Kennametal Inc.

Good morning. I would like to welcome everyone to Kenna Meadows' second quarter and fiscal 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star then the number two. Please note that this event is being recorded. I would now like to turn the conference over to Michael Pisi Vice President of Investor Relations.

Thank you, Operator. Welcome, everyone, and thank you for joining us to review Canon Metal's second quarter fiscal 2025 results. This morning, we issued our 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 Sanjay Chaubey, President and Chief Executive Officer, and Pat Watson, Vice President and Chief Financial Officer. After Sanjay 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 Ken Amedal's SEC filings. In addition, we will be discussing non-GAAP financial measures on the call today. Reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our form 8K on our website. And with that, I'll turn the call over to Sanjay.

Sanjay Gupta Thank you, Mike. Good morning. and thank you for joining us. I'll start the call today with some remarks regarding our recent announcements, followed by a review of the quarter and some in-market commentary. Then Pat will cover the quarterly financial results as well as the fiscal 25 outlook. Finally, I'll make some summary comments and then open the call for questions. Now let's start with the two announcements we issued in mid-January. The January 14th announcement highlighted actions we're taking to address our investor day commitments around plant closures and navigate current market conditions. In support of our commitment to long-term competitiveness, we announced actions to reduce our structural costs and our footprint. Within the metal cutting segment, we announced the closure of a facility in Greenfield, Massachusetts and the consolidation of two facilities near Barcelona, Spain into a single modern facility. The operations in Greenfield, Massachusetts are expected to cease in April 2025, and the plant closer is expected to be substantially complete by December 31st, 2025. The consolidation of Barcelona and Spain facilities are expected to be substantially complete by June 30th, 2025. Additionally, in effort to mitigate the current market conditions, mainly in EMEA, we announced a global reduction in professional workforce. These combined actions are expected to deliver annualized run rate pre-tax savings of approximately $15 million by the end of fiscal 2025. We expect pre-tax charges of approximately $25 million in connection with the execution of these actions. The breakdown is as follows. Approximately $10 million is for cash-related facilities charges. Approximately $5 million is for non-cash facilities charges. and approximately $10 million for severance-related cash expenditures. These facility closures and other cost actions keep us on track to deliver our commitment to close three to five plants and achieve $100 million cost savings by fiscal 27 that we committed to at our investor day in September 2023. The second announcement was an organizational change within the infrastructure segment. Effective January 20th, Faisal Hamadi was named president of the infrastructure segment, reporting to me. Faisal succeeded Franklin Cardenas, who served in that role for the past five years. I want to thank Franklin for his contributions to Kenner Metal and wish him the best. Faisal has been with the company since July, serving as the vice president of value creation systems. Prior to that, he served in various roles with increasing responsibility at Eaton Corporation since July 2007. His most recent role at Eaton was as the general manager of its $600 million hydraulics and actuation portfolio. Additionally, he held positions in finance, sales, and manufacturing operations prior to his general manager role. Basil is a great addition to the infrastructure team bringing strong and well-rounded business experience in commercial, operations, and general management. He is a strategic thinker and true collaborator and is already hard at work with the team as they continue to grow and improve our infrastructure business. Additionally, continuous improvement remains an important focus area for us, so Faisal's value creation systems responsibilities will be integrated with existing roles at Canamil. This will provide a strong alignment between business, operations, and continuous improvement efforts across the company. Now turning to our results. On slide three, let me begin by saying this was a disappointing quarter from both a sales and profitability perspective, especially in metal cutting. From an industry and macroeconomic viewpoint, our sales continue to be impacted by challenging market dynamics. In our second quarter, market conditions worsened further in EMEA, and that is impacting several of our end markets. Additionally, industrial production in the US remains soft. Together, these factors led our sales to come in at the low end of our expectations for the quarter. As we have said before, while we cannot control external factors like these, we do focus our efforts on things we can control. For example, The announcements in mid-January that I just talked about not only align with our longer-term objectives, but they also demonstrate our commitment to positioning the company for competitiveness and improved profitability. Now for our quarterly results, sales decreased 3% year over year. At the segment level, infrastructure decreased 4% organically, while metal cutting was down 7%. On a constant currency basis, America's sales were flat at 0%, Asia-Pacific sales decreased 3%, and EMEA declined 7%. Organically, this marked the fifth consecutive quarter of negative organic growth. As a reference point, historically, cycles