Kennametal Inc. Aktie

Good morning. I would like to welcome everyone to Kennametal's Q3 Fiscal 2026 Earnings Conference Call. [Operator Instructions] Please note that today's event is being recorded. I would now like to turn the conference over to Michael Pici, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Welcome, everyone, and thank you for joining us to review Kennametal's Third Quarter Fiscal 2026 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 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 Sanjay.

Thank you, Mike. Good morning, and thank you for joining us. I will begin with an overview of the quarter, including end market commentary followed by a discussion on unit volume trends. From there, Pat will cover the quarterly financial results and the fiscal year '26 outlook, along with an early look at fiscal '27. Finally, I'll make some summary comments, and then we'll open the line for questions.

Turning to Slide 3. Let me begin by addressing some of the highlights from our strong third quarter. Our global commercial teams continued to advance our strategic growth initiatives. The infrastructure team delivered solid growth. In construction, we saw volume growth from strong product performance and the advantage we have as a secure source of tungsten in a tight supply environment.

Additionally, we received large orders in our defense business, further securing ongoing growth in this market as we head into fiscal '27. In metal cutting, we continue to increase our share of wallet with key accounts, especially in aerospace and defense and build upon our momentum in energy from AI power generation initiatives.

In general engineering, we have been winning new customers through targeted promotional campaigns and improvements to our digital customer experience, especially for our small- to medium-sized customers. As you know, we continue to prioritize above-market growth as a strategic imperative, and these wins position us well in our key end markets.

Turning now to the broader tungsten environment. Prices continued their unprecedented increase throughout the quarter, rising from approximately $900 per metric ton to $3,000 as the supply of material continued to be constrained. This tungsten price and supply environment have created both challenges and opportunities. On the challenges front, we have seen a highly competitive market for material, but our supply chain has held up relatively well. We have and will continue to implement pricing actions in response to these rising tungsten costs and remain confident in our ability to secure that price.

We are also focused on managing the working capital and balance sheet implications of higher tungsten costs. In terms of opportunities, our vertical integration has been a real strength in this market, providing us better supply chain control and flexibility compared to some competitors. For example, as competitors are turning away orders or extending lead times, we are well positioned to capture business that is aligned with our strategic priorities.

During the quarter, we capitalized on these opportunities in each of our business segments, specifically earthworks within infrastructure and aerospace and defense in metal cutting. These new opportunities also facilitate shaping our product portfolio away from lower margin to higher-margin solutions.

As such, we are seeing a unique combination of three factors that are opening the door to sales opportunities. First, continued market recovery; second, solid execution on our strategic growth initiatives; and third, a window of opportunity from the current tungsten market, which is likely to persist in the near term.

Given those dynamics, we are prioritizing our time and attention on growth opportunities over restructuring initiatives in the near term. And we are shifting the time line for facility closure actions we had previously planned to complete in fiscal '27. We will provide additional detail on the restructuring time line as appropriate. Even with that shift, we are still targeting approximately $110 million in savings from cost takeout actions by the end of fiscal '27, which is $10 million above what we outlined at Investor Day.

Now let's move to our quarterly results, which once again exceeded our sales and EPS outlook. Compared to outlook, sales were mostly driven by increased price realization and better-than-expected volume in both segments. EPS benefited from the additional price raw timing of $0.09, positive volume and lower-than-anticipated tax rate. Year-over-year, sales increased 19% organically. Please note, this was our third consecutive quarter of organic growth, driven by additional price realization, strategic growth initiatives and continued recovery in several end markets.

Adjusted EPS increased to $0.77 compared to $0.47 in the prior year quarter. And adjusted EBITDA margin was 20.8% compared to 17.9% in the prior year quarter. Cash from operating activities year-to-date was $70 million compared to $130 million in the prior year period. Free operating cash flow year-to-date was $18 million compared to $63 million in the prior year. Free cash flow was adversely impacted by increased working capital requirements related to tungsten prices.

Finally, we returned $15 million to shareholders through dividends. As it relates to our outlook, today, we are raising our sales and EPS outlook for fiscal '26. This update reflects the additional price due to the continued rise in tungsten and additional volume. Pat will provide more details on our updated outlook shortly.

In summary, we are pleased with this quarter's results and how the team is navigating these unique business conditions. As I mentioned, there are opportunities and challenges in this market, and we remain focused on delivering on our commitments throughout fiscal '26 and setting ourselves up for a successful fiscal '27.

Now let's turn to Slide 4 for an end market update. As a reminder, our full year outlook reflects forecast 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. My comments will focus on the bottom half of the slide and address transportation and energy, which are the only end markets that changed since our last call.

IHS estimates for transportation slightly improved from the previous estimate, up in the low single-digit range, mostly driven by improvements in Asia Pacific market. Energy improved slightly relative to our prior outlook as customer sentiment improved. The tone is now cautiously optimistic, which is an improved stance compared to what customers were previously signaling.

Turning to Slide 5. As we have talked about over the last several years, customer activity rates and our sales volumes have been below the pre-COVID peak. I want to take some time to provide insight into unit volume and how those trends have improved over the last few quarters. This chart uses units sold volume and excludes the impact of price and foreign exchange. It also excludes infrastructure defense sales as these are lumpy and not tied to industrial production metrics.

Now let me spend a moment on what is driving the volume recovery and just as importantly, why we believe it's sustainable. As the call-out indicates, we are now experiencing the second consecutive quarter of year-over-year trailing 12-month unit volume growth despite a macro backdrop that has been uneven. Volumes are strengthening in the Americas and Asia Pacific, but EMEA continues to lag, and that is consistent with what we are seeing in PMI and industrial production data.

A key driver continues to be aerospace and defense, which remains strong across both metal cutting and infrastructure. Importantly, this strength isn't simply tied to OEM build rates, which are still roughly 20% below pre-COVID levels, but rather to share gains and deeper penetration with tier suppliers. That gives us confidence there is still additional runway as production rates normalize over time. We are also starting to see early signs of stabilization in general engineering and energy, even while headline indicators remain soft.

In Energy, power generation continues to see meaningful momentum. And while U.S. land rig counts are still about 30% below pre-COVID levels, we are seeing enough stabilization to suggest we are past the trough. In infrastructure, earthworks has delivered volume gains for 2 consecutive quarters, driven by share gains.

Stepping back, if you look at the chart, global volumes are now up approximately 3% from the Q1 fiscal '26 trough following 36 months of stagnant industrial production. Our performance is not just the result of a market recovery. It's shaped by where we compete, how we allocate resources and where we are winning share. We know we operate in cyclical end markets, but we are quite confident in the long-term growth potential of these markets and our ability to capture share within them.

Now let me turn the call over to Pat, who will review the third quarter financial performance and the outlook.

Thank you, Sanjay, and good morning, everyone. I will begin on Slide 6 with a review of our Q3 operating results. Sales were up 22% year-over-year with an organic increase of 19% and favorable foreign currency exchange of 5%, which was slightly offset when adjusting for the divestiture we concluded last year.

Sales volume in the quarter was up low single digits. At the segment level, organic sales increased 30% in Infrastructure and 12% in Metal Cutting. On a constant currency basis, Americas sales increased 27%, Asia Pacific sales increased 25% and EMEA was up 2%. The sales performance this quarter exceeded the expectations we provided last quarter on higher sales volumes from better market conditions and share capture. We also had higher-than-expected price, primarily in infrastructure from the continued rapid increase in tungsten prices.

By end market, on a constant currency basis, Earthworks grew 43%, Energy increased 28%, Aerospace and defense grew 23%, General engineering grew 14% and Transportation increased 1%. I will provide more color when reviewing the segment performance in a moment. Adjusted EBITDA and operating margins were 20.8% and 13.8%, respectively, versus 17.9% and 10.3% in the prior year quarter.

The margin increase was driven by favorable price raw of $39 million within the Infrastructure segment, pricing and tariff surcharges in Metal Cutting, increased sales and production volumes and year-over-year restructuring benefits of $7 million.

These are partially offset by higher compensation costs, which are mostly performance-based, tariffs and general inflation and a prior year benefit from an advanced manufacturing tax credit of approximately $8 million that did not repeat in the current year.

Adjusted earnings per share was $0.77 in the quarter versus $0.47 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on Slide 7. The year-over-year effect of operations this quarter was positive $0.36. This reflects approximately $39 million of favorable timing of price raw material costs, price and tariff surcharges in Metal Cutting, higher sales and production volume and incremental restructuring benefits of $7 million. These are partially offset by higher compensation costs, tariffs, general inflation and higher raw material costs in Metal Cutting.

There was a headwind of $0.08 related to the net prior year manufacturing tax credit. You can also see the $0.02 of transaction gains related to preferential Bolivia exchange rates. Currency, other and pension impacts offset each other.

Slides 8 and 9 detail the performance of our segments this quarter. Reported Metal Cutting sales were up 18% compared to the prior year quarter with 12% organic growth and favorable foreign currency exchange of 6% Regionally, excluding currency exchange, Asia Pacific increased 18%, the Americas increased 17% and EMEA increased 3%.

Looking at sales by end market on a constant currency basis, Aerospace and defense increased 27% year-over-year due to improved build rates in Americas and easing supply chain pressures in EMEA, combined with our global focus on deeper market penetration.

Energy grew 17% this quarter from data center power generation wins. General engineering increased 13% year-over-year due to price, volume gains in Asia Pacific and stronger distribution sales in the Americas. And lastly, transportation increased 1% year-over-year due to price and market softness, primarily in EMEA.

Metal Cutting adjusted operating margin of 11.2% increased 160 basis points year-over-year, primarily due to higher price and tariff surcharges, higher sales and production volumes and incremental year-over-year restructuring savings of approximately $5 million. These factors were partially offset by higher compensation, tariffs and general inflation and higher raw material costs.

Turning to Slide 9 for Infrastructure. Reported Infrastructure sales increased 29% year-over-year with organic growth of 30% and favorable foreign currency exchange of 4%, partially offset by a divestiture effect of negative 5%.

Regionally, on a constant currency basis, Americas sales increased 42%, Asia Pacific increased 35% and EMEA sales were flat.

Looking at sales by end market on a constant currency basis, Earthworks increased 43% from higher demand in construction as we were able to provide product to customers who are unable to source product from other players and share gain in underground mining. Energy increased 34%, mainly driven by price. General engineering increased 18% due to price and higher powder demand in Asia Pacific, partially offset by lower demand in EMEA. And lastly, Aerospace and Defense increased 17% due to defense orders, driven by continued focus on growth initiatives and timing in the Americas.

Adjusted operating margin increased 680 basis points year-over-year to 18.3%, primarily from the favorable timing of pricing compared to raw material costs of $39 million and year-over-year restructuring savings of $2 million. These items were partially offset by higher compensation costs and a prior year manufacturing tax credit of $8 million that did not repeat in the current year.

Now turning to Slide 10 to review our free operating cash flow and balance sheet. Our third quarter year-to-date net cash flow from operating activities was $70 million compared to $130 million in the prior year period. This change was driven primarily by higher working capital from higher tungsten prices and increased volumes of tungsten to secure our supply chain.

Our third quarter year-to-date free operating cash flow decreased to $18 million from $63 million in the prior year, primarily due to the increased primary working capital changes I just referenced, partially offset by lower capital expenditures. On a dollar basis, year-over-year, primary working capital increased to $819 million from $654 million. On a percentage of sales basis, primary working capital increased to 32.4%.

It's important to note that from both an earnings and cash flow perspective, the business is operating as it normally would when the price of tungsten rises. In periods of rising tungsten prices, we always experienced favorable price raw timing effects in sales and earnings, while we experienced headwinds to cash flow as primary working capital grows based on tungsten valuation.

What is unique about the current circumstance is the magnitude of the rise in tungsten prices. In no recent time have we experienced a ninefold increase. Due to the uncertain nature of tungsten pricing and the corresponding pressure it has placed on working capital, we once again made the decision not to repurchase shares.

Net capital expenditures decreased to $52 million compared to $67 million in the prior year quarter. In total, we returned $15 million to shareholders through dividends. Inception to date, we have repurchased $70 million or 3 million shares under our $200 million authorization.

We remain committed to returning cash to shareholders while executing our strategy to drive growth and margin improvement. We continue to maintain a healthy balance sheet and debt maturity profile. At quarter end, we had ample liquidity to support the business with combined cash and revolver availability of approximately $742 million. And as always, we remain well within our financial covenants. The full balance sheet can be found on Slide 16 in the appendix.

Now on Slide 11, regarding our full year outlook. We now expect FY '26 sales to be between $2.33 billion and $2.35 billion, with volume ranging from 2% to 3%, net price and tariff surcharge combined of approximately 16%, and we anticipate an approximate 2% tailwind from foreign exchange. The increased outlook reflects additional pricing actions related to the increase in cost of tungsten since our February call.

Specifically, within the fourth quarter, we expect net price and tariff surcharges combined of approximately 35% compared to the prior year quarter. We now expect adjusted EPS in the range of $3.75 to $4. This outlook includes approximately $2.45 related to the timing of price raw benefit due to the rise in tungsten prices, the significant majority of which affects the Infrastructure segment. This effect increased $1.50 from the prior outlook.

On the cash side, the full year outlook for capital expenditures is now anticipated to be approximately $85 million. And free operating cash flow is expected to be approximately negative 30% of adjusted net income, reflecting the working capital pressure from the rising cost of tungsten as discussed earlier.

It's important to note our outlook does not include any effects from the conflict in the Middle East. The other assumptions in our outlook are noted on the slide. While it is earlier than normal, I would like to take a moment to provide a bit of a framework to help you think about FY '27. First off, our current assumption is that tungsten prices will remain elevated for some period of time going forward. That implies there will be significant carryover pricing given the 35% price expectation for the fourth quarter.

This carryover pricing will diminish as FY '27 progresses since we would fully lap it in the fourth quarter. Keep in mind that this assumption holds price at the fourth quarter level. Also, we would expect price raw timing benefits in a flat tungsten environment will continue through the first half of FY '27 with the bulk of the benefit occurring in the first quarter. Outside of tungsten, we would expect normal cost inflation going into FY '27.

However, we would see performance-based compensation reset the target, providing a $20 million tailwind. We will also see additional savings from restructuring and continuous improvement of $10 million. We will provide the rest of the details, including market expectations for FY '27 on our call in August.

Back to you, Sanjay.

Thank you, Pat. Turning to Slide 12. Let me take a few minutes to summarize. We have delivered 3 strong quarters so far in fiscal '26, driven by price and modest improvements in various end markets, project wins on the commercial side and productivity and cost improvement actions.

