Gold prices buoyed by tariff fears; US duties on 1-kilo bars spur supply concerns
Kennametal Inc. (KMT) reported its fourth-quarter earnings for fiscal year 2025, revealing a miss on both earnings per share (EPS) and revenue compared to analysts’ forecasts. The company posted an adjusted EPS of $0.34, falling short of the expected $0.38, while revenue came in at $516.45 million, below the anticipated $527.56 million. Following the announcement, Kennametal’s stock experienced a significant decline, dropping 27.26% to $20.99 in pre-market trading. According to InvestingPro analysis, the company currently shows a "FAIR" overall financial health score of 2.37 out of 5, with particularly strong scores in profit (2.84) and cash flow (2.78) metrics.
Key Takeaways
- Kennametal’s Q4 adjusted EPS of $0.34 missed the forecast by 10.53%.
- Revenue for the quarter was $516.45 million, a 2.11% shortfall from expectations.
- The stock price fell 27.26% in pre-market trading, reflecting investor disappointment.
- The company announced a cost reduction program targeting $125 million in savings.
- FY 2026 sales outlook set between $1.95 billion and $2.05 billion.
Company Performance
Kennametal’s performance in Q4 2025 was marked by a decline in organic sales by 4% for the fiscal year. The company continued to face challenges in industrial markets, with transportation and earthworks sectors showing signs of weakness. Despite these headwinds, Kennametal secured new projects in aerospace, defense, and AI power generation, indicating potential areas for future growth.
Financial Highlights
- Revenue: $516.45 million, down from the forecast of $527.56 million.
- Adjusted EPS: $0.34, a decrease from $0.49 in the previous year.
- Cash flow from operating activities: $278,000.
- Returned $122 million to shareholders through share repurchases and dividends.
Earnings vs. Forecast
Kennametal’s Q4 2025 results fell short of expectations, with EPS at $0.34 compared to the forecasted $0.38, a negative surprise of 10.53%. Revenue was also below projections, missing the mark by 2.11%. This performance contrasts with previous quarters where the company had met or exceeded expectations.
Market Reaction
In response to the earnings miss, Kennametal’s stock dropped 27.26% to $20.99 in pre-market trading. This decline is significant, placing the stock closer to its 52-week low of $17.30. The market’s reaction underscores investor concerns about the company’s ability to navigate current industry challenges and achieve its financial targets.
Outlook & Guidance
Looking ahead, Kennametal has set its FY 2026 sales outlook between $1.95 billion and $2.05 billion, with an adjusted EPS guidance ranging from $0.90 to $1.30. The company expects 40% of EPS to be realized in the first half of the year and 60% in the second half. Capital expenditures are projected at approximately $90 million. With an Altman Z-Score of 3.28 and a Piotroski Score of 7, InvestingPro analysis suggests strong financial stability. Subscribers to InvestingPro can access 6 additional exclusive ProTips and a comprehensive Pro Research Report for deeper insights into Kennametal’s financial health and growth prospects.
Executive Commentary
CEO Sanjay Chawbe emphasized the company’s strategic focus on structural changes and cost reductions, stating, "We are making changes structurally. And we are also prepared for volume to come back." CFO Pat Watson highlighted the company’s pricing strategies, noting, "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."
Risks and Challenges
- Continued weakness in industrial markets could impact future sales.
- Potential fluctuations in tungsten prices may affect cost structures.
- Macroeconomic pressures and supply chain disruptions pose ongoing risks.
- The company’s ability to achieve cost savings and efficiency targets is crucial for future profitability.
Q&A
During the earnings call, analysts raised questions about the impact of tungsten price fluctuations and the company’s structural cost reduction strategy. Executives confirmed no significant market share loss and reiterated their commitment to improving operational efficiency.
Full transcript - Kennametal (KMT) Q4 2025:
Conference Operator: Good morning. I would like to welcome everyone to Kennametal Fourth Quarter and Fiscal twenty twenty five Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. Please note that this event is being recorded.
I would now like to turn the conference over to Michael Pisci, Vice President of Investor Relations. Please go ahead.
Michael Pisci, Vice President of Investor Relations, Kennametal: Thank you, operator. Welcome everyone and thank you for joining us to review Kennametal’s fourth quarter and fiscal twenty twenty five 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 Pisci, Vice President of Investor Relations.
