Kennametal Inc (KMT) 2023 Q1 法說會逐字稿

Welcome, everyone, and thank you for joining us to review Kennametal's First Quarter Fiscal 2023 results. Yesterday evening, 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 Kelly Boyer, Vice President of Investor Relations. Joining me on the call today are Chris Rossi, President and Chief Executive Officer and Pat Watson, Vice President and Chief Financial Officer. After Chris and Pat's prepared remarks, we will open the line for questions. At this time, I would like to direct your attention to our forward-looking disclosure statement. Today's discussion contains comments that constitute forward-looking statements and as such, involve a number of assumptions, risks and uncertainties that could cause the company's actual results, performance or achievements to differ materially from those expressed in or implied by such statements. These risk factors and uncertainties are detailed in Kennametal's SEC filings. In addition, we will be discussing non-Gap financial measures on the call today. Reconciliations to Gap financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our forum page on our website. And with that, I'll now turn the call over to Chris.

I'll start today's call with a review of the quarter, our growth road map and some recent strategic wins. Then Pat will go over the quarterly financial results and the outlook. Finally, I'll make some summary comments before opening the call for questions. Beginning on Slide 2 in the presentation. The first quarter results highlight continuing growth and successful execution of our strategic initiatives, offset by macroeconomic factors such as high inflation, foreign exchange and regional headwinds in EMEA and China. Sales increased 9% organically year-over-year, offset by negative foreign exchange of 7% for a total sales increase of 2%. On a sequential basis, sales decreased by 7% from Q4 to Q1, in line with expectations and slightly better than the normal 8% to 10% seasonal decline due to the European summer holiday season and seasonal construction trends. Year-over-year, on a constant currency basis, all regions and end markets grew. The Americas led with double-digit growth. In Asia Pacific, rolling Covid lockdowns affected growth rates in China, but other Asia Pacific countries remain strong. In EMEA, sales were negatively affected by disruptions due to the Ukraine crisis as well as our exit from Russia in Q3 last year. By end market, aerospace, energy and earthworks all reported double-digit growth and transportation and general engineering grew mid-single digits. So overall, end market demand is holding up well, and we expect that to continue through fiscal year '23. That said, I know there are diverging views on the direction of the global economy, especially when looking beyond fiscal year '23. The good news is that whatever direction the global economy may take in the short term, we believe we are well positioned in all our end markets for the long term. We have a strong position in Aerospace and expect to continue to take share as aircraft build rates improve. We are well positioned in both renewable and traditional energy markets to take advantage of the investments that will be needed to meet growing energy demand. Our earthworks business will benefit from increasing government support for construction and elevated mining activity required to meet the immediate demand for coal and longer term to support the conversion to green energy. We see transportation remaining supply constrained with production at lower levels in the short term but gradually improving, and we expect to benefit from the leadership position we are establishing in tooling for electric vehicles. Lastly, we expect general engineering to benefit from the continuing growth in industrial production and our fit-for-purpose strategy. So, while we acknowledge the shorter-term uncertainty, we feel quite good about the longer-term underlying growth drivers in our end markets and in our ability to secure market-leading positions. Now looking to profitability for the quarter. As we discussed on our last call, macroeconomic factors are masking the underlying piece volume leverage we are getting from simplification modernization and our focus on operational excellence. In Q1, this volume leverage benefit was offset by macroeconomic-related factors, including a significant FX headwind and a decrease in pension income, which is noncash, due primarily to changes in the assumption on return on assets. In addition, we experienced temporary supply chain disruptions, which Pat will provide more color on later. In the meantime, I want to remind everyone that over the last several years, we have been successful at managing numerous supply chain and other operational disruptions resulting from the pandemic. So I'm confident we will fully mitigate these most recent challenges by the end of this fiscal year. As expected, operating expense as a percent of sales increased to 21.9% this quarter with annual salary increases being one of the drivers. Another major driver is increased travel to customer sites and product trials as customer eased COVID-19 restrictions for supplier partner visits. This is good news for our commercial and engineering teams as it affords them the opportunity to demonstrate our latest product innovations across our entire brand portfolio. While obviously in expense, we see these costs as an investment in growth and gaining share. I'll discuss on a later slide some examples of the returns we are getting on this investment. Taxes increased slightly year-over-year in the quarter to 27.5% due mainly to regional mix. Adjusted EPS declined to $0.34 compared to $0.44 in the prior year quarter, with the majority of the decline driven by the macroeconomic factors I discussed. Our free cash flow this quarter is consistent with our typical use of cash in Q1, driven by payment of performance-based compensation. Also affecting cash flow this quarter was an increase in working capital, mainly inventory due to higher raw material costs and increased safety stocks to mitigate supply chain related disruptions. Finally, another use of cash was the buyback of $19 million of shares, which brings the total amount bought back since program inception to $105 million. Our share repurchase program reflects the confidence we have to execute on our strategic initiatives for long-term value creation despite the current macroeconomic headwinds. Now let's turn to Slide 3 to review our growth road map. As you can see, the road map outlines the share gain initiatives, megatrends and other growth areas that comprise our commercial excellence strategy. First, of course, we are focused on growing our share of the current base business. In addition to innovative products and best-in-class customer support, the investments we made over the last few years on modernization and our ongoing operational excellence initiatives are enabling us to drive a larger share of wallet with existing and new customers. Beyond the base business, there are also megatrends that are well aligned with our technical expertise and market exposure, and therefore creating opportunities for growth in market segments such as electric vehicles, aerospace, digital and ESG. Also, and still within the organic growth areas of focus, we are now able to cost-effectively reach segments of our end markets and application spaces that we historically were unable to serve. This is due to simplification modernization as well as digital customer targeting and our digital customer experience platform. Examples of that platform includes supporting small- to medium-sized job shops, providing tooling for medical device manufacturers and supporting micro machining and fit-for-purpose applications. And finally, we have the opportunity to supplement our organic growth initiatives through acquisitions. Now please turn to Slide 4 for some recent commercial wins that are great examples of our success in executing on this road map. Again, this quarter, we had significant wins in aerospace, including providing tooling for a large aerospace engine supplier, solving this customer's technical challenges has opened the door for additional business. We also had a win with an aerospace customer for high-performance tooling used in the creation of specialized components for space stations and astronaut backpacks. This quarter, we again gained a larger share of wallet with existing customers, including an oilfield services customer, where we applied our material science and additive manufacturing capability to become the sole source supplier for the customer's new nozzle design, which cannot be manufactured using traditional manufacturing techniques. In the Process Industries segment, we collaborated with an OEM and leveraged our technical and manufacturing expertise to provide a plastic extrusion dye that significantly outperforms the competition in delivery, performance and technical support. Finally, in the rapidly growing electric vehicle segment, where we have established a leadership position in metal cutting, we broadened our reach with a win in our infrastructure segment by providing aware solution used in battery production. These are just some examples of impressive wins that demonstrate our ability to gain share and give us confidence that the investments we are making in commercial excellence, expense and innovation are paying off. Now let me turn the call over to Pat, who will review the first quarter financial performance and the outlook.