Going forward, we will remain focused on the strategic growth initiatives and lean transformation we have underway while also exploring ways to strengthen our portfolio over time. Additionally, we will continue to actively manage our tungsten supply chain. And in summary, we remain confident in our plan for long-term value creation for shareholders.

With that, operator, please open the line for questions.

[Operator Instructions] And today's first question comes from Steve Volkmann with Jefferies.

Can we just start with what do you think -- what was the incremental margin on the volume in the quarter?

Yes. I think the volume incremental margin was pretty normal for us, Steve. I think there's a couple of things, obviously, in the quarter that are kind of masking that because we've got some big numbers being thrown around there. Obviously, you've got the $39 million worth of price raw timing benefit coming through. In the prior year, we had that $8 million advanced manufacturing tax credit. And then I'd say the third component there that's just unusual for us is variable compensation.

So last year, we would have been on the low side of accruing for variable compensation. This year, given performance, we're a bit on the high side. In the quarter, that's like an $18 million number there in and of itself. And then, of course, you have some benefits coming through for restructuring. But when you pull all that back, volume leverage is pretty normal for the business.

Okay. And then it sounds like you've adjusted price. You obviously have a big forecast for the fiscal fourth quarter. Are we like where we need to be today in terms of price? Or will there be more price that sort of flows through in the fourth quarter and maybe even later into the summer?

Yes. Steve, this is Sanjay. As you know, this is a very dynamic situation that we are managing, and we'll continue to monitor how that moves. As even the last call, you talked about that how it was moving on a daily basis, hourly basis. So that's why we will just tell you that we are looking at different market variables. And our -- definitely, our goal here is to fully offset the cost implication of tungsten.

I would just add to that, we did put price in here in the market, various states by region, but effectively in the April, May time frame.

April, May...

And the next question comes from Steven Fisher with UBS.

Congrats on managing all the complexities here. Just a follow-up on that last question. Just curious about the differences between metal cutting and infrastructure. I know with infrastructure, it does tend to be fairly quick to capture that pricing. I'm just curious -- confidence that you can really fully pass on the price increases within the metal cutting and what the frequency of timing you can put that through?

Essentially, are the customers that are going to these distributors, are they really seeing a 35% increase on the shelf there from these products? Just curious if there's any real differences there in dynamics between metal cutting and infrastructure.

Yes, sure, Steve. I think, first of all, like in the past, we have talked about the metal cutting is a list price business. And also when you look at the material flow, even there is more lag in that, but infrastructure sees that first. And based on the different product, we also have like different content of how much tungsten is used.

So that will reflect -- when you look at the growth numbers, sales growth numbers by different end markets within the different segments, you will see, in some cases, very, very high number. Many cases, those are driven by the higher content of tungsten. So we have in infrastructure, many customers who are on the index price basis, but many others are not. And we do move relatively quicker on infrastructure pricing. In metal cutting, there's a 3- to 6-month lag generally. And then based on the list price change, we implement that.

Okay. And then maybe just a little more color on what you're seeing in energy and how you see that evolving for the next few months.

Just curious what you are hearing from your customers there? And is that something you're preparing for kind of a bit more of a ramp-up?

Yes. On the energy, I'll divide the equation into two pieces here. First is the AI power generation-related energy demands, which we see more so in the metal cutting side. Definitely, as you know, there's a lot of industrial activities driven around the world, but a lot in the U.S. also. And we are very well positioned with our innovative solutions, application support and custom solutions for our customers, and we are doing a pretty good job in winning share there.

And I do believe that, that will continue. And as you have seen in even this quarter report, we talked about that quite a bit. When it comes to the other side of energy, which is more or less, let's say, oil and gas, it will definitely touch a little bit metal cutting, but a lot more in the infrastructure side. As we talked about it, that there is a little bit of optimistic view, but it's cautiously optimistic view.

The rig count projection right now has gone from 527 to 532. But if you look at the market, there are 2 camps. There are people who are saying that there will be a lot more investment coming up here. And there are people who are saying that this is temporary and things like that. But our overall conclusion based on what we see, the trough is behind us, and we should see some steady improvement going forward.

And our next question is from Julian Mitchell with Barclays.

Just maybe a first question, just to try and clarify the tungsten related sort of tailwind to EPS, I think you said $2.45 for fiscal '26 in aggregate.

In the fourth quarter, is it around $1.75? Is that roughly the right math? Just wanted to check that.

Yes. I think if you kind of back into that, Julian, we had about an EPS terms of about $0.16, I think, in Q2, $0.39 here in Q3. And so we just forced the rest out of Q4.

That's great. And then maybe, Pat, help us understand those moving parts around the sort of cash flow, year-ending leverage, when you might look to resume the share repurchase program?

Help us understand what that free cash flow in the fourth fiscal quarter is looking like? And how quickly does it sort of reverse following that based on where tungsten is today?

Yes. So I would think about it this way, and we talk about this from a -- how does the cost structure lag from an income statement perspective, that obviously, the balance sheet is following that, too. So as tungsten has ramped, we're going to continue to see inventory build on a valuation basis here in the fourth quarter. That's really what's driving that negative free operating cash flow for the full year.

And so as that kind of builds up, we would anticipate you get about a quarter or two out. Again, from a change in tungsten, we would kind of get flatlined. The business would then move back to its normal pattern in terms of its cash generation ability.

Obviously, as I said kind of in the scripted remarks here, the magnitude of what we're dealing with here is just significantly larger than what we've seen in the past, right? Think about that from a share repurchase perspective. Look, we've been very committed to returning cash to shareholders through the dividend program as well as through our repurchase program. Our desires have been at a minimum to offset dilution from equity compensation programs. We just fundamentally think that's good housekeeping. In the current environment, what would we want to see to really resume that?

We really want to see some stabilization and clarity about where tungsten is headed. Our obvious thesis here at the moment is that tungsten should be relatively stable. That being said, it's a very dynamic marketplace today.

The next question is from Steve Barger with KeyBanc Capital Markets.

Steve, you may be muted on your side.

You talked about good activity in aerospace and defense and some share gains in infrastructure and earthworks. But at the same time, I think you said some competitors are turning away orders, presumably on price cost.

So can you talk about what you think is happening with prebuy and just people scrambling to get product due to inflation? And then how does that map to the longer-term durability of share gains?

Yes. Steve, this is Sanjay. I'll take that first. First of all, we did see some prebuy, but it was mostly in the infrastructures earthwork construction business. Beyond that, there was not much material impact on prebuys in the rest of the business.

We did see opportunities also in the earthworks business within infrastructure and also in aerospace and defense in metal cutting, where we did see some evidence, where we were able to capture, where competitors were not able to either provide proper lead time or even just meet the demand. So that's how we saw that.

Does that answer your question?

I think so. Just so I'm clear, why do you think the competitors are not able to meet demand right now?

Yes. What we have seen some competitors are definitely having problem in getting raw material. And even if they're getting raw materials, they're also pretty booked and they're putting longer lead times. So in some cases, we are able to provide a better lead time, and that's how we got it.

I would say that, I mean, the opportunity, obviously there, Steve, is that there is short-term disruption in the marketplace. That gives us an opportunity to quote and win business that maybe we wouldn't normally have seen the same opportunities on. The opportunity for us and the challenge to our sales organization, quite frankly, is to convert that to permanent long-term share capture.

Yes. One more thing, Steve, I will add to that. I think for investors who may be listening to us first time, I do want to mention that this situation that we have with tungsten is not driven by higher demand. It is driven by supply constraints. As in past, you have seen some of the times, tungsten went up. At the same time, oil and gas and some of the other industry, which consumes a lot of tungsten went up.

This time, it is because of supply constraints and also export controls. So just simply, in a big portion of market, there is less supply right now.

Yes. Understood. That actually is a good segue to my next question. If I heard you right, you're slowing facility closures. And last quarter, you expected restructuring savings of $125 million. Now that's $110 million. Are those 2 things related? And if so, why -- maybe I missed it, why are you slowing facility closure?

Yes, very good question. As we said in the prepared remarks, and I will clarify that a little bit more. Obviously, we are seeing right now more growth opportunities, which is driven by all 3 factors: market improving, then also share gain through our routine strategic growth initiatives that we have talked about it in the past. And on top of that, a window of opportunity from the tungsten situation.

So we look at how we can create the best value for all our stakeholders. And we feel right now that allocating more resources on growth opportunities and driving our routine business leverage will create more shareholder value for now. And that's how we are making the shift.

However, we are not stopping the work on footprint optimization. We'll continue to work on it. Time line will shift a little bit. We'll come back and give you more information on that at appropriate time.

Our next question is from Tami Zakaria with JPMorgan.

First question is on tariffs. I think IEEPA got struck down. Do you expect to file any refunds? And if so, what kind of -- what amount of refund would you expect to collect?

Yes, Tami, First of all, as you know, this is also one of the very dynamic situation. We still have tariffs in place. And so we are not taking any hasty action on this yet. I think we'll continue to monitor. And based on that, we'll make decisions. So nothing more to share at this point in today's call.

Understood. That's fair. And my second question is, for the fourth quarter, I just wanted to clarify, do you expect volume growth to be in that 2% to 3% full year range or it could come in above that?

Yes. It's the full year range. I would say it's depending on where you're at in that range, Tami, it's going to be low to at the high end, maybe up into the mid-single digits. You obviously factor in 35% price we talked about from a script perspective. Don't forget, we had a divestiture in the prior year, and you got a little bit of FX in there as well. So that kind of is the math there in terms of you think about the top line.

I would emphasize, as we just think about the profitability that obviously, we're going to see sequentially profitability step up pretty significantly here based on that price raw. And given the circumstances that we're in today, it is unusual, we're going to have some of that price raw realization in Metal Cutting, too. So when you think about, again, the margin performance of the business as a whole in the two segments, pretty big ramp-up for both of them.

And the next question comes from Angel Castillo with Morgan Stanley.

Just maybe first, I wanted to start out on the market share gains. That's been a meaningful driver, I guess, of the organic growth that you've been seeing. Just curious if you could unpack that a little bit more. I guess I'm trying to understand if it's possible to, I guess, separate how much of the share gains you think was maybe driven by value proposition or project wins that tend to be a little bit stickier versus where it's maybe related to kind of competitor supply constraints.

And in particular, I guess, to the latter bucket, curious if you kind of expect that over time as kind of supply perhaps normalizes, if you would expect to kind of get that back or if there's any kind of stickiness to some of those shifts that we might be seeing on the kind of supply-driven angle?

And also if you could comment on the promotional campaigns you talked about as well, that would be helpful.

Yes. Sure, Angel. First of all, again, it is a combination of all 3 factors: market improving, and we think that, that should continue. Then second will be in our strategic growth initiatives, and we have talked about in the past, those will include, for example, what we have done in aerospace and defense and energy and general engineering, earthworks and so on and so forth, how we have gone about winning bigger share of wallet with existing customers, but also going out and winning business at different tiers of the supply chain or our customer value chain.

And those I will tell you that are very sustainable because we're winning those using our core competencies from product and innovation and our commercial excellence and our operational capabilities.

Now the third piece of the volume that we have also talked about, the window of opportunity we have from tungsten Dynamics. We also think that those are sustainable, at least in the near term that we see that. In the long term, we'll see how that plays out. But we are being very strategic about which opportunities that we go and capitalize. We are selective on what opportunities we think are going to be longer-term sustainable for us.

So all in all, of course, it's a mix of 3 things, and I won't be able to quantify break down or don't want to disclose it in public domain on that. But I can tell you that as we have talked about in past, that driving growth above market has been one of our strategic imperatives, and it will continue to be.

In last 2 years, 3 years, actually, I will go a little bit beyond that, we have shown our ability to outperform or at least hold our own in our metal cutting business where we have in public peer data. And this is going to continue to be one of the focus. So in short, I will just say that it is going to be a meaningful piece of our overall volume story.

Very helpful. And then if you could bear with me, I guess, a 3-part question here just on tungsten. Hoping to better understand, I guess, a couple of things. One, any more color you can add in terms of the sourcing that you're doing and how that differs versus competitors that allows you in a market that you described as very competitive in terms of sourcing to make sure that you're able to have the right amount of supply. So just any color you can add on that?

And then maybe a little bit more longer term or medium to longer term, on the tungsten side, I think your preliminary fiscal year '27 outlook talked about that as being kind of stable at current levels. Just anything you can add in terms of the supply-demand that you're seeing progressing from here in terms of -- I think there might be some capacity that's coming online in 2027.

So just to the extent that, I guess, any implications from that or the recently kind of lower prices of tungsten in China as to what -- where that commodity heads in 2027? And then just kind of lastly, implications of that to the price and the market share gains that you talked about on the supply basis.

Yes, certainly. So I'll try to take each one of those in terms. When I think about the advantages we have, I want to go beyond, quite frankly, just the sourcing aspect. And from a sourcing perspective, -- as we've talked about in the past, we do not use significant amounts of Chinese material outside of our Chinese operation. Outside of China, we've got a diversified supply base and partners we've been with for a long period of time in getting material from Bolivia, other East Asian sources and as well as a nice slug of recycled material.

But a lot of the strength that we have as a company vis-a-vis some of the competition that's out there is also the integrated nature of our supply chain, right? So we are -- we have the ability basically to take in tungsten materials at various stages and turn them ultimately into a final product. You think about that from our ability to take raw materials, which is virgin ore in and process that, there is only a handful of companies in the industry that can do that as well. And so that provides us, I think, a durable strategic advantage here in this set of circumstances.

As you think about where it is from an overall pricing perspective, yes, our assumption at the moment is the tungsten prices are stable. I think the last couple of quarters that we've gone through in terms of the magnitude of this price change, I don't think that many market participants would have envisioned us going from a couple of hundred dollars a ton to over $3,000 a ton, excuse me, as we have over the last 12 months.

Certainly, there has been some softening in China the last week or so in terms of the prices, unclear at the moment in time, whether or not that's indicative of a larger trend that will be more durable. We'll obviously continue to monitor and watch that.

And then your last question in terms of what supply is coming online, yes, there's a variety of new mine projects that are out there that will come online. We would anticipate in the fullness of time, that would help moderate the tungsten prices here a little bit on a global basis. I think the other reality of the situation here is, in particular, we've got the export controls in China that are in place, number one. And then number two, we've got lower Chinese mine production over the last 2 years as it relates to -- based on some information in the public domain, lower quality ore potentially out there as well as I would emphasize lower mining permits provided by the Chinese government.

So the market has been in a period of shortage, additional supply obviously would help alleviate some of that. And as that market continues to unfold, obviously, that will inform our pricing decisions and how we set, I'll say, our inventory objectives here in terms of holding inventory as well.

