Kennametal Inc (KMT) 2025 Q2 法說會逐字稿

Good morning.

I would like to welcome everyone to Kennametal's second-quarter and fiscal 2025 earnings conference call.

(Operator Instructions)

Please note that this event is being recorded.

I would now like to turn the call 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 2025 results.

This morning, we issued our 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 start the call today with some remarks regarding our recent announcements followed by a review of the quarter and some end market commentary.

Then Pat will cover the quarterly financial results as well as the fiscal '25 outlook.

Finally, I'll make some summary comments and then open the call for questions.

Now, let's start with the two announcements we issued in mid January.

The January 14 announcement highlighted actions we are taking to address our investor day commitments around plant closures and navigate current market conditions.

In support of our commitment to long term competitiveness, we announced actions to reduce our structural costs and our footprint within the metal cutting segment.

We announced the closure of a facility in Greenfield Massachusetts and the consolidation of two facilities near Barcelona, Spain into a single modern facility.

The operations in Greenfield Massachusetts are expected to cease in April 2025 and the plant closure is expected to be substantially complete by December 31, 2025.

The consolidation of Barcelona, Spain, facilities are expected to be substantially complete by June 30, 2025.

Additionally, in an effort to mitigate the current market conditions mainly in EMEA, we announced a global reduction in professional workforce.

These combined actions are expected to deliver annualized run rate, free tax savings of approximately $15 million.

By the end of fiscal 2025 we expect pre tax charges of approximately $25 million in connection with the execution of these actions.

The breakdown is as follows.

Approximately $10 million is for cash related facilities charges, approximately $5 million is for non cash facilities charges and approximately $10 million for severance related cash expenditures.

These facility closures and other cost actions keep us on track to deliver our commitment to close three to five plants and achieve $100 million cost savings by fiscal '27 that we are committed to at our investor day in September 2023.

The second announcement was an organizational change within the infrastructure segment effective January 20, Faisal Hamadi was named President of the infrastructure segment reporting to me.

Faisal succeeded Franklin Cardenas who served in that role for the past five years.

I want to thank Franklin for his contributions to Canem and wish him the best.

Faisal has been with the company since July serving as the Vice President of value creation systems.

Prior to that, he served in various roles with increasing responsibility at Eaton Corporation since July 2007.

His most recent role at Eaton was the general manager of its $600 million hydraulics and actuation portfolio.

Additionally, he held positions in finance sales and manufacturing operations prior to his general manager role.

Faisal is a great addition to the infrastructure team, bringing strong and well rounded business experience in commercial operations and general management.

He is a strategic thinker and true collaborator and it is already hard at work with the team as they continue to grow and improve our infrastructure business.

Additionally, continuous improvement remains an important focus area for us.

So Faisal's value creation systems responsibilities will be integrated with existing roles at Kennametal.

This will provide a strong alignment between business operations and improvement efforts across the company.

Now turning to our results on slide 3.

Let me begin by saying this was a disappointing quarter from both a sales and profitability perspective, especially in metal cutting from an industry and macroeconomic viewpoint.

Our sales continue to be impacted by challenging market dynamics in our second quarter.

Market conditions worsen further in em and that is impacting several of our end markets.

Additionally, industrial production in the us remains soft together.

These factors led ourselves to come in at the low end of our expectations for the quarter as we have said before.

While we cannot control external factors like these, we focus our efforts on things we can control.

For example, the announcements in mid January that I just talked about not only align with our longer term objectives, but they also demonstrate our commitment to positioning the company for competitiveness and improved profitability.

Now for our quarterly results sales decreased 3% year over year.

At the segment level, infrastructure decreased 4% organically while metal cutting was down 7%.

On a constant currency basis, America's sales were flat 0%.

Asia Pacific sales decreased 3% and EMEA declined 7% organically.

This marks the fifth consecutive quarter of negative organic growth as a reference point.

Historically, cycles tend to last four to eight quarters while managing near term challenges, we remain committed to executing on our strategic priorities to drive above market growth, continuous improvement initiatives, targeting margin and working capital improvement and to optimize our product and business portfolio.

We have more work to do across all these areas and look forward to updating you as we make progress on each moving now to our end markets.