I will begin on Slide 5 with a review of Q1 operating results. Before I begin, please note that we did not record any non-Gap adjustments this quarter therefore, adjusted numbers are not presented. For today's discussion, year-over-year comparisons will be against the prior year's adjusted results. The quarter's results show that we continue to execute our initiatives in the face of headwinds from inflation, foreign exchange, lockdowns in China, disruptions in EMEA and temporary supply chain disruptions. Sales increased 2% year-over-year with 9% organic growth, largely offset by a 7% foreign currency headwinds. On a sequential basis from the fourth quarter, sales declined 7%, which is slightly better than our normal Q4 to Q1 seasonal decline. As Chris noted, adjusted operating expense as a percentage of sales increased 70 basis points year-over-year to 21.9% from higher salaries and travel and demonstration tooling to support sales growth. Adjusted EBITDA and operating margins were down to 15.9% and 9.8%, respectively. The year-over-year operating margin performance was due to higher pricing, offset by higher raw material costs and general inflation, higher manufacturing costs, including $5 million of temporary supply chain disruptions as well as foreign exchange headwinds. During the quarter, we experienced a few disruptions in our supply chain, including a force majeure from a key supplier to our infrastructure business, which required us to use higher cost supplies and materials and incur some labor inefficiency at a couple of locations. We expect these disruptions to abate by the end of the fiscal year. Pricing actions continue to offset raw material, wage and general cost inflation on a dollar basis. The effective tax rate increased to 27.5% due mainly to regional mix. We reported earnings per share of $0.34 versus adjusted EPS of $0.44 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on Slide 6. The year-over-year effect of operations this quarter was negative $0.02 due to the factors that I just discussed. You can also clearly see the effects of foreign exchange and the reduction in pension income on EPS with currency contributing negative $0.06 and the reduced pension income negative $0.03. Please note that the change in pension income is noncash and is driven by market factors in our US pension plan. This change will affect each quarter this year. Our US pension plan remains overfunded. Based on the recent spot rates, we expect foreign exchange to remain a headwind too. Slide 7 and 8 detail the performance of our segments this quarter. Metal cutting sales increased 9% organically year-over-year, offset by a foreign currency headwind of 8%. We achieved growth in all regions and end markets on a constant currency basis. By region, the Americas led at 13%, followed by Asia Pacific at 6% and EMEA at 5%. As Chris noted, Asia Pacific's growth was affected by COVID-19 lockdowns in China this quarter. However, we achieved strong growth in other countries in Asia Pacific. EMEA's year-over-year growth this quarter was negatively affected by approximately 400 basis points from our decision to exit Russia in the third quarter last year. By end market, aerospace led with strong growth of 25% year-over-year. General engineering grew 8% year-over-year and Transportation and Energy grew mid-single digits. Adjusted operating margin decreased 70 basis points from the prior year quarter to 9.5%. The decrease in margin was due primarily to favorable pricing, higher sales volumes at normal operating leverage and favorable product mix, which were more than offset by higher costs, including higher raw material costs, foreign exchange headwinds and temporary supply chain disruptions. Turning to Slide 8 for Infrastructure. Organic sales increased by 10% year-over-year, offset by foreign exchange of 5%. All regions were positive year-over-year, with the Americas leading at 13%, followed by Asia Pacific at 8% and EMEA flat. By end market, again, energy was up strong double digits at 20% year-over-year. The strength in energy was driven mainly by improvement in the US oil and gas market as seen in the continued increase in the US land-only rig count. Earthworks was up 11%, with broad strength in all regions and general engineering was flat, with strength in Asia Pacific, offset by a decline in the Americas and EMEA as a result of project orders in the prior year that did not repeat. Operating margin declined by 340 basis points year-over-year to 10.7%, with price and mix, plus the normal leverage on volume, partially offsetting