Kennametal Inc.

Good morning. I would like to welcome everyone to Ken and metal second quarter fiscal 2024 earnings conference call all lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time simply press star than the number one on your telephone keypad. If you would like to withdraw your question, please press star than the number two. Please note that this event is being recorded. I would now like to turn the conference over to Michael PC vice president of investor relations.

Thank you, operator. Welcome everyone and thank you for joining us to review kind of middle second quarter fiscal 2024 results. This morning we issued our earnings press release and posted our presentation slides on our website. We will be referring to that deck throughout today's call. I'm Michael PC vice president of investor relations joining me on the call today are Christopher Rossi president and chief executive officer. Pat Watson vice president and chief financial officer Sanjay Chow Bay vice president and president of metal cutting and Franklin Cardenas vice president and president of infrastructure. 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 kind of metals SEC filings. In addition, we will be discussing non gap financial measures on the call today. Reconciliations to gap financial measures that we believe are most directly comparable can be found at the back of the deck and on our form a K on our website. And with that, I'll turn the call over to you, Chris.

Thanks, Mike. Good morning, everyone. And thank you for joining us. I'll start the call today with a review of the quarter. As well as some end market commentary and then we'll share an example of the industry leading innovations we're bringing to market. From there, 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 for the quarter sales were flat your year with organic decline of 3% offset by favorable business days of 2% and favorable currency exchange of 1%. At the segment level metal cutting was flat organically and infrastructure declined 8%. On a constant currency basis, the media posted 3% growth driven primarily by the transportation and energy and markets. The Americas declined 5% mainly due to softening demand in general engineering earthworks and energy and the effect of the UAW strike on transportation. Asia Pacific sales were flat driven by growth and general engineering and transportation offset by declines in energy and earthworks. The results also reflect the year over year declines in China. Moving to our end markets. Transportation grew 4% aerospace and defense was flat general engineering decline 2% energy decline 3% and earthworks decline 5%. Looking now at each end market, the earthworks decline was driven by increased price sensitivity in America's construction and softening mining in China. For energy as expected oil and gas was down primarily due to lower US land based rig counts and continuing customer destocking within infrastructure and wind energy project delays in metal cutting. General engineering decline versus prior year with modest growth in metal cutting in the Americas offset by declines in infrastructure. In aerospace and defense sales were flat year over year at the enterprise level metal cutting grew 6% from the continued execution of our growth initiatives and overall market strengths in aerospace while infrastructure declined due to timing of large defense orders. Transportation grew 4% this quarter from continued strength in EMEA driven by metal cuttings electric vehicle and hybrid project winds and a slight increase in Asia Pacific partially offset by a decline in the Americas due to customer production timing effects related to the UAW strike. Turning now to profitability in the quarter. Adjusted operating margin declined 110 basis points primarily due to lower volumes higher wages and general inflation and unfavorable price raw material cost timing in the infrastructure segment. These were partially offset by higher price realization and metal cutting and restructuring savings of approximately $5 million in total. Metal cuttings adjusted operating margin this quarter decreased 40 basis points year over year from higher price realization and restructuring savings of approximately $4 million offset by lower volumes and higher wages and general inflation. The infrastructure segments adjusted operating margins decreased 320 basis points year over year primarily due to lower volumes and as expected unfavorable price raw material cost timing. These factors were partially offset by restructuring savings of approximately $1 million. Adjusted EPS increased to 30 cents compared to 27 cents in the prior year quarter. Free operating cash flow year to date was $36 million which is the highest level since 2016. We continued the share repurchase program this quarter with $15 million of shares bought back bringing the total amount repurchased under the existing program to $163 million. The board of directors authorized another $200 million in share repurchases over a three year period. Our share repurchase program reflects the confidence we have in executing our strategic initiatives for long term value creation despite quarterly macroeconomic headwinds and uncertainties. Turning to slide four I want to provide commentary on our end markets for the full year and how things have evolved through Q2. As we discussed on our last call our outlook for the full year is informed by forecast of specific market drivers and despite developing macroeconomic uncertainty at the time those drivers have remained unchanged and we're still indicating market conditions improving in the second half. Remember for us backlog is not a meaningful indicator of expected quarterly sales and beyond so we rely on forecasts of these specific market drivers and customer input. Fast forwarding to today the forecast of these market drivers have evolved as summarized on the slide. Additionally in December we saw an unexpected slowdown in orders primarily in general engineering and energy which is continuing in January particularly in the US. Based on these changes we still expect second