By end market, aerospace and defense grew 14%.

Energy grew 1%.

General engineering declined 4%.

Earthworks declined 7% and transportation declined 9%.

Transportation and general engineering were largely impacted by market conditions in EMEA and to a lesser extent, the Americas primarily within the metal cutting segment in EMEA.

We have seen lower production volumes and realignment of investments among our customers in response to changes in ev subsidies.

In addition, there are two other contributing factors impacting the transportation and market broadly, consumer preference and infrastructure readiness.

But remember, we remain very well-positioned in this end market regardless of engine type.

With the strong product offerings and application support for internal combustion engine hybrid and full ev platforms in infrastructures, artworks market.

We saw lower mining capital investment in Asia while the Americas was impacted by lower mining activity.

Turning to profitability for the quarter adjusted EBITDA margin was 13.9% compared to 12.4% in the prior year adjusted EPS decreased to $0.25 compared to $0.30 in the prior year quarter.

Cash from operating activities, year-to-date was $101 million compared to $88 million in the prior year period.

Pre operating cash flow year-to-date was $57 million, up from $36 million in the prior year.

And finally, we continued our share repurchase program with $15 million of shares bought back during the quarter.

These results were at the lower end of our revenue expectations and in line with our EPS midpoint, we provided last quarter when looking at the current quarter results, a few general comments regarding the end market performance.

First, aerospace and defense continues to perform well.

We have seen a slight improvement in aerospace as production moves forward.

After the resolution of the recent strike order timing has driven the performance within defense mainly in EMEA second growth initiatives and energy offset the impact of lower incomes in the Americas.

Third mining activity in Asia and Americas continue to be soft.

Finally, the worsening market conditions in EMEA and the intuition of low PMI and IP levels in the US put pressure on both transportation and general engineering.

Turning to slide 4, I want to take a moment to provide additional commentary on our end market for the full year.

As a reminder, our updated outlook for the full year reflects the forecast of specific market drivers and general market conditions.

Both of which have weakened these market drivers combined with a strengthening US dollar and associated higher foreign exchange impacts were the main contributors to our lower full year outlook.

By the end market, the top section shows the assumptions we had in our prior outlook compared to our current outlook.

The bottom of the slide shows some of the key factors in what has changed by end market.

Let me call your attention to the general engineering, transportation and aerospace and defense and markets as those assumptions have changed.

First, general engineering, the key factors that drive our expectations are external IP forecasts for the US and EMEA and PMI data in China.

As I noted earlier, we have seen conditions in EMEA continue to worsen since the start of our fiscal year.

Prior, external forecast for IPI and EMEA was a slight improvement in the first half of calendar year 2025.

That forecast has now shifted to down slightly.

The US IPR forecast was also previously expected to be up slightly in the first half of this calendar year.

And that has not happened.

In fact, the latest data indicates a flat US market.

China IPI remains unchanged, taken together at the midpoint.

We now anticipate this end market to be down slightly year over year as compared to flat previously communicated.

Second transportation, the key external indicators, we track our IHS light vehicle production.

The prior IHS forecast was for vehicle production to increase 1% versus prior year.

And the most recent estimate is for production to be down 1%.

Once again, the pressure is primarily in India with a slight slowdown in the Americas.

It has been well documented.

The pressure OEMs in the EMEA region are facing given these production forecasts and the customer challenges.

We now anticipate that end market to be down year over year compared to up slightly as previously anticipated.

Aerospace and defense is anticipated to increase slightly now as the aerospace supply chain and production issues have been steadily improving.

The forecasted production levels are expected to increase slightly compared to a moderate assumption.

Previously defense continues to benefit from our growth initiatives.

The order patterns with these customers tend to be lumpy peer to peer, but we do continue to see the benefits of our efforts.

Finally, our expectations for energy remain relatively consistent with previous expectations.

Us land based rig counts are forecasted to decline and sentiment remains cautious while earthworks continues to experience normal seasonality in construction and mining continues to decline in China and lower us exports.

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

Thank you, Sanjay and good morning, everyone.

I will begin on slide 5 with a review of the second quarter.

