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spk08: Good morning. I would like to welcome everyone to Kenna Metals' fourth quarter and fiscal 2024 earnings conference call. Today, all participants will be in a listen-only mode to prevent any background noise. After the speaker's remarks today, 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 today's event is being recorded. I would now like to turn the conference over to Michael Pisi, Vice President of Investor Relations. Please go ahead, sir.
spk04: Thank you, Operator. Welcome, everyone, and thank you for joining us to review CannaMetal's fourth quarter and 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 Pese, Vice President of Investor Relations. Joining me on the call today are Sanjay Chaubey, President and Chief Executive Officer, Pat Watson, Vice President and Chief Financial Officer, and Franklin Cardenas, Vice President and President of Infrastructure. After Sanjay 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 statements. 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 Canada Metal's 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 deck and on our Form 8K on our website. And with that, I'll turn the call over to Sanjay.
spk01: Thank you, Mike. Good morning, and thank you for joining us today. It is an honor and privilege to lead this company and to work with our team members around the world. Before I get into the main portion of my remarks, let me say that it has been a very busy two months since I took on the CEO role. During that time, I visited numerous facilities around the world, talking to our team members, investors, customers, and other stakeholders. So much of what I'm hearing from them aligns with and reinforces what we are focused on by way of our value creation pillars. And I'll be speaking more about those in a minute. Earlier this week, we announced the hiring of our metal cutting president, Dave Bersolini. He is a strong business leader with a growth mindset and results orientation. I'm very pleased to have Dave on our team. I've also established a team to implement value creation business systems and tools that will help us drive above market growth, operating margin expansion, and free operating cash flow. In the spirit of true lean, We are making this investment primarily through existing resources and some new talent, almost all of it funded by reallocation of funds. During these first couple of months, we also dealt with the aftermath of a tornado at our Rogers, Arkansas plant. The safe, speedy, and successful restart of that facility was made possible by our local Rogers team and experts from across our organization who came in to help. Those teams work nonstop to safely resume operations and meet customers' expectations. And I just want to take this opportunity to say thank you to them. Now let's turn to some of the details on the quarter on slide three. Overall, I'm very pleased with how we performed in the quarter. Despite market softness and other challenges, sales were at the upper end of our expectations with organic sales declining 1 percent. During the quarter, infrastructure's organic sales declined 2 percent, and metal cutting's organic sales were flat. It is worth noting that metal cutting has consistently outperformed our public peers over the last two years. In-market conditions were mixed. We continue to see strength in aerospace and defense, with sales increasing by 23 percent from the prior year. This was driven by market growth, execution of our strategic initiatives, and project timing. General engineering sales were flat, with favorable project and order timing in the Americas offset the lower economic activity in EMEA. Transportation sales were down 1% year-over-year, mainly from project timing and lower volume in Americas. Energy was down 6% due to the continued year-over-year declines rig count, and wind energy project delays in Asia. Competitive market pressures, especially in road construction, continue to impact our earthworks business, which declined 6 percent. Moving beyond the end markets now, our adjusted EBITDA margin increased 100 basis points from last year, despite lower sales volume and approximately $4 million charge from the tornado. Additionally, as we expected, margins normalized in the infrastructure business, improving 490 basis points from the third quarter on an adjusted basis. During the quarter, we bought back $22 million worth of stock, completing our original $200 million authorization. Overall, let me say that I'm quite pleased with how the business performed in the quarter. Now let's turn to slide four to briefly talk about the full year performance. Fiscal 24 presented us with persistently soft market conditions, foreign exchange headwinds, and the impact of the tornado that I previously mentioned. But even in a year with lower sales volume, we were able to move the business forward. Adjusted EBITDA margin was essentially flagged despite lower volumes, price raw material timing effects in infrastructure, the tornado, and the foreign exchange headwind. We also delivered the highest free operating cash flow since fiscal 15, and the cash flow from operations as percent of sales was the highest in over 25 years. This performance enabled us to return $129 million worth of cash to our shareholders through our dividend and share repurchase programs. End market results for the year were similar to the fourth quarter, with a few differences in the transportation and general engineering end markets. Aerospace and defense grew 13 percent, driven by strategic initiatives and market growth. Transportation increased 1 percent for the year, driven by project orders in EMEA, which were offset by lower production in the Americas and lower Asia-Pacific volume. General engineering declined 1 percent for the year due to lower production in EMEA and the Americas. Market conditions that impacted earthworks which declined 4 percent, and energy, which declined 9 percent, were consistent throughout the year. In summary, we feel good about delivering a solid year end quarter. We managed through many challenges, drove performance improvements, and continue to advance our strategic initiatives. That said, there is