Kennametal Inc.

Good morning. I would like to welcome everyone to Kenan Metal's third quarter fiscal 2024 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 two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Michael Pese, Vice President of Investor Relations. Please go ahead.

Thank you, Operator. Welcome, everyone, and thank you for joining us to review CannaMetal's third 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 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, Pat Watson, Vice President and Chief Financial Officer, Sanjay Chaubey, 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'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 Gap 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 you, Chris. Thanks, Mike.

Good morning and thank you for joining us. I'll start the call today with a review of the quarter and some end market commentary, 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, for the quarter, sales decreased 4% year over year with organic decline of 2%, unfavorable business stays of 1%, and unfavorable currency exchange of 1%. Price was offset by volume declines and product mix. At the segment level, Organic growth was flat at 0% in metal cutting and declined 5% in infrastructure. On a constant currency basis, EMEA posted 0% growth. Asia-Pacific sales declined 1%, and the Americas declined 5%. Moving to our end markets, aerospace and defense grew 10%. Transportation was flat at 0%. General engineering declined 2%. Earthworks declined 5%. and energy decline 14%. These results are in line with what we expected and noted on our previous earnings call. Let me take a moment to provide some color on end markets year over year. In aerospace and defense, sales increased 10% year over year, metal cutting grew 9%, and infrastructure grew 13%. Both segments benefited from continued execution of our growth initiatives and market strength in aerospace. Transportation was flat at 0% this quarter due to continued strength in EMEA, which was driven by EV and hybrid project winds offset by a decline in the Americas due to prior year project winds that did not repeat. General engineering declined 2% versus prior year due to lower industrial production in EMEA and the Americas that affected both segments. Earthworks declined 5% during the quarter, primarily due to lower mining activity in China. Energy declined 14% primarily in oil and gas as a result of the 20% decline year-over-year in U.S. land-based rig counts and wind energy project delays in Asia, turning now to profitability in the quarter. Adjusted EBITDA declined 150 basis points primarily due to lower sales and production volumes, higher wages and general inflation, unfavorable foreign exchange, and the continued effect of unfavorable timings of pricing compared to raw material costs in the infrastructure segment. These were partially offset by higher price realization in the metal cutting segment and restructuring savings of approximately $6 million. Metal cutting adjusted operating margins decreased 230 basis points year-over-year driven by lower sales and production volumes, higher wages and general inflation, and a property sale gain in the prior year. These items were partially offset by higher price realization and restructuring savings of approximately $5 million. The infrastructure segments adjusted operating margins decreased 100 basis points year over year, primarily due to lower sales volumes, higher wages and general inflation, and the unfavorable timing of pricing compared to raw material costs. These factors were partially offset by restructuring savings of approximately $1 million. Adjusted EPS decreased to 30 cents compared to 39 cents in the prior year quarter. Free operating cash flow year-to-date was $84 million, up from $60 million in the prior year. The increase in free operating cash flow was driven primarily by working capital changes, including improved inventory levels, partially offset by higher capital expenditures, and lower net income. And finally, we continued the share repurchase program this quarter with $15 million of shares bought back, bringing the total amount repurchased to $178 million. Our share repurchase program reflects the confidence we have in our ability to execute our strategy for long-term value creation, despite quarterly macroeconomic headwinds. Regarding the full year outlook, as we discussed in detail last quarter, our outlook for the full year is largely informed by forecasts of specific market drivers, and those remain generally unchanged for the balance of the year. Pat will provide more details on the outlook in his section. Now on slide four, I'd like to highlight an example of how our innovation advantage continues to deliver enhanced product offerings to our customers. This slide shows our new universal turning grade with Ken Gold technology from our metal cutting portfolio. This new turning grade offers longer tool life, faster cutting speeds, and enhanced reliability across a broad range of aerospace defense, transportation, medical equipment, and general engineering applications. Notably, this new turning grade is the fifth product launched for turning applications that leverage our state-of-the-art Ken Gold coating and insert manufacturing capabilities that were enabled by modernization. And they are a great example of how we're no longer forced to play defense due to antiquated manufacturing capabilities, but instead we are now playing offense with new products to drive growth that outpaces the market. 