice President of Investor Relations. Please go ahead.

Thank you, Operator. Welcome, everyone, and thank you for joining us to review Canon Metals' third 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 Michael Pisi, 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'd like to direct your attention to our forward-looking disclosure statement. Today's discussions contain 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 8K on our website. And with that, I'll turn the call over to Chris.

Thank you, Mike. Good morning and thank you for joining us. I'll start the call today with a review of the corridor and a few recent customer wins, as well as an example of the industry-leading innovation we're bringing to market. Then Pat will cover the quarterly financial results as well as the outlook. Finally, I'll make some summary comments and then open the call for questions. Beginning on slide two in the presentation, in the corridor, we delivered year-over-year organic sales growth and continued the successful advancement of our strategic initiatives while navigating various macroeconomic headwinds. Those headwinds included high inflation, foreign exchange, and a slower reopening in China post the COVID-related disruptions in the prior quarter. Sales increased year-over-year at 8% organically, with favorable business days of 1%, offset by negative foreign exchange of 4%. At the segment level, metal cutting grew 10% and infrastructure grew 5%. As expected, price continues to be a significant part of the sales increase and is one of the strategic levers we are using to offset inflation. Additionally, we experienced strong volume growth driven by metal cutting, which was toward the high end of the volume range that was provided on our last call. Sequentially, sales grew 8%, driven by increased volume and lower FX headwinds this quarter. On a constant currency basis, EMEA posted 14% growth, which included a negative 150 basis point effect due to our Russia exit, and the Americas grew 8%, driven by aerospace, general engineering, energy, and transportation end markets. Asia Pacific reported 1% growth, reflecting a slower recovery from COVID disruptions in China, as well as lower transportation and energy end market demand. By end market, aerospace reported 25% growth. Energy and general engineering grew 9%, transportation grew 5%, and earthworks grew 1%. Overall, we expect our end markets to remain resilient for the balance of our fiscal year. Of course, we recognize that there are still risks in the global economy, However, as I've said several times before, we believe we are well positioned in all our end markets, despite these uncertainties and challenges. In aerospace, although aircraft build rates are still well below pre-pandemic levels, we continue to gain greater share of wallet, which positions us well for continued growth as build rates improve. In energy, we have seen improvement as oil and gas customers' inventory management actions stabilized versus last quarter. Based on customer feedback, we're optimistic that a long-term growth trend is underway. In addition, our products and solutions serve both renewables and traditional energy markets, which positions us well to benefit from increased demand in both. We expect general engineering to remain steady, despite some moderation in industrial production, as we reach new customers through our digital customer experience platform. Transportation increased mid single digits this quarter with strong growth in both the Americas and EMEA while we experienced lower demand in Asia Pacific. We anticipate this end market to strengthen as supply chains improve and China reopens. Remember, we maintain a leading position in both traditional and emerging transportation applications and will benefit from the technical and market leadership positions we're establishing in tooling for hybrid and electric vehicles to take advantage of this megatrend. And finally, Earthworks continues to benefit from strong underground mining activities in Asia Pacific and modest growth in EMEA. In the Americas, we anticipate future opportunities from increased government spending on infrastructure projects, including trenching for internet, electric grid expansion, and for road rehabilitation as these funds begin to work through the federal, state, and local procurement processes. Customers we spoke with at ConExpo indicated that the flow of funds process does take time, but remain confident in the growth potential from this bill. So while there are still some uncertainties in the current macro environment, we're working to ensure that we perform well in all scenarios. Right now, we feel good about the underlying long-term growth drivers and potential in our end markets, and we believe we are well positioned in each. Turning now to profitability in the quarter. As 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 and operating margins increased year-over-year despite the muting effects of foreign exchange. The infrastructure segment accounts for the change in company operating margins year-over-year. As I mentioned last quarter, we intentionally extended the shutdowns of powder production into January. As a result of these actions, and as anticipated this quarter, we experienced underabsorption in the infrastructure segment. This action enabled us to lower inventory levels and take advantage of an improving supply chain. We continue to expect infrastructure margins to significantly improve in the fourth quarter, reaching a level that is approximately equal to the first quarter. Pat will go into more detail on metal cutting and infrastructure margins in his section. But let me just say that, in general, we certainly have opportunities ahead for even greater margin improvement. Company-wide, we remain focused on driving improved profitability through operational excellence by improving manufacturing and business process productivity and fixed costs, and through optimizing investments in commercial excellence and technology to target our highest return growth initiatives. Operating expense as a percentage of sales was slightly higher compared to prior year at 21.1% this quarter. Adjusted EPS declined to 39 cents compared to 47 cents in the prior year quarter, with a decline largely driven by the factors I discussed. Free operating cash flow this quarter increased significantly to $56 million from $13 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 $7 million of shares bought back, bringing the total amount repurchased since the beginning of the program to $123 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 to review some recent commercial wins that resulted from successful execution of our growth roadmap. I want to highlight a key win in power generation within our infrastructure business. We gained a larger share of wallet by developing a custom wear component solution with superior performance, which enabled us to command a premium for our solution. Next is an aerospace win. We secured an initial order providing tooling for a commercial engine manufacturer that is building a new facility overseas. We provided a solution that exceeded the customer's delivery expectations. Turning now to EV, we received preferred supplier status with an Asian EV OEM for tooling associated with braking systems. Winning preferred status positions us well to increase market share in the region and in the growing EV end market. In our metal cutting business, we delivered a full solution package for a leading manufacturer of steel components in the oil and gas industry, displacing a competitor's products. This solution resulted in a 300% performance improvement for the customer. And finally, we provided a solution in the mining industry using our additive manufacturing capabilities. We leveraged our proprietary process to develop wear resistant nozzles that direct high pressure, high flow water and solids to aid in underground mining activities. We provided an upgrade from a steel solution to tungsten carbide with no additional tooling required and reduced customer lead times. These are just some examples of wins that demonstrate our ability to gain share with both existing and new customers. Now on slide four, I'd like to highlight an example of how innovation continues to drive enhanced product offerings to our customers. This slide shows our new Penn Gold turning insert. Simply put, this product is our gold standard insert for general purpose turning applications. We developed an innovative proprietary coating technology, which has been enabled by our investment in modernization, that delivers significantly improved wear performance over previous insert grades, while also making it easier for customers to identify wear and maximize edge usage. The improved thermal abrasion and shipping resistance that Ken Gold delivers enables our customers to increase productivity, improve quality, and lower overall production costs. This product is ideal for use in many of our target applications, such as shafts, rings, flanges, and bearings for electric vehicles, and for turning applications in general engineering. Now let me turn the call over to Pat, who will review the third quarter financial performance and the outlook.