more work to do to deliver sustained performance on growth and profitability, and we are committed to continuing that work in fiscal 25. Turning to slide five for the value creation pillars I mentioned a few minutes ago. I'm pleased to share with you our three value creation pillars. These pillars are built on a strong foundation and will be guiding us in fiscal 25 and beyond. First is delivering growth. This is exactly as it sounds. We are focused on growing above market and will do that through innovative solutions and application support, best-in-class customer service, and commercial excellence. As a brief side note, many of you will remember that we talked about several strategic pillars last fall at the Investor Day in New York. Innovation advantage, commercial excellence, and operational excellence. Those concepts have also been embedded as part of these value creation pillars. You can see innovation and commercial excellence in pillar one, and operational excellence in pillar two. principles to everything we do, increasing value at work and removing waste from our processes. This is not just for our manufacturing plants, but also applies to all parts of our business. The value creation systems team will build our capabilities and drive adoption of continuous improvement tools with the full engagement of the broader team. Now moving to the third pillar, portfolio optimization. This pillar is how we will systematically review and optimize our product and business portfolio to generate value for all our stakeholders. This is a critical, ongoing process to ensure that we're generating attractive returns from our current mix of investor capital and resource allocation. In addition, we'll work towards improving our sales mix, emphasizing markets and applications with a higher growth and margin profile as well as businesses that are less cyclical than our traditional mix. While I'm on this topic, let me say this. Buying a third leg of a stool is not a part of our strategy. Our primary focus is driving above-market growth, margin expansion, and cash flow improvement through organic actions. But we will consider bolt-on acquisitions to fill product or coverage gaps for attractive applications and markets aligned with our strategic focus. For example, medical, ceramics, and aerospace and defense, as we had mentioned during Investor Day also. Finally, these pillars are supported by a strong foundation of engaged employees, our core values, and a winning culture. Now, there is more to come on these value creation pillars in the future, but for now, let me say this. We are focused on serving our customers, providing a great place to work for our team, and delivering above-market growth operating margin expansion, and improved return on invested capital. The growth and continuous improvement pillars will be our primary focus on this journey, especially in the near term, while making systematic progress on portfolio performance over time. Now let's turn to slide six. Here I will provide a quick overview of market trends. The top section of this slide provides directional context on end market sales performance reflected in our fiscal 25 assumptions at the midpoint. The lower section includes the key macroeconomic factors reflected in our outlook. Given the short cycle nature of our business, backlog is not a meaningful component of our business model and has minimal impact on our outlook. As such, to set our outlook range, we rely on external market indicators and customer inputs, plus the expected impact of our strategic initiatives. You can see the data points on the slide, so let me provide you with a little bit more color beyond the numbers. Overall, fiscal 25 is expected to be a continuation of mixed market conditions, softer markets in the near term, and a modest improvement in the second half of our fiscal year. In aerospace and defense, we expect continued growth, but at a slightly lower rate, as the major OEMs have revised their bill rates for the rest of calendar year 24 and then improving in calendar year 25. Aircraft build rates are still 35% below pre-pandemic levels. But with our strategic initiatives, we are well positioned to win market share and capitalize on market growth as quality and supply chain constraints ease over time. Defense-related orders are expected to stay strong for the year. This market tends to have significant quarterly fluctuations due to the lumpy nature of customer buying patterns. Transportation is expected to experience slight growth in production for the current IHS light vehicle forecast, but most of the improvements are projected for calendar year 25. In the near term, we see indications of a softer transportation market, especially in EMEA. In fiscal 24, we continue to be successful in winning projects on battery and hybrid programs, a strategic focus area for us, at a higher rate versus our traditional rate in transportation. As you may have seen, several manufacturers have commented about the pace of new battery platform investments in production, which are slowing. As a result, in the near term, this slowdown could provide for some tougher comparisons for us, especially in EMEA. In any case, we are very well positioned to grow with all engine types for the long term. General engineering is expected to be flat. IPI in the U.S. continues to remain flat near term with a slight improvement in the first half of calendar year 25. Eurozone remains consistent with slight improvement in the first half of calendar year 25. We anticipate China to be flat as per market indicators. In energy, RIC counts are projected to increase moderately with a growth anticipated to occur in the first half of calendar year 25. Customer feedback also indicates a cautious outlook for the second half of calendar year 24, and rig output productivity remains a key focus. Considering these factors, we anticipate this end market to remain down slightly, especially in the near term. Finally, earthworks, including mining and road construction, is expected to be soft in the near term and also experience competitive pricing pressure. Now, let me turn the call over to Pat, who will review the fourth quarter financial performance and fiscal 25 outlook.