Joining me on the call today are Sanjay Chawbe, 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 eight ks on our website. And with that, I’ll turn the call over to Sanjay.
Sanjay Chawbe, President and Chief Executive Officer, Kennametal: 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 twenty twenty six 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 three, let me begin by highlighting some of the accomplishments the team delivered despite market headwinds. During the fourth quarter, our infrastructure team secured a $25,000,000 multi year award with a U. S. Defense customer.
In metal cutting, we secured wins in aerospace and 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 seized operations in Greenfield, Massachusetts and we consolidated facilities in Spain to advance our footprint rationalization efforts. We also recognized $6,000,000 in restructuring savings this quarter and we have achieved run rate savings of approximately $65,000,000 inception to date for all cost out actions at the 2025 and expect approximately $90,000,000 by the end of fiscal twenty twenty six. 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 cost 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 eight 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 and 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 $2.00 $8,000,000 Finally, we returned $122,000,000 to shareholders through share repurchases of $60,000,000 and dividends of $62,000,000 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 twenty twenty six outlook at the midpoint of our range. In aerospace and defense, we expect low double digit growth, reflecting higher OEM bill 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 twenty twenty six outlook.
Pat Watson, Vice President and Chief Financial Officer, Kennametal: Thank you, Sanjay, and good morning, everyone. I will begin on Slide four 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 and 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 and 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. Lower mining activity in Asia Pacific and The Americas was partially offset by higher construction in 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 $6,000,000 in savings from the restructuring program we announced in January. Additionally, we have increased this program and now expect approximately $35,000,000 in annualized savings, up from the $15,000,000 we originally communicated. At year end, we achieved $65,000,000,000 of run rate savings against the $100,000,000 target we set at our last Investor Day.
Adjusted EPS declined to zero three four dollars 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 $5,000,000 of shares bought back and $15,000,000 in dividends paid. The bridge on slide five shows the effect on EPS of operations, including all 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 $6,000,000 The $07 net benefit related to the tornado that occurred last year includes a $04 benefit from the charges incurred in the prior year and $03 from the net insurance proceeds received this year.
Currency impact of $04 which reflects transaction gains including a preferential Bolivia exchange rate. As discussed last quarter, unmitigated tariff costs were negative $04 of EPS. You can also see the effects of the tax rate which was positive $02 other reflects lower share count and interest expense which was neutral. Slides six and seven detail the performance of our segments this quarter. Metal Cuttings reported an organic sales declined 4% compared to the prior year quarter.
Regionally, excluding the effects of currency exchange, Asia Pacific was down 1%, The Americas declined four percent and EMEA declined 5%. Looking at sales by end market on a constant currency basis, Aerospace and 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 five fifty basis points year over year due to lower volumes, higher wages, inflation and net tariff costs of approximately $4,000,000 partially offset by price and restructuring savings of $4,000,000 Turning to slide seven for infrastructure. Organic sales decreased by 5% year over year with unfavorable business days and the effect of the divestiture percent 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 and 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 $7,000,000 net effect of the tornado, price and restructuring savings of $2,000,000 Now turning to slide eight to review our free operating cash flow and balance sheet. Our full year free operating cash flow was $121,000,000 compared to $175,000,000 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 2024. Net capital expenditures were $87,000,000 compared to $102,000,000 in the prior year. In total, we returned approximately $20,000,000 to shareholders through our share repurchase and dividend programs this quarter.
During the quarter, we repurchased 232,000 shares or $5,000,000 under our $200,000,000 authorization. And as we have every quarter since becoming a public company over 50 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 $840,000,000 of cash and revolver availability at quarter end. The full balance sheet can be found on slide 21 in the appendix.
Turning to slide nine 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 2026 sales to be between $1,950,000,000 and $2,050,000,000 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 2025 sales. On an operating income basis, foreign exchange is expected to be an $8,000,000 tailwind and non cash pension expense is expected to be a headwind of $5,000,000 Approximately $35,000,000 of restructuring savings has been included.