And the next question is a follow-up from Steve Barger with KeyBanc Capital Markets.

Pat, just to level set expectations for the models. You said price raw timing benefit from tungsten flows through into the first half, mostly in 1Q. Is the right way to think about FY '27 kind of reverse order from this year, high point by far in 1Q trailing back down to your quarterly average of like $0.40 towards the end of FY '27.

Yes. A couple of ways that I think about that. Steve, first off, just let me give you some like the basic walk, and I'll start from the midpoint, right? Midpoint of the outlook this year is $3.88. We said we've got $2.45 of price raw in there, probably have about 0.20 worth of variable compensation that would reset.

So let's think of like a clean FY '26, removing those items, about $1.63 in EPS terms, right?

And then kind of moving forward next year, you're going to add $0.10 in for the additional restructuring that we talked about. That gets you down to like about $1.73 before you get to, what I'll call is additional price raw, which again should exist in that first half, right?

And then whatever the volume assumption is that you guys make at this point in time, obviously, we'll give some clarity about that in August.

The second thing I would say about that in terms of now taking that cadence and thinking about the year, yes, I think the right way to think about this, again, this is assuming a relatively stable tungsten environment would be first half, we're going to see the benefits of price raw. Back half of that year, we'll get back to what I would call it is a normal level of profitability, right, absent the price raw tailwinds.

The next question is a follow-up from Julian Mitchell with Barclays.

This will be a quick one. Maybe just flesh out a bit more the cadence of kind of volume demand. You had that very interesting chart on cumulative volumes going back several years. So that was interesting. And you've clearly seen a pickup, as you said a couple of times. There's some prebuy, I suppose, in that. So maybe give us any color you can on sort of how base volumes are performing, if you can really get to that level of detail from your channel partners and so forth?

And have you seen an improvement in base demand in the last couple of months? Or it's difficult to disentangle that from prebuy movement?

So I'll take that first, and then Sanjay will hit most of it. But just to clarify that chart to make sure we're all talking about the same way, right? That chart is based on a 12 trailing months basis. Julian. So based on that, you can think about it as an annualized chart, it's going to kind of flatten out any sort of short-term prebuying issues, right?

Because again, we're talking about an annual type number. And with that, I'll turn it over to Sanjay.

Yes, Julian, with regards to rest of the drivers at this point, Q4, we are confident in what we are saying that we do see impact from improving market condition, which is again moderate. And then on top of that, our share gain opportunities that we have, those will definitely play out. I think with respect to fiscal '27, we'll come back and talk about that in August, but the initial signs are -- seems like things are definitely stabilizing.

And this concludes today's question-and-answer session. At this time, I would like to turn the conference back over to Sanjay Chowbey for any closing remarks.

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

Thank you. And as a reminder, a replay of this event will be available approximately one hour after its conclusion. [Operator Instructions] And today's conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.

Good morning. I would like to welcome everyone to Kennametal's Second Quarter and Fiscal 2026 Earnings Conference Call.

[Operator Instructions]

Please note, 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 Kennametal's Second Quarter Fiscal 2026 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 Kennametal's SEC filings. In addition, we will be discussing non-GAAP financial measures on the call today. Reconciliation 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 Sanjay.

Thank you, Mike. Good morning, and thank you for joining us. I will begin the call today with an overview of the quarter, including end market commentary, followed by a spotlight on one of our growth focus areas, Power Generation. From there, Pat will cover the quarterly financial results as well as the fiscal year '26 outlook. Finally, I'll make some summary comments and open the line for questions.

Turning to Slide 3. Let me begin by addressing some of the highlights from our strong second quarter. Our global commercial teams continue to advance our strategic growth initiatives. In the quarter, the Infrastructure team secured significant mining orders in Earthworks from key distributors in Asia Pacific and EMEA. Both wins were a direct result of our team's efforts with those customers to deliver high-quality technical support and superior product performance.

In Metal Cutting, we won projects that continue to advance our growth focus on Aerospace and Defense. We also secured engine and transmission wins in Transportation. In General Engineering, we increased our share with a pump manufacturer by providing them an innovative solution for machining valve seats. As you know, we have and will continue to prioritize above-market growth.

In the quarter, we also implemented pricing actions in response to rising tungsten costs, which are at historically high levels. We remain confident in our ability to price for the rising tungsten costs and in our ability to offset the impact. On the cost improvement front, we realized $8 million in restructuring savings this quarter and continue to execute our plan to lower structural costs and consolidate manufacturing operations. Some of these plans will extend beyond this fiscal year into fiscal '27. And as a result, we have updated the impact in fiscal '26, which Pat will address when he provides our updated outlook.

Now let's move to our quarterly results, which again exceeded the sales and EPS outlook we provided last quarter. Compared to the outlook, sales were better than expected on higher sales volume, which included the stronger-than-anticipated effect of customers buying ahead of price increases and modest improvement in certain end markets. EPS benefited from the volume and a lower-than-anticipated tax rate. Year-over-year, sales increased 10% organically.

That's our second consecutive quarter of organic growth and reflects price realization, buy ahead and continued modest relief from the broad market weakness. Excluding the effects of the buy ahead, sales volumes were modestly positive in the quarter, reflecting a continuation of gradual volume improvement we have seen since the fourth quarter of fiscal '25.

In terms of profitability, adjusted EBITDA margin was 17.1% compared to 13.9% in the prior year quarter. And adjusted EPS increased to $0.47 compared to $0.25 in the prior year quarter. The improvement in our profitability reflects the benefits from our strategic growth and restructuring initiatives as well as price/raw timing effects from the unprecedented increase in tungsten prices.

As a result, today, we are raising [Audio Gap] outlook shortly. In summary, we are pleased with this quarter's results and we continue to focus on delivering our commitments throughout fiscal '26.

Turning to Slide 4 in our end market update. The top half of this slide shows our outlook at the midpoint and includes impact of price growth initiatives and market factors.

I will focus on the bottom half of the slide and address the 3 markets that have changed since our last call: Transportation, Aerospace and Defense and General Engineering. First, IHS estimates for Transportation slightly improved from the previous estimate of down low single digits to flat. Production volumes in Asia Pacific improved; in EMEA, the current forecast is a bit better, but still down; and the Americas declined slightly.

Secondly, for Aerospace and Defense. The aerospace industry continues to show growth and OEM build rates continue to improve.

Finally, in General Engineering, the IPI forecast in the Americas improved slightly while other regions remain essentially unchanged. Also the most recent GBI and ISM PMI surveys indicate expansion in the U.S. for the first time in almost a year. For our other end markets, conditions remain mostly unchanged from our previous forecast.

Turning now to Slide 5. I want to take some time to expand upon an opportunity we introduced last quarter: the rising global demand for electricity and what it means for Kennametal. Across the growing energy value chain, Kennametal has a broad range of products that help our customers run faster and longer from resource extraction through energy transmission, generation and use. Electricity demand is projected to grow at about 3% annually through 2030 fueled by the rapid expansion of AI data centers, electric vehicle adoption and continued grid build-out. Data centers alone could represent 17% of U.S. power demand by 2030 along with EVs and hybrids, growing at a strong double-digit CAGRs in the Americas from 2023 to 2027.

And as demand rises, the energy mix is diversifying. By 2030, incremental energy supply is expected to come from 45% natural gas, 35% solar and 20% wind plus coal is expected to remain a meaningful source as overall demand for electricity persists. The grid is also scaling quickly with U.S. high-power transmission lines forecasted to grow at a 20% CAGR through 2030. This source to generation opportunity represented approximately 17% of our fiscal '25 sales. We anticipate this market to grow low single digits through 2030. Some areas like gas and combustion turbines are anticipated to experience relatively higher growth over this time frame.

In our Infrastructure segment, our wear resistant solutions are used in oil and gas extraction as well as trenching and foundation digging for wind turbines and transmission lines.

In Metal Cutting, we supply products and solutions used in gas turbines and combustion engines supporting both utility and AI data center power generation. Gas turbines are projected to grow at 15% CAGR and combustion engines for backup generators at 10% CAGR. We are well positioned to capitalize on these trends with the right products already in our portfolio and access to the right customers. And among those customers, we are well known for quality, reliability and innovation and we offer a global footprint that supports them [ wherever ] who will review the second quarter financial performance and the outlook.

Thank you, Sanjay, and good morning, everyone. I will begin on Slide 6 with a review of the second quarter operating results. Sales were up 10% year-over-year, with an organic increase of 10% and a favorable foreign currency exchange of 1%. The divestiture we concluded last year also had a negative 1% effect. At the segment level, Infrastructure increased 11% organically and Metal Cutting increased 9%. On a constant currency basis, Americas sales increased 16%, Asia Pacific sales increased 9% and EMEA was up 2%.

As Sanjay mentioned, our sales performance this quarter exceeded our expectations. Relative to those expectations, higher sales volumes, including the effect of customers buying ahead of tungsten related price increases with a catalyst for the outperformance. By the end market, on a constant currency basis, Aerospace and Defense grew 23%, Earthworks grew 18%. General engineering grew 8%; Energy increased 4% and Transportation increased 3%. I'll provide more color when reviewing the segment performance in a moment.

Adjusted EBITDA and operating margins were 17.1% and 10.5%, respectively, versus 13.9% and 6.9% in the prior year quarter. The margin increase was driven by favorable price/raw effect of $17 million within the Infrastructure segment, higher pricing and tariff surcharges in Metal Cutting, increased sales and production volumes in Metal Cutting, and year-over-year restructuring savings of $8 million.

These were partially offset by higher compensation costs, tariffs and general inflation and a prior year benefit from insurance proceeds of approximately $3 million that did not repeat in the current year. Adjusted earnings per share were $0.47 in the quarter versus $0.25 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on Slide 7.

The year-over-year effect of operations this quarter was $0.22. This reflects [Audio Gap] approximately $0.15 of favorability from price/raw material cost timing, price and tariff surcharges and higher sales and production volume in Metal Cutting and incremental restructuring benefits. These were partially offset by higher compensation costs, tariffs and general inflation. There was a headwind of $0.02 related to the net insurance proceeds received in the prior year due to the tornado that damaged our Rogers facility. You can also see $0.02 of transaction gains related to preferential Bolivia exchange rates. Currency and pension impacts offset each other.

Slides 8 and 9 detail the performance of our segments this quarter. Reported Metal Cutting sales were up 11% compared to the prior year quarter, with 9% organic growth and favorable foreign exchange of 2%. Regionally, excluding currency exchange, the Americas increased 15%, Asia Pacific increased 9% and EMEA increased 3%.

Looking at sales by end market. Aerospace and Defense increased 19% year-over-year due to the absence of the Boeing strike that occurred in the prior year, improved build rates in the Americas and easing supply chain pressures in EMEA, combined with our global strategic focus. Energy grew 11% this quarter due to data center power generation wins. General Engineering increased 9% year-over-year due to indirect channel buy ahead and price; and lastly, Transportation increased 3% year-over-year due to internal combustion engine and transmission wins in the Americas and price.

Across all end markets, there was approximately $10 million of sales in the quarter as a result of customers buying ahead of price increases. Regionally, approximately half of the buy ahead was in the Americas with 1/3 in Asia Pacific and the balance in EMEA. Metal Cutting adjusted operating margin of 9.6% increased 360 basis points year-over-year, primarily due to price and tariff surcharges, higher sales and production volumes and incremental year-over-year restructuring savings of approximately $6 million. These factors were partially offset by higher compensation, tariffs and general inflation.

Turning to Slide 9 for Infrastructure. Reported Infrastructure sales increased 8% year-over-year with an organic growth of 11% and favorable foreign currency exchange of 1%, partially offset by a divestiture impact of 4%. Regionally, on a constant currency basis, Americas sales increased 17%, Asia Pacific increased 8% and EMEA sales decreased by 1%.

Looking at sales by end market on a constant currency basis, Aerospace and Defense increased 33% due to defense orders driven by continued focus on growth initiatives in the Americas. Earthworks increased 18% due to mining share gain and higher global construction volumes due to buy ahead and share gain. General Engineering increased 5% due to price and higher powder demand in the Americas and Asia Pacific partially offset by lower demand in EMEA. And lastly, Energy was flat as higher prices offset weaker market conditions.

Within Infrastructure, we saw approximately $3 million of sales as a result of customers buying ahead of higher prices. Adjusted operating margin increased 370 basis points year-over-year to 12.3% primarily due to a few factors. The increase in operating income was primarily due to the $17 million effect from a favorable timing of pricing compared to raw material costs and year-over-year restructuring savings of $2 million partially offset by higher compensation costs, prior year net insurance proceeds of $3 million and general inflation.

Now turning to Slide 10 to review our free operating cash flow and balance sheet. Our second quarter year-to-date net cash flow from operating activities was $73 million compared to $101 million in the prior year period. Our second quarter year-to-date free operating cash flow decreased to $38 million from $57 million in the prior year due primarily to working capital changes, including the increase in inventory from higher tungsten prices partially offset by lower capital expenditures.

On a dollar basis, year-over-year, primary working capital increased $97 million from an $85 million increase in inventory to $690 million. On a percentage of sales basis, primary working capital increased to 31.9%. Net capital expenditures decreased to $34 million compared to $44 million in the prior year. We returned $15 million to our shareholders through dividends. Due to the unprecedented increase in level of tungsten prices and the corresponding increase in our working capital, we did not repurchase shares in the second quarter.

Inception to date, we have repurchased $70 million or 3 million shares under our $200 million authorization. And as we've had every quarter since becoming a public company over 50 years ago, we paid a dividend to our shareholders. We remain committed to returning cash to shareholders while executing our strategy to drive growth and margin improvement. We continue to maintain a healthy balance sheet and debt maturity profile with no near-term refunding requirements. During the quarter, we amended and extended our revolving credit agreement, which has capacity of $650 million and matures in November 2030. At quarter end, we had combined cash and revolver availability of approximately $779 million, and we're well within our financial covenants. The full balance sheet can be found on Slide 17 in the appendix.

Now on Slide 11 regarding the full year outlook. We now expect FY '26 sales to be between $2.19 billion and $2.25 billion, with volume ranging from flat to positive 3%. Net price and tariff surcharge combined of approximately 11% and we anticipate an approximate 2% tailwind from foreign exchange. The increased outlook reflects additional pricing actions related to the increase in cost of tungsten since we provided our prior outlook.

