Kennametal Q3 Fiscal 2026 Earnings Call - Tungsten Surge Drives Upside to EPS, Pressures Cash Flow

Operator: Good morning. I would like to welcome everyone to Kennametal’s Q3 fiscal 2026 earnings conference call. Today, all lines have been placed on mute to prevent any background noise. After today’s speaker remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If your question has been addressed and you would like to withdraw it, please press star then the number 2. Please note that today’s event is being recorded. I would now like to turn the conference over to Michael Pici, Vice President of Investor Relations. Please go ahead.

Michael Pici, Vice President of Investor Relations, Kennametal: Thank you, operator. Welcome, everyone, and thank you for joining us to review Kennametal’s third quarter fiscal 2026 results. This morning, we issued our earnings press release and posted our presentation slides on our website. We will be referring to that slide deck throughout today’s call. I’m Michael Pici, Vice President of Investor Relations. Joining me on the call today are Sanjay Chowbey, President and Chief Executive Officer, and Patrick 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 in our Form 8-K on our website. With that, I’ll turn the call over to Sanjay.

Sanjay Chowbey, President and Chief Executive Officer, Kennametal: Thank you, Mike. Good morning, and thank you for joining us. I will begin with an overview of the quarter, including end market commentary, followed by a discussion on unit volume trends. From there, Pat will cover the quarterly financial results and the fiscal year 2026 outlook, along with an early look at fiscal 2027. Finally, I’ll make some summary comments, and then we’ll open the line for questions. Turning to slide 3. Let me begin by addressing some of the highlights from our strong third quarter. Our global commercial teams continued to advance our strategic growth initiatives. The Infrastructure team delivered solid growth. In construction, we saw volume growth from strong product performance and the advantage we have as a secure source of tungsten in a tight supply environment.

Additionally, we received large orders in our defense business, further securing ongoing growth in this market as we head into fiscal 2027. In Metal Cutting, we continue to increase our share of wallet with key accounts, especially in aerospace and defense, and build upon our momentum in energy from AI power generation initiatives. In general engineering, we have been winning new customers through targeted promotional campaigns and improvements to our digital customer experience, especially for our small to medium-sized customers. As you know, we continue to prioritize above-market growth as a strategic imperative, and these wins position us well in our key end markets. Turning now to the broader tungsten environment. Prices continued their unprecedented increase throughout the quarter, rising from approximately $900 per metric ton to $3,000 as the supply of material continued to be constrained.

This tungsten price and supply environment have created both challenges and opportunities. On the challenges front, we have seen a highly competitive market for material, but our supply chain has held up relatively well. We have and will continue to implement pricing actions in response to these rising tungsten costs and remain confident in our ability to secure that price. We are also focused on managing the primary working capital and balance sheet implications of higher tungsten costs. In terms of opportunities, our vertical integration has been a real strength in this market, providing us better supply chain control and flexibility compared to some competitors. For example, as competitors are turning away orders or extending lead times, we are well-positioned to capture business that is aligned with our strategic priorities.

During the quarter, we capitalized on these opportunities in each of our business segments, specifically Earthworks within Infrastructure and aerospace & defense in Metal Cutting. These new opportunities also facilitate shaping our product portfolio away from lower margin to higher margin solutions. As such, we are seeing a unique combination of three factors that are opening the door to sales opportunities. First, continued market recovery. Second, solid execution on our strategic growth initiatives. Third, a window of opportunity from the current tungsten market, which is likely to persist in the near term. Given those dynamics, we are prioritizing our time and attention on growth opportunities over restructuring initiatives in the near term. We are shifting the timeline for facility closure actions we had previously planned to complete in fiscal 2027. We will provide additional detail on the restructuring timeline as appropriate.

Even with that shift, we are still targeting approximately $110 million in savings from cost takeout actions by the end of fiscal 2027, which is $10 million above what we outlined at Investor Day. Let’s move to our quarterly results, which once again exceeded our sales and EPS outlook. Compared to outlook, sales were mostly driven by increased price realization and better than expected volume in both segments. EPS benefited from the additional price raw timing of $0.09, positive volume, and lower than anticipated tax rate. Year-over-year, sales increased 19% organically. Please note, this was our third consecutive quarter of organic growth, driven by additional price realization, strategic growth initiatives, and continued recovery in several end markets. Adjusted EPS increased to $0.77 compared to $0.47 in the prior year quarter.