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. The quarter's results show that we continue to execute our initiatives in the face of soft market conditions. Sales were down 4% year over year, with an organic decline of 2%, fewer workdays of 1%, and unfavorable currency exchange of 1%. The sales performance this quarter was in line with the expectations we previously provided. Operating expense as a percentage of sales was flat year-over-year at 21.1%. Adjusted EBITDA and operating margins were 14.2% and 8.1%, respectively, versus 15.7% and 9.8% in the prior year quarter. During the quarter, we realized approximately $6 million of savings from the previously announced restructuring program. We remain on pace to achieve run rate savings of $35 million annually by the end of FY24. The adjusted effective tax rate increased year-over-year to 26.5%, primarily driven by unfavorable geographical mix, partially offset by favorable return to provision adjustments. Adjusted earnings per share were $0.30 in the quarter. versus EPS of 39 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 7 cents. This reflects lower sales and production volumes and higher wage and general inflation in both businesses and unfavorable price and raw material timing in infrastructure. These items were partially offset by higher prices in metal cutting and restructuring savings in both businesses. You can also see the effects of the tax rate, foreign exchange, and lower share count on EPS. Slides 7 and 8 detail the performance of our segments this quarter. Reported metal cutting sales were down 2% compared to the prior year quarter, with flat organic sales and an unfavorable foreign currency effect of 1% and unfavorable workdays of 1%. by region on a constant currency basis. Sales in EMEA were flat, with the Americas and Asia Pacific each down 1%. EMEA's year-over-year performance reflects growth driven by transportation and aerospace and defense, offset by general engineering. In the Americas, we continue to execute our growth initiatives in aerospace and defense and in general engineering. Growth in these end markets were more than offset by lower sales in transportation and energy. In Asia Pacific, Sales growth in India was more than offset by market conditions in China and a few other smaller markets. Looking at sales by end market, aerospace and defense grew 9% year-over-year as our strategic initiatives continue to drive results in this end market. General engineering declined 2% year-over-year, with modest growth in the Americas and Asia Pacific offset by lower sales in EMEA. Energy declined 8% this quarter, with the majority of the effect in the Americas coming from continued slow conditions in oil and gas and in Asia Pacific from wind power project delays. And lastly, sales and transportation were flat with EV and hybrid project winds and overall strength in EMEA offset by project sales in the prior year that did not repeat in the Americas. Metal cutting adjusted operating margin of 10.8% decreased 230 basis points year over year as lower sales and production volumes, higher wages and general inflation, and a gain on a property sale of approximately $1 million in the prior year period that did not repeat were partially offset by higher price and restructuring savings of approximately $5 million. We will continue to align variable costs to production levels over the next several months. Turning to slide 8 for infrastructure, reported infrastructure sales were down 7% year-over-year due to negative organic sales of 5% and unfavorable foreign exchange and fewer business days of 1% each. Regionally, on a constant currency basis, India sales increased by 1%, Asia Pacific declined 2%, and America sales declined 9%. Looking at sales by end market, on a constant currency basis, aerospace and defense sales increased 13%, driven by market growth and executing on our growth initiatives. General engineering declined 2% due to lower industrial activity year-over-year and or inventory sales in the prior year, partially offset by ceramics growth in EMEA and Asia Pacific. Earthworks declined 5% due to lower underground mining in China and the lower sales of snowplow blades in the Americas from a milder winter. And lastly, energy declined 16%, mainly in Americas, due to lower