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.