Despite the record level of tungsten, we remain confident in our ability to achieve the price. From a cost perspective, as Sanjay noted earlier, some of our EMEA restructuring actions will take a bit longer to execute. And as a result, our updated range includes $30 million of savings. Depreciation and amortization, foreign exchange and pension assumptions are unchanged and noted on the slide. We now expect adjusted EPS in the range of $2.05 to $2.45. This outlook includes approximately a $0.95 year-over-year benefit related to the timing of price and raw material costs.

On the cash side, the full year outlook for capital expenditures is unchanged and free operating cash flow is expected to be approximately 60% of adjusted net income. This revision reflects the additional working capital required by the rising cost of tungsten as discussed earlier.

Turning to Slide 12 regarding our third quarter outlook. We expect third quarter sales to be between $545 million and $565 million, which reflects the effects of the buy ahead that occurred in the second quarter. We expect volumes to range from negative 4% to flat. If you were to adjust for the buy ahead that occurred in the second quarter, volume at the midpoint would be positive 1% and would be the third consecutive quarter of improving volume trends. The outlook also includes price and tariff surcharge realization of approximately 13% and 5% positive impact from foreign exchange. We expect adjusted EPS in the range of $0.50 to $0.60. This includes approximately $0.30 year-over-year benefit related to price/raw timing.

It's worth noting that the prior year's third quarter results included a $0.13 benefit from the advanced manufacturing tax credit. The other key assumptions for the quarter are noted on the slide. And with that, I'll turn it back over to Sanjay.

Thank you, Pat. Turning to Slide 13. Let me take a few minutes to summarize. We delivered a solid first half of fiscal '26 driven by price, modest improvements in a couple of end markets, project wins on the commercial side and cost improvement actions. We continue to make steady progress on our strategic growth initiatives, lean transformation and structural cost improvement while also exploring ways to strengthen our portfolio over time. We remain confident in our plan for long-term value creation for our shareholders. And with that, operator, please open the line for questions.

[Operator Instructions]

Our first question comes from Stephen Volkmann with Jefferies.

I guess, no surprise, maybe I'll talk about tungsten a little bit here. So a couple of things. You talked about some pull forward here into the last quarter, is there some big price increase that's about to hit that people wanted to get in front of?

Yes, Steve, we had a modest price increase in January 1 relative to what we have done in past, I think it's in mid-single digits.

I'd add to that, Steve, I think, even in places where we're not on a list price business, and we've got a lot more material content. We've got customers who are informed about the direction of what the tungsten price is.

Okay. And since the price of Tungsten is up, I think, since you started this conference call, that's only a slight joke. It is up 33% year-to-date, right? So how do you -- like how fast can you kind of keep up with this?

Yes. So Steve, there are parts of our business where the prices get effective very quickly. Those are like -- the spot buy. And also we have parts of the business which are indexed to the prices. And of course, in Metal Cutting, pretty much everything is on the list price basis. So that takes a little bit more time. But based on the order pattern and the lead time, that also works out just fine for us. As you asked the first question, I made the comment modest because prices of tungsten has gone up a lot more than almost 2 to 3x. But by the time you look at how it affects overall in the price of our product, and I mentioned, yes, mid-single digit is relatively higher price. But our customers also see these dynamics, and they have been also kind of monitoring it very closely. And there were some buy ahead, as Pat mentioned in his prepared remarks. If you even adjust for that, we still think that the overall market improved sequentially, and then we're still expecting slight improvement in market from that perspective.

Okay. All right. Great. And then just the final piece here. How should we think about the supply side? I'm curious, like, are you worried about access to tungsten. Is there any chance that the market gets tight and you kind of can't get what you need. And maybe as you answer that, Sanjay, just remind us about sort of your kind of internal versus external sourcing of tungsten and I'll pass it on.

Yes, sure. I will also have Pat chime in here, but let me start by saying that we have multiple different sources, and we have things in pipeline in terms of how we work with our vendors and suppliers. We have -- in many cases, we have long-term agreements. So we feel confident in our ability to get what we need for the outlook that we're giving you at this point. Pat?

Yes, I'd say obviously, in terms of sources, we use a diversified mix of recycled materials. We've got our facility in Bolivia that pulls out material from that market. And in terms of what we're using, I'll say, outside of China, we do not have a dependence on Chinese material to satisfy those operations. Obviously, with the ramp-up of tungsten, and as we've commented before, this is really a supply-driven price increase at the moment across the industry. We are seeing additional activity, I would say, in terms of what's happening at mines and projects also in terms of government involvement in some of those things to facilitate that. And so I think if we took a longer-term view of this as well, there's ample supply that's out there that should come online.

Yes. Steve, I'll add one more thing. Along with the supply side of the question, we, as a company based on material science and technology, we also look for ways that how we use tungsten in the most efficient way in our product. There are places where over the years, we have taken parts of our product mixed with the steel and then having the parts of the tool made by tungsten. So we are also looking for as there are some pricing concerns and also the supply side concerns, how do we make our product more efficient in that result.

Our next question comes from Julian Mitchell with Barclays.

I just wanted to start off with clarifying your -- the volume trends just kind of through the year. So I guess you have the third quarter guidance of slight volumes down year-on-year at the midpoint. The full year is slight growth. So maybe help us understand or remind us kind of Q1, Q2, how are volumes moving then and trying to understand kind of that interplay of maybe some pull forward of volume versus what you're seeing in the end market final demand volume-wise.

Sure, Julian. First, let me back up a little bit from your question of the full year, and then I'll come to Q2 and Q3 in a second. If you go back to the August outlook, at midpoint, we have said volume was going to be minus 2.5%. Last quarter, we said at midpoint, volume was going to be for the full year again at plus 1%. This time, we are saying volume is 1.5%. So it gives you at least confidence that volume is moving in the right direction as the year has progressed.

Of course, we have -- like that's the 400 basis point change in 6 months in our volume projection for the full year. In parallel, of course, we have 700 basis point change in the price, which is a bigger driver of top line. But coming back to Q2 and Q3 dynamics. In Q2, we had a buy ahead, as Pat alluded to that earlier, about $13 million by the time you add both segments. Now if you adjust for that, Q2 will be flat. And then if you adjust for that also Q3, rather than showing as negative, it will be plus 1. So we are showing you also Q1 was minus 1. Q2 was plus in a flat and then Q3 getting plus 1. So volume overall is moving forward in the right direction for us.

That's really helpful. And maybe just my follow-up. If we focus on, I suppose, 2 markets in particular that are very relevant for you, General Engineering and then Transportation. So Transportation, I suppose, has been pretty soggy updates on auto production ex China, General Engineering, I think, understandably people getting excited because of the manufacturing PMI move a couple of days ago. Just give us sort of your perspective on those 2 markets. And again, the volume demand picture, please. I know you've guided the sales assumptions on Slide 11.

Yes, sure. So let me start with Transportation first, then I'll come to General Engineering. In Transportation, as we had in our prepared remarks that EMEA improved slightly, still in negative territory in low single-digit territory. Asia Pacific improved, this is again data coming out of the IHS. That has had quite a bit of improvement, almost 200 basis points. Americas is essentially flat, slightly negative, but essentially flat in terms of Transportation. So overall, what we said was that Transportation was minus 1 last time, now it's about flat. For us, again, this is just the market. For us, of course, we are winning projects, and we have also seen some comp issues with projects that we had in EV a couple of years ago, in last 24 months, where we've got good stocking orders and all that.

That has some other dynamics going on. As you know, some of the programs have not taken off as much. So overall, we expect Transportation to help us with this slight improvement in the trend.

Now coming to General Engineering. As said in the prepared remarks, Americas is where we have seen tangible difference. Other areas like EMEA and also in APAC, essentially flattish or similar outlook that we had before. In the recent outlook, I think the PMI -- ISM PMI report that came out earlier this week, we saw that it was above 50 for the first time in 12 months. So that's a good sign, but there's just 1 month.

We got to see that translate into -- that sentiment translate into real orders. And hopefully, that happens. So that can give us a little bit of upside. But in our view, right now, we have assumed slight improvement in Americas and essentially flattish for other 2 regions.

Our next question comes from Steven Fisher with UBS.

So just to talk about the cadence a little bit more. Thanks for giving that adjusted progression on the volumes adjusting for the pull forward. I guess just looking at what's implied in Q4, it seems like a lot of the year's upside is really falling into Q4. Can you just talk a little bit about what is driving such a big uplift in Q4 and then, I guess, related to that, how should we think about carryover into the second half of this calendar year, both from a kind of a price and volume and price cost perspective?

Yes. A couple of things, just to kind of walk you through there, Steve. The way I look at the progression here in terms of the second half, and if I strip away a couple of elements here and that is we obviously had some [ track ] between Q2 and Q3 on some buy ahead. And then if we think about the incremental price that's going into the business here in the back half, you pull that out at the midpoint look pretty normal from a sequential volume perspective.

As you think about that change then, which is pretty significant Q3 to Q4, what's driving that pretty significant step up in terms of where pricing is. And that's just a dynamic that's associated with the timing of when we've seen tungsten prices rise here. In the month of January alone, tungsten was up nearly $340, right? And so much of that will hit us then in fourth quarter. And then as you think about in your question in terms of what's the first half of our fiscal '27 kind of look like, yes, where we're kind of sitting now, you would anticipate right, some bleed over into early part of FY '27 in terms of favorability of price/raw.

Obviously, as we talked about in the scripted remarks, there's a headwind out there as well at some point in time once tungsten stabilizes, this will have the absence of some of this benefit, but when that happens, obviously uncertain at the moment.

The other two things I would think about in terms of that early part of '27 and beyond that price/raw dynamic coming into play. Just keep in mind that there's additional restructuring that will be coming in place that ultimately will get us to a run rate of about $125 million at the end of next fiscal year. That's a 35 -- excuse me, a $30 million lift, and then additionally, here, as we think about FY '26, there's a little bit more than your average performance-based compensation in play. And that -- when you think about '27, that's probably a $0.10 to $0.15 tailwind then at this point in time going into '27.

That's really helpful. And then, I guess, nice to see that you continue to have some of these wins from your customers. Can you just talk about the competitive dynamics on that? How actively or how broad is the competitor set on these? Or is the pie just getting bigger and these are areas that you're not facing a lot of competition?

Yes. Of course, we are facing competition in all areas, but I will just tell you that we are using our core competencies as we have spoken before, with material science, our products and solutions, and also adding that with application engineering support, which is, again, a lot of talent we have in the field, in the front line and our engineering team. And then our global footprint that helps us meeting customer demands anywhere in the world, I think we are using our core competencies and a very structured approach on our growth initiatives to drive very close intimacy with customers and solving their problems and winning these projects.

I can tell you a few things that we have spoken and past, but you look through the different end markets we play. In Aerospace and Defense, we have been definitely winning bigger share of wallet with our major customers. And also, we have expanded our new customer list in that in the last few years.

Similarly, in Earthworks, we talked about mining project wins and all that. We definitely have had some new products coming out there and also supporting our customers with good operational performance and quality and delivery. Now I have to say that Earthworks, some of the wins we have has been price sensitive as we have noted in the past.

So we know that, that pressure will be there on us even going forward. With respect to Energy, we have talked about oil and gas customers are definitely valuing our products as they are going more -- not necessarily increasing rig counts, but going more distance in the horizontal ways. We have very good products there. Along with that, in Energy, we have had very good success with supporting our customers on the power generation for AI data centers. We highlighted that last quarter or so.

Today, we talked about the broader electricity and energy play and how we are well positioned to capture that at least to outperform the market. Transportation, we are very well prepared regardless of whichever way our end customers go with respect to drive trend. We had very proven products in combustion engines. Then we launched a lot of really good products on battery and hybrid. Of course, there's quite a bit of dynamics in the mix right now, but we are well positioned to support our customers in that.

And finally, coming to General Engineering. We have very strong channel partners. We work very closely with them. Along with that, in parallel, we have launched many initiatives in General Engineering to help our smaller customers, small- to medium-sized customers. In parallel, we have also launched new initiatives on digital machining solutions. We have put in public domain, our partnerships with key technology players out there. So we're taking a very comprehensive approach as it applies to our overall market.

Our next question comes from Steve Barger with KeyBanc.

This is actually Christian Zyla on for Steve Barger. First question, if you guys get both volume and price for several quarters, how should we think about incremental margins relative to history? Is there a range that you guys are targeting?

Yes. On the volume, as we have said before, Metal Cutting is going to have a little bit higher incremental leverage than Infrastructure. But net-net, we have said mid-40s as average. Pat, do you want to add something to that?

No, I just only say that's a through-the-cycle type number as well. And so individual quarters depending on where a variety of factors that could move around a little bit.

Yes. With respect to price, obviously, we have said it, our first intent there is to make sure that we are offsetting the cost. So the mid-40s number is on volume.

Got it. Understood. And then I guess second question, just your full year guide assumes tungsten prices remain stable from the current level. How fast your list prices adjust in Metal Cutting if tungsten keeps rising? And I guess, conversely, if tungsten prices fall at some point, would you have to give back the surcharges and reduce your list price? And how fast does that happen?

Yes. So we generally have about 3 months or so lag in Metal Cutting in terms of list price change. With respect to if the prices come down, our goal is to stay competitive in the market. So we'll see when that happens and what the extent of that is.

Our next question comes from Angel Castillo with Morgan Stanley.

Just maybe a near-term one first. I wanted to clarify, I don't know if -- apologies if I missed this, but did you say, I guess, how much orders are kind of rising in January, just what you're seeing kind of thus far in the last month and whether that kind of aligns with what you're talking about in terms of the organic growth or maybe even at or just kind of compare to that?

Sorry. We have not talked about January specifically in the prepared remarks, Angel, but I can just tell you that we have a good start, and we are confident about the outlook we gave you.

Understood. And then, Sanjay, just a little bit of a bigger picture question. Back in, I think, fiscal 4Q, you had talked about some additional self-help initiatives, plant closures and other kind of changes you are making given how challenging the backdrop was and just the overall demand picture. But ever since that, I feel like things have been steadily improving, more tailwinds with Power Generation, just general kind of market share wins.

Can you talk at a higher level? Is this -- do these changes impact how you're thinking about repositioning the business, the plant closures, what you need to target or what the business needs to focus on versus perhaps even areas of investing, so you can kind of take more advantage of those kind of higher, faster growth power gen type of markets, just bigger picture just how it impacts your strategy?

Yes, absolutely. Angel, first of all, let me recap what we have done, and then I'll talk about where we're going next. So in last 12 months, we have closed 2 manufacturing plants successfully. We divested 1 business. And now looking forward, we are working on projects as we've spoken after the Q4 of last year. We are going to, of course, keep an eye on where the market is and specifically to different product lines, the demands. And if we have to adjust our plan, we will, our overall goal here is to do what is best for our shareholders, our customers and our team. But at this point, the plans that we have put together still makes sense, and we are making good progress on that.