spk06: Thank you, Sanjay, and good morning, everyone. I will begin on slide seven with a review of the fourth quarter operating results. The quarter's results show that we continue to execute our initiatives in the face of continued headwinds from inflation, foreign exchange, and some market softness. Sales decreased by 1% year over year, with a 1% organic decline and headwinds from foreign exchange of 2%, partially offset by favorable workdays of 2%. Operating expense as a percentage of sales decreased 50 basis points year-over-year to 19.5% on an adjusted basis. Adjusted EBITDA and operating margins were 17.7% and 11.5% respectively, versus 16.7% and 11.4% in the prior year quarter. During the quarter, we realized approximately $7 million in savings from the previously announced restructuring program. Timing delays caused a slight shift with some actions moving into July, and we continue to expect to achieve $35 million of run rate savings. As a result, in FY25, we expect approximately $14 million in rollover savings. Lastly, forward exchange headwinds from the strong U.S. dollar were approximately 2% this quarter. The adjusted effective tax rate increased year-over-year to 29.3%, primarily driven by unfavorable geographical mix and prior year adjustments related to evaluation allowances against deferred tax assets that did not repeat in the current quarter. Adjusted earnings per share were 49 cents in the quarter versus 51 cents in the prior year period. As Sanjay mentioned, we also delivered the highest free operating cash flows since FY15, and cash flow from operations, as the percent of sales was the highest in over 25 years. The main drivers of our EPS performance are highlighted on the bridge on slide 8. The positive year-over-year effect of operation reflects restructuring savings, timing of raw material costs, price, and operational excellence initiatives, partially offset by lower sales and production volumes and higher wage and general inflation. Our results this quarter also include an approximate $0.04 hit from the Rogers tornado on our results. You can also see the effects of the tax rate and currency on EPS, with taxes of negative $0.07 and currency negative $0.02. Other reflects lower share count and interest expense, which contributed $0.03. Slides 9 and 10 detail the performance of our segments this quarter. Reported metal cutting sales were down 1% compared to the prior year quarter, with flat organic growth and a foreign currency headwind of 2%, partially offset by favorable business days of 1%. By region, on a constant currency basis, the Americas led at 7%, Asia Pacific was down 2%, and EMEA declined 3%. America's year-over-year growth this quarter was driven by order timing in the indirect channel within general engineering and market, and continued market growth and the execution of our growth initiatives in aerospace and defense, partially offset by a decline in transportation. Globally, the indirect channel represents about 60% of Metal Cutting's annual FY24 sales. The decline in Asia Pacific sales was primarily the result of weakness in general engineering and wind energy projects. And EMEA's year-over-year performance reflects soft market conditions within general engineering partially offset by market strength and share gain initiatives driving growth in aerospace and defense. Now, looking at sales by end market. Aerospace and defense grew 11% year over year, as our strategic initiatives continue to drive results in this end market. General engineering grew 1% year over year, with the timing noted earlier driving the growth in Americas, partially offset by declining sales in EMEA and softness in China. Transportation declined 1% year-over-year, mainly from project timing and lower volume in the Americas. And lastly, energy declined 1% this quarter. Metal cutting adjusted operating margin of 13.4% increased 80 basis points year-over-year, driven by price and restructuring benefits, partially offset by lower sales and production volumes, higher wages and general inflation, and foreign exchange. Turning to slide 10 for infrastructure. Organic sales decreased by 2% year-over-year, with foreign exchange headwinds of 1%, partially offset by favorable business days of 1%. Regionally, EMEA grew 3%, followed by Asia Pacific at 1%, and America's sales declined by 3%. Looking at the sales by end market, aerospace and defense grew 58% due to order timing when compared to the prior year, and general engineering declined 2%, with lower demand in the Americas partially offset by modest growth in Asia Pacific. Earthworks sales declined 6% due to competitive market conditions resulting in lower construction volumes and lower specialty product sales in the Americas. And lastly, energy declined 9%, mainly in the Americas, due to lower U.S. land rate counts and less drilling activity. As we have expected, adjusted operating margin increased sequentially from 3.8% in the third quarter to 8.7% in the fourth quarter, since the timing of price raw material effects that impact margin in the second and third quarter are now behind us. Compared to the prior year, adjusted operating margin declined 90 basis points. Operating margin this quarter included an approximate $4 million charge from the tornado, representing approximately 190 basis points of margins. Additionally, we saw lower sales and production volumes, partially offset by favorable price raw material timing, restructuring savings, and an advanced manufacturing production credit for FY24 under the Inflation Reduction Act. Now turning to slide 11 to review our free operating cash flow and balance sheet. Net cash flow provided by operating activities in fiscal 24 was $277 million, compared to $258 million in the prior year. This is the highest as a percentage of sales in over 25 years. Our free operating cash flow was $175 million compared to $169 million in the prior year. We are very pleased with the team's effort to drive improvements in our inventory efficiency, which was the primary driver of our improved working capital. On a dollar basis, year over year, primary working capital decreased to $626 million. On a percentage of sales basis, primary working capital decreased to 32%. Net capital expenditures were $102 million compared to $89 million in the prior year. In total, we returned approximately $129 million to shareholders through our share repurchase and dividend programs. We repurchased $22 million of shares in Q4 for a total of $200 million or 7.4 million shares since the inception of the program. representing approximately 9% of outstanding