half fiscal year 24 sales to outpace the first half however year over year growth is expected to be down slightly. More specifically the changes year over year by end market are summarized here. In general engineering we now expect a slight decline driven by lower forecasted industrial production primarily in the US, Eurozone and China. And in energy we're no longer expecting the second half uptick that our customers were indicating last quarter. US land-based rate counts at the end of our fiscal year are now expected to decrease 5% compared to last quarter's forecast. Our order deliveries have shifted to the second half of calendar year 24 aligned with customer sentiment that North American activity continues to lag with no meaningful recovery during the first half of this calendar year. Earthworks is anticipated to decline. Although we anticipate normal seasonality of demand we are seeing greater price sensitivity than expected as we enter the second half of fiscal year 24. In addition we're also seeing some slowdown in China mining. In transportation we continue to expect slight year over year growth as project winds offset a decline in global light vehicle production per IHS. Our outlook for the full year now includes the effects of the UAW strike. We anticipate aerospace and defense will continue to experience growth in both segments in the second half albeit at a slightly lower level. The number of aircraft produced is expected to decline about 13% from last quarter's forecast with potentially some additional near-term production disruptions due to recent OEM quality issues. Major OEM aircraft build rates are still forecasted to increase in the mid-teens over the first half and they are still below pre-pandemic levels. And we're confident in our ability to continue winning new projects and gaining share in this end market. Finally from a regional perspective we're no longer expecting a second half recovery in China as the latest official PMI metric remains flat at 50. On last quarter's call I mentioned that given the macroeconomic uncertainties we would be prepared to take proactive measures if the end markets didn't improve as expected in the second half. To that end we are taking additional restructuring actions to increase our current restructuring program from the previously announced $20 million run rate savings by the end of fiscal year 24 to $35 million. This accelerates our progress towards achieving the $100 million of cost out targets that we first discussed at Investor Day. Pat will provide additional details in his prepared remarks. Now on slide five I'd like to highlight an example of how our innovation advantage continues to deliver enhanced product offerings to our customers. The slide highlights our new and proprietary metal cutting insert. This new geometry enables higher productivity for our customers and eliminates the need to change tools for finishing operations making it ideal for transportation, medical equipment, and general engineering applications. Notably this is another innovation enabled by modernization. Simply put we could not produce this proprietary geometry on our legacy equipment. Furthermore the new insert is available with our new Ken Gold coding technology which expands the differentiated performance across a wider range of applications. As you may recall the new Ken Gold coding technology was also enabled by modernization. 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 a review of second quarter operating results. We continue to execute our initiatives in the face of challenging market conditions. Sales were flat year over year with an organic decline of 3% offset by favorable work days of 2% and favorable currency exchange of 1%. As Chris pointed out the performance this quarter was affected by shifting market conditions that put pressure on all of our end markets. This is the second quarter for metal cutting and the fourth quarter for infrastructure with negative year over year volume. Adjusted EVTA and operating margins were .4% and 6% respectively versus 13.7 and .1% in the prior year quarter. During the quarter we realized approximately $5 million in savings from the ongoing restructuring program. The adjusted effective tax rate was negative 8% primarily driven by an approximate $8 million tax benefit from a change in the Swiss tax rate in the current year's quarter. The prior quarter included an approximate $2 million tax benefit from a Swiss tax ruling. Adjusted earnings per share were $0.30 in the quarter versus EPS of $0.27 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on slide seven. The year over year effective operations this quarter was negative $0.05. This reflects lower volumes and price raw material timing partially offset by operational excellence initiatives and restructuring savings. You can also see the effects of the Swiss tax rate I just spoke about on EPS with taxes contributing positive $0.07. Lower share count also contributed $0.01. Slides eight and nine detail the performance of our segments this quarter. Reported metal cutting sales were up 4% compared to the prior year quarter with 0% organic growth and a favorable foreign currency and favorable workday effects of 2% each. We achieved growth in EMEA and the Americas with Asia Pacific flat due to the slowdown in China. By region, EMEA led at 4% followed by the Americas at 1% while Asia Pacific was flat. EMEA's year over year performance reflects growth driven by transportation and aerospace and defense. America's year over year growth this quarter was driven by the execution of our growth initiatives in aerospace and defense and in the general engineering end market. Asia Pacific's decline was primarily driven by market conditions in China. Looking at sales by end market, aerospace and defense grew 6% year over year as our strategic initiatives continue to drive share capture. General engineering grew 1% year over year with the strongest growth in the Americas partially offset by lower sales in EMEA. And lastly, transportation grew 4% year over year driven by our strategic growth initiatives in