Our next question comes from Tami Zakaria with JPMorgan.

Very nice results. A question on India. Could you remind us whether you have sourcing exposure from there? And how that might benefit should tariff rates on India come down in the coming months?

Yes, Tami, about 6 months ago or so when this question came up when the tariff had gone up, we have said that we don't really bring a lot of products from India to U.S. So for all practical purposes, the impact was minimum. And then whatever we had over the last few quarters globally, not just the India impact, but as overall we have taken appropriate actions, including relocating several thousand stock SKUs to different places of the world to offset that. So for all practical purposes, this change, tariff coming down will not have that impact. But I do believe that it should help India market, where we are a big player also in our -- so domestically, it should help us, but from a tariff perspective, it's not material for us.

Understood. Very helpful. And along the same lines, should some more trade deals come through, how should we think about pricing? Would tariff surcharges get automatically rolled back? Or you took permanent price increases, which might stick even if tariffs go down in the coming months, how should we think about that?

We have kept the tariffs as is right now. We have not converted that to a permanent price change, but we're keeping that option open. If there are some parts of the trade agreements that feel like more permanent, we'll do that. That is good for everybody, including our customers. But as of right now, we're keeping tariffs as tariff. And if the tariffs do come down, we will immediately adjust it down.

This concludes our question-and-answer session. I would like to turn the conference back to Sanjay Chowbey for closing remarks.

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

A replay of this event will be available approximately 1 hour after its conclusion. To access the replay, you may dial toll-free within the United States (877) 344-7529. Outside of the United States, you may dial (412) 317-0088. You will be prompted to enter the conference ID 945699, then the pound or hash symbol. You will be asked to record your name and company.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Good morning. I would like to welcome everyone to Kennametal's First Quarter and Fiscal 2026 Earnings Conference Call. [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. Please go ahead.

Thank you, operator. Welcome, everyone, and thank you for joining us to review Kennametal's First Quarter Fiscal 2026 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 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 Sanjay.

Thank you, Mike. Good morning, and thank you for joining us. I'll begin the call today with a brief overview of the quarter, including some end market commentary, followed by a spotlight on one of our growth focus areas, Power Generation. From there, Pat will cover the quarterly financial results as well as the fiscal year '26 outlook. Finally, I'll make some summary comments, and then we will open the line for questions.

Turning to Slide 3. Let me begin by addressing some of the highlights from our strong first quarter. Our global commercial teams continue to advance our strategic growth initiatives. In the quarter, infrastructure secured 2 large project wins within our Earthworks end market. Both wins were a direct result of our team's efforts with those customers to deliver high-quality technical support and superior product performance. That combination has and will continue to be a winning formula for us.

In Metal Cutting, we won projects in Energy, Aerospace and Defense and Transportation. For example, we increased our share of wallet with an aerospace customer to provide high precision tooling solutions for machining military components. As you know, we continue to prioritize above-market growth, and these wins position us well in markets that are benefiting from long-term secular growth trends.

We also continue to respond to the evolving tariff landscape, and we remain committed to fully offsetting the impact of tariffs through various actions, including product moves, supply chain optimization and surcharges as appropriate. Separately, we have implemented pricing actions in response to the continuing rise in tungsten costs, which have increased since August and are at historically high levels. We remain confident in our ability to price to offset the rising tungsten costs.

On the cost improvement front, we realized $8 million in restructuring savings this quarter, and we continue to execute our plans to lower structural cost by reducing employment costs and consolidating manufacturing operations.

Now let's move to our quarterly results, which exceeded the sales and EPS outlook we provided last quarter. Compared to the outlook, sales were primarily driven by better-than-expected volume across all end markets. EPS benefited from the additional volume and a lower-than-anticipated tax rate. Year-over-year, sales increased 3% organically. That's our first quarter of organic growth in 2 years and reflects modest relief from the broad market weakness that has impacted our end markets for the past 8 quarters.

As you may recall, historically, down cycles tend to last 4 to 8 quarters. Adjusted EPS increased to $0.34 compared to $0.29 in the prior year quarter. In terms of profitability, adjusted EBITDA margin was 15.3% compared to 14.3% in the prior year quarter. Cash from operating activities year-to-date was $17 million compared to $46 million in the prior year period. Free operating cash flow year-to-date was negative $5 million compared to $21 million in the prior year. And finally, we returned $25 million to shareholders through share repurchases of $10 million and dividends of $15 million.

Today, we are raising our sales and EPS outlook for fiscal '26. This update reflects the modestly improved market conditions, additional price and tariff surcharges and our favorable performance in the first quarter. Pat will provide more details on our updated outlook shortly. In summary, we are pleased with this quarter's results, and we continue to focus on delivering our commitments throughout fiscal '26.

Turning to Slide 4 and our end market update. As a reminder, our full year outlook reflects forecasts of specific market drivers and general market conditions. I will focus on the bottom half of the slide and address the 2 markets that have changed since our last call.

First, IHS estimates for Transportation slightly improved from the previous estimate, while still being in the negative low single-digit range. Volumes in the Americas have improved from the prior estimate, partially offset by pressure that continues to impact EMEA.

And secondly, for Aerospace and Defense, expectations are improving as the aerospace industry has recovered from supply chain challenges and will benefit from the recent approval that will increase OEM production. Market factors remain mostly unchanged within the other end markets.

Turning to Slide 5. We are seeing emerging opportunities in Power Generation, driven by rising demand for both renewable and traditional energy sources to support the expansion of AI data centers. This is an expanding opportunity for Kennametal across both of our segments, and we are capitalizing on this trend.

As we shared last quarter, we secured a key win in Metal Cutting connected to the backup generators that are providing energy security to those data centers. And it's our deep expertise in application engineering and machining complex engine components that is positioning us particularly well to support customers as they manufacture backup power generation systems and utility scale gas turbines.

With respect to the gas turbines, these applications require the same capabilities that we have long applied in Aerospace and Defense. So this is also an area that we know very well. While this slide focused on Metal Cutting, the opportunity extends across both segments.

In Infrastructure, our wear-resistant solutions and a strong position in oil and gas extraction aligns with the growing need for natural gas as a reliable fuel source for uninterrupted power. So while our recent wins are in backup power systems, the opportunity is much broader, and we are well positioned to capitalize on that as the trend continues.

Now let me turn the call over to Pat, who will review the first quarter financial performance and the outlook.

Thank you, Sanjay, and good morning, everyone. I will begin on Slide 6 with a review of the first quarter operating results. Sales were up 3% year-over-year on both a reported and organic basis. At the segment level, Metal Cutting and Infrastructure both increased 3% organically and by end market. On a constant currency basis, Aerospace and Defense grew 20%; Earthworks grew 5%; Energy increased 1%; General Engineering was flat and Transportation declined 1%. Regionally, on a constant currency basis, sales in the Americas increased 7%, EMEA was flat and sales decreased 1% in Asia Pacific.

The sales performance this quarter exceeded the outlook we provided last quarter. Relative to those expectations, share gains in Earthworks, better-than-expected auto build rates and overall modest volume improvements were the catalysts for the outperformance. I will provide more color when reviewing the segment performance in a moment.

Adjusted EBITDA and operating margins were 15.3% and 8.2%, respectively, versus 14.3% and 7.6% in the prior year quarter. The improved margin was driven by price and tariff surcharges and incremental year-over-year restructuring savings of $8 million, partially offset by higher compensation costs, tariffs and general inflation and a prior year benefit from net insurance proceeds of $4 million that did not repeat in the current year. Adjusted EPS was $0.34 in the quarter versus $0.29 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on Slide 7.

The year-over-year effect of operations this quarter was positive $0.05. This reflects incremental restructuring benefits, favorable timing of price/raw material costs, tariff surcharges and the advanced manufacturing tax credit, partially offset by higher compensation costs, tariffs and general inflation. The headwind of $0.04 from the net insurance benefits received in the prior year due to the tornado that damaged our Rogers facility. You can also see $0.04 of transactional gains related to preferential Bolivia exchange rates.

Slides 8 and 9 detail the performance of our segments this quarter. Reported Metal Cutting sales were up 5% compared to the prior year quarter with 3% organic growth and favorable foreign currency exchange of 2%. Regionally, excluding the effects of currency, the Americas increased 6%, EMEA increased 1% and Asia Pacific declined 1%.

Looking at sales by end market, Aerospace and Defense increased 16% year-over-year from improved build rates in the Americas and easing supply chain pressures in EMEA. Energy grew 12% this quarter due to data center power generation wins. General Engineering was flat year-over-year from lower production activity, primarily in EMEA. And lastly, Transportation declined 1% year-over-year due to project timing in Asia Pacific and an overall slowdown in EMEA and the Americas.

Metal Cutting adjusted operating margin of 8% decreased 20 basis points year-over-year, primarily from higher compensation costs, tariffs and general inflation. These factors are partially offset by higher prices and surcharges and incremental year-over-year restructuring savings of approximately $6 million.

Turning to Slide 9 for Infrastructure. Infrastructure sales increased 3% organically with reported sales growth of 1%, which was negatively affected 3 points from the divestiture, which closed in June. Regionally, on a constant currency basis, Americas sales increased 7%, Asia Pacific was flat and EMEA sales decreased by 3%.

Looking at sales by end market on a constant currency basis, Aerospace and Defense increased 28% from defense orders driven by continued execution on our growth initiatives in both EMEA and the Americas. Earthworks increased 5% due to mining share gains in the Americas and higher global construction demand, partially offset by Asia Pacific mining market softness. General Engineering was flat due to higher powder demand in the Americas and higher demand in Asia, partially offset by lower industrial activity in EMEA. And lastly, Energy declined 5%, mainly in EMEA, driven by project timing and from a lower U.S. land rig count.

Adjusted operating margin increased 190 basis points year-over-year to 8.8%. Adjusted operating income of $17 million increased primarily due to the favorable timing of pricing compared to raw material costs, partially offset by prior year net insurance proceeds of $4 million and higher compensation costs and general inflation. Additionally, we recognized year-over-year restructuring savings of approximately $2 million.

Now turning to Slide 10 to review our free operating cash flow and balance sheet. Our first quarter net cash flow from operating activities was $17 million compared to $46 million in the prior year period. The change in net cash flow from operating activities was driven by working capital changes, including a higher investment in inventory, primarily from rising tungsten prices. Because sales volumes declined less than normal from the fourth quarter of FY '25 and pricing and tungsten value was up, working capital was a more challenging comparison this quarter.

Our first quarter free operating cash flow decreased to negative $5 million from positive $21 million in the prior year, primarily from the lower cash flow from operations. On a dollar basis, year-over-year, primary working capital increased to $660 million and on a percentage of sales basis, it increased to 32%. Net capital expenditures of $23 million declined modestly from $25 million in the prior year quarter. In total, we returned $25 million to shareholders through our share repurchase and dividend programs. We repurchased 475,000 shares or $10 million in Q1 under our $200 million authorization.

And as we have every quarter since becoming a public company over 50 years ago, we paid a dividend to our shareholders. We remain committed to returning cash to shareholders while executing our strategy to drive growth and margin improvement. We continue to maintain a healthy balance sheet and debt maturity profile with no near-term refunding requirements. At quarter end, we had combined cash and revolver availability of approximately $800 million, and we're well within our financial covenants. The full balance sheet can be found on Slide 17 in the appendix.

Now on Slide 11 regarding the full year outlook. We now expect FY '26 sales to be between $2.1 billion and $2.17 billion, with volume ranging from negative 1% to positive 3%, net price and tariff surcharge combined of approximately 7%, and we anticipate approximately 2% tailwind from foreign exchange. We now expect adjusted EPS to be in the range of $1.35 to $1.65. The increased outlook reflects additional pricing actions related to the rising cost of tungsten and additional surcharges in place to address the changes in policy since our August call.

The adjusted tax rate for the year is now 27%. And as a result of the additional cash that we need to invest in inventory due to higher tungsten costs, free operating cash flow as a percent of adjusted net income is now 100%. All of the other elements of our outlook remain unchanged.

Turning to Slide 12 regarding our second quarter outlook. We expect Q2 sales to be between $500 million and $520 million, with volume ranging from negative 4% to flat, price and tariff surcharge realization of approximately 7% and a 2% positive impact from foreign exchange. One comment regarding the adjusted effective tax rate this quarter. The rate of approximately 30% assumes a discrete item that is driving the rate higher in Q1 than our full year outlook. We expect adjusted EPS in the range of $0.30 to $0.40. The other key assumptions for the quarter are all noted on the slide.

And with that, I'll turn it back over to Sanjay.

Thank you, Pat. Turning to Slide 13. Let me take a few minutes to summarize. We delivered a solid first quarter, thanks to modest improvements in a couple of end markets, project wins on commercial side and cost improvement actions. We continue to make steady progress on our strategic growth initiatives, lean transformation and a structural cost improvement while also exploring ways to strengthen our portfolio over time.

In parallel, we are monitoring external drivers such as trade and monetary policies and raw material prices and taking timely and necessary actions. We remain confident in our plan for long-term value creation for our shareholders.

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

[Operator Instructions] Today's first question comes from Angel Castillo with Morgan Stanley.

Congrats on a strong quarter here. I just wanted to touch base a little bit more on the end market outlook. I think, you noted a little bit on the kind of prepared remarks about what you're seeing across end markets. But I think it kind of stood out to me that some of the changes on Slide 4 for each end market were quite notable in terms of going from down to up or materially kind of more into the double digits, all the while some of the kind of market factors that are listed below seemed a lot more muted to unchanged.

Can you just clarify, I guess, within each of these, what specifically is kind of driving the material kind of uplift? And in particular, maybe also from a regional standpoint, how should we think about the mix of which regions are driving kind of the improved outlook for each of these?

Yes. Thank you, Angel. Good question. So let me walk you through that slide, which is Slide 4. Just first of all, as a reminder, on that slide, the top half of the slide is basically reflecting our sales trend and the bottom half of the page reflects what is the external factor, which is the market. So in all of these end markets, there are 3 pieces: first one is, APT and surcharge -- APT-related price increase and surcharges; second is, market itself, whether the market improved or it stayed flat; and the third piece is, project wins and share gains.

So as we discussed in our prepared remarks, there were definitely some markets where we had bigger benefit of project wins, for example, in Aerospace and also in Energy, especially in the Power Generation side. Now let me walk you through the other factors. So like I said, APT and surcharge-related price affects all end markets. Specific to where we saw changes in end market in Transportation and Aerospace where we saw the biggest change -- changes. Let me walk you through that a little bit.