Adjusted EBITDA margin was 20.8% compared to 17.9% in the prior year quarter. Cash from operating activities year-to-date was $70 million compared to $130 million in the prior year period. Free operating cash flow year-to-date was $18 million compared to $63 million in the prior year. Free operating cash flow was adversely impacted by increased working capital requirements related to tungsten prices. Finally, we returned $15 million to shareholders through dividends. As it relates to our outlook, today we are raising our sales and EPS outlook for fiscal 2026. This update reflects the additional price due to the continued rise in tungsten and additional volume. Patrick will provide more details on our updated outlook shortly. In summary, we are pleased with this quarter’s results and how the team is navigating these unique business conditions.

As I mentioned, there are opportunities and challenges in this market, and we remain focused on delivering on our commitments throughout fiscal 26 and setting ourselves up for a successful fiscal 27. Now let’s turn to slide 4 for an end market update. As a reminder, our full year outlook reflects forecasts of specific market drivers and general market conditions. The top half of this slide reflects our sales outlook at the midpoint and includes price, volume, and market factors. My comments will focus on the bottom half of the slide and address transportation and energy, which are the only end markets that changed since our last call. IHS estimates for transportation slightly improved from the previous estimate. Up in the low single-digit range, mostly driven by improvements in Asia-Pacific market. Energy improved slightly relative to our prior outlook as customer sentiment improved.

The tone is now cautiously optimistic, which is an improved stance compared to what customers were previously signaling. Turning to slide five. As we have talked about over the last several years, customer activity rates and our sales volumes have been below the pre-COVID peak. I want to take some time to provide insight into unit volume and how those trends have improved over the last few quarters. This chart uses units sold volume and excludes the impact of price and foreign exchange. It also excludes Infrastructure defense sales, as these are lumpy and not tied to industrial production metrics. Let me spend a moment on what is driving the volume recovery, and just as importantly, why we believe it’s sustainable. As the call-out indicates, we are now experiencing the second consecutive quarter of year-over-year trailing 12-month unit volume growth.

Despite a macro backdrop that has been uneven, volumes are strengthening in the Americas and Asia Pacific. EMEA continues to lag, and that is consistent with what we are seeing in PMI and industrial production data. A key driver continues to be aerospace and defense, which remains strong across both Metal Cutting and Infrastructure. Importantly, this strength isn’t simply tied to OEM build rates, which are still roughly 20% below pre-COVID levels, but rather to share gains and deeper penetration with tier suppliers. That gives us confidence there is still additional runway as production rates normalize over time. We are also starting to see early signs of stabilization in general engineering and energy, even while headline indicators remain soft. In energy, power generation continues to see meaningful momentum.

While U.S. land rig counts are still about 30% below pre-COVID levels, we are seeing enough stabilization to suggest we are past the trough. In Infrastructure, Earthworks has delivered volume gains for 2 consecutive quarters, driven by share gains. Stepping back, if you look at the chart, global volumes are now up approximately 3% from the Q1 fiscal 2026 trough, following 36 months of stagnant industrial production. Our performance is not just the result of a market recovery. It’s shaped by where we compete, how we allocate resources, and where we are winning share. We know we operate in cyclical end markets, but we are quite confident in the long-term growth potential of these markets and our ability to capture share within them. Let me turn the call over to Pat, who will review the third quarter financial performance and the outlook.

Patrick Watson, Vice President and Chief Financial Officer, Kennametal: Thank you, Sanjay, good morning, everyone. I will begin on slide 6 with a review of our Q3 operating results. Sales were up 22% year-over-year, with an organic increase of 19% and favorable foreign currency exchange of 5%, which was slightly offset when adjusting for the divestiture we concluded last year. Sales volume in the quarter was up low single digits. At the segment level, organic sales increased 30% in Infrastructure and 12% in Metal Cutting. On a constant currency basis, America sales increased 27%, Asia Pacific sales increased 25%, and EMEA was up 2%. The sales performance this quarter exceeded the expectations we provided last quarter on higher sales volumes from better market conditions and share capture. We also had higher than expected price, primarily in Infrastructure, from the continued rapid increase in tungsten prices.