shares. We also paid a dividend to our shareholders, something we have done every quarter since becoming a public company over 50 years ago. Our commitment to returning cash to shareholders reflects our confidence in our ability to execute our strategy to drive growth and margin improvement. We continue to maintain a healthy balance sheet and debt maturity profile with no near-term funding requirements. At quarter end, we had combined cash and revolver availability of approximately $828 million and were well within our financial covenants. The full balance sheet can be found on slide 21 in the appendix. Turning to slide 12 regarding our outlook. We are providing an outlook for both the full year and the first quarter, beginning with the full year. We expect FY25 sales to be between $2 billion and $2.1 billion with volume ranging from negative 3 to positive 2%, price realization of approximately 2%, and a 1% negative effect from foreign exchange. From a seasonality perspective, we expect sales to be slightly more second-half weighted than our recent trends. Some year-over-year assumptions in our end market sales at the midpoint are as follows. Aerospace and defense having moderate growth, general engineering and energy are flat, transportation increasing slightly, and a slight decline in earthworks. The current inflationary environment persists into FY25, but is assumed to continue to moderate. We expect to offset raw material wage and general cost increases on a dollar basis. Foreign exchange and non-cash pension costs are expected to be headwinds of $4 million each on a pre-tax basis. As I mentioned earlier, approximately $14 million of rollover savings from our previously announced restructuring initiative have been included. We expect these savings to be realized more in the first half of the year. Depreciation and amortization is expected to be approximately $135 million, and we expect interest expense of approximately $27 million and an effective tax rate of approximately 27.5%. We expect adjusted EPS to be in a range of $1.30 to $1.70. On the cash side, the full year outlook for capital expenditures is approximately $110 million, and the outlook for primary working capital is approximately 30% by fiscal year end, which represents solid progress toward our goal set at investor day of driving primary working capital below 30% by FY27. Taken together, we continue to expect free operating cash flow to be greater than 125% of adjusted net income. The bridge on slide 13 highlights the main drivers impacting EPS at the midpoint of our outlook. The year-over-year effect of operations is positive. This reflects higher price, no headwind from the timing of price around material costs, restructuring savings, and productivity, partially offset by lower sales and higher wage and general inflation. Additionally, we expect to invest approximately $5 million in third-party expertise to help us execute on some initiatives related to the $100 million cost-out plan we outlined last fall. Our results also include approximately $0.04 tailwind from the impact of the Rogers tornado that occurred in FY24. We are continuing to work with our insurance providers to finalize a claim for insurance recoveries related to the tornado. You can also see the effects of the tax rate and currency on EPS, with taxes of negative 13 cents and currency negative 4 cents. Non-cash pension is also negative 4 cents. At the midpoint, this implies an EBITDA margin improvement of about 100 basis points. Turning to slide 14 regarding our first quarter outlook, we expect Q1 sales to be between $480 million and $500 million. with volume ranging from negative 4 to positive 1%, price realization of approximately 2%, and 1% negative effect from foreign exchange. Let me share some details on the sales assumptions and trends in the Q1 outlook. Overall, at the midpoint, this reflects a decline of approximately 10%, slightly outside our recent historical norms due to persistent market softness. We expect moderate growth to continue in aerospace and defense, and transportation to have slight growth. However, general engineering is at slight decline and energy and earthworks decline slightly. Foreign exchange and non-cash pension expense is expected to have a negative impact of approximately $1 million each on a pre-tax basis. Interest expense is assumed to be approximately $7 million and the effective tax rate is approximately 27.5%. Lastly, we expect adjusted EPS in the range of $0.20 to $0.30. Let me provide some commentary about the EPS range. When compared to the prior year at the midpoint, our adjusted EPS outlook reflects lower volume plus the pension, tax, and currency items I previously discussed. We also expect some additional expense in the quarter from trade shows that did not occur last year plus some expense timing. And with that, I'll turn it back over to Sanjay.
spk01: Thank you, Pat. Turning to slide 15, let me take a few minutes to summarize. Overall, we are pleased with our performance in fiscal 24. Looking forward to fiscal 25, market conditions are expected to be mixed, as you heard earlier. We are focused on what we can control and will work to improve our operating performance while monitoring and managing external factors. We'll build upon the momentum on growth and continuous improvement pillars to drive above-market growth, margin expansion, and continued progress on cash flow. In parallel, we'll take a systematic approach to improve portfolio performance over time. In summary, with steady performance, cash generation capabilities, sustainable competitive advantages, and a focused approach to value creation. Canon Metal offers a compelling investment opportunity. And with that, operator, please open the line for questions.
spk08: We will now begin the question and answer session. As a reminder, 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. As a further reminder, Please limit yourself to one question plus one follow-up. At this time, we will pause momentarily to assemble our roster. And today's first question comes from Angel Castillo with Morgan Stanley. Please proceed.
spk02: Hi, this is Grace for Angel. Thank you for the question. So you had a solid quarter in aerospace and defense and further indicated that you expect fiscal 25 to be upped moderately. So can you elaborate on how much of that improvement you see in fiscal 25 is driven by market share gains or project wins versus underlying industry growth? And I know it can be lumpy, so any color on that, you know, what might expect from a quarterly cadence on that. Thank you.
