Kennametal Inc.

Good morning. I would like to welcome everyone to Kenna Metals' fourth 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 that this event is being recorded. I would now like to turn the conference over to Michael Pisi, Vice President of Investor Relations.

Thank you, Operator. Welcome, everyone, and thank you for joining us to review CannaMetal's fourth quarter and fiscal 2023 results. This morning, 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 Christopher 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 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 Metals 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 thanks for joining us. I'll start the call today with a review of the year, then the quarter, and a few recent customer wins, as well as an example of the industry-leading innovation we are bringing to market. Then Pat will cover the quarterly financial results, as well as the fiscal year 24 outlook. Finally, I'll make some summary comments and then open the call for questions. Beginning on slide three, fiscal year 23 presented us with several macroeconomic headwinds that the team successfully navigated to deliver results in line with our full-year expectations. Sales increased year-over-year at 9% organically, offset by negative foreign exchange of 5%, and unfavorable business days of 1%. At the segment level, metal cutting reported 10%, and infrastructure reported 7% organic growth. Price continued to be a significant part of the sales increase and is one of the strategic levers we use to offset inflation. On a constant currency basis, all regions grew, with EMEA leading at 11% and Americas at 9%, both driven by growth in all end markets. And Asia Pacific grew at 3%, which continues to be affected by a slower China recovery. Moving to our end market results, you may have noticed that we have reclassified some of our end market sales in the press release and slides. Beginning this quarter, to better align with the company's strategic goals and growth initiatives, Certain end markets that we report externally have been redefined. The changes include the following. We've created a new aerospace and defense end market, which includes defense sales, mainly powder sales and ammunition cores within our infrastructure segment, and certain metal cutting tooling sales to defense contractors. This change results in certain defense sales being reclassified from general engineering in both segments to the new aerospace and defense end market. This aerospace and defense end market also includes the sales previously classified as aerospace for metal cutting. Finally, infrastructure's ceramic sales, which includes wear parts and evaporator boats for food packaging production, have been reclassified from energy to the general engineering end market. We will discuss these end markets and how they connect to our growth initiatives in our upcoming investor day on September 8th. Refer to slide 18 in the appendix for additional information and a reconciliation of these changes. YM market for fiscal year 23, aerospace and defense reported 14% growth, energy grew 11%, transportation grew 8%, general engineering grew 7%, and earthworks grew 5%. Shifting to profitability, for the full year adjusted operating margin was 9.6% compared with 11.1% in the prior year. The pricing actions taken in both business segments substantially covered all forms of inflation on a dollar basis. The metal-cutting segment's volume came through at the expected operating leverage, and operating margins increased year over year, despite the negative effects of foreign exchange. In the infrastructure segment, our intentional extension of the shutdown of powder production into January resulted in underabsorption within the segment, which negatively affected margins. This action, however, had the intended effect of lowering safety stocks as supply chain lead times and reliability improved. Across both segments, in early June, we announced the initiation of an action to streamline our cost structure while optimizing investments in commercial and operational excellence initiatives. This action is currently expected to deliver annualized pre-tax savings of approximately $20 million by the end of fiscal year 2024. We expect a pre-tax charge of approximately $20 million in connection with the execution of this initiative, which is primarily severance-related cash expenditures. Approximately $7 million of that charge was recognized during the quarter and has been excluded from our adjusted results. Pat will have more details on this when he discusses the outlook. Preoperating cash flow for the year was $169 million. the highest level in over eight years, driven primarily by working capital changes, including improved inventory levels. Inventory reduction is a key area of focus, and I am pleased with our team's efforts to deliver on this commitment. In summary, we managed through many challenges in fiscal year 23, while continuing to advance our strategic initiatives to position the company for improved performance. Let's turn to slide four for a review of the quarter. Sales increased year over year at 7% organically, offset by foreign exchange of 2% and unfavorable business days of 1%. At the segment level, metal cutting grew 10% organically, which once again this quarter significantly outperformed our largest competitor, and infrastructure grew 3%. As expected, price continues to be a significant part of the sales increase, and it