From a timing perspective, we expect these restructuring benefits to be fortysixty weighted first half to second half. We expect adjusted EPS to be in the range of $0.90 to $1.3 On the cash side, the full year outlook for capital expenditures is approximately $90,000,000 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 FY24 tornado. You can also see the effects of the tax rate and currency on EPS with taxes of negative $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 $465,000,000 and $485,000,000 with volume ranging from negative 7% to negative 3%, price and tariff surcharge realization of approximately 42% 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.
Sanjay Chawbe, President and Chief Executive Officer, Kennametal: 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 a $100,000,000 fiscal twenty twenty seven cost out target, exiting fiscal twenty twenty five with approximately $65,000,000 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 two site closures. I also strengthened our executive bench, bringing in Dave Bursalini 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 three to five 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 two phases. Phase one, complete foreclosures by the 2027 with an updated cost savings of $125,000,000 exceeding our original target by $25,000,000 We now expect this program to incur cash restructuring costs of 125,000,000 Phase two will result in the reduction of two additional facilities by the end of fiscal twenty twenty eight. Together, these two phases reflect six total consolidations, which exceeds our previous target of three to five outlined at Investor Day and extends the overall timeline by twelve 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.
Conference Operator: Thank you. And our first question today will come from Angel Castillo with Morgan Stanley. Please go ahead.
Angel Castillo, Analyst, Morgan Stanley: Thanks and good morning. Wanted to Hi, Joe. Hi. Just a quick question maybe on the fiscal year 2026 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?
Sanjay Chawbe, President and Chief Executive Officer, Kennametal: Yes, sure, Angel. First, let me start by saying we have taken a balanced view on our outlook for 2026. As we look at the market indicators, we cite Industrial Production Index, PMI and also we talk to customers, we look at the old rig counts and all that. So overall, what we see, like I’ve said before, single digit declines in transportation, oil and gas and earthworks. Aerospace and defense are 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 at midpoint.
Angel Castillo, Analyst, Morgan Stanley: 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 of kind of a structural challenges that need to be kind of fixed. Can you maybe talk about maybe two 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? Thank you.
Sanjay Chawbe, President and Chief Executive Officer, Kennametal: Yes, sure. Yes, Angel, I think it will be a combination of both. I do think that we have seen two years of slowdown in the market, and now we are projecting even volume decline in fiscal twenty twenty six. So of course, there are a lot of different factors out there. It’s very difficult to project calendar year 2026 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.
Angel Castillo, Analyst, Morgan Stanley: Helpful. Thank you.
Conference Operator: And our next question will come from Julian Mitchell with Barclays. Please go ahead.
Julian Mitchell, Analyst, Barclays: Hi, good morning. Julien. Morning. Maybe just wanted to start with the fiscal twenty twenty six 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 margins down in fiscal twenty twenty six, perhaps tariffs part of that. I think that was a $04 headwind in the June. Maybe help us understand what’s embedded for the full year ahead?
Pat Watson, Vice President and Chief Financial Officer, Kennametal: Yes. So, maybe the best place for us to start, I think I’ll hit all of your kind of questions here, Julien, is 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 $516,000,000 worth of revenue, you kind of have to normalize that for the divestitures that we had during the quarter. And if you do that, you’ll get to a number that’s closer to a $510,000,000 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 for 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 four or five 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 as 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 to ing and fro ing going on here from 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 $04 headwind as we expected.
I think we had talked about potential $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 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 see a little bit of margin compression relative to the tariff situation.
Julian Mitchell, Analyst, Barclays: Thanks a lot. And then just my second question, maybe confirm, is the margins in your EPS guide midpoint or operating margin sort of down a bit? Just wanted to confirm that in fiscal twenty twenty six. And Sanjay, I think people on this call and investors, they’ve heard half a dozen restructuring programs at Kennen Metal 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? Thank you.
Sanjay Chawbe, President and Chief Executive Officer, Kennametal: Yes, sure. I think, Julien, 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, very good, obviously valid question.
What I can speak to is from the time of Investor Day, what we have said about the $100,000,000 target and now we have implemented 65,000,000 and then projecting all the way to 125,000,000 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 project, 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 two, two point five 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.
Pat Watson, Vice President and Chief Financial Officer, Kennametal: Okay. Just to clarify on the operating margin there, Julien. Sanjay referenced the up. That’s if you pull out some of the positive one timers we had in fiscal twenty twenty five 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, will be modestly down.
Julian Mitchell, Analyst, Barclays: That’s very helpful. Thank you.