Project WINS in EV and hybrid vehicles in EMEA somewhat offset by weaker conditions in the Americas as a result of the effects of the UAW strike. Metal cutting adjusted operating margin of .4% decreased 40 basis points year over year as higher selling prices and restructuring savings of approximately $4 million were offset by lower volumes and higher wages and general inflation. Turning to slide 9 for infrastructure. Reported infrastructure sales were down year over year from an organic sales decline of 8% partially offset by a foreign exchange tailwind of 1%. Regionally, sales were flat in Asia Pacific, declined by 1% in EMEA, and sales in the Americas declined 12%. Looking at sales by end market on a constant currency basis, aerospace and defense decreased 14% due to defense order timing when compared to the prior year. General engineering declined 10% from softer demand in EMEA. Earthworks declined 5% with underground mining offset by lower construction volume in the Americas. And lastly, energy declined 4% mainly in the Americas due to lower than expected U.S. land rig counts and continued destocking of inventory at our customers. Adjusted operating margin declined year over year to .9% primarily from two factors. First, lower sales volumes primarily in the earthworks in general engineering end markets in the Americas. Second significant factor affecting the margin discordor, as expected, was unfavorable price raw material timing. These headwinds were partially offset by operational excellence initiatives, including restructuring. Now turning to slide 10 to review our free operating cash flow and balance sheet. Free operating cash flow year to date was $36 million, up from $4 million in the prior year. This was the highest first half free operating cash flow generated since 2016. The increase in free operating cash flow was driven primarily by working capital changes, including improved inventory levels and proceeds from the disposal of property, plant, and equipment, partially offset by higher capital expenditures. On a dollar basis, year over year, primary working capital decreased to $668 million. On a percent sales basis, primary working capital increased to 32.7%. We continue to focus on optimizing inventory levels and driving improved working capital. Net capital expenditures increased to $52 million year to date compared to $48 million in the prior year. In total, we returned $61 million year to date to shareholders through our share repurchase and dividend programs. We repurchased $15 million of shares in Q2 for a total of $163 million, or 5.8 million shares, representing approximately 7% of outstanding shares since the inception of the program. As Chris mentioned earlier, the Board of Directors authorized another $200 million share repurchase program over a three-year period. And, as we have every quarter since becoming a public company over 50 years ago, we have 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 continue to maintain a healthy balance sheet and debt maturity profile. At quarter end, we had combined cash and revolver availability of approximately $770 million and were well within our financial covenants. A full balance sheet can be found on slide 17 in the appendix. Turn to slide 11 regarding our third quarter outlook. Let me share some details on the sales assumptions and trends affecting the Q3 outlook. At the midpoint, our Q3 range reflects sequential growth from the second quarter that is generally in line with our historical norms. On a -over-year basis, we expect aerospace and defense to continue to grow and transportation to increase slightly. Additionally, we expect energy to decline from lower rig counts, delayed project work, and continued to stock in. General engineering to decline. Birthworks to decline as pricing pressures continue to affect growth, and we anticipate no significant improvement in China. The current inflationary environment persists, but at a modest pace. Foreign exchange and non-cash pension expense are expected to be neutral on an operating income basis. We expect adjusted EPS in the range of $0.25 to $0.35 per share. Turning to slide 12 regarding our full year outlook. We expect FY24 sales to be between $2.02 billion and $2.07 billion, with volume ranging from negative 4% to negative 2%, net price realization of approximately 2%, with our inflationary pricing actions partially offset by lower prices for customers with index pricing. Foreign exchange is expected to be neutral. -over-year, we expect aerospace and defense to have moderate growth, transportation to increase slightly, general engineering to decline slightly, and energy and earthworks to decline. From a cost perspective, the current inflationary environment persists, but is assumed to moderate. We expect to offset raw material, wage, and general cost increases on a dollar basis. Assuming the price for tungsten remains constant in the second half of FY24, we will begin to benefit from lower material costs in the fourth quarter. This will largely affect our infrastructure segment. We expect infrastructure's fourth quarter adjusted operating margin will be approximately at the same level as the fourth quarter of FY23. Foreign exchange and non-cash pension expense is expected to be neutral on an operating income basis. Our previously announced restructuring initiative has been expanded, and we now expect to achieve annualized run rate savings of approximately $35 million at the end of FY24, up from $20 million. The total estimated cost of this program is now $25 million versus the previously announced $20 million. We now expect adjusted EPS to be in the range of $1.35 to $1.65, with a full-year effective tax rate of approximately 21%. Our outlook for depreciation and amortization, interest expense, and capital expenditures remains unchanged. On the cash side, the full-year outlook for capital expenditures remains $100 to $110 million, and the outlook for primary working capital is approximately 32%. Taken together, we will 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 the call back over to Chris. Thanks, Pat.