U.S. land rig counts and drilling activity. Adjusted operating margin declined year-over-year to 3.8%, primarily due to a few factors. First, lower sales volume primarily in the energy and earthwork end markets, higher wages and general inflation, and unfavorable price raw material timing. These headwinds were partially offset by restructuring savings of approximately $1 million. As we discussed last quarter, provided that tungsten prices remain relatively steady, as they have, Q3 was the last quarter we expected to experience unfavorable price raw material effects. Accordingly, we continue to expect infrastructure's fourth quarter margins to be approximately at the same level as last year's fourth quarter. Now turning to slide nine to review our free operating cash flow and balance sheet. Our year-to-date free operating cash flow increased to $84 million from $60 million in the prior year. The increase in free operating cash flow was driven primarily by working capital changes, including improved inventory levels, partially offset by higher capital expenditures and lower net income compared to the prior year period. Primary working capital this quarter was down from the prior year. The company continues to focus on optimizing inventory levels and remains focused on driving improved working capital. On a dollar basis, year over year, primary working capital decreased to $658 million down from $712 million at the end of the third quarter of fiscal 23. On a percentage of sales basis, primary working capital decreased to 32.7%. Year to date, net capital expenditures increased to $79 million compared to $66 million in the prior year. In total, we returned $31 million to shareholders through our share repurchase and dividend programs. Under our $200 million share repurchase program that ends in June, We bought $15 million of shares in Q3 for a total of $178 million, or 6.5 million shares, representing approximately 8% of outstanding shares since the inception of the program. We had no activity under the new $200 million three-year share repurchase program authorized by our board in February. And, as we have every quarter since becoming a public company over 50 years ago, we paid a dividend to our shareholders. Our commitment to returning cash to shareholders reflects confidence in our ability to execute our strategy to drive growth and margin improvement. We continued to maintain a healthy balance sheet and debt maturity profile. At quarter end, we had combined cash and revolver availability of approximately $785 million and were well within our financial covenants. The full balance sheet can be found on slide 15 in the appendix. Turning to slide 10, regarding our full-year outlook. Since we are now in the fourth quarter, we are narrowing our sales and EPS outlook. We now expect FY24 sales to be between $2.03 billion and $2.05 billion, with volume ranging from negative 4 to negative 3%, net price realization of approximately 2%, with our inflationary pricing actions partially offset by lower prices for customers with index pricing due to higher material content and a neutral effect from foreign exchange. However, reflected in the annual outlook is an anticipated fourth quarter foreign exchange headwind of approximately 1% year over year. Our adjusted EPS outlook is now $1.40 to $1.55. The last notable change to our outlook is an increase in our free operating cash flow to be greater than 125% of adjusted net income, up from greater than 100%. The other elements of our outlook shown on the slide are unchanged from the prior quarter. 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. Although macro conditions remain a headwind in the short term, the global megatrends that should drive market growth over the long term remain intact. We've successfully navigated similar macro headwinds before and will stay focused on what we can control to improve margins and drive share gain throughout the economic cycle. As you know, I announced my decision to retire effective May 31st. I've been fortunate to lead a strong team of employees dedicated to improving the company and continuously improving our ability to serve customers Through simplification and modernization, we've streamlined the organization and improved sales effectiveness, improved customer service, made our factories more efficient, and enabled the development of new products. We successfully navigated the challenges of COVID and embarked on a cultural transformation to drive accountability across the enterprise for gaining share and improving profitability. I'm exceptionally proud of the work our teams have done to make Kenemento stronger over the last seven years. Finally, I'm especially proud to turn leadership of the company over to my chosen successor, Sanjay Chaubey. I'm confident that the company will continue to improve under his very capable leadership. Sanjay, is there anything you'd like to add?