So for Transportation, we saw Americas coming out a little bit stronger in the Q1, and we have outlook at this point also for the full year and based on even IHS data that we expect while still being in the low single digit in a negative territory, the Transportation IHS forecast at this point is improved from the prior outlook we had 3 months ago.

In Aerospace, the customer build rate and also supply chain constraint easing up and also from a Defense perspective, definitely, we are seeing market to be stronger in that regard. Earthworks, when you see the arrow going up on the top of the page -- half of the page, that is mostly driven by share win.

Same thing in Energy. Energy is more or less staying flat with respect to oil and gas. If you look at the rig counts and all that, about the same as where we anticipated 3 months ago. But we have had good project wins when it comes to the Power Generation and that helped in the Energy.

And in General Engineering, we are seeing improvements. In Q1, we have seen some. But for you look at -- when you look at the full year, other than China, more or less, I think we're seeing slight improvement or flattish type situation in the Gen Eng when it comes to IPI. So that's really what we have at this point.

Again, in summary, APT and surcharge helping and share wins are also helping along with that and modest improvement in a couple of end markets.

That's very helpful. And maybe just as my follow-up, just to kind of double-click on some of these numbers. But maybe on the market share dynamic, could you just give us a little bit more color as to -- is that because the kind of cadence of wins here maybe it's seemingly accelerating in some of these end markets. Is there something about either the product that's really resonating with customers? Is it more related to being competitive advantages to being a domestic producer?

And then as it relates to this or maybe more to the price dynamic that's driving some of these improvements, any concerns here that as you look at tungsten prices or kind of you're passing through higher prices here, any concerns that people start to consider either trading to other non-tungsten equipment? Or I guess, anything that you would note as it pertains to kind of elasticity of the customer to be willing to continue to kind of take these higher prices?

Sure. So first of all, with respect to share gain, it is definitely driven by what we have discussed before, the 3 main drivers: first, innovative solutions; secondly, our commercial excellence, which includes our engagement with customers and application support; and third, operational excellence. Our overall operational performance at this point, including safety, by the way. Safety, quality, on-time delivery has been very good. We continue to make good progress on that. So I think all of those combinations are definitely helping us in share gain.

With respect to -- I think just to confirm, your second part of the question was, can you remind me?

Moving [ something ] away from.

Okay. Yes. Sorry, yes.

Yes, so specific to the customers for the price increases in tungsten?

Got it. Yes. Tungsten, yes. We have looked at that -- from our perspective, what we provide in terms of the innovative solutions, I believe that the value customers get through our solutions has -- is very strong in terms of like even with higher tungsten prices, it will make more sense for them to continue using that rather than changing it to stainless steel or some other type because the performance that they receive from our solution will more than offset even the increase that they're going to see from the tungsten prices.

So we don't see a big risk from that. But Angel, to your broader question, as you look at some of the end markets, they are still on the fence. Can things get worse? Yes. Like we know there is a monetary policies, trade policies and things like that. So things can get worse. But overall, we have taken a very balanced approach in terms of what we see from the market and also from price dynamics, and on top of that, overall our share gain initiatives.

And our next question today comes from Tami Zakaria with JPMorgan.

Very nice quarter. I wanted to ask you about the $250 million TAM from engines, large engines, which I thought was very interesting. How much of this $250 million is simply volume? Or does it also include pricing? And I may have missed it, but what share of that $250 million do you realistically expect to gain over the next 3 years?

Yes, Tami, good question. So first, let me explain that the $250 million that we have carved out to show as a TAM for Power Generation, some of this used to sit within either Energy or Transportation. Now we have carved it out to say, what is it so that we can really focus on that? And then how much is the growth initiative here. At this point, as we pointed out there, if you look at last 2, 3 years, that market has been growing in the high single-digit range, and we are still projecting it to grow at 10% rate for the next few years. So that's how we see it.

At this point, of course, the $250 million does include the latest price dynamics in that. But in the bigger picture, it does have -- like the historical trend is there from that perspective. And as far as we are concerned, market share-wise, we don't disclose at this point about that information. However, we are very confident that our solutions and our overall value proposition with application support and custom solutions that we are very well positioned to win in this.

Understood. That is very helpful. I wanted to ask you about the Energy end market outlook a bit. I think it improved to mid-single digits from flat, if I'm reading it correctly. What's really driving this improved outlook for Energy? Rig counts is still down. Is it well? So could you just elaborate on that a little bit?

Yes. As you look at that, again, Slide 4, in the bottom half of the page, we are clearly telling you that oil and gas stays about the same, right? It's not getting worse. That's good news. But overall sales, which is in the top half of the page, we are saying it's improving because we have definitely impact of APT-related price increase and also surcharges if applicable. And as you know, a lot of products that is used in oil and gas does have very heavy content or greater content of the raw material.

And just to tack on to that, Tami, keep in mind that across our Energy portfolio between both businesses, it's pretty diversified. So beyond having the exposure in oil and gas, which we think of primarily in Infrastructure, Metal Cutting has some exposure there as well. Obviously, we've been talking about the opportunities we have in reciprocating Power Gen and more traditional power gen sources. And as you followed us over the last couple of years, the great position we have in wind power as well.

And our next question today comes from Steven Fisher at UBS.

Congrats on the quarter. Just to come back to the share gain dynamics a little bit. I know this is something you obviously embedded in your multiyear outlook since 2023. So it's nice to see it coming through. I guess just now that we're starting to see this a little bit more visibly and you started to talk about it more, what visibility do you have to anything else in kind of lined up that could materialize in some program wins over the next couple of quarters?

Yes. Again, good question, Steven. Let me start by first addressing some of the higher growth end markets that we see right now from Aerospace and Defense, we have had success in that for the last 2, 3 years. Actually, we have talked about it all the way back in the Investor Day. And we have a good pipeline of projects that we continue to work on. Then when it comes to Power Generation, we already talked about a little bit. So that also has good pipeline.

When it comes to Transportation, we will position ourselves very well as the transportation industry was going through quite a bit of dynamic shift in terms of the powertrain. And we have solutions which will support whether a customer launches new internal combustion engine or hybrid or plug-in hybrid or battery-only electric vehicle, we have good solutions, and we have very good strong application support for that. So well positioned on that.

And in parallel, we continue to work on Earthworks, as you saw some of the project wins we reported in Q1. And finally, coming to General Engineering, our strong relationships with our channel partner and really working together to do what's best for our end customers have also bode well for us, and we'll continue to work on all of these 5 end markets.

That's really helpful. And then I guess just on the tungsten price, can you just talk about how much of that top line benefit and margin dynamic you saw in Q1 relative to what might still be ahead? What could you still see there in Q2? And then are you expecting to see things in balance between your -- what you're passing along and what you're experiencing by, say, Q3?

Yes. If we think about that, [ that's a modest ] -- we saw a modest amount of tailwind, I would say, Steve, in the first quarter, right? And then what you're going to see here as we go into Q2 -- and in Q2, we'll see a little bit of ramp-up there. Price will go up. We'll get a little bit of tailwind from that. We did see a -- we saw a little bit of advanced buying here in Q1, call that low single digits that might be flopped between Q1 and Q2 from a volume perspective. And that's part of what's animating, I'll say, our volume outlook for Q2.

But as you think about Q3, Q3, we should see a pretty significant step-up in price/raw. If tungsten prices were to stick around where they are currently, we probably have our strongest EPS quarter in Q3 as we get into Q4, get into basically price/raw neutrality at this point in time.

And as we've talked about on prior calls, we tend to -- what flows through the P&L tends to lag the market by about 2 quarters. If we were to see increases in tungsten prices throughout this quarter, that would tell us that, that period of favorable price/raw would continue more into the fourth quarter. Obviously, if we were to see some of that tungsten price roll off, we would start seeing some of that fall through in Q4 as well. But right now, our outlook assumes stable pricing for the balance of the year from a tungsten perspective.

And our next question today comes from Steve Barger at KeyBanc Capital Markets.

Going back to data center, you said some of that TAM used to sit in Energy or Transportation. So what is the incremental machining opportunity you see from data center? And can you frame up, does it add single-digit millions of revenue, double-digit millions? How are you thinking about that?

Yes, Steve, it's definitely built into that $250 million. At this point, over the last few years, we have seen that in the $100 million range, and then we're raising it to a 10% CAGR.

Got it. Okay. And then, Sanjay, going back to your comment on some higher expectations for General Engineering. I think everybody is looking for the turn there. So is your outlook based on expectations for improvement just due to how long this downturn has been? Or is it customers saying they want to restock? Or are they seeing actual demand pick up that they're either seeing it or they're planning for it? Can you just frame up that comment?

Yes, sure. Steve, when it comes to General Engineering, I think at this point, by region, I'll comment a little bit. In U.S. and Americas in general, we saw a slight improvement. And by the way, you'll hear the word slight quite a bit here just because we are on the fence. I can tell you that even if you look at our outlook, the way we have framed it, overall volume for the full year, we are saying at midpoint is 1%. So that gives you the idea that we're right on the fence, a slight bit of improvement in IPI will help us, and that's what we have built because that's what we have seen from external projection perspective.

In recent months, we have seen some improvement in Americas. EMEA, in Q1, we saw, but the projection for the rest of the year is more flattish. And in China, we have seen positive projection, slight bit of positive projection.

And our next question today comes from Chris Dankert at Loop.

I guess just to circle back to the earlier question, can you kind of help frame for us what the assumed price/cost impact actually is in the guide? Are we assuming dollar neutrality for the year? Is it dollar positive margin? Can you just kind of walk us through what's actually assumed in your guide from a price/cost perspective here?

Yes. So I would say for the full year, there will be positive price/raw, right? And you just kind of have to look through where the volume is because, again, volume at this point in time on a full year basis, as Sanjay just talked about, it's up 1%, right, at the midpoint of the guide, right? In addition to that, I would just point out to you that think about some of the comments we had last quarter in terms of some of the tailwinds we had in the prior year that are just not repeating here this year.

So when we just think about that overall profitability and EPS walk, yes, we're going to have a very modest amount of positive volume, not quite frankly, enough to write [ home about ] from a leverage perspective. We will have some benefits, obviously, from the restructuring coming through.

We're going to have significant amounts of cost inflation here coming through in the business, whether that relates to tungsten tariff costs as well as, I would say, the normal salary inflation that comes about in addition to some of the headwinds that we've got in, in terms of $15 million that we talked about in the prior quarter in terms of net tornado benefits that occurred in the prior year and some additional tax credits that came through from a tungsten perspective as well as about a $5 million pension headwind.

So we'll see that positive price raw here really in Q3. And as we just talked about previously, when we get out to Q4, we'll really get to a more neutral basis.

Okay. Okay. That's helpful. And then as we're thinking about those restructuring savings, any additional color either in terms of the ratability there or maybe just even how to think about what the key programs are inside that restructuring savings?

Yes, I'd say it's pretty ratable throughout the year, maybe with a little bit of a trail off in Q4 as we start lapping some stuff.

In terms of what's in that program, we've done some shifting of resources that what's been able to unlock some cost as well as in the last year, talked about the closure of 2 facilities, one here in the U.S. and the consolidation of 2 locations in Spain that are driving that.

Yes, we are on track for the $35 million that we have projected for the year.

And our next question today comes from Julian Mitchell of Barclays.

I just wanted to try and dial in again a little bit on the sort of EPS guide change and the moving parts there. So I think the guide midpoint went up by sort of $0.40 or so. And maybe $0.05 of that is the lower tax rate. So are we right in thinking that sort of the price/cost part of that $0.40 is kind of more than half of it? So maybe, I don't know, $0.20, $0.30 tailwind from price/cost versus the prior guide?

And then it sounds like a lot of that comes in the third fiscal quarter. And as we look ahead, simplistically, if the tungsten price stays where it is today, is it sort of neutral after this year? Or does it sort of flip to a kind of headwind as your COGS catch up? Just trying to understand that dynamic, please.

Yes. Good questions, Julian. I would say the best way to think about the change in the outlook is you got outlook to outlook, there's really 2 primary changes. One is volume and the second one is price, right? And so there is some incremental volume in there in terms of the change, and you can probably call that in EPS terms, $0.20-ish, $0.30 -- $0.25, $0.30, right? I think that tax number is probably a little bit hot. So it's probably closer to about $0.03 of tax, ETR to ETR, when you do the math, Julian.

And then so you'll have some remainder in that. And included in that is price/raw favorability that's in the year, but you've also got some muting of that is some higher variable comp, okay? That's also nestled in there. So as you think about Q4, and I'm going to switch now to talking about this sequentially because I think on a year-over-year basis becomes a little more difficult. Q4, effectively, what's in the outlook is neutrality. And unless there's a change in tungsten, right, we would expect to be price/raw neutral on that piece going forward from that as you think about the following fiscal year, right?

As we think about that from a headwind perspective, yes, there is some favorability this year that we will have on price/raw that won't repeat next year, right? And when you do that from a year-over-year perspective, I appreciate that would be seen as a headwind. But if you think of it sequentially, we'll be on the same basis.

That's helpful. So you've got sort of that -- as you said, it's sort of $0.20 to $0.30 price/cost tailwind this year. Is that right?

Yes. I go back to the math I just kind of gave you there, Julian, so.

Yes. I think, Julian, keep that in mind, as Pat said, that volume, which, again, if you look at prior outlook versus this outlook, has improved by 350 basis points. Price improved by 300 basis points. Average was 4%, now it's 7%. So it gives you an idea that volume is playing a role in EPS. And within the volume, you've got project wins, you've got some improvement in market. And then also, I think those are the 2 main components of that.

That's helpful. And then just my sort of second question would be around just the sort of Power Gen exposure, and you have that helpful kind of Slide 5 that you've touched on a couple of times already. Just wanted to understand what is your revenue sort of exposure as pertains to that Slide 5 material? What was your dollar revenue in the last 12 months or fiscal '25? Or just trying to understand what your sort of jumping off point is today in revenue as we look ahead to that TAM expansion.

Yes. Julian, we are not disclosing that deeper detail. But let me just tell you the information you have, if you look at the Metal Cutting slide, you will see that Metal Cutting Energy had improved by 12%, whereas Infrastructure Energy had a decline. This is Q1 by 5%. That will tell you, you can do some math in that, and you can see that some of the increase in Metal Cutting Energy revenue is driven by some of those projects.

And our next question today comes from Joe Ritchie at Goldman Sachs.

