Kennametal Inc.

Good morning. I would like to welcome everyone to Kenna Mettle's first quarter fiscal 2027 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 Pici, Vice President of Investor Relations.

Thank you, operator. Welcome, everyone, and thank you for joining us to review CannaMetal's first quarter fiscal 2027 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 Pici, Vice President of Investor Relations. Joining me on the call today are Sanjay Chowbey, 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 Kenna 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 slide deck and on our forum 8K on our website. And with that, I'll turn the call over to Sanjay.

Thank you, Mike. Good morning and thank you for joining us. I will begin the call today with an overview of the quarter. I will also share some end market commentary and updates on our strategic growth and lead transformation initiatives. From there, Pat will cover the quarterly financial results as well as the fiscal year 27 outlook and some commentary regarding our future state margins beyond fiscal 27. Finally, I'll make some summary comments and then we'll open the line for questions. Turning to slide 3, let me frame the quarter around what we did well and where we have more work to do. First, what we did well. We delivered sales and earnings above the midpoint of our outlook, primarily driven by favorable trunks in price and cost timing alongside continued volume growth in metal cutting. Metal cutting delivered our fourth consecutive quarter of volume improvement, achieving mid-single-digit volume growth and continued progress in capturing share in aerospace and defense and energy, including power generation. We also continued pricing actions to address elevated tungsten costs and deliver $3 million in restructuring savings. Where we have more work to do is addressing infrastructure volume and overall cash conversion. Infrastructure volumes declined in a low double-digit range, primarily in energy and earthworks. Let me go a little deeper about the reasons behind the decline and the steps we are taking to improve. First, infrastructure is experiencing pricing pressures in certain price-sensitive applications. While we priced according to the rising raw material cost, we were temporarily ahead of the market. Going forward, we are selectively pricing to win targeted applications. Second, in mining, there were market slowdowns in China caused by the implementation of industry-wide safety regulations following a mining accident in May of this year. We anticipate that volumes will recover as mining activity resumes. And third, we also saw product substitution in very limited applications, and we have identified other opportunities here to cover the shortfall. Our outlook assumes the volume recovery is weighted more towards the second half of fiscal 27. Cash conversion remains another clear priority for us. Higher tungsten costs increase inventory values and working capital requirements, resulting in cash use despite strong reported earnings. Our focus is on improving inventory efficiency and cash conversion across the business. We'll go deeper on this as the call progresses. But let me say, I believe we have a real opportunity to improve our inventory turns and cash conversion while also improving our customer responsiveness. We will continue to build on metal cuttings momentum, address infrastructure volume pressures, and improve cash generation. Pat will provide more detail on our results and outlook. Now let's move to our quarterly results, which again exceeded the midpoint of the sales and EPS outlook we provided last quarter. Compared to the outlook, sales were primarily driven by increased price realization and better than expected volume in metal cutting, which was offset by lower volumes in infrastructure. EPS benefited primarily from the additional price draw timing of $0.89, partially offset by lower volumes. Year over year, sales increased 54% organically. The growth was driven by additional price realization and continued volume increases in most end markets within metal cutting. This was partially offset by volume declines within the infrastructure segment that I just described a moment ago. EPS increased to $3.48 compared to adjusted EPS of $0.34 in the prior year quarter. In terms of profitability, EBITDA margin was 51.9% compared to an adjusted margin of 15.3% in the prior year quarter. Free operating cash flow year to date was negative $212 million compared to negative $5 million in the prior year. As expected, free operating cash flow was adversely impacted by increased working capital requirements related to tungsten prices. And finally, we returned $15 million to shareholders through dividends. We're updating our EPS outlook for fiscal 27 to reflect the Q1 performance and the recent decline in tungsten prices. Pat will provide more details on the outlook shortly. In summary, we are pleased with this quarter's results and how the team is navigating these very unique business conditions. We remain focused on delivering on our commitments throughout fiscal 27. Turning to slide four in our end market update. As a reminder, our full year outlook reflects forecasts of specific market drivers and general market conditions. The top half of this slide reflects our sales outlook at the midpoint and includes price, volume, and market factors. In general, the full year view of our market drivers remains relatively unchanged. I do want to point out some underlying trends that continue. In general engineering, IPI estimates in the U.S. and PMIs in China have both continued to improve, while EMEA has seen some modest weakening. IHS estimates for transportation improved again from the previous estimate, but remains down in the low single-digit range. Volumes in EMEA, while still forecasted to be down mid-single-digit, are slightly better this forecast than