Operating results sales were down 3% year over year with an organic decline of 6% partially offset by favorable workdays of 3%.

As Sanjay discussed, sales this quarter were at the lower end of the expectations we provided last quarter.

Relative to those expectations, we experienced continued pressure most notably in EMEA and the Americas which impacted our general engineering, transportation and earthworks and markets.

Energy was a bit stronger than we had anticipated due to project volume year over year, we experience pressure in most end markets and regions.

With the exception of aerospace and defense and energy, I will provide more color when reviewing the segment performance in a moment adjusted operating expense as a percentage of sales increased 100 basis points year over year to 22.7%.

Adjusted EBITDA and operating margins were 13.9% and 6.9% respectively versus 12.4% and 6% in the prior year quarter.

During the quarter, we realized approximately $6 million in savings from the previously announced restructuring program.

This action has successfully delivered annualized run rate, pretax savings of approximately $35 million.

Lastly, foreign exchange was flat.

This quarter, the adjusted effective tax rate increased year over year to 26.9% primarily driven by discrete items recognized in the prior year quarter, an unfavorable geographical mix partially offset by an increase in the advanced manufacturing production credit.

Under the inflation reduction act adjusted earnings per share was $0.25 in the quarter versus $0.30 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 positive $0.06. This reflects the absence of unfavorable price raw in the prior year and incremental restructuring benefits and $0.02 of an advanced manufacturing credit partially offset by lower sales and production volume, higher wages and general inflation.

We also received a net benefit of $0.03 of insurance proceeds related to the tornado that damaged our Rogers facility in the fourth quarter of FY24.

You can also see the effects of the tax rate on our results the year over year change, as we noted on our prior call was anticipated to be a $0.12 headwind and this was the largest driver impacting our PS performance currency and pension impacts on EPS are negative $0.02 and negative $0.01 respectively.

Other reflects a lower share count which contributed $0.01 slide 7 and 8 detail.

The performance of our segments.

This quarter reported metal cutting sales were down 4% compared to the prior year quarter with a 7% organic decline partially offset by favorable workdays of 3% by region a constant currency basis.

The Americas were flat.

Asia Pacific declined 1% and NAIA declined 10%.

America's year over year performance.

This quarter was driven by the execution of our growth initiatives in aerospace and defense offset by declines in the general engineering and transportation and markets.

Asia Pacific's decline was primarily driven by lower production in the aerospace and defense end market and reflects a slight decline in China.

A year over year decline reflects weakness in the transportation and general engineering and markets partially offset by strength in aerospace and defense.

Looking at sales by end market, aerospace and defense grew 7% year over year as our strategic initiatives continue to drive results along with easing supply chain challenges and improved build rates in EMEA energy declined 1% this quarter due to customer order timing in EMEA.

General engineering declined 4% year over year due to lower production activity primarily in EMEA and project timing in the Americas.

And lastly, transportation declined 9% year over year due to an overall slowdown in EMEA and the Americas partially offset by Asia Pacific project orders, metal cutting adjusted operating margin of 6% decreased 240 basis points year over year, primarily from lower sales and production volumes and higher wages and general inflation.

These factors were partially offset by pricing lower raw material costs and incremental year over year restructuring, savings of approximately $4 million turning to slide 8 for infrastructure reported infrastructure sales were flat year over year with favorable business days of 3% and favorable foreign currency exchange of 1% offset by an organic decline of 4% regionally on a constant currency basis.

EMEA sales increased by 5%.

The Americas were flat and Asia Pacific declined by 6%.

Rofin Ami was primarily driven by defense order timing and higher activity in earthworks partially offset by general engineering.

The decline in the Americas was primarily from lower mining activity and mine closures and earthworks offset by defense and energy project timing.

The decline in Asia Pacific primarily reflects lower volume and order timing in underground mining.

Looking at sales by end market on a constant currency basis.

We grew our aerospace and defense sales by 35% by continuing to execute on our growth initiatives in both EMEA and the Americas energy increased 2% mainly in Americas driven by project timing, partially offset by lower us land rig count.

General engineering declined 2% from lower industrial activity in EMEA, partially offset by ceramics in Asia.

And lastly, earthworks declined 7% from a customer mine closure and lower mining activity in Americas.