Yes. Nice to see the strong start to the year. Just a couple of quick ones. I know we've talked a lot about tungsten. It's interesting to me the -- look, tungsten prices were up materially this past quarter. And Pat, you kind of talked through the dynamics. It typically takes a couple of quarters. I was just wondering, has anything changed from a timing standpoint in your ability to pass through price earlier than you have historically? Just seems like the dynamics have gotten perhaps a little bit better on the margin there. Just any thoughts around that would be helpful.

Yes. I think 2 things to think about there as it relates to pricing. We've got 2 semi-unique circumstances going on simultaneously here. One is where tungsten is sitting at today is a historical high, right? And then secondly, I would say we've got the tariff surcharges that are in place, which are a unique event for us and many other companies in terms of how they've had to deal with some of the tariff costs. So I think the situation is pretty unique that we're in at the moment.

I do credit the commercial teams. They have gotten out there and been aggressive where they can be and been smart about where we can make sure we're raising prices to cover the costs. And that's never an easy conversation with the client. No client ever really wants to have their price raised. But as Sanjay talked about previously, we remain very confident in our ability to go out there and get the cost and make sure we're covering for it.

We've had a track record of doing so. And I think some of the commercial capabilities that as an organization that we've developed over the last couple of years, not only do they help us in terms of going out and winning market share, but they also help us in terms of making sure we're accurately pricing for the product that we have and the value we're creating for the customer.

Got it. That's helpful. And I guess just maybe following up on that tariff discussion. To the extent that you're putting surcharges through, how are you guys thinking about a situation in which tariffs are potentially rolled back? What does that ultimately mean for kind of like the price/cost equation that you have baked into the guide for the year?

Yes, sure. Joe, I think, first of all, tariff situation, as you guys know, has been very dynamic. And we have taken a very broad sets of actions, starting with like production move, supply chain optimization and where necessary, we did implement surcharges. And as things have changed, those surcharges also have been very dynamic from our side.

For example, when the tariff for products going from U.S. to Canada, that was taken down, we took the surcharges out. So we are very quickly adopting and doing what we need to do to recoup the cost that we need to, but at the same time, being very, very competitive in the market. So we'll continue to do that.

And in the long term, let's say, some of the tariffs that we get to a point where they become permanent, then we will make those changes in the permanent prices. So that's the way we are looking at it.

Thank you. This concludes the question-and-answer session. I'd like to turn the conference back over to Sanjay Chowbey for closing remarks.

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

Thank you. A replay of this event will be available approximately 1 hour after its conclusion. To access the replay, you may dial toll-free within the United States (877) 344-7529. Outside of the United States, you may dial (412) 317-0088. You will be prompted to enter the conference ID of 7492050 then the pound or hash symbol. You will be asked to record your name and company.

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Good morning. I would like to welcome everyone to Kennametal Fourth Quarter and Fiscal 2025 Earnings Conference Call. [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. Please go ahead.

Thank you, operator. Welcome, everyone, and thank you for joining us to review Kennametal's Fourth Quarter and Fiscal 2025 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 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 Sanjay.

Thank you, Mike. Good morning, and thank you for joining us. I'll begin the call today with a brief overview of the full year and then some end market commentary. From there, Pat will cover the quarterly financial results as well as the fiscal '26 outlook. Finally, I'll make some comments reflecting on my first year as CEO and provide an update as to our plans moving forward. Then we'll open the line for questions.

Turning to Slide 3. Let me begin by highlighting some of the accomplishments the team delivered despite market headwinds. During the fourth quarter, our Infrastructure team secured a $25 million multi-year award with a U.S. defense customer. In Metal Cutting, we secured wins in Aerospace & Defense as well as project wins in Power Generation, supporting AI data centers within the energy end market. These key wins position us well moving forward in markets that are benefiting from long-term secular growth trends.

We successfully executed tariff mitigation actions to address the impact of trade policies on our business. Where appropriate, we rerouted internal supply chain as well as leveraged our global footprint to optimize product flow. We also implemented surcharges. And while we experienced an impact in the quarter, as anticipated, we remain committed to fully offsetting the impact moving forward.

On the cost front, in January, we announced plans to lower structural costs by reducing employment costs and consolidating manufacturing operations. During the fourth quarter, we ceased operations in Greenfield, Massachusetts, and we consolidated facilities in Spain to advance our footprint rationalization efforts.

We also recognized $6 million in restructuring savings this quarter, and we have achieved run rate savings of approximately $65 million inception to date for all cost-out actions at the end of fiscal '25 and expect approximately $90 million by the end of fiscal '26.

We made modest progress on portfolio optimization by completing the sale of our Goshen facility in early June. I want to thank the team for their support. And while we have made headway on our structural costs and portfolio actions, we have much more to do. I will provide some additional comments on this later in the call.

The results reflect the continued broad market weakness that has impacted our end markets for the past 8 quarters. Weak global production volume, declining U.S. land-based rig counts and slowing light vehicle production, especially in EMEA, continued to pressure our performance. Adding to these pressures are supply chain disruptions in certain end markets and continued uncertainty around tariffs and the potential effect tariffs have on global production.

Now turning to the full year. In addition to market softness in several end markets, foreign exchange headwinds pressured our top line as sales declined 4% organically. On a segment basis, Metal Cutting declined 5%, Infrastructure declined 2%.

Most of our end markets experienced mid-single-digit declines on a constant currency basis, though Aerospace & Defense was a bright spot with mid-single-digit growth. Energy was flat. All regions on a constant currency basis experienced low single-digit declines.

Adjusted EPS was $1.34 as several one-time items and restructuring savings offset the lower sales and production volumes. Cash flow from operating activities for the year was $208 million. Finally, we returned $122 million to shareholders through share repurchases of $60 million and dividends of $62 million.

In summary, our performance reflected market softness and our continued efforts to get the best results possible in that environment. We know we have a lot more to do here, which I'll speak to more in a moment. See Slide 16 in the appendix for additional details on our full year results.

Now I want to provide some color around the end market conditions reflected in our fiscal '26 outlook at the midpoint of our range. In Aerospace & Defense, overall, we expect low double-digit growth, reflecting higher OEM build rates as production and supply chain conditions improve.

Defense continues to experience growth from increased spending and project wins. Transportation is expected to decline mid-single digit based on IHS global production forecast, which have been especially volatile as customers are working through product mix evolution and supply chain reconfiguration due to trade policies.

General Engineering is expected to be down low single-digit as global production metrics continue to remain stagnant. We anticipate the energy end market to be flat. Finally, Earthworks is projected to be down mid-single digit. See Page 17 in the appendix for additional detail on our end markets.

Now let me turn the call over to Pat, who will review the fourth quarter financial performance and the fiscal '26 outlook.

Thank you, Sanjay, and good morning, everyone. I will begin on Slide 4 with a review of the Q4 operating results. Our results for the quarter reflect the continued broad-based market softness affecting all of our end markets and regions.

The sales in the quarter came in slightly below our expectations as a result of modest shortfalls in general engineering from continued market softness, mining pressures in Earthworks and supply chain disruptions in Aerospace & Defense. On an organic basis, in Q4, sales decreased year-over-year at 5% with Metal Cutting declining 4% and Infrastructure declining 5%.

Regionally, on a constant currency basis, we experienced low- to mid-single-digit declines. Similarly, by end market, we experienced low- to mid-single-digit declines in all of our end markets. In Energy, the decline was due to lower energy activity in EMEA and lower rig counts in the Americas.

Transportation within Metal Cutting was impacted by continued OEM production softness, mainly in EMEA. We experienced an unusual decline in Aerospace & Defense sales. In the Americas, we lapped a large order delivery in Infrastructure last year and had a temporary supply chain disruption at one of our metal cutting customers this year. These discrete items were partially offset by growth in EMEA from OEM build rates.

Lower industrial production continues to affect General Engineering across both segments, and lower mining activity in Asia Pacific and the Americas was partially offset by higher construction and Earthworks.

Adjusted EBITDA margin was 14.8% versus 17.7% in the prior year quarter. The decline in adjusted EBITDA margin was primarily from lower volumes across the business as well as the expected unfavorable effect of tariffs, net of the surcharges we implemented. These unfavorable items were not offset by the higher prices, restructuring benefits and the positive net effect from the tornado which occurred in the prior year.

During the quarter, we realized approximately $6 million in savings from the restructuring program we announced in January. Additionally, we have increased this program and now expect approximately $35 million in annualized savings, up from the $15 million we originally communicated.

At year-end, we achieved $65 million of run rate savings against the $100 million target we set at our last Investor Day. Adjusted EPS declined to $0.34 compared to $0.49 in the prior year quarter. And finally, as part of our capital allocation strategy, we continued the share repurchase program with $5 million of shares bought back and $15 million in dividends paid.

The bridge on Slide 5 shows the effect on EPS of operations, including all of the factors I just discussed, plus currency, taxes and share count.

The year-over-year effect of operations this quarter was negative. This reflects lower sales and production volumes, higher wage and general inflation, higher raw material costs, pricing and incremental year-over-year restructuring savings of approximately $6 million.

The $0.07 net benefit related to the tornado that occurred last year includes a $0.04 benefit from the charges incurred in the prior year and $0.03 from the net insurance proceeds received this year.

Currency impact of $0.04, which reflects transaction gains, including a preferential Bolivia exchange rate. As discussed last quarter, unmitigated tariff costs were negative $0.04 of EPS. You can also see the effects of the tax rate, which was positive $0.02. Other reflects lower share count and interest expense, which was neutral.

Slides 6 and 7 detail the performance of our segments this quarter. Metal Cuttings reported an organic sales decline 4% compared to the prior year quarter. Regionally, excluding the effects of currency exchange, Asia Pacific was down 1%, the Americas declined 4% and EMEA declined 5%.

Looking at sales by end market on a constant currency basis, Aerospace & Defense grew 1% year-over-year from higher OEM production in EMEA, partially offset by prior year OEM project timing and a customer supply chain disruption in the Americas this quarter. Transportation declined 4% mainly due to lower volume in EMEA. General Engineering declined 5% with weakness due to lower industrial activity in EMEA and prior year indirect channel order timing in the Americas.

And lastly, Energy declined 6% this quarter from lower activity due to weak energy prices. Metal Cutting adjusted operating margin of 7.9% decreased 550 basis points year-over-year due to lower volumes, higher wages, inflation and net tariff costs of approximately $4 million, partially offset by price and restructuring savings of $4 million.

Turning to Slide 7 for Infrastructure. Organic sales decreased by 5% year-over-year with unfavorable business days and the effect of the divestiture at negative 1% each. Foreign exchange contributed a 1% tailwind.

Regionally, on a constant currency basis, Asia Pacific declined 4%, EMEA declined 5% and the Americas declined 7%. From an end market perspective, Energy grew 1%, mainly from project timing in EMEA, partially offset by lower U.S. land rig counts and drilling activity in the Americas.

General Engineering declined 5% with lower demand in the Americas and EMEA, partially offset by modest growth in Asia Pacific. Earthworks declined 7% from lower mining activity due to lower coal prices in the Americas and Asia Pacific, partially offset by higher Americas construction activity. Lastly, Aerospace & Defense declined 16% due to a large prior year order in the Americas.

Adjusted operating margin declined year-over-year to 6.8%, primarily from lower sales and production volumes, including certain plant shutdowns and higher raw material costs, partially offset by the $7 million net effect of the tornado, price and restructuring savings of $2 million.

Now turning to Slide 8 to review our free operating cash flow and balance sheet. Our full year free operating cash flow was $121 million compared to $175 million reported in the prior year. The decline in cash flow is primarily the result of lower net income versus the prior year and an increase in inventory from higher tungsten costs compared to a reduction in inventory in FY '24. Net capital expenditures were $87 million compared to $102 million in the prior year.

In total, we returned approximately $20 million to shareholders through our share repurchase and dividend programs this quarter. During the quarter, we repurchased 232,000 shares or $5 million under our $200 million authorization. And as we have every quarter since becoming a public company over 50 years ago, we paid a dividend to our shareholders.

We remain committed to returning cash to shareholders while executing our strategy to drive growth and margin improvement in this challenging environment. We continue to maintain a healthy balance sheet and debt maturity profile with $840 million of cash and revolver availability at quarter end. The full balance sheet can be found on Slide 21 in the appendix.

Turning to Slide 9 regarding our full year outlook. We are providing a range for both the full year and the first quarter, beginning now with the full year. We expect FY '26 sales to be between $1.95 billion and $2.05 billion, with volume ranging from negative 5% to flat, price and tariff surcharge realization of approximately 4% combined and an approximate 2% tailwind from foreign exchange. As a point of information, the recent divestiture represented approximately 1.5% of FY '25 sales.

On an operating income basis, foreign exchange is expected to be an $8 million tailwind and noncash pension expense is expected to be a headwind of $5 million. Approximately $35 million of restructuring savings has been included.

From a timing perspective, we expect these restructuring benefits to be 40/60 weighted first half to second half. We expect adjusted EPS to be in the range of $0.90 to $1.30. On the cash side, the full year outlook for capital expenditures is approximately $90 million and free operating cash flow is approximately 120% of adjusted net income.

The bridge on Slide 10 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 and restructuring savings, partially offset by lower sales and production volume, higher raw material and tariff costs, higher wages and general inflation.

The outlook includes approximately $0.15 of headwinds from prior year one-time items related to IRA manufacturing credits and the net insurance proceeds from the impact of the FY '24 tornado.

You can also see the effects of the tax rate and currency on EPS with taxes of negative $0.06 and currency neutral as the weaker U.S. dollar is offset by favorable transactional FX related to Bolivia recorded in the prior year. Other reflects lower interest income, partially offset by lower share count.

Turning to Slide 11 regarding our first quarter outlook. We expect Q1 sales to be between $465 million and $485 million, with volume ranging from negative 7% to negative 3%, price and tariff surcharge realization of approximately 4% and 2% positive impact from foreign exchange.

Our Q1 range reflects a volumetric decline that is generally in line with our historical norms and also includes a sequential step-up from foreign exchange and price. We expect adjusted EPS in the range of $0.20 to $0.30. The other key assumptions for the quarter are noted on the slide.

And with that, I'll turn it back over to Sanjay.

Thank you, Pat. Turning to Slide 12. I want to take a moment to reflect on my first year as CEO and provide a framework for the future. During the year, I spent a lot of time with customers and employees across both segments. My focus was to learn about the broader enterprise and continue to identify opportunities for improvement, which I'll talk about in a moment.

We continued our focus on growth, winning key projects in defense and AI power generation, among others. We made progress on $100 million fiscal '27 cost-out target, exiting fiscal '25 with approximately $65 million of annualized savings. We strengthened our capabilities in lean tools by conducting over 35 Kaizen events company-wide and strategic growth projects, such as our Digital Customer Experience initiative by expanding our partnerships with the investment in Toolpath, building upon our existing relationships with Autodesk and ModuleWorks.