increased raw material costs and higher costs, including temporary supply chain disruptions in foreign exchange. In Q1, price continued to cover raw material, wage and general inflation on a dollar basis. Now turning to Slide 9 to review our balance sheet and free operating cash flow. We continue to maintain a healthy balance sheet and debt maturity profile. At quarter end, we had combined cash and revolver availability of approximately $700 million, and we're well within our financial covenants. On a percentage of sales basis, primary working capital decreased to 31.7%. On a dollar basis, primary working capital increased year-over-year to $664 million, reflecting higher raw material costs and additional safety stock associated with extended supply chains. Net capital expenditures were $29 million, an increase of approximately $12 million from the prior year, but in line with our expectation of full year capital spending of $100 million to $120 million. Our first quarter free operating cash flow was negative $40 million, a decrease from the prior year quarter, but consistent with our usual first quarter outflow due to seasonal sales patterns and the timing of incentive compensation payments, paid a dividend of $16 million in the quarter. Finally, as Chris noted, we repurchased $19 million of shares during the quarter under our previously announced repurchase program. Since inception, we have repurchased $105 million of stock. This reflects our confidence in our strategy for growth and margin improvement. A full balance sheet can be found on Slide 50 in the appendix. Now let's turn to Slides 10 and 11 to review the outlook. Starting with the second quarter, we expect sales to be between $480 million to $500 million, which on a sequential basis and excluding additional foreign exchange headwinds would be in line with our normal seasonality of 1% to 2%. Sales range assumes $40 million of year-over-year currency headwinds and pricing actions of approximately 7%. We expect strength to continue in underlying demand in all our end markets, and we are assuming no significant disruptions from COVID lockdowns in China or energy uncertainty in EMEA. We believe customers will remain cautious in this environment and do not expect meaningful restocking at this time. Adjusted operating income is expected to be a minimum of $30 million, which reflects continued inflation headwinds against our strong pricing actions. Sequentially from the first quarter, raw material costs increased by approximately $15 million and then are expected to remain approximately at this level for the balance of the fiscal year. It is important to note that over the last 5 quarters, we have been aggressively raising prices ahead of experiencing the full effect of higher tungsten prices. In Q2, this favorability of price over material cost is negligible as raw material costs reflecting the current market cost now flows through the PNL. This price over material cost timing is normal and primarily affects the Infrastructure segment. Lastly, we expect the supply chain disruptions we discussed earlier to continue in the second quarter and then fully abate by the end of the fiscal year. Turning to Slide 11 regarding the full year, we expect FY '23 sales to be between $2 billion and $2.08 billion with volume flat to up 4%. Price realization of approximately 5% to 6% and a headwind from currency of approximately $130 million. This sales outlook assumes that there will be no significant disruptions from COVID-19 lockdowns or energy disruptions in EMEA. We expect adjusted earnings per share to be between $1.30 and $1.70. Even in this inflationary environment, price realization and our operational excellence productivity projects will continue to offset raw material wage and general cost increases on a dollar basis. The $130 million foreign exchange sales headwinds is expected to result in a $25 million operating income headwind. Additionally, lower pension income will be a headwind each quarter this year for a total of $14 million. We remain committed to driving strong execution on our operational and commercial excellence initiatives and expect to continue to see compelling results from our road map. Depreciation and amortization is expected to be approximately $135 million and our outlook for working capital and capital expenditures remains unchanged. Finally, over the full year, we expect free operating cash flow at approximately 100% of adjusted net income, in line with our long-term target, further demonstrating our progress transforming the company.