Thank you, Chris, and good morning, everyone. I will begin on slide five with a review of the Q3 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 continued headwinds from inflation, foreign exchange, and the lingering effects of COVID disruptions in China. Sales increased by 5% year-over-year, with 8% organic growth and favorable workdays of 1%, partially offset by headwinds from foreign currency of 4%. As Chris pointed out, price remains a large portion of the sales increase. On a sequential basis from Q2, Sales growth of 8% was above our normal Q2 to Q3 seasonal pattern of up 3% to 4%, driven by increased volume and more favorable foreign exchange. Operating expense as a percentage of sales increased 40 basis points year-over-year to 21.1%. Adjusted EBITDA and operating margins were 15.7% and 9.8%, respectively, versus 18.3%, and 11.4% in the prior year quarter. The year-over-year decrease in operating margin was mainly due to the following factors. As discussed last quarter, we were aggressively raising prices in the prior year ahead of experiencing the full effect of higher tungsten prices. Starting in Q2, for the infrastructure segment, however, the favorability of price over material cost is negligible as raw material costs reflecting the current market price is flowing through the P&L. Approximately three-quarters of our metallurgical material costs are in the infrastructure segment. We expect raw material costs to be relatively steady for the balance of the fiscal year. As in prior quarters, higher pricing substantially offset higher raw material wage and general inflation in the quarter. As mentioned on our Q2 call, we decided to extend the planned shutdowns of our powder production operations into January resulting in approximately $5 million of unfavorable absorption in the infrastructure segment this quarter, consistent with last quarter. This decision enabled us to reduce inventory levels and take advantage of improving supply chain conditions. Lastly, foreign exchange headwinds from the strong U.S. dollar were $3 million. The effective tax rate decreased year-over-year to 24.4%, primarily due to geographical mix. Earnings per share were 39 cents in the quarter versus adjusted EPS of 47 cents in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on slide 6. The year-over-year effect of operations this quarter was negative 4 cents, which includes a negative 5 cent effect from underabsorption. 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 2 cents and currency and reduced pension income, each contributing negative 3 cents. 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 assumption is affecting each quarter of this fiscal year. Foreign exchange is expected to remain a year-over-year headwind, although, based on recent spot rates, the year-over-year headwind is expected to decline in Q4. Slide 7 and 8 detail the performance of our segments this quarter. Reported metal cutting sales were up compared to the prior year quarter, with 10% organic growth and business days of 1%, partially offset by a foreign currency headwind of 5%. We achieved growth in the Americas and EMEA regions in all end markets on a constant currency basis. By region, the Americas led at 16%, followed by EMEA at 11%, while Asia Pacific was at negative 3%. America's year-over-year growth this quarter was driven by the execution of our growth initiatives in aerospace and the continued broad and resilient demand across all end markets. The MIA's year-over-year performance reflects growth driven by execution on our strategic initiatives and broadly favorable end market conditions. Asia-Pacific's growth, as Chris noted, was negatively affected by a slower recovery from COVID-related disruptions in China. Looking at sales by end market, Aerospace sales grew 25% year-over-year as we continue to win new business, a result of our focused execution on our strategic initiatives in this end market. General engineering grew 11% year-over-year, with the strongest growth in Americas and EMEA. Energy grew 7% this quarter as the customer year-end inventory rebalancing activities we experienced last quarter subsided. And lastly, transportation grew 5% year-over-year, benefiting from improved customer supply chains and hybrid EV business in the Americas and EMEA, somewhat offset by weaker conditions in Asia Pacific. Metal cutting achieved its best operating margin post-COVID, with operating margin of 13.1%, despite an approximately 30 basis point headwind from the strong U.S. dollar. And, through our focus on growth and operational excellence, we are positioning ourselves for further margin expansion. pricing, volume growth, and productivity offset cost increases. Turning to slide 8 for infrastructure, organic sales increased by 5% year-over-year, partially offset by foreign exchange headwinds of 3%. Regionally, EMEA grew 24%, followed by Asia Pacific at 7%. America's sales were flat, primarily