spk01: Good morning, Grace. First of all, let me just comment on what we had in fiscal 24. We had continued strategic wins and also market helped us. Along with that, we saw that OEMs have been adjusting their bill rates. Most likely you have noticed that Airbus took it down from 800 to 770, and Boeing's bill rate has been a little bit uncertain. So we looked at that, and that's how we projected what we expect in fiscal 25. It will include all three components. It will have market, which we expect to continue to grow, but slightly at a lower rate. It will have strategic growth, wins, which we have talked about in the investor day, that we have gone beyond the engine, which used to be our main focus. We have gone in components and structures, and also new customers at the tiered level we have gotten. And finally, there will be, of course, a little bit of price component to it. So a combination of those three, that's how we are looking at aerospace next year.
spk02: Got it. That's very helpful. And can you also talk about the implied cost? re-acceleration in growth throughout the remainder of the year based on lower 1Q base? What gives you confidence in 1Q marking the bottom? Thank you.
spk06: Yeah, thanks, Grace. So if we just think about the sales cadence, I'll say throughout the year, we're actually anticipating a pretty normal year after we get through Q1. You know, if we think about the normal cadence, certainly Q1 is down, perhaps down a little bit harder this year. as we just got some more seasonality coming out of that, anticipating flat to up slightly in Q2, and then the normal acceleration we would have in the back of the year. So overall, from a sales cadence perspective, a pretty normal year, I would describe it as.
spk02: Thank you.
spk08: And the next question comes from Joe Ritchie with Goldman Sachs. Please proceed.
spk10: Hey, good morning, everyone. Sanjay, pretty cool to see you fairly early in your tenure talking about the value creation pillars. I want you to maybe double click a little bit on this portfolio optimization piece. Maybe just give us a little bit more color what you're thinking around that piece of it and the ability to potentially continue to right-size the portfolio.
spk01: Good morning, Joe, again. Yeah, so as I talked about the three value creation pillars, these will work in unison. Of course, you know, we will do a lot of things to grow from an organic perspective. We have laid out some of the key work streams in that area. Continuous improvement where we'll continue to apply lean principles across all parts of business. That will help us with margin expansion and also continue our momentum on inventory and working capital improvements. Now moving to third pillar, portfolio. Like you said, this generally takes time and we are, as I mentioned earlier, this is going to be something that over the time we'll work on it while primary focus will be on organic growth and continuous improvement. Even the portfolio piece, the way I look at it, there are three steps to it. First step is just putting a process in place so that we do proper assessment. And the assessment will include, you know, how much money we're investing in a business, what is the resource allocation, what is the working capital allocation, what kind of return we're getting at that. And even if, let's say, we find that there are businesses which are not performing to a desired level, the next step of that is not immediately talk about divestment or any kind of inorganic action. The first step will be still organic actions. We're going to go look at what we need to do to improve that business. from all perspectives, growth, working capital, new CapEx, and also organizational capability perspective. If suppose we do get to a conclusion that there are parts of business that will be served better with a bigger scale with some other party, then we will look at that. But that is not our number one focus. In parallel, of course, I talked about inorganic growth helping us. From a growth perspective, we will continue to look at ideas for bolt-on acquisitions to support our strategic areas like medical, ceramics, aerospace, and defense, where we believe that we can bring more growth synergy and also generate better return for investors.
spk10: That's great, Keller. Appreciate that. And then just a couple quick ones. Pat, just on the This particular quarter, what did you see from – what was the impact? I know it was price-cost was a positive impact, and it's embedded in that $0.08. I'm just curious, what was the impact specifically this quarter for those two items? And then as you think about the first quarter guidance that you gave, what's embedded in that 1Q number?
spk06: Yeah, in terms of price cost, the big driver, Joe, you're going to see for that is Q4, obviously, in infrastructure, which is the big driver of margin improvement as that, you know, price raw material timing event is now past us, which was in Q2 and Q3. You know, as we think about, I'll say, Q1, I'll just set some framework in terms of the full year, and we'll place Q1 inside that framework. You know, from a full-year perspective, you know, overall, when we talk about EBITDA margins at the midpoint, we talk about that being up 100 basis points, and that's really a function of, you know, improved operations, the lack of the price draw headwinds we had last year, the restructuring benefits we've had, the productivity we've got in place. Now, on top of that, we've got a couple items in terms of some unfavorable effects based on where rates sit today. Obviously, it's a relatively minor amount, but it could move around on us throughout the year. We've got some non-cash pension costs coming through, about $0.04 there, and then the tax rate's a little bit higher than where we would have it on a long-run basis, so we're at 27.5% this year versus 25% in the long run. Now, taking that annual framework and then thinking about Q1, You know, Q1, you've got all the same things going on there. And then from a Q1 profitability perspective, a couple of just discreet things going on. Number one, we've got some trade shows. So, you know, we've not been at, for example, IMTS, which is our principal metal cutting show here since pre-COVID. That will be occurring this quarter. So that's naturally an expense this quarter. You know, Sanjay talked about reallocation of resources. We'll see some of that move around, but we think that's an important opportunity. for us to get in front of our customers. I'd say the last component of that is we've really got, as well, just a little bit of compensation moving around throughout the year. You're going to see a little bit of that hit in Q2, excuse me, Q1. And then as we just think about, say, the earnings cadence now throughout the year, I think you're going to see earnings step up in a pretty normal fashion. So Q1 to Q2 come up along with the volume. and then accelerate in the back half. If we look at the last couple of years, Joe, in terms of I'll say the front half, back half split, you know, and last year was a little wonky because of the tax benefits we received in the first half. But if you kind of levelize tax, you're going to get to around 38, you know, 40% of earnings in the front half of the year and about 60, you know, 62 in the back half. And so I think that's pretty normal for where the business is right now, and that's about what we would expect this year too.