prior. The recent EU-China agreement limiting Chinese hybrid imports could potentially benefit OEM production in Europe. The Americas improved modestly as well. and finally Asia Pacific declined slightly relative to our prior outlook. Energy saw U.S. land-based rig counts improve from our prior estimate and customer sentiment remain focused on rig productivity and cost. Data center power generation continues to experience strong mid-teens growth. Market factors remain mostly unchanged from our previous outlook within the other end markets. Now let's turn to slides five and six, which highlight our focus on building a sustainable, repeatable model for driving above-market growth and margin expansion through lean transformation. Slide five highlights some key growth initiatives that we have talked about previously in our progress in strategic positioning, gaining share, and accelerating sales growth. It starts with identifying customer problems where our material science and engineering know-how can make a meaningful difference. We then make deliberate choices about where to compete and put the right resources behind those opportunities. That means we are focusing our commercial teams and technical talent on applications where we have a clear path to win. The initiatives on this slide reflect that approach. We have been expanding our U.S. defense presence, extending our aerospace capabilities into airframes and components, pursuing hybrid and electric vehicle programs, and supporting power generation for AI data centers. The common thread is applying our expertise to demanding customer applications. And our goal is to help customers improve their manufacturing performance, giving them a compelling reason to choose Canamero. As you can see, We have demonstrated successes to build upon. U.S. defense revenue grew approximately 90% from fiscal 23 to fiscal 26 through share gains and deeper participation in defense programs. In aerospace, our 12% compound annual revenue growth exceeded market growth of 9% over the same period. This was due to increased share of wallet, winning new customers, and high value component wins. In transportation, light vehicle production grew just 1% from fiscal 23 to fiscal 26, while a more favorable mix of internal combustion engine platforms helped sustain tooling demand. At the same time, we won new hybrid electric vehicle programs through our market-leading solutions and application support. We are positioned very well to compete and win as the market evolves. In energy, power generation revenue doubled from fiscal 25 to fiscal 26, including a startup tooling purchase for a customer's plant expansion versus approximately 14% market growth. This once again demonstrates share gain in this high growth area. While the starting baseline percentages for U.S. defense and power generations were modest, this is nonetheless notable progress by the team. We see this approach as the sustainable, repeatable growth algorithm we are using to generate value. We identify opportunities where our expertise gives us an advantage, put the right resources behind them, and apply our material science and engineering know-how to win. Each success creates a foundation for the next, helping us build lasting customer value and long-term shareholder returns. Now on slide six. As you have heard me say, since the day I became the CEO, continuous improvement is something I believe very strongly in. This is a multi-year journey to build a sustainable lean culture, and it is becoming an increasingly integral part of how we run Kena Metal. Our lean transformation initiative is focused on strengthening the capabilities of our people through processes and tools, and we see further opportunity as this evolves and expands. Since the program began in fiscal 25, we have held more than 300 Kaizens involving over 3,000 employees and generating over $70 million in cumulative growth savings. Those measures reflect both the value of the work and the breadth of involvement across the organization. And the savings generated have helped fund investments we have made in the business and will help us drive margin expansion. The specific examples captured on this slide illustrate how the combination of tools, training, and processes lead to improvements over time. In the first example, as part of the sintering process, teams are improving loading and material handling to increase asset utilization and reduce cycle time. Then for our round tools product line, an inventory pilot project is testing an approach to improve material flow within the plant. Its scope covers about $20 million in work-in-process inventory. This pilot project is a proof of concept for potential application elsewhere. We'll build upon the momentum we are seeing in our lean transformation as we expand its reach across the enterprise and drive continuous improvement in safety, quality, delivery, inventory, and productivity. I would also add that this lean transformation is part of our margin expansion model. That model has four levers, volume growth from both growing end markets and share capture, strategic pricing, the lean transformation process, and portfolio management. We are driving all four together, and they form the backbone of our operating model for margin expansion. We know there have been a lot of questions about our long-term margin profile if tungsten prices were to remain at this elevated level. The four levers I just covered give us confidence that we can deliver long-term EBITDA margins of 16% to 19%, assuming a stable, elevated tungsten price environment. This margin target is consistent with our 2023 Investor Day baseline. We have only revised this target to reflect the impact of higher tungsten prices, which have increased eightfold since they were issued. Now let me turn the call over to Pat, who will review the first quarter financial performance and the outlook.