I would, Chris. First, on behalf of all of us at Kenna Metal, let me just say thank you for everything you have done for the company over the last seven years. I also want to personally thank you for your support and coaching. especially during this transition period. Now, a quick update from my side. Over the last couple months, I have continued to run metal cutting, along with taking time to learn more about the infrastructure business and the enterprise as a whole. Looking ahead, we'll work on the following top three priorities while living our values of safety, respect, integrity, and accountability. First, above-market growth. through innovation advantage, best-in-class customer service, and commercial excellence. Second, margin expansion through operational excellence and applying lean principles. And third, executing a balanced capital allocation strategy. In closing, I'm really excited to step into the CEO role on June 1st, and I'm looking forward to connecting with all of you in August to cover our full year results and fiscal 25 outlook.

Thanks, Sanjay. And with that, operator, please open the line for questions.

Yes, sir. 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 two. And we'll pause momentarily while we assemble our roster. And the first question will come from Steve Volkman with Jeffries. Please go ahead.

Morning, Steve. You there?

Perhaps you're muted, Mr. Volkman. We'll move on to our next question from Ms. Angel Castillo with Morgan Stanley. Please go ahead.

Hi. Thanks for taking my question. And, Chris, it's been a pleasure working with you and wish you all the best. And, Sanjay, looking forward to working with you going forward. So maybe just, you know, to dive into a little bit more of kind of the outlook and what you're seeing, you know, under the surface and the fundamentals, you know, the quarter kind of shook out as you expected, but it looks like the mix of it in terms of end markets might have been a little bit different. Can you just walk through the major end markets and maybe some of the pivots or changes that you've seen, you know, in terms of the underlying trends in the third quarter and then maybe kind of bolster that with some of the underlying trends that you're seeing thus far in the fourth quarter across those end markets?

Yeah, sure. Let me start with metal cutting first. You know, we had expected general engineering to be flat with industrial activity remaining soft in the Americas and EMEA. And then Asia Pacific, sequentially the IPIs, they were going to slightly improve. And that's basically what we saw. The build rates on aerospace increased. They deteriorated slightly, I think, because of the quality issues that one of the major OEMs had. And energy was pretty much flat. The week count was flat. And as we said on our prepared remarks, it was down year over year. But if I look at Q3 to Q4 sequentially, I'd still say general engineering, again, relatively flat. Americas and EMEA and Asia-Pacific would be improving. That's driven primarily by India. And then also China, there's a normal seasonality that we would see there that would drive some improvement. Aerospace, that segment continues to improve and be strong, but it is dependent on the production issues stabilizing for one of the major OEMs. But generally, the long-term trends for that are still very positive. Energy, we expect, again, to be flat. The rig count in Q4 is expected to go up a couple rigs, but essentially, Angel, it's pretty much flat. And then PowerGen remains stable in EMEA and Asia Pacific. For transportation, we think that America is going to continue to improve, again, sequentially due to strike recovery and also seasonality. EMEA will probably be flat, and Asia Pacific will improve also due to seasonality. If I can go then to infrastructure, I would say that You know, the quarter played out about what we said. My comments that I made for metal cutting and general engineering will be the same for infrastructure. And energy, as I said, was flat with the rig counts being stable. And then our customer sentiment in terms of an outlook for energy, in North America anyway, is they seem to have been done with their, completed their inventory adjustments, and we think things will pretty much be flat for the fourth quarter. On mining, that activity was lower than we expected. It was driven primarily by lower coal demand in the U.S., largely due to the milder winter and a slower China recovery. And then in construction, that followed the normal seasonal pattern. Pat mentioned the snow blades that were down slightly due to the mild winter. If I look at infrastructure going forward, Again, general engineering, same comments apply to as we have with metal cuttings. Basically flat with some continued strength in India driving growth in Asia Pacific. Energy, as I said, will probably be flat Q3 to Q4. Mining is expected to sort of stabilize at the current levels. In general, there are softer market conditions in China and China. In terms of the thermal coal, the milder winter obviously created an excess supply of coal, so that will also probably continue to be a bit of a headwind. And then construction, we expect that to follow the normal seasonal pattern, except in China, again, due to the lower economic activity, it looks like construction is slowing down a little bit.

That's very helpful.

Angel, thanks.

I appreciate it. No, that's very thorough and helpful. Thank you. Maybe switching over to the stronger free operating cash flow that you talked about, can you just maybe give us a bit of a sense of what you're kind of expecting there in terms of maybe some of the absolute value and then the use of that cash in terms of the buyback? What kind of cadence should we anticipate in terms of potential buybacks in the following quarters? And do you kind of expect that to pick up from current levels, given where the stock price is, or how are you kind of seeing that?

Yeah, Angel, a couple thoughts just overall on free operating cash flow development. As you know, our strongest quarters from a cash flow perspective are Q3 and Q4. We would expect that to be the case here as well, and FY24. From a capital structuring perspective and the way we have thought about our share repurchase program, has been always at a minimum to offset the dilution that comes from management compensation programs, as well as opportunistically buyback shares when we've got the cash and when it's appropriate given other potential calls on cash like, you know, Bolton M&A and the like. You know, as well as we think about our cash position, I'll say going throughout the year, you know, as we close out Q4, you know, always on our mind is the fact that as we enter into the new fiscal year, normally our worst cash flow quarters do one, right? And so those are always thoughts that are on our mind in terms of how we size in the share repurchase program. Obviously, as well, we're going to be concluding here our first repurchase program of $200 million that will terminate here at the end of the fiscal year. And our board's already authorized The second tranche of that repurchase program starting in February, an additional three-year $200 million repurchase program that we'll all get started on in the future here as well. So we remain committed to returning cash to shareholders and, you know, working on that balanced capital allocation strategy.