spk01: Pat, I'll just add that we also prepared remarks that we have third-party assistance in helping us from the productivity and other improvements. So some of that expense will also hit Q1, but we'll see bigger part of the benefits of that as the year progresses.
spk10: Okay, thank you. Appreciate all the color.
spk08: Our next question comes from Julian Mitchell with Barclays. Please proceed.
spk05: Hi, good morning. Maybe just wanted to start on the kind of demand cadence, because I suppose what we've heard from some other companies in the industrial world, even just this morning, is destocking in a bunch of markets, particularly sort of general engineering, discrete automation, and so forth. off-highway, that's continued in the last month or two, consistent with sort of six, 12 months ago, and then maybe what you're seeing is kind of more pressure on the CapEx or project side of things. It sounded from the prepared remarks like the demand environment from your standpoint there has been very steady in recent months and kind of in line with what you'd thought. I just wondered if that was a fair characterization or maybe help us understand, you know, how have you seen the demand environment trending just the last kind of couple of months? What's moving around?
spk01: Julian, first of all, we have seen market being soft. And also, as we talked about the projection, the first half of fiscal 25, we see continued softness and then some recovery in the second half of our fiscal year, which will be calendar year 25. If you look at the recent quarter, as we talked about even in metal cutting, we did perform slightly better than market, which we have been for the last several quarters. So I do believe that plays into role. With respect to what we are seeing with our channel partners and customers, we are not seeing any major shift in stocking or destocking. I think for all practical purposes, our energy customers, they were very cautious some time ago. They made the adjustments I think even more than a year ago. And from an industrial perspective, we are also not seeing any major stocking or destocking. Our overall delivery performance has improved. Lead time has improved in some areas. And as a result, we also think that our channel partners have adjusted inventory. So we are not going to see any major destocking in coming months.
spk05: That's clear. Thanks, Sanjay. And just maybe one for you more strategically. So say slide number five is sort of a good starting point. You know, I guess a couple of things. One would be versus that investor day late last year, kind of are there any points of increased emphasis, let's say, from your viewpoint or areas of nuance perhaps for you personally as CEO versus that framework late last year. And then on the sort of outgrowth or trying to rejuvenate Kenner Metal's organic sales growth, can you do that while increasing margins or do you think we need some period of sort of higher reinvestment The margins suffer for a bit, but you get the fruits of that on sales and margins kind of down the line.
spk01: On the investor day targets, Julian, we, as I said earlier, that the things we control, we feel very confident about those things. Like the above market growth, we talked about 1% to 2%. Price, we believe that we'll be able to price for inflation and also price for value. Market obviously stays unknown, but at the same time, we believe in the fundamentals of the industries we serve for the long term. I think we have several mega trends that will continue to help us, but there could be some shift in the market assumptions, as we all know. Now, with respect to the $100 million cost out that we also talked about at the investor day, we are on track, as you heard from Pat, that we are going to exit the year at the $33 million run rate from Fiscal 24 perspective. And then we'll exit Fiscal 25 at $35 million from the restructuring type of benefits. And then on top of that, we have $15 million worth of improvement roughly on cost of sales. So by the end of Fiscal 25, we'll be hitting halfway mark of what we mentioned about the $100 million. And with the additional focus on continuous improvement, which we need to make sure that we deliver on $100 million. So we do feel very comfortable with overall those targets. Now, coming to your question, if we do have to do some bolt-on acquisitions and take any other inorganic investment, will that affect margin? At this time, our goal is that we will do things from an inorganic perspective only when we see attractive ROIC potential and where we see growth synergies and merger synergies. So I don't expect that to be a negative factor in our decision.
spk05: Great. Thank you.
spk08: The next question is from Tammy Zakaria with JP Morgan. Please proceed.
spk03: Hey, good morning. Thank you so much. So could you comment on the down 3% up 2% volume expectation for the year by segment, should we expect this range to hold for both the segments or there's some differences there?
spk06: There's not a market difference in terms of the segments, in terms of the volume for the year.
spk03: Got it. So as we think about the down 3% and plus 2%, Can you sort of give us some color what end markets we should be looking at or focused on to get to the down three or to get to the up two for the year? I'm trying to ask which end markets do you think will be the decider of whether it goes to the low end or the high end?