Lower mining capital investment levels in the Asia Pacific partially offset by higher activity in EMEA adjusted operating margin increased 670 basis points a year over year to 8.6% primarily due to a few factors.

The absence of unfavorable price raw in the prior year, a net benefit of $2 million from insurance recoveries related to the tornado that struck Rogers Arkansas facility in late fiscal '24.

The advanced manufacturing production credit under the inflation reduction act of approximately $2 million and incremental year over year restructuring, savings of approximately $2 million.

These factors were partially offset by lower production volumes and higher wages in general inflation.

Now turn to slide 9 to review our free operating cash flow and balance sheet.

Our second quarter year-to-date net cash flow from operating activities was $101 million compared to $88 million in the prior year period.

The change in net cash flow from operating activities was driven primarily by working capital changes partially offset by lower net income compared to the prior year period.

Our year-to-date free operating cash flow increased to $57 million from $36 million in the prior year.

Primary working capital this quarter was down from the prior year.

The company continues to focus on optimizing inventory levels and remains focused on driving improved working capital on a dollar basis year, over year, primary working capital decreased to $592 million and on a percentage of sales basis, primary working capital decreased to 31.3%.

Net capital expenditures decreased to $44 million compared to $52 million in the prior year quarter.

In total, we've returned $31 million to shareholders through our share repurchase and dividend programs.

We repurchased 525,000 shares or $15 million in Q2 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.

Our commitment to returning cash to shareholders reflects confidence in our ability to execute 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 $821 million and were well within our financial covenants.

The full balance sheet can be found on slide 15 in the appendix turning to slide 10.

Regarding our third quarter outlook, we expect Q3 sales to be between $480 million and $500 million with volume ranging from negative six to negative 2% price realization of approximately 2% and the 3% negative impact from foreign exchange.

Let me share some details on the sales assumptions and trends impacting the Q3 outlook.

Our Q3 range at the midpoint reflects growth that is slightly below our historical norms.

Due to the current market conditions, the high end of our range remains in line with our normal sequential trends on a year over year basis.

Aerospace and defense growth continues.

I'll bet at a slower pace as North American OEM production takes time to recover energy.

And general engineering are anticipated to be down slightly.

Transportation is expected to decline mainly from lower volumes in EMEA and earthworks declined slightly due to continued competitive market conditions.

Foreign exchange and noncash pension expense is expected to have a negative impact of approximately $3 million and $1 million dollars respectively.

On a pretax basis, interest expense is assumed to be approximately $7 million and an effective tax rate of approximately 27.5%.

Lastly, we expected adjusted EPS in the range of $0.20 to $0.30 per share.

Now on slide 7, regarding the full year outlook, we now expect FY25 sales to be between $1.95 billion and $2 billion with volume ranging from negative five to negative 2% net price realization of approximately 2%.

And we anticipate an approximate 2% year over year headwind from foreign exchange, as Sanjay noted in his prepared remarks, the worsening market conditions in EMEA and the continued stagnation of industrial production in the US coupled with a strengthening US dollar are the key factors behind the updated outlook.

Foreign exchange sales headwinds are approximately $40 million at the midpoint of our updated outlook using the EUR as a proxy for us dollar strength.

We've seen the dollar strengthen from approximately a dollar rate to the EUR in the 1st and 2nd quarters to range of a dollar three to a dollar five.

In January year over year, we expect aerospace and defense to have slight growth.

Transportation to decline.

General engineering to slightly decline and earthworks and energy to decline slightly from a cost perspective.

We expect offset raw material wage and general cost increases on a dollar basis and that foreign exchange and noncash pension expense are expected to be headwinds of $8 million and $4 million respectively on a pretax basis.

Approximately $14 million of rollo savings from our previously announced restructuring initiative has been included and is anticipated to have a slight impact in the second half of the fiscal year.

Our outlook also includes the effects of the plant closures and the new restructuring actions which combined are anticipated to generate approximately $15 million of annualized savings for fiscal '25.

We've included approximately $6 million in savings related to these actions from a timing perspective, we anticipate a significant majority of the savings to be recognized in the fourth quarter.