Very helpful. Thank you.

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

Hi, good morning, and I wish you all the best, Chris, and thanks for all the help down the years. Maybe just to start off with the question perhaps on that price sort of ROAS dynamic, understand it was a headwind in the third quarter year on year. Should be a tailwind, I think, right now in the fourth quarter. and into early next year. So I just wondered, perhaps, Pat, if you could sort of flesh that out a little bit, you know, what kind of tailwind typically the infrastructure segment should get in Q4 from Tungsten and any sort of way of sizing the effect into the first half of next year.

Yeah, so as we think about, we'll go through the general dynamics here. In that infrastructure segment, we do see price lead raw material costs a little bit. That's what drives part of this dynamic for us. As we move from Q1 into Q2, we did see a sequential headwind of about $13 million. At the enterprise level, that was predominantly in the infrastructure segment. As we move from Q2 to Q3, that headwind was basically, I'll say, equal in size And then as we get into Q4, we'll see that headwind abate, right? And so at this point in time in Q4, I'll say we're simply pricing on the same level the cost is flowing through the P&L. Again, in general, as we think about how that structurally works for us, we have visibility, I'll say, into the cost structure going forward from a tungsten perspective, about two quarters. And as we've seen tungsten prices here over, I'd say, the last 45 days or so, You know, recent low, again, probably about 45 days ago, sitting around 312, 313 per MTU. Most recently, last week, we were about 332, 333. So we have seen a little bit of an uptick in the cost of tungsten. As that, I'll say, continues at that level, we'll see that. Again, as time moves on, we'll get more and more stability into the cost structure into the, I'll say at this point in time, the second quarter, more or less, of the of FY25 and so that's kind of where we're at right now.

Thanks very much. And then just my second question, you've talked about demand a little bit already and I just want to follow up on that. So I think China is an area where clearly you took down the outlook a little bit. I just wondered sort of beyond China, have you seen any change in demand patterns particularly in areas like general engineering in the last couple of months or your business selling into kind of say off-highway machinery OEMs. It seems like listening to other companies in the last two or three weeks there has been some softness in orders or sales in those types of markets. Just wondered if you'd seen a similar pattern or else you know, outside China, things have actually been very steady for you.

Yeah, I think in general, you know, general engineering, for example, if you look at the Eurozone, you know, I think that PMI has been below 50 now, Julian, for like 21 months. And it's, you know, for the last several months, it's just kind of been bouncing just below the 50 mark in between, I think, 45 and 50. So it hasn't really changed much. And the same thing with the U.S. We seem to be in this mode where it's in the contraction territory, but it's kind of stabilizing at about the same level. Now, recently, if you look at April's IPIs for industrial production, which is a good metric for general engineering, it ticked up a little bit in April, but we've seen that happen before, so I don't know that we can call it a trend. But we still see, at least through the fourth quarter, I think things are sort of stable at these maybe softer levels is how I characterize it.

That's helpful. Thanks very much.

The next question will come from Tammy Zakaria with JP Morgan. Please go ahead.

Hi. Good morning. Thank you so much. And Chris, thanks for all the help and wish you the best of luck. And welcome aboard to Sanjay. So my first question is around modeling. Can you remind us, is the fourth quarter similar from a workday perspective year over year, or we have a different compare?

You know, from a workday perspective, it is fractionally higher. I don't think it's even a full workday, Tammy. Okay.

Got it.

Okay. There is just, you know, embedded in that. Obviously, we've had, I'll say, for the most part, an Easter holiday shift where Easter was more of a third quarter phenomena for us this year in the Americas and Europe. And last and the prior year, it would have been a fourth quarter phenomena.