Turning to slide 13 to summarize. Overall, although market conditions changed from our previous outlook, over the long term, the global megatrends driving market growth are still intact. We remain confident in executing our strategy to drive share gain throughout the economic cycle. We have experience navigating these market headwinds, and we will focus on taking actions to place the company in the best position moving forward. An example of this is accelerating the $100 million of cost-out actions we outlined in Investor Day. And with that, operator, please open the line for questions.

If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you are using a speakerphone, please pick up your handset to press the keys. If you would like to withdraw your question, please press star, then the number two. Our first question today comes from Steve Volkman with Jeffreese. Please go ahead.

Hi. Good morning, everybody. Thanks for taking the question. Hi,

Steve.

A couple quick things, I guess, from me. I'm interested. I think both of you guys mentioned sort of increased price sensitivity. I think maybe that was just Earthworks, but I'm trying to get a little more color there. Does that mean you're seeing actually pricing go negative there, or is it that you're holding the line but others might not be? Just any more color there would be great.

Yes, Steve. It was a U.S. phenomenon. It was related to road milling. And, you know, I think I would say that we're holding our prices and being more selective. I think what might be happening from a market perspective is the projects are still there. If you remember last year, we talked about the fact that there was less miles being milled because, you know, budgets were strained. And the infrastructure bill helps to – is supposed to be able to help to backstop those budgets. But, you know, that business for the construction season, which happens at the end of our fiscal year, that business is quoted right now. And so I think people are worried that they want to make sure that they get locked into those projects right now. And it's kind of driving a little bit more price sensitivity than we would normally see. Okay. All right. Which was a little different than what we had expected.

Got it. Okay. Thanks. And then, you know, relative to sort of the weaker end market outlooks that seem pretty broad here, is there any way, Chris, to sort of think about how much of this might be inventory de-stock and how much is just kind of weaker end markets? Because they seem a bit weaker than sort of what we're hearing from other companies.

Yeah. I think, you know, on the de-stocking side, our distributors have been pretty – and this is kind of a global comment – have been pretty conservative in terms about not getting over their skis by adding inventory. So we never really thought we saw much of a restocking, if you will, except in areas where they knew, like aerospace, they were supporting – they knew they had to hold the inventory because those demand patterns were a little more certain. So we don't think this is like a major de-stocking because it wasn't really a major restocking, if you will. And so therefore it's more of a – it's more of a little uncertainty in terms of what the economic outlook looks like. I mean, you saw just based on how much the data has changed over the last quarter. So I think it's more about that. And then clearly in infrastructure, from an oil and gas perspective, they've been working their inventories down. And they've now, versus the customer sentiment and what's now been articulated actually by the oil field service companies on their earnings calls, they now believe that, especially in North America, that that business is going to continue to be slow, at least for the rest of our year or the first half of calendar year 24.

Okay. Thank you, guys. I'll pass it on.

The next question comes from Stephen Fisher with UBS. Please go ahead.

Thanks. Good morning. I appreciate that. I appreciate that you're focusing on the things that you can control when the markets are outside of your control. So maybe you can just sort of level set us on the cost tailwinds that you have for fiscal 25 versus fiscal 24 now that you're accelerating the cost savings. In other words, if nothing else changed into next year, how much lower are your fiscal year 25 costs compared to the 24? I know there's still going to be likely some inflation headwinds, but just understanding what's the tailwind that you start off with facing 25 on lower costs?

Yeah, I think the way I would think about that, Steve, is we're going to hit a run rate and we exit the year at $35 million. Right. And we think about the build this year in terms of where we had had $5 million this quarter in Q2. We'll see a slight uptick here from Q2 to Q3, but probably a more substantial uptick in Q4. I think Q1 was I think about $4 million in total. So, you know, take that $35 million and kind of back out where approximately we're going to be here, you know, in this year. And we'll see that roll over to next year in terms of savings from that restructuring program in particular.

Okay, that's helpful. And then on pricing, I'm curious how broad are the price realizations that you have in, I guess, the 2% in Q3 and maybe Q4? And when were those prices increases put in? And I guess I'm wondering how hard is it to introduce new price increases at the moment? Given some of the market backdrop.