urning to Slide 12. Let me take a few minutes to summarize. The results this quarter demonstrate our ability to execute our strategic initiatives despite uncertainty in the economy and headwinds from inflation and foreign exchange. I'm pleased with our progress on growth initiatives as outlined on our growth road map and our wins each quarter continue to demonstrate our industry-leading innovation and deep understanding of our customers' applications. Our balance sheet is strong and the expected total year free operating cash flow gives us the flexibility to continue investing in our strategic initiatives. It also allows us to optimize capital allocation, including bolt-on acquisitions, dividends and share repurchases. As a reminder, we have a long history of consistently paying a dividend, having done so every quarter since being listed on the New York Stock Exchange in 1967. Our share repurchase program is further evidence of our confidence in the underlying intrinsic value of the company. Although the current economic environment limits visibility, we expect sales to follow our normal sequential quarterly growth patterns for the full year. Despite any short-term economic uncertainty, we feel good about the longer-term underlying drivers in our end markets and are confident in our competitive positioning

I was wondering if we can just focus a little bit on volume since I guess that's kind of where you get your leverage. Sorry, if I missed it, but what was volume up in the quarter and maybe price as well just to sort of round that out

Steve, volume would have been up year-over-year at what we said it was a $4 million effect on operating income positive. So what I think most analysts are modelling that leverage to be at 50%. So that would equal about a volume increase of around $8 million based on that model.

So overall, if you look at that, we got the $8 million approximately in terms of volume in there, the 7% of FX and then you kind of back into where the price would be based on those 2 numbers.

I guess, general engineering must have been down on a volume basis and EMEA as well. Can you just sort of comment on what you're seeing there?

What I would say for metal cutting in sort of Q4 to Q1, that the Americas sort of stay at a strong level, and that will continue through our forecast for Q2. EMEA did weaken slightly and AP stayed around the same. For transportation, it was pretty stable in all regions but as you know, it's still kind of lower levels in the current environment as they still are waiting for chips, et cetera. Aerospace did increase Q4 to Q1, and we expect that, that will continue at these higher levels through Q2, and actually, that's part of our forecast for the full year. Then energy kind of remained stable, Steve, at higher levels. So that was -- that continues to be a strength for us. On the infrastructure side, gen-en the US was steady and Pat had mentioned some of the factors that affected EMEA, which was the Ukraine Russian conflict. AP was steady. Then we had some pluses and minuses with large orders not repeating that distorted the number there but generally, the underlying business and infrastructure with the exception of the Ukraine conflict is pretty strong. Energy, of course, remains at strong levels. Then mining, and the underground mining projects are really, I would say, at an elevated level, maybe aren't increasing, but they're expected to stay at that higher level. Construction for Asia Pacific was strong in China. EMEA, I would say, is sort of flat sequentially and the Americas, of course, was down due to seasonality.