Got it. That's very helpful. And my second question is around aerospace and defense. I think one of the major OEMs just had a new investigation open on a different aircraft model. This is more from a medium to long-term perspective. How are you thinking about build rates over the next few years? Do you expect aerospace and defense to grow nicely over the next few years? And also, can you comment on the mix between commercial aerial versus defense within your portfolio?

Yeah, I'd say on the commercial versus defense, it's mostly commercial, but there is a portion that is certainly defense-related. And our view for aerospace and the commercial air production long-term is that the demand is solid. If you look at the major OEMs, yes, there's quality issues, which we think – are certainly inhibiting demand in the short term, and we've kind of reflected that in our fourth quarter forecast. But even if you look at the other major OEMs, they're still constrained by supply chain. And we know that that supply chain, because we're also active in that, those suppliers are actively working on increasing production. So I think it's just a matter of time where the supply chain will no longer be a constraint, especially when you were talking about in the mid-term timing. But the demand is very solid. There's definitely a need for more aircraft. And so we feel very good about that, but there are some constraints right now that are holding things back. And I still don't think, I don't believe production build rates are still what they were prior to the pandemic, Tammy.

Got it. Thank you so much.

The next question will come from Steve Barger with KeyBank. Please go ahead.

Good morning. This is Christian Zylon for Steve Barger. Thank you for taking the questions, and we'd just like to echo previous comments. It's been a pleasure working with you, Chris, and we look forward to working with you, Sanjay. First question, I know you guys continue to put focus on your commercial excellence and product innovations. Can you just give us some idea of how the new product contributions relate to growth? And then in a production upcycle, How much do you think you would outgrow the market given your efforts on these fronts?

Yeah, I think it's a really good question because as I talked about in my opening remarks, prior to modernization, I think it was fair to say that we were lagging in terms of our ability to release new products and position ourselves to take share. And that's now changed with modernization. You know, the example I gave in my prepared remarks were this is the fifth product innovation that's been released since modernization. That's just on this coding area. That's not all products, of course. But I think if we look back prior to modernization, you know, it may have been seven or eight years before we had released anything along those lines because we simply lacked the manufacturing capability to to make this new these new products with this new coating technology so for me it's very it's very significant that we we finished this modernization in sort of 2022 we're leveraging this these examples and so most of that growth is still ahead of us you know if you look at the adoption rate and how people are looking at these new products they feel they feel very good about it but clearly that's a change from where we were before modernization where we were not releasing new products as quickly. So innovation advantage is very key to driving share gain. It is one of the major levers we have, along with, of course, customer service levels, and that's also improved through modernization. Because typically before, we were challenged in terms of consistency and quality before modernization, and also I think our on-time performance and performance ability to respond within the proper lead times was also constrained. So we feel very good about it. It is a major driver. And we haven't differentiated Christian in terms of how much of a driver of share gain that is, other than I would say it's a big piece of it. And then I would comment on our investor day that we plan on getting 1% to 2% growth from the markets based on the long-term megatrends. We used about 2% growth from price, and that's pretty consistent with what we've done historically. And then the share gain, again, driven as one of the big levers on innovation, that's also 1% to 2% over the long term.

Great. Very helpful. Thanks for that, Culler. If I could just follow up on that, I guess which markets do your innovation wins allow you to take share in? Or, I guess, do they enable upside to the range that your margins seem like they've been in for the past few years?

Yeah, I think they, you know, maybe the example that I gave in my prepared remarks, if you notice, that had a broad range of applications. So it's, you know, we do customize some tools that are specific, for example, maybe more on titanium machining that happens in aerospace more than anywhere else. But for the most part, a lot of these products are, While they may be designed with a specific application, for example, in aerospace in mind, they have broad application across many industries. So that's a good thing about our products is they have broad application. There was another part to your question, Christian, but I forgot what it was. Can you repeat it?

Just on the if the product innovation winds enable upside to the range that your margins seem like they've been in over the past few years. Thank you. Appreciate the time.

Yeah, I think that, you know, the innovations apply to sort of higher end challenging applications. And in those applications, we price for value anyway. So as long as we've now been focused on that element of commercial excellence, I don't know that they're going to drive necessarily improved margins to that process, but they are an enabler to winning new business and having the opportunity to make the higher margins on those type of products anyway. And then they also apply to more fit-for-purpose type applications, and those help to improve our competitiveness. Not sure that there's necessarily a specific group that is going to necessarily drive more margin improvement. specifically because they're used over such a broad application across our end markets.