Conference Operator: And our next question will come from Steven Volkmann with Jefferies. Please go ahead. Great. Good morning, guys.
Steven Volkmann, Analyst, Jefferies: Maybe this is a Pat question. Tungsten is obviously up actually a lot here recently. Normally, that’s pretty strong positive correlation with your margins, but it doesn’t seem like you’re really factoring that in for FY 2026. Am I thinking about it the right way?
Pat Watson, Vice President and Chief Financial Officer, Kennametal: 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 would 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 2026, we will see some lift in the margins as we always get that 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 as we’ll know more as with the weeks go along in terms of what the development from a tungsten price perspective it is here out.
Steven Volkmann, Analyst, Jefferies: Okay. Thank you. 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 eightytwenty 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?
Sanjay Chawbe, President and Chief Executive Officer, Kennametal: Yes. Thank you, Steve. Good question. Look, first of all, I think our competitors and others have only talked about the calendar year 2025. At this point, I believe that there is alignment on when you look at the next six months.
I do think that transportation, we look at the OEMs, they have come out in The U. S. Mid single digit kind of decline for second half of this year. When you look at the oil and gas majors, they have also talked about that they are not really planning to really invest a lot more on new old rigs and things like that. And then when you look at the earthworks and mining, so I think if you look at these three industries, transportation, oil and gas and earthworks, we are very similar in what we’re seeing from our customers.
And aerospace defense, including the 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, winning a little bit bigger share of the wallet. So I think that our outline for next six months will be very similar. We are taking it next following six months. At this point, yes, there could be some argument that we who knows what’s going to happen in calendar year 2026.
But we believe that we have taken a balanced view in our 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 are 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 think we need to do more.
Conference Operator: Okay. Thanks. And our next question will come from Tamy Zakaria with JPMorgan. Please go ahead.
Tamy Zakaria, Analyst, JPMorgan: Hey, good morning. Thank you so much. Good
Pat Watson, Vice President and Chief Financial Officer, Kennametal: morning, Tami.
Tamy Zakaria, Analyst, 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?
Sanjay Chawbe, President and Chief Executive Officer, Kennametal: Yes. Good question, Tammy. 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 reason it’s 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 and gas application are very heavy on material content.
So as a result, at this point, from a revenue perspective, we’re staying flat, but we know that from a piece volume perspective, it will be down.
Tamy Zakaria, Analyst, JPMorgan: Understood. That’s very helpful. And then similarly for Aerospace and 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?
Sanjay Chawbe, President and Chief Executive Officer, Kennametal: I think besides the normal seasonality that happens, we are basically expecting at this point aerospace and defense to continue to get better as the supply chain constraints have gotten better and also OEM production have improved. At this point, definitely, the 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. 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, Tammy, low double digit growth.
Tamy Zakaria, Analyst, JPMorgan: Got it. Okay. Thank you.
Conference Operator: Our next question will come from Steve Barger with KeyBanc Capital Markets. Please go ahead.
Steve Barger, Analyst, KeyBanc Capital Markets: Thanks.
Conference Operator: Steve.
Steve Barger, Analyst, KeyBanc Capital Markets: Hey, good morning. The $2,000,000,000 revenue guide is the fifth year at this level plus or minus about $50,000,000 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?
Sanjay Chawbe, President and Chief Executive Officer, Kennametal: Yes, Steve. Overall, I think volume decline transportation, oil and 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 two point five 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’ improved 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 two point five, three years, we have not seen a cycle, up cycle. Generally, cycles last six to eight quarters. 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.
Steve Barger, Analyst, KeyBanc Capital Markets: 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 of the last few meetings? And with the average tenure of the Board being about ten years, is it maybe time to get some new thinking in the room?
Sanjay Chawbe, President and Chief Executive Officer, Kennametal: 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 the 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.
Pat Watson, Vice President and Chief Financial Officer, Kennametal: Steve, I would only add to that, that just from a Board composition perspective, 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.
Steve Barger, Analyst, KeyBanc Capital Markets: Okay. Thanks.
Conference Operator: And this will conclude our question and answer session. I’d like to turn the conference back over to Sanjay for any closing remarks.
Sanjay Chawbe, President and Chief Executive Officer, Kennametal: 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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