due to a customer who insourced production, which we previously disclosed, as well as timing of project orders. Looking at sales by end market, energy grew 10%, general engineering grew 5%, and earthworks grew 1%. The strength in energy was driven mainly by improvement in the U.S. oil and gas market, as indicated by U.S. rig counts up approximately 20% year-over-year from Q3 22 to Q3 FY 23. As Chris noted earlier, the prior quarter customer destocking action stabilized this quarter. Earthworks saw growth in Asia Pacific, driven mainly by underground mining, while growth in EMEA was unfavorably affected by mine flooding in South Africa, and sales in the Americas were negatively affected by order timing. Lastly, general engineering was driven mainly by project orders in EMEA, offset by lower demand in the Americas from customer insourcing I just mentioned and timing of project orders. Operating margin declined year-over-year to 4.8%, primarily due to two factors. First, as discussed earlier on the call, the favorability of price over material costs we have been experiencing is now negligible as raw material costs reflecting the current market cost 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 powder plant shutdown that was extended into January. We did, as anticipated, experience underabsorption this quarter, which helped us lower inventory levels as the supply chain continues to normalize. We continue to expect operating margin will return to approximately the Q1 FY23 level in Q4. This expected improvement in profit margin is driven by increased sales volume, primarily from the seasonal uptick in construction and more favorable absorption in our powder operations. The force majeure we previously discussed remains in effect, but we do not expect to incur disruption costs in Q4. Now, turning to slide 9 to review our free operating cash flow and balance sheet. Our third quarter free operating cash flow increased to $56 million from $13 million in the prior year quarter on a dollar basis. Year-over-year, primary working capital increased to $712 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 32.9%. We expect inventory levels to decrease again in the fourth quarter as we continue to manage inventory levels down now as our supply chain continues to improve. Net capital expenditures were $18 million compared to $22 million in the prior year quarter. In total, we returned approximately $23 million to shareholders through our share repurchase and dividend programs. We repurchased $7 million of shares in Q3 for a total of $123 million, or 4 million shares, representing approximately 5% of outstanding shares since the inception of the program. As we have every quarter since becoming a public company over 50 years ago, we've paid a dividend to our shareholders. Our commitment to returning cash to shareholders reflects our confidence in our ability to execute our strategy to drive growth and margin improvement. We continue to maintain a healthy balance sheet and debt maturity profile. At quarter end, we had combined cash and a revolver availability of approximately $731 million and were well within our financial covenants. The full balance sheet can be found on slide 14 in the appendix. Turning to slide 10 regarding our full year outlook. We are raising the low end of our FY23 outlook. We expect sales in FY23 to be between $2.07 billion and $2.1 billion, with volume up 1 to 2 percent, price realization of approximately 7 percent, and a headwind from foreign exchange of approximately $100 million. This sales outlook assumes that demand in China improves throughout the fourth quarter and foreign exchange is sequentially neutral. On a full year basis, we expect 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 we now expect interest expense of approximately $28 million and an effective tax rate of approximately 24%. We're also raising our outlook for adjusted EPS. We expect adjusted EPS in the range of $1.50 to $1.70 on the cash side. For the full-year outlook for capital expenditures, it's approximately $100 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 11, let me take a few minutes to summarize. Overall, we're pleased with our organic growth and strong 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 we're seeing in the supply of materials, which allows us to draw down safety stocks. And we look forward to continued margin improvement in Q4 as we benefit from the inventory reduction actions we took in Q3. Looking beyond fiscal year 23, we're encouraged by our 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 modernized plants and our ongoing focus on optimizing for growth our investments in commercial excellence and technology. And we're confident in our ability to continue to return cash to shareholders while investing in our strategic initiatives for growth and profit-building improvements. And with that, operator, please open the line for questions.

