Yahoo Finance Kennametal Inc. (NYSE:KMT) Q3 2024 Earnings Call Transcript
Kennametal Inc. (NYSE:KMT) Q3 2024 Earnings Call Transcript May 8, 2024
Kennametal Inc. misses on earnings expectations. Reported EPS is $0.2376 EPS, expectations were $0.31. Kennametal Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. I would like to welcome everyone to Kennametal Third Quarter Fiscal 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remark, there will be a question-and-answer session. [Operator Instructions] 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.
Michael Pici: Thank you, operator. Welcome, everyone, and thank you for joining us to review Kennametal’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 Pici, 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 Chowbey, Vice President and President of Metal Cutting; and Franklin Cardenas, Vice President and President of Infrastructure. After Chris and Pat's prepared remarks, we will open the line for questions. At this time, I would like to direct your attention to our forward-looking disclosure statement.
Today's discussion contains comments that constitute forward-looking statements and as such involve a number of assumptions, risks and uncertainties that could cause the company's actual results, performance or achievements to differ materially from those expressed in or implied by such statements. These risk factors and uncertainties are detailed in Kennametal'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 8-K on our website. And with that, I'll turn the call over to you, Chris.
Christopher Rossi: 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 innovations we're 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. Getting on Slide 3, for the quarter sales decreased 4% year-over-year with organic decline of 2%, unfavorable business days 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 declined 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 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 wins offset by a decline in the Americas due to prior year project wins 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 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 timing 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’s 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 1100 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 dollars. Adjusted EPS decreased to $0.30 compared to $0.39 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 of 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 continue the share repurchase program this quarter with $15 million of shares bought back bringing the total amount repurchase 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 forecast, 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 4. 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 KENGold 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 KENGold coating and insert manufacturing capabilities that were enabled by modernization. And they are 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.
Pat Watson: Thank you, Chris, and good morning, everyone. I will begin on slide 5 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 $0.39 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on slide 6. The year-over-year effective operations this quarter was negative $0.07. This reflects lower sales and production volumes and higher wage and general inflation in both and unfavorable price in raw material timing and 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. Slide 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 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, 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% percent 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 in Transportation were flat with EV and hybrid project wins 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 cost 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% in unfavorable foreign exchange and fewer business days of 1% each. Regionally on a constant currency basis EMEA 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 ore 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 the 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 the 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 9 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 shareholders reflects confidence in our ability to execute our strategy to drive growth and margin improvement. Continue 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 do now expect FY24 sales to be between $2.03 billion and $2.050 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 it 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 will turn it back over to Chris.
Christopher Rossi: 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 successfully navigated similar macro headwinds before and we'll 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 enable 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 Kennametal stronger over the last seven years. Finally, I'm especially proud to turn leadership of the company over to my chosen successor, Sanjay Chowbey. I am confident that the company will continue to improve under his very capable leadership. Sanjay, is there anything you'd like to add?
Sanjay Chowbey: I would, Chris. First, on behalf of all of us at Kennametal, 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 of 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 2025 outlook.
Christopher Rossi: Thanks, Sanjay. And with that operator, please open the line for questions.
Operator: [Operator Instructions] And the first question will come from Steve Volkmann with Jefferies. Please go ahead.
See also
30 Funny Dirty Things to Say in a Prank Call and
15 States with the Most Alcohol Related Deaths in the US.
To continue reading the Q&A session, please click here.