tend to last four to eight quarters. While managing near-term challenges, we remain committed to executing on our strategic priorities to drive above-market growth continuous improvement initiatives targeting margin and working capital improvement, and to optimize our product and business portfolio. We have more work to do across all these areas and look forward to updating you as we make progress on each. Moving now to our end markets. By end market, aerospace and defense grew 14%, energy grew 1%, general engineering declined 4%, earthworks declined 7%, and transportation declined 9 percent. Transportation and general engineering were largely impacted by market conditions in EMEA and, to a lesser extent, the Americas, primarily within the metal cutting segment. In EMEA, we have seen lower production volumes and realignment of investments among our customers in response to changes in EV subsidies. In addition, there are two other contributing factors impacting the transportation and market broadly. consumer preference, and EV infrastructure readiness. But remember, we remain very well positioned in this end market, regardless of engine type, with the strong product offerings and application support for internal combustion engine, hybrid, and full EV platforms. In infrastructure's earthworks market, we saw lower mining capital investment in Asia, while the Americas was impacted by lower mining activity. Turning to profitability for the quarter, adjusted EBITDA margin was 13.9% compared to 12.4% in the prior year. Adjusted EPS decreased to 25 cents compared to 30 cents in the prior year quarter. Cash from operating activities year to date was $101 million compared to $88 million in the prior year period. Pre-operating cash flow year to date was $57 million up from $36 million in the prior year. And finally, we continued our share repurchase program with $15 million worth of shares bought back during the quarter. These results were at the lower end of our revenue expectations and in line with our EPS midpoint we provided last quarter. When looking at the current quarter results, a few general comments regarding the end market performance. First, aerospace and defense continues to perform well. We have seen slight improvement in aerospace as production moves forward after the resolution of the recent strike. Order timing has driven the performance within defense, mainly in EMEA. Second, growth initiatives in energy offset the impact of lower rig counts in the Americas. Third, mining activity in Asia and Americas continue to be soft. Finally, the worsening market conditions in EMEA and the continuation of low PMI and IPR levels in the US put pressure on both transportation and general engineering. Turning to slide four, I want to take a moment to provide additional commentary on our end markets for the full year. As a reminder, our updated outlook for the full year reflects the forecast of specific market drivers and general market conditions, both of which have weakened. These market drivers combined with strengthening U.S. dollar and associated higher foreign exchange impacts were the main contributors to our lowered full-year outlook. By the end market, the top section shows the assumptions we had in our prior outlook compared to our current outlook. The bottom of the slide shows some of the key factors and what has changed by end market. Let me call your attention to the general engineering, transportation, and aerospace and defense end markets as those assumptions have changed. First, general engineering. The key factors that drive our expectations are external IPI forecasts for the US and EMEA and PMI data in China. As I noted earlier, we have seen conditions in EMEA continue to worsen since the start of our fiscal year. Prior external forecasts for IPI and EMEA was a slight improvement in the first half of calendar year 2025. That forecast has now shifted to down slightly. The US IPI forecast was also previously expected to be up slightly in the first half of this calendar year, and that has not happened. In fact, the latest data indicates a flat US market. China IPI remains unchanged. Taken together at the midpoint, we now anticipate this end market to be down slightly year over year as compared to flat previously communicated. Second, transportation. The key external indicators we track are IHS, light vehicle production. The prior IHS forecast was for vehicle production to increase 1% versus prior year, and the most recent estimate is for production to be down 1%. Once again, the pressure is primarily in EMEA, with a slight slowdown in the Americas. It has been well documented the pressure OEMs in the EMEA region are facing. Given these production forecasts and the customer challenges, we now anticipate that end market to be down year over year compared to up slightly as previously anticipated. Third, aerospace and defense is anticipated to increase slightly now as the aerospace supply chain and OEM production issues have been steadily improving. The forecasted production levels are expected to increase slightly compared to moderate assumptions previously. Defense continues to benefit from our growth initiatives. The order patterns with these customers tend to be lumpy, period to period, but we do continue to see the benefits of our efforts. Finally, our expectations for energy remain relatively consistent with previous expectations. U.S. land-based rig counts are forecasted to decline and sentiment remains cautious, while earthworks continues to experience normal seasonality in construction and mining continues to decline in China and lower U.S. exports. Now let me turn the call over to Pat, who will review the second quarter financial performance and the outlook.