Our current outlook includes the $0.02 associated with the advanced manufacturing credit.

As part of the Inflation reduction Act.

We anticipate that we will be eligible for similar credits in the future.

Assuming there are no changes to the existing legislation, depreciation and amortization is expected to be approximately $135 million.

We expect interest expense of approximately $27 million and an effective tax rate of approximately 27%.

We expect adjusted EPS to be in the range of $1.05 to a $1.30. On the cash side, the full year outlook for capital expenditures is now approximately $100 million and the outlook for primary working capital is approximately 30% by fiscal year end.

Taken together, we continue to expect free operating cash flow to be greater than 125% of adjusted net income.

Lastly, as it relates to the outlook, I do want to comment on the developing trade situation.

The outlook we provided today does not consider any additional costs favorable or unfavorable market developments that may occur as a result of the changing international trade landscape.

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

Thank you, Pat.

Turning to slide.

12.

Let me take a few minutes to summarize as I discussed at the top of the call.

We have clearly faced challenging market conditions so far this year and have been actively managing those challenges.

That said, I'm still disappointed with our most recent results.

And even though we didn't see progress this quarter, we remain committed to above market growth and margin improvement as it relates to growth, we are confident in our competitive position and are performing better or keeping pace with the overall market.

We continue to advance initiatives targeting customer wins in all our focused growth areas.

Now as it relates to margins, continuous improvement is a key strategic lever to improving our profitability.

For example, we recently hosted special kaan events in several of our large plants focused on process and efficiency improvements.

Those events yielded tangible results and played an important role in the evolution of our culture to one that prioritizes confused improvement in everything we do.

We have also recently taken actions to improve our cost structure which will help us achieve the targets.

We laid out at our September 2023 Investor Day, specifically the $100 million structural cost improvement plan by the end of fiscal 2027.

By the end of this fiscal year, we anticipate to be about 65% complete on achieving those run rate savings.

We will also continue to monitor market conditions and take appropriate mitigation actions as needed.

These actions taken together demonstrate progress, but we certainly know we have more to do.

We will continue to work on actions within all three pillars and leverage our competitive advantages to deliver long term shareholder value with that operator.

Please open the line for questions.

(Operator Instructions)

Julian Mitchell, Barclays.

Maybe just the first question around the sort of current demand environment I suppose, particularly in general engineering.

Because it seems as if the sort of soft data and things like surveys have been better for a couple of months, several short cycle, industrial peers of yours have talked about improving customer sentiment and, and some distributors have mentioned that as well.

Just wondered sort of what you're seeing in general engineering by region, realize it's a pretty tough environment, but you didn't change your sales outlook much for that piece.

So maybe just some update there and how demand has trended in the last couple of months in that piece.

So let me just first comment on overall what we're seeing right now.

Definitely some improvement, especially as we have gone to the second half of January, our order incoming rates have improved and of course our bill rates also.

So there is a definitely sequential improvement.

We are seeing.

However one of the things that you see in the outlook that was based on our assumptions, early in the year in August, when we talked, that had assumed much more improvement in us.

And also in a computer improvement in China, India continued to grow Europe at the time, we were thinking that it will be challenges.

Actually, we kind of pointed that out, but things have got a little bit more challenging in Europe.

So I think that's why we reduced our overall outlook in terms of like second half, but we are seeing definitely things improving in the recent weeks.

And then just my follow up question.

When you're thinking, Sanjay, more broadly about the cost structure at Kenny Metal, and you have the extra measure announced January 14, but, sort of overall looks like operating margins this year for the total company.

You know, maybe running around sort of, 8%, 8.5% or so.

Yeah, that's lower than the 10 or 20 year average.

And that's with a lot of restructuring actions in the past 10 plus years, realized demand is soft and of course, that's pushing margins down a bit short term.

But is there a sort of a view that maybe another much broader plan might be needed with sort of multiple plants to get the through cycle margins higher?

Yes, Julian first, let me summarize again the things that we have already done.

And also, in process right now, as we mentioned, you know that we laid out $100 million cost structure type of actions in the investor day with the recent actions and announcements, we'll get to $65 million worth of that.

And of course, like you said, when we have shortfall in volume, not all of that is going to show up in the bottom line.