Yeah, the prices that we put in were largely done at the start of our fiscal year. And then, you know, we continue to monitor pricing in both segments as the year progresses. And I think there was some smaller modifications that were recently made, in particular metal cutting. In general, Steve, you know, we think that we can hold on to the prices that we've put in place. I think this infrastructure example, road milling, which by the way is in a large portion of our business and it's probably the least profitable portion of infrastructure anyway. You know, absent that, for the most part, I think competitors have been behaving sort of logically and along the lines of what we do. So, you know, we think we can continue to raise prices, especially in line with inflation. So even in a declining market, you know, there are some, you know, very small players in China, for example, that are less price sensitive, but they are always less price sensitive in any market. And we don't think they have the differentiated value proposition to be substantially much of a threat or influence the prices that we're able to demand in our key markets.

Okay, thanks very much.

The next question comes from Julian Mitchell with Barclays. Please go ahead.

Hi, good morning. I just wanted to circle back to the, hey, just to follow up on that sort of operating margin, you know, guidance for the year. So it looks as if, you know, you're looking at an operating margin, you know, clean basis, exiting the year at sort of, you know, nine and a half percent in infrastructure. I think you'd said to be flat year on year and that's versus maybe a break even in the third quarter. So is all of that step up that tungsten aspect? Just trying to understand, I guess, how much might be coming from, say, volumes sequentially in Q4 versus simply tungsten. And then we're looking at the kind of third quarter guide. Is it sort of a margin of seven and a half, eight percent total company? Is that the framework?

As you think about infrastructure, Julian, you're right in the sense that there's a big component of that margin here in Q2 and we'll repeat in Q4 is this, you know, price raw timing, right? Once we get out to Q4, that'll flip to a positive for us, you know, a company wide and an infrastructure. That's going to propel a pretty significant improvement in the margins. And then on top of that, as you know, Q4 is the strongest quarter for infrastructure as well. And so we will see a volume uptick more notable in Q4 than we would going from Q2 to Q3 from a margin perspective as well.

That's helpful. Thank you. And for the third quarter, you know, we should think about the company margin being about seven and a half, eight percent with a sort of a break even in infrastructure. Is that fair?

Yeah, I think from an infrastructure perspective, you'll see a really modest improvement in margin Q2 to Q3, right? And then you'll see a little bit of an uptick here as well from a metal cutting perspective, again, based on volume.

That's helpful. And then just my follow up question. Maybe on the sort of cash flow conversion side of things, you know, surprised perhaps that with the weaker volumes, maybe you're not getting more conversion from working capital kind of liquidation, just as that volume rolls over. Anything going on there? Just sort of curious how you think about inventory management. I mean, I think inventories were flat sequentially and up a little bit versus June. Or are you kind of holding the working cap on the assumption that the sales will improve in kind of six months time?

Yeah, as I think about the working capital, a couple of things from a framework perspective, you know, over a longer term basis, we've got a number of initiatives underway to drive down working capital and inventory in particular. When you think about that, then in the context of, I'll say, shifting market conditions in the short term, you know, the supply chain is relatively elongated, you know, just in terms of physical distance and time. It does take a little bit of time for us to rectify that supply chain. So as you know, we've got softening here that developed in the month of December. It'll take us a little bit of time to kind of get the inventory and supply chain reacclimated to where we expect demand to come out. And so that'll put a little bit of, you know, temporary pause probably on our ability to drive down the inventory, but that's not going to take us off track of the objectives we set for ourselves in terms of improving that working capital over the long run.

That's great. Thank you. Thanks, Julian.

The next question comes from Tammy Zakaria with JP Morgan. Please go ahead. Hi. Good morning.

Thank you so much for giving us... Hi, how are you? So I have a question on the arrow and defense segment. I think you now expect lower growth environment related to some OEM production issues. So from your perspective, how temporary or structural is this risk? If the set OEM issues prove more, you know, long term or structural, what's the strategy to diversify away from it and try to win new OEMs? How prepared are you should this need arise?

Yeah, I think I would think of a couple of things here. The good news about aerospace and defense, whether it's the large OEMs or the other producers, is there still is a huge amount of demand out there and they're producing at much lower levels than even pre-pandemic. And they would like to actually produce even more aircraft, but they are constrained really by the supply chain. So the particular quality issue we think is probably just a short term phenomenon. We don't know exactly. We think we've got the appropriate risk factored into our immediate outlook, but I don't see that as a risk for the longer term projections of this business. And so we feel quite good about our ability to gain share. And, you know, we're adding new customers as part of that share gain, not just at the OEM level, but also the tier of suppliers, the tier one, two, and three suppliers that support this industry. That's where our opportunity is. So I don't think any of that changes our picture, but it did, our forecast did have to reflect that while there'll be growth, it won't be quite as much as we thought in the short term.

Got it. That's reassuring. That's helpful. Thank you. And then my second question is, can you remind us what your current price positioning is versus some of your main competitors, given the last couple of years of relatively higher price realization? From your perspective, are your products now cheaper or in line or relatively at a premium versus some of the competitors out there?