You said in your prepared remarks that you expected some of these unusual headwinds to mitigate by the end of this fiscal year. Are you talking about sort of the supply chain and the pension and kind of all these things? Or just maybe a little detail on what you're expecting to sort of be done with by the end of the fiscal year.

Yes, we were really talking about the temporary supply chain issues. We also gave guidance on what's going to happen with pension and FX for the full year. So I'll just direct you to the slides there. Yes, the temporary cost actions -- or temporary supply chain disruption, Steve, we started to see those obviously in the first quarter, and they were -- it turned out they were stronger than what we thought. Then we had a new one from a supplier, which is a force majeure. Frankly, I'm not even sure our suppliers saw that coming because it's actually a result of their supply chain. But in this current environment, certainly throughout the pandemic, we're used to putting in mitigation strategies and so I would say that we've got the plan in place to find alternative suppliers, and we're implementing that plan right now. The reason they'll abate is that as we move through the second half of the year, the mitigation plans that our suppliers have in place will allow them to continue to supply us and we can return to the normal source of supply, which would be a less costly mix. So we're calling it temporary because it's kind of a result of the current chaotic environment that we're operating in but those will abate by the end of the year.

I'm going to add on the pension, Steve, that we set those parameters in terms of the assumptions at the beginning of the year. So those numbers are pretty locked in for the year in terms of the $14 million headwind we have for the full yea

I just wanted to follow up on the two headwinds you called out on Slide 10 around the raw materials of EUR 25 million year-on-year and that supply chain one of $5 million in the second quarter. Maybe just help us understand what's dialed into that full year guidance for the second half for those two items in terms of year-on-year? I understand that raw materials sequentially starts to stabilize but just as we're thinking about year-on-year for those two items in the second half, how would you kind of steer us?

Yes. I would say on the supply chain, so for the first half of the year, it's about a $10 million subject, and it is expected to abate by the end of the year, Julian, and I think you can model somewhere between maybe $5 million to $7 million still in the back half of the year order of magnitude

On the raw material, you're correct. Once we kind of get to this level here in the second quarter, it should be basically at that level throughout the rest of the year sequentially. On a year-over-year basis, that will be a net headwind for us for the rest of the year from a material perspective, but that is inside our expectations of our price realization covering our cost inflation for the full year.

So that raw material headwind, it's sort of $25 million in Q2, the second half as a whole is something like that number, is it?

Yes but it's, again, covered inside that the entire price cut here

My follow-up question would just be around when we're thinking about the sort of volume outlook, it looks like you're assuming sort of steady year-on-year volume trends at the balance of the year, normal seasonality, I think, as you called out sequentially. When we're looking at any of the main end market moving pieces, anything expected to change sort of sharply as you go through the year? I guess transportation is one that I might have thought would be up more at some point than what you saw in fiscal Q1. I think a lot of the companies selling into transportation, their sales are up double digits right now, say, looking at Eaton Vehicle this morning, for example. So just wondered kind of any main moving parts you're calling out on end market swings for the balance of the year and anything particular in transport transportation?

I think on transportation, that may be an opportunity for us. We've sort of baked in that we've got, things are going to kind of stay steady where they are. Just because as I listened, for example, to Ford, I think last quarter, their chip issue wasn't as big an effect but GM's was and it switched around this quarter. So I think that's our best estimate. That could be some upside for us. If you look at our range for the full year of $2 billion to $2.080 billion. The way I would think about the drivers there is that Pat highlighted a couple of the significant risks, the energy potential energy issues in EMEA and then COVID lockdowns in China. Then underlying the baseline assumption, of course, is that there is still continued resilience in the US industrial production base. So I would say that what's going to kind of move us on that range of from the low end to the high end is probably these regional factors, whether they become worse or in some cases, they may actually improve. Those will be the big drivers as opposed to specific end markets.

I'm sorry to come back to the second quarter raw materials dynamic, I just want to make sure I understand it. I mean the step down from the first quarter, is that the message that the prices are no longer covering those the pickup in raw material costs? Is that the message? And if so, then why not? I may have misunderstood that.