But we know these are the right things to do and we continue to do that.

But along with what you see in the restructuring numbers and all that, we also have been managing what I will call non head count related actions.

You know, where restructuring may not be involved, for example, short work week and other tools that we have at our disposal.

So we continue to work on that.

At this point, we will continue to monitor the market conditions and take necessary actions.

But in parallel, like I've always talked about that with continuous improvement pillar, we will continue to improve our overall margin and working capital.

Angel Castillo, Morgan Stanley.

Sanjay, I was hoping we could just go back to that first commentary around the improvement that you've seen in orders in the second half of January was that, was that specific to general engineering?

Was it more broadly, if it was just specific to general engineering, could you talk about the order trends you're seeing in some of the other key end markets in January as well as same kind of question before regionally?

Was that order pickup in any particular region versus broader trends you're seeing?

Yeah.

First of all, yes, that definitely consisted both general engineering and also other industries that we serve and markets, we serve one area where, we have again continue to monitor more closely.

Is the EMEA there also we have seen improvement in the last couple of weeks of January, but it is overall across the board.

And then maybe just in terms of the implied kind of fourth quarter guide, I think the EPS pickup is a little bit more substantial than you would normally see based on your 3Q guide.

And I think if I'm reading this correctly, the bridge would just be some of the savings that you start to get, in the fourth quarter.

So could you just help us understand maybe how much of it is just these savings starting to flow through versus any kind of, assumed kind of a rebound in end market demand?

Yeah, I would say a lot of that is going to be the savings from the additional restructuring program that really drives that improvement I would say beyond what we would normally experience in Q4, as you know, Q4 is normally our strongest profitability quarter.

In particular, just overall sales volumes tend to be higher and as well as in the infrastructure business, that tends to be the heavy quarter for construction season which drives some additional volume through the infrastructure business.

Steve Barger, KeyBanc Capital Markets.

Sanjay, you've replaced both segment heads in the past six months.

Can you just give us some specifics for each of their plans for what they expect to do differently going forward?

Just trying to get a sense for how that management change should should result in broader changes.

Yeah, thank you, Steve.

I think the focus areas will be pretty much aligned with, what I have laid out in the slides, like the last slide which talks about our, delivering growth.

They, both bring very good, commercial strong experience, in product management, sales marketing and also, in confused improvement because they have both been a practitioner of that.

So we expect to confuse the improvements in margin and working capital through that and then on portfolio in terms of overall portfolio, we'll look at all different things, like we have talked before our product SKU optimization and all of that along with, what we need to do in terms of pruning the portfolio we have.

And along additionally, targeted M&A that really, really clear shareholder value.

So I think the foundational element in building further, strengthen our talent, those will be the focus areas.

So to that point, we've been talking about commercial excellence for years now.

Do you have product lines that are consistently break even or loss producing that are dragging on new product wins?

And if so why not start to divest those or, or shut them down.

As we have mentioned before, that we do not disclose a by product line margin and all that.

But just to give you a directional answer here, yes, we are looking at that and we are taking some actions and there are more things in the works right now and we don't communicate as we go forward, when we get to a point, we have a little bit more solid action and you know, date, but I can assure you that our overall goal here is to definitely improve our portfolio mix with both, pruning of the current portfolio that we have and also in our building and diversifying our overall revenue mix.

Now, if I could just get one last one, we've talked a lot over the years about the footprint, potentially being too big, too many rooftops.

Sales have been flat for quite a few years.

Now.

Is there any thought to accelerating that process and consolidating plants at a faster rate?

We are working very diligently on that, Steve.

I think, we have to balance between making sure that we maintain customer service and not lose business because of that.

So I think overall we'll continue to work on it, as you said, with lower volume, that definitely has been one of the focus area for us also.

Mike Feniger, Bank of America.

Just on the tariff side.

I understand it's a very fluid situation.

We're seeing some short cycle suppliers kind of starting to think about the China piece, just any color you can kind of help us on when we think of the China piece.

But also, Mexico, Canada, how we kind of think about where your footprint fits and how much gets imported to the US, any color there and how that would change your view on the pricing side versus the cost side as we kind of monitor this dynamic situation.