Yeah, I, the way I would think about it is, you know, we always try to price for value and there's parts, for example, the metal cutting segment that we just don't want that business because it's only competing on price and that's not where our advantage is. In the current environment or even in a downturn or upturn, we think we're priced competitively and it's based on the value we deliver and we think even over the last few years through COVID and the high inflation, our competitors have largely been on par with our prices increases as much as we can tell. Some of them are publicly disclosed information. Others, though, for sure are talking to the same customers we are and distributors. So we think we're in line with what the competition is doing and we don't think that landscape has really changed or put us at a disadvantage going forward.

Got it. Thank you so much.

The next question comes from Michael Finager with Bank of America. Please go ahead.

Hey guys, yeah, thank you. Hey, everyone. Thanks for taking my questions. Just how do you touch on your own inventories? I'm curious with how you're managing the working capital just with the weaker end market in your guidance. Do you have to do some under producing in the back half, maybe more than expected? Just how do you feel like you can get your inventory to the end of the year to kind of position yourself for 25? Just curious how you're thinking of that given kind of the softer end market backdrop? Yeah,

absolutely. As we think about the back half and I'd say embedded in our outlook and the change in our outlook over the last 90 days here, we are assuming that we will take some actions here internally to make sure that we constrain, excuse me, constrain production a little bit. That will result in a little bit of under absorption. That's factored into the outlook we have in place. And I think that inventory number, given the midpoint of the outlook and where we think the end of market is going to be relatively flat as we move through the rest of this fiscal year.

Great. And is there anything you would flag in January? You made some comments, I think, on the Earthworks side. I'm trying to get a sense on the general engineering side. I like typically how your customers either on the distributor side or the OEMs typically kind of look at, typically book in January, how that informs the next six months and what you kind of saw in January now relative to maybe where you're at. November, December, what? Thanks, everyone.

Yeah, I think our comment on January was about the order pattern that we started to see in December and certainly in the second half of December. That lower order pattern repeated sort of in January. We didn't see much of a change there. So that was that comment. The other thing I want you to realize is part of what we had talked about on the call when we do our forecast is that backlog in this business is not a meaningful indicator of the forecast for sales in any given quarter. There simply isn't much backlog. Most of this business is transacted within the same day, and so it's very much a statistical process. So the better indicator is how our order is actually coming in. And so the fact that they came down in December and continued that pattern to sort of level off in January I think is the best indicator of the future for us, which is why we, you know, that was one of the major inputs that we had to take to reassess our second half outlook in addition to the third party prognosticators on those. On the longer term, midterm trends.

Thank you. The next question comes from Steve Barger with Key Bank Capital Markets. Please go ahead.

Morning, Steve. Thanks.

Good morning.

Just over the past few years, you've put a real focus on commercial excellence, product innovation and new markets to try and drive share gains. But organic growth still seems to track the metalworking index or industrial production. Top line is going to be flat for three years now. Why are you convinced your initiatives are working? And is the team bringing you new ideas on how to drive out growth differently?

Yeah, I think, you know, we talk about the share gains that we're making. And if I think about what's different about Canada Metal than before is certainly the simplification of modernization and many of the innovations that we kind of highlight on these calls, they weren't possible before modernization. And also, you know, if you ask our customers from a quality perspective and delivery perspective, prior to modernization, we were playing defense. We were always, we were a lot of times explaining why we were missing deliveries or not making their cycle times, etc. So I think that situation is improved. And that allows us to now go in and talk to new customers. And so we do we do believe that, like, for example, in aerospace, that our growth rate has been higher than what the changes in industrial production in aerospace are. So that gives us an indicator that we're growing faster than the market. You know, Franklin's got several examples in infrastructure where we were underserving customers, for example, in Chile, and we, we got large new orders, because we've expanded into different types of mining applications or wear solutions application. So we've got a number of things that point to gaining share. I would say, Steve, that the headwinds, though, of the market in this situation that can move against you, the share gains while they're there, can get lost in the noise. And if you think about the if you think about just in the month of December, you know, versus our midpoint, we probably saw most of that $7 million missed from our midpoint in the month of December. So that kind of a reduction happening that quickly can cause the numbers to be masked. The other thing is, is that on electric vehicles, we've got lots of indications that we're winning above our normal win rate in those type of applications. Again, most of that is based on our ability to differentiate from a technology perspective. So I agree with you that the share gains can get lost inside the noise of the cycle of the market. And volumes, I'll remind you, are still down about 20 about 15% from 2019 levels.