I think you want to take a look at that pricing versus raw material dynamic over a longer-term basis, as we talked about in our prepared remarks, we've been very aggressive in the last 5 quarters going out and getting price. We've experienced that price realization in front of some of those material costs showing up in the PNL. Simply what's happening as we're moving into the second quarter here is that we -- I'll say we're on the same basis in terms of charging for our customers from a material cost perspective and where the material costs are. So as we get into the second quarter here, that's where we see the sequential headwind, but that will not be a headwind again as we move forward for the rest of the year. Again, once we think about that overall material cost, we've always been successful covering that with price

I guess just on the second half in terms of a revenue run rate I know you're just giving some of the puts and takes here. I mean I guess to what extent should investors be looking at things like the ISM new orders coming in below 50, that kind of suggests some lower revenues? To what extent is it new programs that you have in the works that you think are going to make up for any potential difference? Or I know you said there's maybe a little bit of upside in aerospace. Just trying to think about conceptually how are you thinking about some of these leading indicators and how that's factored into your revenue outlook and kind of daily run rate for the second half of the year?

We gave the guidance that we're going to sort of follow our normal seasonality from this point forward. So that would suggest that all things being equal, that seasonality is going to happen, regardless of what the IPIs do, unless the IPIs move significantly north or south. So our outlook is sort of the things kind oF the world has defined in Q1 kind of stays that world going forward. That will be the driver as to whether we're at the high end where it might improve or at the lower end where things get worse. In our outlook, we are assuming that the US continues its resilience. As you know, PMIs have been hovering somewhere around the 50% or the 50 mark for the US.

So the 5% to 6% pricing you're expecting for this fiscal, I was curious, is that uniform across the 2 segments? How about the region? Is it 5% to 6% across all regions as well?

We're not going to disclose that kind of information Tami, but I think the way to think about it is the answer is probably no, in general. Every customer is different and we start with the value-based pricing, of course, but there can be differences between infrastructure and metal cutting for sure. Even within those businesses, there's differences from customer to customer. So that's kind of an average for both businesses.

I want to make the point. It wasn't just a peanut butter spread of price, if you will.

The supply chain pressure is continuing. What are the main one or two pressure points now? Are they the saying they were, let's say, 2 quarters ago? Or anything new has popped up in the last quarter or so?

I guess if your question is from a customer perspective, we see some easing in supply chains in general. We just had a conversation about transportation and maybe that gets better. We're not expecting it to be, but it could potentially improve but there is some easing of supply chain pressures on our customers. Although it hasn't been that significant yet, we haven't seen it materialize into a substantial increase in orders. If you were talking about our temporary disruptions, I think we covered that on some previous questions.

Inventories was up, you flagged how you're building some safety stock. I'm just curious with the intro build, has that been positive to your absorption and your margin over the last quarter or 2? How do you see your inventories progressing through the year based on your demand outlook?

First of all, we put that inventory in place to make sure that we can maintain the right customer service levels, especially as our customers were coming out of pandemic, and we wanted to make sure we didn't miss an opportunity there. I think based on our current outlook, you have our forecast for primary working capital, so it's baked in there. I think in general, we would expect inventory to start to come down. I think in terms of the absorption issue, that would be more of a subject inside metal cutting, where they have a higher labor content in their cost. So there was a little bit of that inventory driving better absorption, of course. As the inventory bill reduces, I don't think it's going to have a substantial effect on the sort of first half profitability versus the second half profitability

I'm just curious on competition. Is there any intensity or increasing intensity on the competition side with maybe currency playing a factor with some of the foreign competitors. I guess what I'm trying to get to is the 7% pricing, is there anything preventing you guys from going further from pricing, not just the cost, but above the cost? Is it the competition? Is it working with your customers that are under pressure? Just curious if there's a ceiling there that you guys are starting to hit that won't let you price even further.

Yes, that's a good question and certainly a conversation we have with our sales folks. It is a balance. The magnitude of this price increase is much larger than I think the industry would normally have. That's understandable because we have to price commensurate with the inflationary environment. There is, Michael, there is limits and every customer has got to be treated differently. So that's the way we're approaching it. In some cases, we ultimately start with what value are we bringing to the customer and the more value we have, the more aggressive on price we can be. So we don't necessarily just try to cover the cost. We price based on value but even that has some limitations. So we're trying to do ultimately the way your question suggests, there is a balance between how much price you can get and then the volume effect, and we're trying to strike that right balance.

I just want to say, we do have a strategy from an in-region, for-region production perspective. So when we think about our currency exposure, much of our currency exposure is simply translational since we're trying to produce in region for the customers we're serving.