Thank you. 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. This time, we'll pose momentarily to assemble our roster. Our first question comes from Julian Mitchell from Barclays. Please go ahead.

Hi, good morning. I just wanted to home in for a second on the metal cutting margins. So a good sort of operating leverage, I think 45% year on year in the third quarter. Just wanted to check, is the sort of the guide implying that steps up a bit in the fourth quarter? So you're getting a sort of mid-teens operating margin in metal cutting in Q4. And then as we think about the year ahead, is that sort of mid-40s incremental margin in metal cutting sort of a good placeholder?

Yeah. Morning, Julian. So a couple things to think about there. Obviously, as we think about FY24, we're going through our annual planning process now. And so that's something obviously we'll update you on when we get to our call in August. As we think about the margin performance of the metal cutting segment in the fourth quarter, you know, as we look, you know, I'll say sequentially Q3 to Q4, and normally we would see a slight uptick in volume Q2 to Q, excuse me, Q3 to Q4. Obviously, that will lever, and as we've talked about before, metal cutting generally leverages, you know, a little bit above where our normal run rate is on a consolidated basis. So, we expect, you know, with volume coming through, you know, slightly higher margin performance.

Thanks very much. Yeah, and that's a higher operating margin sequentially, I suppose. Yes. That makes sense. Thank you. And then just my second quick one would be, I wondered what you're seeing in terms of distributor behavior, any customers or channel partners looking to slow down orders or de-stock a little bit in the last couple of months? Has there been any change in customer behavior in the Americas in particular? And then on China, as you said, it's a below-plan recovery to date. I think in areas like transportation, you're assuming an improvement, understandably. So maybe any more color on kind of what you're seeing real-time in China, please.

Yeah, I would say, Julian, on the metal-cutting side... Ever since we came out of the pandemic, the distributors have been really pretty cautious about just how much inventory they add. So, for example, if they're supporting aerospace customers, they tend to be adding inventory there because they want to make sure that they can serve those customers, and there's also a pretty good trajectory on growth there. But, you know, those that are serving more general engineering, I think they've been cautious. So we're not We're not really seeing a destocking, but I don't think, Julian, we ever really saw a restocking, if you will. And then I think we've talked about on the infrastructure side, you know, we did see oil and gas customers and even some of the construction customers taking some inventory reduction actions as the supply chain problems start to abate. They needed less safety stock and less stock, so... You know, there's kind of been adjustments throughout the whole supply chain in that regard. As it relates to China, yeah, transportation is, you know, as we know, we have a lot of exposure to transportation, especially in metal cutting. The recovery has been slower, and I think that's, in our mind, that's been driven by an actual reduction in demand for the sale of cars over there. That is expected to begin to improve, but we have to watch that one, Julianne.

That's great. Thank you.

Our next question comes from Dylan Cumming from Morgan Stanley. Please go ahead. Great. Good morning, guys. Thanks for the question.