Thanks, Scott.

The next question will come from Michael Finnegar with Bank of America. Please go ahead.

Hey, gentlemen. Thanks for taking my question. I'm just curious. I appreciate, obviously, the guide for the fourth quarter. Just Seasonally, when you head into your next fiscal year, I think sales are typically down a certain range, quarter over quarter. Just based on the current environment today, should we expect that normal seasonality heading into next year? Could we see better than normal seasonality? Or are there still kind of headwinds that would make us feel like that normal seasonality might have a little bit more pressure than we look at in prior years?

Yeah, you know, obviously, I'll start off by saying, Mike, that we're in the planning process right now for FY25, right? But just a couple things to think about. I'll say, you know, to answer your question from a sales perspective, going into Q1, as well as just some cost structure items to think about relative to 25 as well. You know, first off, we would see, you know, our expectations on normal seasonality going from Q4 to Q1 would be down about 8% to 10%, right? And so that would be our normal expectations. Beyond that, as we just think about the framework, I'll say for FY25, there's a couple things just to touch on. Number one is, and we talked about this a little bit earlier on the call, would be raw material costs, where tungsten sits today, slightly up from the lows. Again, as we continue to have stability in that tungsten price, that would be a favorable thing as we think about price raw, phenomena going into the first half of FY25. And I said the second thing in terms of just the, you know, the overall cost structure of things we've been working on is obviously we've got our existing restructuring program that's out there, you know, that we intend to hit a run rate here of $35 million on an annual basis at the end of the year. You'll see some I'll call it rollover benefit as we move from 24 to 25 as we achieve that full rate throughout FY25. But again, we're right in the planning process now. The management team is digging into all the market and cost phenomena, and we'll report back to you with a holistic outlook on FY25 in about 90 days.

Great. And just on metal cutting, the flow through in the quarter, the 230 bps of margin degradation, I believe there was a one-time gain, though, in the prior year. Just wanted to flesh it out. Was the decremental margin on I think it was flat organic growth there. Was that in line with kind of what you guys were thinking, just trying to understand what you guys kind of saw in that quarter? How would you kind of think about it in terms of your sensitivity to volumes?

Yeah, I think the first thing, certainly there was about a million-dollar gain in the prior year in the metal-cutting business that was related to a property sale that did not repeat. So you've got to factor that in. I think the other thing as we think about margins and decrementals in terms of the quarter, two things. Number one is, yeah, your comments in terms of the total sales change is accurate, but don't forget in there there's positive price embedded in the quarter as well. If you think about the price realization of the quarter, that would imply volumes obviously being negative. I'd say that the other piece of that volume being negative in terms of what's happening in Q3 in particular, you know, from a decremental perspective, is going into Q3. You know, we saw a slowdown in markets in the December timeframe, and that just simply causes us to react to what that demand is in the quarter and, you know, reset production and, you know, adjust the cost structure. Those things just simply don't happen instantaneously. They happen over time. as we put the actions in place to constrain the cost relative to where volume demand is from an end market perspective and production as well.

Great. And I'll just, if I could have one more, excuse me, more in there. Just the stable, the commentary in general engineering, the stable at software levels, I'm just curious, are you guys, is your inventory levels with your customers, your customer inventory levels, Are they reflective of that stable software levels? Do they have a little bit more progress to go? Any comment on that would be helpful. Thanks, everyone.

Yeah, I would say that the customers have, in terms of destocking, they were already very cautious about how much inventory they were holding anyway, and I think they still maintain that. So I would say that their current stocking levels reflect – That forecast that I provided, that outlook on the conditions. So no more, no significant destocking that we're looking at to be ahead of us. And then I think they're also cautious on the restocking and they'll probably need to see some demand signals before they get into that mode.

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

Thanks, operator, and thanks, everyone, for joining the call today. As always, I appreciate your interest and support, and please don't hesitate to reach out to Mike if you have any questions. Have a great day. Thanks.

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