I just wanted to ask about the commercial excellence initiatives. What are the market indices you measure growth against? Or I guess, how can you tell us the team is performing in line with the cycle and then taking share on top of that? How are you measuring that?

We have a sort of a very detailed process whereby customer, we calculate what we think an entitlement is for that particular customer. So we'll know, for example, certainly, their current level of business. Then then we can tell how much of their business that we're getting on a sort of a per customer basis. So it's actually if you try to fly to a too high a level, Steve, it's hard to find just how much is market and how much is share gain. If you measure it on a sort of a per customer basis, that's the way we look at it. The other thing we can do with our distribution channel is we have targets where for our distribution channels about how much growth we're trying to get because obviously, they're dealing with tens of thousands of different customers. In that case, we do look at indices of based on regional manufacturing. We would say that our growth with that particular distributor in total has been greater than those indices, which gives us comfort that there's actually a pickup for us. So those are a couple of examples of how we try to look at it.

Do you feel like there's been good progress in the share gains as you've measured what you think the customers should be taking relative to what they are?

Yes, we do because, for example, in Aerospace, where we actually were starting with quite a low share and we don't have a huge share now. That one, we can tell that many of those tier suppliers and even some of the OEMs for certain types of their business, we just didn't have that business before, and they're now starting to direct that to us. I can tell you on the fit-for-purpose application space, which is a lot of small and medium-sized job shops, the growth in that portfolio of WIDIA that's been rebranded and repositioned for fit-for-purpose. That growth rate is faster again than what we see in kind of the general engineering and maybe even the Kennametal tooling. So those are all directional indicators that we're picking up share with these customers

That was one of my questions back on Slide 3 with the underserved markets and supporting small and medium job shops. Is that a function of incentivizing distributors? Or do you have new specific sales initiatives from your own internal sales group to drive growth there?

I think it's a combination of both. In some cases, some of those small job shops are so small, they're not even covered by distributors. So we have targeted digital marketing towards those small customers. In many cases, they may through our supply chain, our channel partners, they may direct their inquiries ultimately through the distribution channel. Together, we're working with our channel partners to make sure we're reaching those companies and whether it comes back through distribution or whether it comes directly through our website and we pick up the inquiry through our inside sales organization, it doesn't matter to us. We're still going to sell tooling. So it is definitely a team effort with the distribution channel.

So my first question, obviously, growth still remains pretty strong here in the Americas. I'm just curious, are you starting to see any benefit at all from the infrastructure stimulus package that got passed last November? Or do you expect a lot of that to still be on the come in calendar year '23?

I think it's still on to come. We really haven't seen any -- we've seen a lot of inquiries and quotes, but it hasn't translated into business. You said calendar year '23, I think we might see it in our fiscal year '24 because I'm not sure that even over the next 6 months or 8 months, the trend of just a lot of inquiries, but no business, I'm not sure that's going to change. So it seems to be taking longer for these to turn into projects. That could be a little bit because inflation is putting pressure on some of these projects. Also, frankly, some of these companies are still dealing with temporary supply chain issues. So for us, I think it's going to be more of a fiscal year '24 subject

I'm just curious that the force majeure that you referenced earlier. Can you maybe provide a little bit more specifics around that? Is it very much a customer-specific issue? What particular components were they supplying into you? Just any other color there would be helpful.

I would say that it's a raw material to one of our infrastructure powder-producing plants. So it's not specific to any customer because that infrastructure business really feeds the raw material that we use to make inserts and cutting tools in addition to the products inside infrastructure. So it's kind of applies across the whole business, but it's definitely limited to a supplier that's feeding a plant, a couple of plants, and that disruption sort of permenates through not only infrastructure, but there's a little bit of that knock-on effect into metal cutting but it's not affecting one customer. I would also emphasize that our customers actually are not going to see any disruption. This is really about, we've managed to put another source of supply and we avoided any production disruption. It's really though that, that alternate supply is more expensive and the faster we can mitigate it, the better

As I said, this quarter, it's another data point, I think, to demonstrate our ability to advance our strategic initiatives and also our ability to secure what I believe is really market-leading positions. Also just as a quick reminder, I encourage everyone to review our third annual ESG report, which was published in September and is posted on our website. As always, I appreciate your interest and support in Kennametal, and please don't hesitate to reach out to Kelly, if you have any questions.