I realize this is probably a bit more of a difficult one to answer, but, you know, just kind of curious if you had any kind of data points or feedback from your kind of distribution channel around impacts on the tighter financing environment. I think there's a lot of concern out there with regards to potential impacts on the broader industrial complex, but just, you know, curious as to what you're hearing from your customers as well.

Yeah, we haven't really heard very much from our distributors or our smaller customers, if you will, about the potential banking crisis. So it's nothing that we've seen. We keep an eye on it and we're monitoring the situation. We do have a lot of our customers are actually quite small and certainly the deposit limits that they would have in any banks are probably covered by the FDIC and those kind of things. We think that there's not going to be much of an effect, but it is something that we have to watch.

Okay, that's clear. Thanks, Chris. And then just one question on kind of broader price cost and pricing trends. I think, Pat, you mentioned in your prepared remarks that you were expecting a bit less of a benefit from overall price cost positivity as we move through the end of the year here. How are you guys thinking about pricing going into next fiscal year? I mean, are you planning to put through further price increases? Do you feel like we're hitting the upper bound? I'm sending color on how that progression should progress into next year. It would be helpful.

Yeah, I mean, as we think about pricing going ahead into next year, you know, obviously we'll just talk about strategically as we think about pricing, we're committed to making sure that we price for the value of the product, number one. Number two, being mindful of the environment we're in and the inflation that we see in the business from a cost perspective, being sure that we are pricing not just for value but the cost that's going into the product. So, again, as we kind of complete our FY24 planning process here and get a good grip on, what the cost inflation in the business will be. We'll make sure that we have pricing actions across both businesses that are in place that are responsive to, again, the value proposition of the product and the cost structure that we think we'll be having.

Very helpful. Thank you.

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

Thanks. Good morning, guys. Good morning, Joe. Hey, can we... I want to just understand China maybe a little bit further. I know that you guys have talked about EV being a big opportunity for you guys going forward. I'm just curious, just in China, are you typically selling into Western OEMs? Are you selling into the Chinese OEMs? Just help us understand your penetration of the EV market in China.

Yeah, we're selling into both, but it's interesting, Joe, that the traditional OEMs are recognizing with this EV that a lot of the Chinese players are the ones to watch out for. And so while we're selling into both, we have a strategic focus on the new players that are important for EV and even hybrids going forward. So we have to tackle both. We feel like we're in a good position on both. But the traditional OEMs, if you will, they're going to see some competition from the Chinese.

Okay, great. Yeah, that's helpful. And I guess maybe just my follow-on question in thinking about infrastructure specifically, you talked about the powder production shutdown. Is that continuing at all into the fourth quarter? It sounds like that's done at this point, but you also made a comment around inventory levels continuing to be reduced into 4Q as well. So I just want to make sure I square those two things.

Yeah, I think the inventory question was more about from our customer's perspective, and they had taken some significant actions in Q2 and Q3, and that situation seems to have stabilized. We don't expect that the powder plants are running in the fourth quarter, so we're not having to make an adjustment there. So I think I answered both parts of your question, but let me know if I didn't.

Yeah, no, no, that's, um, that's, that's, that's, that's perfect. Maybe, maybe I'll just ask one more that just longer term question. Um, you guys, you guys talked about Ken Gold, um, and highlighted it this quarter. I'm just curious, like how long had that particular, um, you know, range of products been in development and it seems like there's some really good opportunity here. I just want to understand the, the opportunity a little bit better.

Yeah, it's been in the works for, for a while. And, um, Like a lot of the product innovations that our technology team have come up with, we were limited primarily by our ability to produce the product. The precision in which you have to place these coatings, in the case of Ken Gold, required modern equipment and actually new processes. And so, Joe, what really enabled the release of that product was the completion of the modernization at some of our insert facilities. So I would say in this case, it was modernization that was a pacing item. And, you know, we expect there's more of that to come because one of the major reasons to modernize was not only to improve our cost and our quality and delivery performance, but it was also to enable our innovation folks to bring to market some of the great products they got. And Ken Gold is a great example of that.

It sounds good. Thanks, guys.

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

Hi, good morning. Thanks so much for taking my questions. Most of my questions have actually already been asked. I just have a couple of quick ones, and I'm sorry if you already disclosed it, but do we know what price versus volume growth was in each segment in the most recent quarter that you just reported?