Yeah, Mike, a couple of things that I think are worth going over there.

I think, everyone's aware in terms of our absolute China exposure runs about 10% of the total portfolio, Canada is about half of that in Mexico is around $40 million right?

So in terms of the size of all three of those, I think a couple of things that are important as you put those numbers in context and that is on any of those trading relationships, you know, that tend to be bilateral.

So we tend to import some product, we export some product from the US as well.

One of the things that as we think about potential responses to, any tariff regimes that would be put in place would be we do have a global footprint, our ability to leverage that global footprint to offset potentially some of the cost of that as well as you know, in terms of what's happened here over the last couple of days, obviously looking for where are the exclusions?

Are they going to be broad based or are they going to be more targeted?

And then lastly, what's the competitive environment for the product?

So, we're monitoring that situation, those are kind of all the factors that we're taking into consideration.

Obviously we serve as global customers globally.

We want to be able to remain and do that and to do that responsibly to their needs and that good pricing and good cost for us.

And so we'll try to balance all those operational considerations out as this landscape evolves.

And just inventories.

It did seem like there was a little progress on the inventory side for your own inventories.

Just can you help us understand as you go to the end of the year?

And we kind of go and think about Q3 in the back half.

Where do you think your inventories are, are going to end up for the year?

Do you still take them out?

And then just a follow on question with that, given some of the reset on the end market commentary, how you feel like your customers on inventories or distributors are kind of feeling right now.

As we're kind of heading into, the first half of 2025 or for you guys to come back half of your fiscal year?

Yeah.

So just in terms of inventory and I'll put this in the context, also Mike in terms of the outlook.

So, yeah, I'd say, given where sales develop here in the quarter, our inventory levels are probably a little bit elevated where we would like them to be.

We're going to take some action here as we move through the balance of the fiscal year to constrain production a bit and bring inventory levels back to where we would want them to be.

Again, I'd say our objective as we think of total working capital is to drive that primary working capital to approximately 30% by the end of the year.

Now, obviously, in doing that, we're prioritizing, generating the cash from inventory efficiency, over, I'll say the non cash benefit associated with some fixed cost absorption.

So that's kind of how we'll think about that over the course of the year.

I think you'll see a little bit of that happen in Q3 from an inventory reduction perspective and then some additional happen here in Q4 as well as we think about inventory that's out there in the channel.

I don't think at this point in time based on what we're hearing from customers, the inventories are misaligned to where demand is.

I think inventory at the customer level is, pretty well controlled, even in spite of some of the changing market efficience.

Steven Fisher, UBS.

Just wanted to follow up on a comment.

I think you made about competitive dynamics in earthworks.

Sounded like there was some additional pressures there.

Can you just provide a little more color on that?

Is this a new source of, of competition?

Is it new dynamics that you hadn't been seeing before?

Can you just talk a little bit more about that, please?

It's not necessarily something new new.

I mean there are two parts of the equation here.

One is in China.

I think overall capital investment has been down.

So when that happens, that puts a little bit more pressure because market has excess capacity and also some of the things that we supply, including our drums products, those are more expensive, almost falls in the CapEx type of category.

So we are seeing some pressure there but we are, holding our own and competing quite well in the US.

There is definitely some reduction in production and also construction.

That's where we have seen some of the price pressure and we compete at times, we have actually also lost some business, but in many cases, customers have come back to us because of our overall value proposition.

So we do see some dynamics there.

And I apologize if you covered this earlier in the call.

But just in the context of your your broader guidance for this year, that's now updated in terms of the organic growth, thinking back to your Investor Day framework of of contributions from new products and, and market penetration.

Can you just update us on sort of what how you're thinking about that contribution for this year embedded within your organic growth targets?

I think what we discussed during the investor day, roughly let's just say 2% market, 2% strategic growth and 2% price.

At this point, we still feel very confident about, approximately 2% on price and approximately 2% on organic growth.

But market has been a bigger headwind.

So as we see, the unit volume definitely is affected by that.

So I think we are still thinking that way and overall when you look at the pure data and all that, that will also indicate that we are maintaining or performing slightly better than that.

This concludes our question and answer session.

I would 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.

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