Yeah, no, that's it's a great point, at least to my second question, which is about capital allocation. You know, again, just looking at three years of what will be flat sales, but really, we can go back to FY 16 or 17. And we're in the same general range of revenue and earnings. Why are you convinced share buyback is a good use of cash versus more aggressive cost streamlining or M&A to find some growth?

Yeah, I think we think we have the right capital allocation strategy. So you know, your question implies there's a trade off going on between restructuring and taking costs out. And we absolutely have that as part of our investment thesis. That's why we're going after $100 million. And that that project is not being not being inhibited because of cash allocation. We're moving at a pace and its size properly for what we think we can execute. But we're not limited by cash there. From an M&A perspective, we are looking for other opportunities to grow, but we're going to stay within our own fairway. And we're looking for opportunities where we can help accelerate growth. And so there is a pipeline of those opportunities that we continue to pursue. And you'll have to you'll have to inform you about those as we go. Anything else you'd add to that, Pat? I

just think the other thing I would add, Steve, as we talked about it investor day, we talked about a little bit today in terms of our inventory management, we were really focused on driving cash performance in the business here this year and the going forward years, you know, we've got a string over the last couple quarters of generating cash flow that's much improved over where we have been. And so I guess we as we as we as we work forward here, we're really confident in our ability to drive cash out of the business. And that, you know, we'll go back from a standpoint of, you know, as Chris said, reinvesting back in the business at the pace we can support, as well as, you know, funding share repurchases as appropriate.

Thanks for the time.

The next question comes from Angel Cotillo with Morgan Stanley. Please go ahead.

Hi, good morning and thanks for taking my question. I just wanted to quickly clarify on January comments. I think you mentioned, you know, trends continue versus December. Just wanted to clarify, I guess, the leveling off. Is that basically the same year over year kind of drop as you were seeing in December? Or is that to mean that January continued to be weaker even then December more from a sequential basis? So just kind of clarify there and then maybe from a longer term perspective, you noted PMC, you mentioned the minimize or manufacturing indices in your in your slides as we see maybe a modest pick up in those and kind of the January timeframe. How would you kind of read that in terms of your longer term? Maybe as we look into kind of the first half of your fiscal year, 25, you anticipate that some of these trends will start to drive more of a pick up based on what you historically see.

Yeah, I think to answer your first question, that was a sequential comment. So they've leveled off sort of sequentially. And then, you know, the you know, we're encouraged when the PMIs start to go above 50 and look favorable. And so I would say to you that the January actually, when you start to look at some of these these forecasts, there was a bit of an uptick. Now we've seen that before. I mean, the US S&P Global Flash PMI had increased, I think, three months in a row prior to the lead up of our second or our first quarter earnings call. And that trend reversed. So but what encourages me, though, is that the you know, there's still a lot of a lot of now industrial companies, we have the advantage of seeing what they're what they're saying about their markets. They're now projecting their full year candle year fiscal year 24. And it seems like, Angel, that a lot of them are saying, yes, it's probably going to be a little slower in the in the first half of the calendar year. And they're expecting an increase in business in the second half. And so we're encouraged by that.

Very helpful. And then maybe just more from a regional standpoint, I guess, the dynamic that you saw in December versus January, could you talk about that? Sounds like maybe America's and EMEA is an area that might be slowing down a little bit more within that kind of December, January timeframe. So just curious if you could unpack some of that more near term nuances, maybe by by the kind of the regions, ex China and ex Asia.

Yeah, I think most of that slowdown was was in the Americas. And and then Asia Pacific, we were expecting, frankly, China to have a recovery. And that didn't really happen. I think they're going to continue to struggle. And we think that'll continue for the rest of the year. I would say EMEA was was about in line with what we what we thought they're already kind of operating at a low industrial production level. The change there, though, is going forward is that was expected to start to improve. And it looks like it's going to take a little longer to start to improve.

Very helpful. Thank you.

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

Joe, thanks.

Good morning, guys. Hey, Chris, I'm going to start with a broader question. I just want to kind of understand the cycle that you're seeing today versus maybe some previous cycles that you've seen with this business. It seems it seems different, at least to us. You know, just curious, how would you kind of characterize it? And then similarly, do you have any expectation for how you guys rebound or reaccelerate post the cycle?