spk01: Yeah, so, Tammy, to start with, I will say general engineering. because, again, about half of our revenue comes from that. So what happens in general with industrial production, IPI, and in general when you look at even the PMI sentiment, besides India, all the other major markets are either flat type of sentiment or negative sentiment. So if that improves, we will see definitely moving us to the higher side of our range. And then the other piece I will say, in terms of like EMEA, Transportation industry is quite a bit down, and I think we expect that even a couple next quarters will be like that. And as the transition from hybrid and electric and all that continues to work through, where we did win more projects in the last couple years than our traditional rate that we had in the transportation, as that transition is happening, if that moves a little faster, that will also help us. And then finally, on aerospace, One of the OEM, which is having quality issues and other things, and if that production improves, that will also help us. But overall, in our outlook, we did consider where we can win market share, and that's how we have adjusted. So that initiative will continue. So at this point, that's how we're looking at the range.
spk03: Understood. Thank you.
spk08: And the next question is from Steven Fisher with UBS. Please proceed.
spk11: Thanks. Good morning. So thanks for all the color that you've provided on the Q1 comparison so far. But I guess depending on how big that conference spending is, it seems like it's still the handful of items you mentioned maybe accounts for a handful of cents. But it seems like there's still maybe Another 5, 10 cents that we need to account for. So I'm just wondering if there's anything else you can help quantify in EPS terms in the bridge items for Q1 to Q1 and maybe included in that a little help on what you're thinking about the margins for each of the segments in Q1.
spk06: Yeah, certainly. So from an overall EPS perspective, we just talk about some of the items that we go through. Obviously, tax is going to be a fairly large drag there because you're talking about moving from, I think, a 21% tax rate to the 27 and a half. We've guided in the quarter, you know, at the midpoint, you're looking at four or five cents there. And then you can prorate the, you know, the pension item FX as well. You're going to get a couple cents from that. You know, from an overall perspective as well, you're going to have a volume decrement in there that drives that down as well. And you're talking five, six cents from an overall volume perspective. Again, you know, at the midpoint on top of that, you're going to layer in, you know, some favorability in terms of got a few cents from restructuring coming in year over year. And then, yeah, you're layering in some of these cost timing elements that we talked about as well. That's pretty much the full picture there in terms of what's driving differential.
spk11: Okay, that's helpful. And then just to follow up on Julian's question about the going back to the investor day kind of framework, just trying to think about the fiscal 25 guidance in that context. where you have your 2% price that's consistent. And Sanjay, it sounds like the 1% to 2% market share gains you feel good about. Is that 1% to 2% market share gain embedded in your volume for the year? Meaning basically it's a couple of percentage points. lower than that because it's got a positive 1% to 2% share gain embedded in there?
spk01: First of all, let me just clarify that 1% to 2%. We're not implying we gain 1% to 2% market share. What we're saying is 1% to 2% growth will come through market share. That is embedded in the model. Of course, the bigger factor obviously right now is market. in terms of percentage moves that we have seen. There are several markets which are down in mid-single digits or high single digits. So that's where, despite the fact that we are performing better than market, net-net numbers are definitely affecting our fiscal 25. But like I said earlier, the things we are doing today and have been doing for the last couple of years in terms of driving growth initiatives, driving productivity, driving quality, inventory reduction, the things we are doing will continue to help us in the business. And one of these days, we'll see the market also turn a little bit positive. So we are very well positioned to capitalize on what we can do even now and also when the markets improve.
spk06: And if I may add to that, and Sanjay, you mentioned this earlier in terms of where we're going to be at on the $100 million cost takeout program as well. So expecting to be about $50 million when we exit this year. So halfway through the program, halfway through the cost takeout. as well as the progress we've made on working capital. And as we think about where we're at in FY25 here from an outlook perspective, driving that primary working capital as a percent of sales to 30%, and that is consistent with what our objective was in terms of 27 from a primary working capital perspective as well. So we're driving on all fronts here towards achieving success. our goals in terms of growing the business, what we can do, as well as improving the profitability.
spk11: Very helpful. Thanks a lot.
spk08: And our next question is from Steve Barger with KeyBank Capital Markets. Please proceed.
spk07: Thanks. Good morning. Good morning. So, Jay, for the portfolio optimization, I hear you about wanting to put a process in place to better understand what's happening. But, you know, you, Pat, and the team have been there quite a while, so there shouldn't be too many surprises. So, first, can you tell us what percentage of revenue is generating margin that you consider unacceptable? And, second, if there are parts of the business that have been a persistent drag on margin, why not exit it?
spk01: Yeah, okay. Morning again to Steve. First of all, yes, we do have experience in running the business for a few years, and we do have our ideas. But look, first, like I said, our focus is not to immediately jump to conclusion that divestment may be the answer. I think the first area that we are going to continue to work on is what we need to do in terms of growing and also continuous improvement in working capital allocation, resource allocation. That's where we are, and I will share more information as time goes and we take some actions. But at this point, it's too early for me to give you a prognosis on this from an action perspective. And for all different reasons, some of those will be shared only when that happens. But at this point, my main message here is that we are going to improve overall performance of our portfolio one way or the other, either through organic actions or if we have to take inorganic actions, we are also ready to do that.
spk07: Can you tell us what percentage of revenue is generating a margin that you consider unacceptable?