Yeah, as we talked about in the prepared remarks as well as the press release, we've had strong price realization across both businesses. From a volume perspective, we did see volume growth in metal cutting on a year-over-year basis, and we had a slight negative volume in the infrastructure segment in the quarter.

Got it. And as we look into the fourth quarter, do you expect volume to be positive in both segments?

Overall, volume will be positive in both segments as we go into the fourth quarter on a year-over-year basis, as well as sequentially.

Got it. Thank you so much.

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

Hey, good morning, guys. Hi, Steve. Hi, Steve. Happy to hear your commentary around continued end market resilience. Can you square that up with ISM being sub-50 for six months and the metalworking index having been sub-50 for six of the last seven months. I think in the past your organic growth has tracked those to some degree. Do you think there's anything about your mix or this cycle that suggests that that could decouple going forward?

Yeah, I think maybe it's particular to this cycle in that with all the supply chain constraints a lot of our customers had, they built huge backlogs. And so Even coming out of the pandemic, many of them have never returned to pre-pandemic production levels. So they've got that backlog. So normally, Steve, if you'd have that type of, those indices are below 50, we would probably start to see a little softening in our business more than we've seen. So we've used the word resilience and that there's an expectation that that might happen, but it really hasn't shown yet. And my theory is, is that A lot of our customers are operating with large backlogs and never really, because of whether it be labor shortages, chip shortages, or other supply chain constraints, never really ramped their production back up to pre-COVID levels in many of the markets that we're at.

Yeah, that makes sense. I think that's a good theory. Price is running maybe four times ahead of volume this year. So if inflation moderates next year, will you be able to drive incremental price based on the value proposition or And given your commercial excellence initiatives, do you just have a general algorithm for your growth versus the market?

Yeah, in terms of price, I think Pat said it. We're always trying to price versus value. Now, in the case of a high inflationary environment, we also had to factor that in, and all our competitors did the same. But if we return to a more normal inflationary environment, you know, we really don't have to necessarily change anything because we're always sort of pricing based on value. Um, and so we'll continue to do that. And, um, and, and, you know, that's, that's actually a business process. You have to have it to discipline with the salespeople. It's an education. And so we've been, we've been at this now for several years prior to the hyperinflation. So we'll, we'll continue to push prices as much as we can, um, recognizing it's a competitive environment, but, um, You do have to sell value, and we're getting much better at it than we were even a few years ago. Sorry, what was the second part of your question?

You've done a lot on commercial excellence over the past couple of years. Do you have an internal kind of algorithm or expectation for what your organic growth should look like relative to whatever the market does in an up cycle or a down cycle?

Yeah, I would say in general, you know, we don't – For competitive reasons, I don't want to give you the target, but our expectation is that if the market is expanding, we're gaining share and we're growing faster. And that's the way we compensate our sales force and our business leader executives is it's not enough just to ride the market up or ride the market down. We expect you to do better than the market.

How do you define the market for them? Is it based on the metalworking index or something like that?

Yeah, it can be. Unfortunately, in this business, you have to use several indices. It kind of depends on where you are in the world. But if you take, for example, a country like Germany, there's a lot of metalcutting companies. They report their metalcutting revenues into an association, and the association then gives you what the metalcutting market is, and you can compare yourself to how you grow there. You can do something a little bit similar to that in the U.S. and other countries. So we have to have several metrics, but those are the kind of things that we looked at that tell us directionally are we gaining share. And then beyond that, you can also look at with specific customers, you know, you have a good sense for how much metal cutting business that they're buying in total versus what you're actually getting. And so we can also set entitlement models and targets based on specific customers and say, hey, we should have you know, X percent of these people's business and we only have Y. So that's how we set the targets.

Got it. Thank you.

This concludes our question and answer session. I would like to turn the conference back to Chris Rossi for closing remarks.

Thanks, Operator, and thanks, everyone, for joining the call today. The results this quarter reinforce our ability to advance our strategic initiatives and secure market-leading positions, and I'm really very confident we'll deliver our full-year outlook. Finally, we look forward to speaking with you next quarter, and I also hope that you'll be able to join us at our upcoming Investor Day on September 8th at the New York Stock Exchange. More details about that event will be forthcoming from Mike. We're excited for you to hear from our executive management team as we share our growth and innovation plans and provide an update on our long-term targets that really reflect where we're taking the company. As always, appreciate your interest and support. Don't hesitate to reach out to Mike if you have any questions. Everyone have a great day. Thanks.

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