Yeah, I think this this cycle, I'll let Pat comment because he's got more of a history than I do. But my my my feeling is that this is a little bit different than what we've seen. I would I would characterize this as a, you know, a continuation of what's been a mild downturn. And previously, we expected, of course, for this to sort of bottom out here and then start to improve in the second half. And it looks like it's going to continue to have a mild downturn. But this downturn has been happening and playing out over over quite a long period of time. And, you know, we've talked on this call before. That's probably due to the fact that there was a huge amount of backlog associated with all the supply chain issues. And so that sort of moderated this. So I think that, you know, typically you might find that once once these volumes start to go go negative, they go negative for quite a while and go pretty steep. We don't see that steep decline, but we recognize we've actually been in decline for some time. I think it's been a couple quarters of volume reduction and in metal cutting and now four quarters in infrastructure. So I think that we I think that our forecast for the first half sort of contemplates at the midpoint that that there's not there's not an uptick, but things are sort of moderating at the at the current levels. And then I absolutely believe in my in my mind that as industrial production improves in the second half of calendar year twenty four, that that's going to be a good opportunity. And maybe the snapback won't be quite as great because we you know, the decline has been has been slow. Maybe the improvement will be slow, but it could also snap back. I guess the answer there is I don't know what that answer is on how the snapback looks. What would you say, Pat?

Yeah, I think one of the things I think that that if we think about downturns and kind of metal or, you know, short cycle industrial companies over a longer period of time, you know, over the last 15 years, we've got two events thrown in there that are quite frankly really idiosyncratic. Right. We've got a we've got a global pandemic. Right. And we've got a we've got a global financial crisis. And I'd say in terms of where we're at, and Chris mentioned, you know, where we are from a volume perspective in both of the businesses here, you know, I think we've got a much more I'll say normalized, you know, industrial downturn. Right. It's kind of playing out where the volumes are coming down gradually. And at this point in time, you know, there's some stability. You know, we talk about how the business kind of performed here in December. And I just kind of comment in terms of the overall performance in December. You know, we came in within that sales outlook we had in place for the full quarter, although a bit lower in the in the in the end where then we would have liked to have been. But I'd say the business kind of performed within the range of as expected, you know, in Q2. And, you know, as we think about how that rolls forward here, it doesn't feel like there's any places where you would see historically if you looked at some of the other downturns and even some of the slowdown that occurred in 2015 where you've got a dramatic fall off in one of the end markets. We do see some choppiness and energy with an oil and gas. You know, we talked about some of the issues that are going on in aerospace, but the base feels pretty solid in terms of where the where demand is at this point in time. You know, as Chris talked about, as we kind of move forward, what's that recovery look like? I think, you know, we'll have to kind of see how that plays out over time.

That's super helpful color from both you. Thank you. And then just my follow on question is just I'm trying to I'm trying to bridge the 2024 guide, the EPS guide to 2023. And so there's a few moving pieces, you know, specifically, it looks like you're you're annualizing your synergies at a high rate, which is great. So, I don't know, maybe maybe you realize 20, 25 million or so this year. But what are the kind of decrementals that you've got baked in to your base volume for the year? And then and then also just on tungsten, do you have do you have a sense for how much of a tailwind that's expected to be as you exit the fourth quarter?

Yeah, so as you think about that the year over year, right, I'll walk you through what are the main components. Obviously, you've got some price realization that's really going to be overcoming some of the inflation that's in the business from a raw material perspective. You know, while we have raw material headwinds, I'll say in the middle of the year here, we're going to see some of that flip. You know, we talked about, you know, in terms of going into Q2 here, like a 12 million, 13 million dollar headwind. You know, that headwind will go away as we get to the back end of the year. So raw material for the full year, I would say, should be slightly positive for us as we get through it. I think you kind of talked about where the restructuring number is, you know, is coming in terms of like 20 to 25 range. Sounds reasonable in terms of, again, the cadence we talked about earlier on the call. Taxability and shares will be slight tailwinds as well. And that really gets you to the big number, you know, in terms of what's changing there. And that's the volume, right? And so unfavorable volume. Yeah, and yeah, probably a little bit normal as we work our way through here. Decrementals, again, as we talked about, just kind of managing production and inventory as we move through the back half of the year.

Great. Thank you.

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

Thanks, operator. And thanks, everyone, for joining the call today. In closing, let me just say that we continue to execute our initiatives in the face of challenging market conditions. We're absolutely focused on what we can control and drive margin improvement and the share gain throughout the economic cycle. As always, we appreciate your interest and support. And please don't hesitate to reach out to Mike if you have any questions. Have a nice day.

Thanks. A replay of this event will be available approximately one hour after its conclusion. To access the replay, you may dial toll free within the United States, -344-7529. Outside of the United States, you may dial -317-0088. You will be prompted to enter the conference ID 4188379, then the pound or hash symbol. You will be asked to record your name and company. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.