spk01: Yeah, that detail, Steve, we are not going to be able to share at this point.
spk07: Okay. And then, Pat, on slide 13, the outlook walk, you show higher price, favorable timing of price versus raw material, and then restructuring. Are those listed in order of magnitude, or are they more equally weighted in terms of their value? the benefit they'll drive?
spk06: I would say they're a bit more equally weighted, Steve.
spk07: How much confidence do you have in what raw material prices will do in the back half of the fiscal year? Because it seems like that can, you know, that often kind of sneaks up and affects quarters.
spk06: Yeah, I mean, as we've said previously, you know, we generally have visibility about two quarters out. at any point in time. So, I'd say, you know, as we think about the first half, we have very good visibility. As time progresses here, we'll start moving into having visibility in Q3. You know, overall, if we think about where tungsten prices have been, they were flat for a period of time. We did see them ramp up, you know, spring into, I'll say, early summer, and then have trailed off here back to their prior level, more or less. In general, I think we're in decent shape again at this point in time for the first half. Got it.
spk07: So that would be the swing factor that you can't control in the back half of the three?
spk06: Yes. As you get to the back half, that's something we'll have to take time to see.
spk07: Got it. Thank you.
spk08: The next question is from Mike Senegar with Bank of America. Please proceed.
spk09: Hey, guys. Thanks for taking my questions. Just on the pricing guidance, the plus two for Q1 and the plus two for the full year, you know, obviously there's some signs now of price deflation kind of playing out even across industrials. I'm just curious how you're thinking about that plus two and Q1. Clearly you have visibility for that. and how you go out and keep that plus two kind of stable for the full year.
spk06: Yeah, I think if you think about the pricing action, so our pricing framework, we've taken some pricing actions here recently, so they're out there in the marketplace now. We'll have some continued, I'll say, pricing that we'll achieve this year on a year-over-year basis for other actions we've implemented. And the last piece I would just say is we continue to look at pricing across the portfolio based on value throughout the year and make adjustments where we can. And so we feel pretty good about where the prices are and what the plan is for pricing over the course of the year. Again, an underlying assumption in the conversation we just had with Steve is really around, you know, tungsten and the index pricing. Our assumption at this point in time is tungsten is relatively flat, and therefore the index pricing is flat. But that's a fact that could swing us as we move through time.
spk01: Also, Mike, I'll just add there are pockets where we are going to experience excess capacity, like in wind energy. We've talked about that. So there will be places where we will be very close to the market and be competitive. So if we have to take some price reduction to maintain business or win new business, we'll be definitely engaged in that.
spk09: Helpful. And you guys have great color on the end markets and how to think about the top line for Q1 and the full year, first half, second half. Those ranges are really helpful. Anything we should think about in terms of the operating margin range in Q1 and for your full year guide? Any differences you should be thinking about those decrementals on the volume side in Q1 versus how that plays out through the second half?
spk06: Yeah, and obviously as you think about the EBITDA margin at the midpoint, we talked about being up 100 basis points for the full year. As we think about decrementals, particularly here, I'd say in Q1, we would normally think about long-term incremental decrementals being in the mid-40s. I think where we're sitting from a volume perspective and capacity today, that's going to probably be a little bit higher from a decremental perspective. But, you know, again, that mid-40s is a better long-term number than what we would experience from quarter to quarter. And, again, I go back to just from an earnings cadence perspective, as we talked about a little earlier on the call, a pretty normal earnings cadence here as well.
spk09: Really helpful. And just lastly, guys, the capital conversion stepping up in 2025, that greater than 125%, is that – I'm just curious if you kind of flash that, is that inventory reduction for, I know we talked about inventory to the customers, just curious about at the, at the Canada level, is, is that the tailwind to cashflow conversion in, in 2025? Just hoping to kind of unpack that a little bit. Thanks everyone.
spk01: Mike, first of all, let me just, as Pat said earlier, majority of that was driven by inventory improvements. And I just want to give you a little bit more color than beyond the numbers. Uh, we started. to add some new processes, brought some new talent, and also made some internal appointments with respect to talent. Through that, we have really made quite a bit of process improvement in how we do our sales, production, inventory management planning. We did overall global network of where we produce, what we produce, how many times we ship through the week, and how much inventory we keep in the warehouses. We have been continuing to optimize that, and that's one of the things that we – that's showing up in the numbers. And good thing is those are sustainable. So that's why what you see that we are building on what we did in 23 and 24, and then on top of that now 25. So we feel pretty comfortable that we'll be able to deliver next-level improvement in fiscal 25. Pat, anything else to add?
spk06: Yeah, so that's – to be really pointed on the answer to your question, so that's one of the things that's driving that cash flow conversion in the year.
spk08: At this time, we are showing no further questioners in the queue, and this does conclude our question and answer session. I would now like to turn the conference back over to Sanjay Chaubey for any closing remarks.
spk01: Thank you, operator, and thank you, everyone, for joining the call today. And as always, we appreciate your interest and support. Please don't hesitate to reach out to us if you have any questions. Have a great day.
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