largely offset inflation. On a constant currency basis, EMEA posted 12% growth, driven primarily by general engineering and an improving customer supply chain in the transportation end market. The Americas grew 3%, mainly driven by aerospace and defense. Asia Pacific reported 3% growth, reflecting a slower China recovery. By end market, aerospace and defense reported 12% growth. General engineering grew 7%. Transportation grew 7%. Energy grew 6%, and earthworks declined 1%. In aerospace and defense, aircraft build rates are still well below pre-pandemic levels, and our strategic focus continues to drive share gains. Transportation growth in the fourth quarter was driven by strong EMEA performance as our customers' supply chain conditions improved, while Asia Pacific experienced lower demand due to a slower reopening in China. We maintain a leading position in both traditional and emerging transportation applications, and we continue to win tooling content to capitalize on this mega trend and enhance our position in the hybrid and electric vehicle market. Let me take a moment to provide some additional color around the end market conditions we experienced as we exited fiscal year 23 and what we see moving forward in the near term. Sequentially, Q4 sales grew 3%, which is slightly below our historical pattern. This was driven by the following factors, moderation of industrial production and general engineering within both segments, which we experienced in the latter part of the quarter, lower oil and gas within infrastructure, and the continued slow recovery in China. This moderation and growth is anticipated to continue into the first quarter of fiscal year 24, steady with the levels we experienced exiting the fourth quarter, and slightly below our historical sequential trend. That said, we expect our end markets to moderately improve throughout fiscal year 24 and growth to accelerate as the year progresses with stronger performance in the second half of fiscal year 24. Pat will provide more detail on how these trends affect fiscal year 24 when he discusses our outlook. 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 operating margins increased year-over-year as a result of commercial and operational excellence initiatives. The infrastructure segment accounts for the company's operating margin decline year-over-year. Lower volumes and product mix drove this decline. As we noted last quarter, we expected and did experience sequential margin improvement within the infrastructure segment from the third quarter level. Operating expense as a percentage of sales was slightly higher compared to prior year at 20% this quarter. Adjusted EPS declined to 51 cents compared to 53 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 109 million from 52 million in the prior year quarter, driven mainly by improved inventory levels. And finally, we continued the share repurchase program this quarter with $12 million of shares bought back, bringing the total amount of repurchase since the beginning of the program to $135 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 five to review some recent commercial wins that resulted from successful execution of our strategic growth initiatives. First is a win in general engineering for our metal cutting business. We delivered a custom solution and included both Vidia and Kenna Metal Tooling technologies. This mix of high performance and fit for purpose tools met the customer's varied technical needs and reduced their cost by 15%. Our tools outperformed the competition in producing a wide range of aluminum steel components for medical and general engineering customers. Next is an aerospace win. We secured an initial order providing tooling for the enclosure of aerospace sensors. We provided a solution that reduces the customer setup time by 90%. Turning to EV, we provided tooling for a new class of high performance engines for a European OEM. We won by demonstrating innovative machining applications while collaborating with machine tool builders and the customers. In our infrastructure business, We leveraged our proprietary additive manufacturing capability to help an oil and gas customer with a complex-shaped solution for a critical flow control valve. We also developed a new material grade to meet the customer's stringent wear resistance specifications. And finally, we provided an improved drum design for a mining application that reduced the fuel consumption of the customer's fleet and increased our share of wallets. These are just some examples of wins that demonstrate our ability to gain share with both existing and new customers. Now on slide six, I'd like to highlight an example of how innovation as a competitive advantage continues to deliver enhanced product offerings to our customers. This slide shows our new Drill Fix Pro tool from our metal cutting product portfolio. Notably, the Drill Fix Pro can be used with many different materials and drilling needs across several end markets and applications such as suspension parts for EV platforms and high temperature alloy applications within aerospace. And the proprietary cooling design allows for a superior finish, lower cost per hole, and increased tool life over previous platforms. These enhanced features demonstrate our ability to provide robust, versatile, cost-effective solutions to address the needs of our customers. Now let me turn the call over to Pat, who will review the fourth quarter financial performance and the outlook.