We completed our first portfolio action with the sale of our Goshen facility. Additionally, in line with the plans we laid out at Investor Day in 2023, we executed footprint actions that included 2 site closures.

I also strengthened our executive bench, bringing in Dave Bersaglini to lead the Metal Cutting team and promoting Faisal Hamadi to run Infrastructure. One of the things that I have realized during this first year is just how much opportunity for improvement Kennametal has. In order to unlock that value, we must fix the structural cost issues holding back our performance.

Additionally, it has become apparent that modernization, while necessary to upgrade our operational and technical capabilities, resulted in more capacity than current market conditions support. These factors drove us to look at our strategy and long-term goals differently. And while we remain committed to our value creation pillars, we are prioritizing rightsizing capacity and our cost structure to set the company up for long-term success.

Let me elaborate here. Previously, we committed to 3 to 5 plant consolidations based on a set of assumptions that included 1% to 2% market CAGR. Frankly, that assumption is no longer relevant due to continued market pressure. As a result, capacity optimization remains one of our top priorities with the goal to reduce our global footprint across both businesses. This includes consolidation of operations and maximizing the efficiency and utilization rates of all locations. The plan is to complete this in 2 phases. Phase 1, complete 4 closures by the end of fiscal '27 with an updated cost savings of $125 million, exceeding our original target by $25 million. We now expect this program to incur cash restructuring costs of $125 million.

Phase 2 will result in the reduction of 2 additional facilities by the end of fiscal '28. Together, these 2 phases reflect 6 total consolidations, which exceeds our previous target of 3 to 5 outlined at Investor Day and extends the overall time line by 12 months.

These actions are complex, will take time to complete and need to be thoughtfully executed to minimize customer disruptions. We believe these actions will enable us to operate efficiently in the current environment and still maintain flexibility for a more robust recovery when that does occur. This is an important step toward addressing our structural costs and should help ease the margin pressures caused by current low volumes.

In addition, we will continue to advance our initiatives focused on above market growth and continuous improvement while also evaluating opportunities to enhance our portfolio. By taking this disciplined approach, we can advance our near-term priorities while also moving forward with our full value creation strategy for the long term.

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

[Operator Instructions] And our first question today will come from Angel Castillo with Morgan Stanley.

Just a quick question maybe on the fiscal year '26 outlook. Can you provide just a little bit more color on kind of what you're seeing maybe fiscal 1Q to date and just how that kind of informs your views on the segment outlook for the full year?

Yes. Sure, Angel. First, let me start by saying we have taken a balanced view on our outlook for '26. As we looked at the market indicators -- we cite industrial production index, PMI, and also we talk to customers, we look at the all rig counts and all that. So overall, what we see, like I've said before, mid-single-digit declines in Transportation, Oil & Gas and Earthworks, Aerospace & Defense growing into low double digit.

So I think we are kind of seeing similar start to the year, like what we are projecting here for the full year. So at this point, pretty much on track to what I will say a midpoint.

Got it. That's helpful. And then I wanted to touch on just the discussion about the shift in strategy to maybe more kind of portfolio optimization. I guess the way I'm kind of reading that, and correct me if I'm wrong, but just the changes and maybe more focus on cost and production footprint seems to maybe screen as a little less conservatism given near-term demand and more kind of a structural challenges that need to be kind of fixed.

Can you maybe talk about maybe 2 sides of that? Like how much of that is just Kennametal's positioning, given -- I kind of thought you would probably be better positioned for the domestic market versus competitors. And so maybe how much of it is just specific to Kennametal versus maybe more macro factors where you're seeing just overall kind of slowdown in production or that you think will persist longer than kind of the near-term kind of dislocations we've seen?

Yes. Sure. Yes, Angel, I think it will be a combination of both. I do think that -- we have seen 2 years of slowdown in the market, and now we are projecting even volume decline in fiscal '26. So of course, there are a lot of different factors out there. It's very difficult to project calendar year '26 at this point. But based on what we have available at this point, we have taken a balanced approach on that.

However, we also know that the things that we are doing with respect to rightsizing capacity and cost structure, these are going to be sustainable changes. We're making changes structurally. And we are also prepared for volume to come back. And we do believe volume will come back because we do participate in a lot of end markets that still have good long-term prospects.

And our next question will come from Julian Mitchell with Barclays.

Maybe just wanted to start with the fiscal '26 outlook. So maybe help us if you can with any kind of seasonality of earnings first half, second half and what's embedded on the top line?

And also when I'm looking at that Slide 10, which is very helpful, on the EPS bridge, maybe put a finer point on, I'm not sure, maybe tariff headwinds, because it looks like your guidance embeds no operating margin expansion. Or perhaps operating margin is down in fiscal '26. Perhaps tariffs are a part of that. I think that was a $0.04 headwind in the June quarter. Maybe help us understand what's embedded for the full year ahead.

Yes. So maybe the best place for us to start -- I think I'll hit all of your kind of questions here, Julian -- is if we just think about the business, I'll say, starting from a sales volume perspective. As you think about where we ended Q4 at about $516 million worth of revenue, you kind of have to normalize that for the divestiture that we had during the quarter. And if you do that, you'll get to a number that's closer to a $510 million. And then from that point, right, we would see, I would say, normal seasonal sequential development volumetrically. And you know we generally talk about being down 8% to 10% Q1 to Q2 -- or excuse me, Q4 to Q1.

And so we expect that volumetric decline. But layered in on top of that, we're going to have some tailwinds coming from pricing and tariff surcharges as well as favorability from an FX perspective. And so that kind of sets you up from a seasonality perspective in Q1. And on that basis, you kind of roll forward. We're anticipating the year pretty much rolling out in a normal sequential pattern throughout the year.

Now I think it's important to kind of think about that. Obviously, we've talked about having some unfavorable volume as we move throughout the year. But on the other side of that, we've had a pretty significant uptick in tungsten costs over the last probably 4 or 5 months. There's a significant amount of pricing that will come about as part of that as we move through the year. And I would say from an earnings perspective as well, we're going to see a pretty normal cadence of about 40% of EPS in the first half, about 60% of EPS in the back half.

And so while you got a lot of toing and froing going on here, some big things going on, I'd say at the top level it looks like a pretty normal pattern for the entire year.

Getting back to your question with respect to tariffs, we did have a $0.04 headwind as we expected. I think we had talked about a potential $0.05 headwind in Q4. Moving into Q1 and then for the balance of the year, either through operational ways or through our surcharge, we are covered on tariffs as they stand right now at the beginning of August in terms of what's been announced and in place at this point in time.

And so obviously, that's a coverage issue. So yes, you're going to see a little bit of margin compression relative to the tariff situation.

And then just my second question, maybe confirm is the margins in your EPS guide -- midpoint are operating margins sort of down a bit? I just wanted to confirm that in fiscal '26. And Sanjay, I think people on this call and investors have heard half a dozen restructuring programs at Kennametal in the last couple of decades. For various reasons, those haven't generated sustainable margin expansion. Maybe any pointers from you as to how you think this plan is different in the confidence of it being able to deliver some kind of sustained margin expansion?

Yes, sure. I think, Julian, the first part -- again, Pat can jump in on that one, too. But on the operating margin, if you look at the bridge, we are projecting operating margin improving in '26. There are other factors that you can see in the EPS bridge.

Now coming to your question, a very good, obviously, a valid question. What I can speak to is from the time of Investor Day what we have said about the $100 million target, and now we have implemented $65 million and then projecting all the way to $125 million, based on the details that we are managing, I'm very confident that we are taking the actions which are very structural, whether it's a footprint related or organizational structure changes or our material cost sourcing-related improvement projects, productivity, which are sustainable.

So I feel very confident that these improvements are sustainable. And when the volume does come back, we'll see the bigger impact of that. Obviously, over the last 2, 2.5 years, we have seen a huge negative impact of volume. So it's not showing up in our overall performance. But I'm confident that what we're doing is going to stick.

Just to clarify on the operating margin there, Julian, Sanjay referenced it up. That's if you pull out some of the positive one-timers we had in fiscal '25 relative to the tornado effect and the tax credit on the tungsten, I think once you normalize those things out, that's up. But if you keep them in, it will be modestly down.

And our next question will come from Stephen Volkmann with Jefferies.

Maybe this is a Pat question. Tungsten is obviously up actually a lot here recently. Normally, that's a pretty strong positive correlation with your margins, but it doesn't seem like you're really factoring that in for FY '26. Am I thinking about it the right way?

Yes. I'd say if we think back, let's call it -- talk about a normal cycle, Steve, we would see tungsten prices positively correlated with higher, I'll just say, industrial production or activity in our end markets.

And so one of the things that's unique at the moment is we are seeing a pretty significant ramp-up in tungsten costs. We will be able to absolutely pass that on to our customers, but we're not getting the added benefit at the moment in terms of the additional volume in the end market. So this situation is just a little bit different.

Now as you think about that from a margin perspective, I would say absolutely as we think about infrastructure margins, specifically in the first half of '26, we will see some lift in the margins as we always get, that, if price starts coming up, raw material costs remain subdued. As you know, we'll get -- as we get to the back half of the year, we'll get more neutral.

And so based on where tungsten sits right now and the recent pricing trends we've had, I would expect that as we move into Q3, we would see neutrality happen somewhere latter half of Q3 and then be fully neutralized in Q4. But we'll know more as the weeks go along in terms of what the development from a tungsten price perspective is here out.

Okay. And then maybe one for Sanjay. It doesn't seem like your competitors or your distributors are getting quite as much of the headwinds as you are. And I'm curious, as you've done your first year review, are there just pieces of this business that you shouldn't be in that are sort of -- it's time to 80-20 this thing rather than just shut factories and actually exit certain low-performing businesses so you can kind of clear the decks for growth when that comes back?

Yes. A good question. Look, first of all, I think our competitors and others have only talked about the calendar year '25. At this point, I believe that there is alignment on when you look at the next 6 months. I do think that transportation, if we look at the OEMs, they have come out in U.S. mid-single-digit kind of decline for second half of this year.

When you look at the oil & gas majors, they have also talked about that they are not really planning to really invest a lot more on new oil rigs and things like that. And then when you look at the earthworks and mining -- so I think if you look at these 3 industries, transportation, oil & gas and earthworks, we are very similar in what we're seeing from our customers.

In aerospace, defense, including space and defense, we are doing quite well there. We will expect to take advantage of the market growth, but also on top of that are winning a little bit bigger share of the wallet. So I think that our outline for next 6 months will be very similar.

We are taking it next -- following 6 months. At this point, yes, there could be some argument that we -- who knows what's going to happen in calendar year '26. But we believe that we have taken a balanced view in overall projection.

Now coming to your other question, should we exit some of the business? Of course, we have spoken about that. A year ago, I talked about portfolio optimization. So we are looking at our product and business mix and making sure that we improve our performance. And we have taken some actions and the actions -- we continue to work on things. Many of those will include organic actions to improve performance of those areas where we think we need to do more.

And our next question will come from Tami Zakaria with JPMorgan.

My question is on the energy end market outlook. I think you're expecting flattish for this fiscal. Does that embed any pickup in rig counts in North America? Or essentially, what's driving that flattish outlook for energy?

Yes. A good question, Tami. I think it's kind of buried in our information there. Overall rig count, we do expect it to come down by mid-single digits. One of the reasons again we are projecting flat because material cost with higher APT price and all that, and a lot of our products that go into oil & gas application are very heavy on material content. So as a result, at this point, from a revenue perspective, we're saying flat, but we know that from a piece volume perspective, it will be down.

Understood. That's very helpful. And then similarly for aerospace & defense, I think you're expecting up high single digit. Is the expectation that it's stable high single-digit growth throughout the fiscal year? Or do you start out slow, but then get better? Any seasonality to think about for that end market?

I think besides the normal seasonality that happens, we are basically expecting at this point aerospace & defense to continue to get better as the supply chain constraints have gotten better and also OEM production have improved. At this point, definitely, Boeing production has been continuously improving. I think there are some challenges with European-based OEM in terms of supply chain and the strike and things like that, that they mentioned in their earnings call. So I do believe those things should be resolved as the year progresses. So at this point, our projection on aerospace, defense, Tami, is low double-digit growth.

[Operator Instructions] Our next question will come from Steve Barger with KeyBanc Capital Markets.

The $2 billion revenue guide is the fifth year at this level, plus or minus about $50 million. And as you noted, volume has consistently been under pressure the last couple of years despite the new wins you talk about. Has competitive pressure increased? Or are you seeing a structural decline in cutting tool demand in some of your end markets?

Yes, Steve, overall, I think volume decline in transportation, oil & gas over the last couple of years is very palpable, right? I mean you can see it in all different data points. And I think that's what we're seeing.

As far as if there is a competitive pressure or things like that, we have also demonstrated in the last 2.5 years, where we have the public peer data available, that we are able to compete and outperform and, at the minimum, match the performance. So we don't think that we're losing any share. In fact, we believe that we are winning share.

And at this point, the way we are also positioning ourselves in aerospace, defense, going forward, we will -- we expect to win more share there. So I think that it is a broader market situation. And as far as overall the addressable market situation, by nature, this business does have some of that built because our job is to improve our customers, improve performance from tooling. So that will put some pressure, but there is plenty of opportunities out there for us to maximize.

And I think overall, last 2.5, 3 years, we have not seen a cycle, up cycle. Generally, cycles last 6 to 8 quarters. This is very unusual what's going on. But of course, we all know a lot of different factors, including now trade policies and other things. So long term, we still feel positive about outlook. But near term, we do know that there are challenges out here.

Okay. And the structural cost changes you're facing aren't new. This has been a restructuring story for years. So I wanted to ask a question about the Board. Can you talk about their sense of urgency around these challenges? What's been the tone in the last few meetings? And with the average tenure of the Board being about 10 years, is it maybe time to get some new thinking in the room?

Yes, there is a very high sense of urgency, Steve, in that regard. And that's why when we talk about unlocking the future value in my last slide, we are -- we know that we need to do more on above market growth and lean transformation and also improving our overall portfolio. But we're emphasizing rightsizing capacity and structural cost actions because of that sense of urgency.

So management team and Board are very much aligned. We're taking a very balanced but also very -- with high sense of urgency these actions.

Steve, I will only add to that, that just from a Board composition perspective, right -- you noted the tenure there. I would just simply note as well we've got a couple of new people on the Board here as well. So there has been some recent additions to the Board, bringing in new perspectives and experiences too.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Sanjay for any closing remarks.

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

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