By end market, on a constant currency basis, Earthworks grew 43%, energy increased 28%, aerospace & defense grew 23%, general engineering grew 14%, and transportation increased 1%. I will provide more color when reviewing the segment performance in a moment. Adjusted EBITDA and operating margins were 20.8% and 13.8% respectively, versus 17.9% and 10.3% in the prior year quarter. The margin increase was driven by favorable price raw of $39 million within the Infrastructure segment, pricing and tariff surcharges in Metal Cutting, increased sales and production volumes, and year-over-year restructuring benefits of $7 million.

These are partially offset by higher compensation costs, which are mostly performance-based, tariffs and general inflation, and a prior year benefit from an advanced manufacturing tax credit of approximately $8 million that did not repeat in the current year. Adjusted earnings per share was $0.77 in the quarter versus $0.47 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on slide 7. The year-over-year effective operations this quarter was positive $0.36. This reflects approximately $39 million of favorable timing of price/raw material costs, price and tariff surcharges in Metal Cutting, higher sales and production volume, and incremental restructuring benefits of $7 million. These are partially offset by higher compensation costs, tariffs, general inflation, and higher raw material costs in Metal Cutting.

There was a headwind of $0.08 related to the net prior year manufacturing tax credit. You can also see the $0.02 of transaction gains related to preferential Bolivia exchange rates. Currency, other, and pension impacts offset each other. Slides eight and nine detail the performance of our segments this quarter. Reported Metal Cutting sales were up 18% compared to the prior year quarter, with 12% organic growth and favorable foreign currency exchange of 6%. Regionally, excluding currency exchange, Asia Pacific increased 18%, the Americas increased 17%, and EMEA increased 3%. Looking at sales by end market on a constant currency basis, aerospace & defense increased 27% year-over-year due to improved build rates in Americas and easing supply chain pressures in EMEA, combined with our global focus on deeper market penetration.

Energy grew 17% this quarter from data center power generation wins. General engineering increased 13% year-over-year due to price, volume gains in Asia Pacific, and stronger distribution sales in the Americas. Lastly, transportation increased 1% year-over-year due to price and market softness, primarily in EMEA. Metal Cutting adjusted operating margin of 11.2% increased 160 basis points year-over-year, primarily due to higher price and tariff surcharges, higher sales and production volumes, and incremental year-over-year restructuring savings of approximately $5 million. These factors were partially offset by higher compensation, tariffs and general inflation, and higher raw material costs. Turning to slide 9 for Infrastructure.

Reported Infrastructure sales increased 29% year-over-year, with organic growth of 30% and favorable foreign currency exchange of 4%, partially offset by a divestiture effect of -5%. Regionally, on a constant currency basis, America sales increased 42%, Asia Pacific increased 35%, and EMEA sales were flat. Looking at sales by end market on a constant currency basis, Earthworks increased 43% from higher demand in construction, as we were able to provide product to customers who were unable to source product from other players and share gain in underground mining. Energy increased 34%, mainly driven by price. General engineering increased 18% due to price and higher powder demand in Asia Pacific, partially offset by lower demand in EMEA.

Lastly, aerospace and defense increased 17% due to defense orders driven by continued focus on growth initiatives and timing in the Americas. Adjusted Operating Margin increased 680 basis points year-over-year to 18.3%, primarily from the favorable timing of pricing compared to raw material costs of $39 million and year-over-year restructuring savings of $2 million. These items were partially offset by higher compensation costs and a prior year manufacturing tax credit of $8 million that did not repeat in the current year. Turning to slide 10 to review our Free Operating Cash Flow and balance sheet. Our third quarter year-to-date net cash flow from operating activities was $70 million compared to $130 million in the prior year period.

This change was driven primarily by higher working capital from higher tungsten prices and increased volumes of tungsten to secure our supply chain. Our third quarter year to date Free operating cash flow decreased to $18 million from $63 million in the prior year, primarily due to the increased primary working capital changes I just referenced, partially offset by lower capital expenditures. On a dollar basis, year over year, primary working capital increased to $819 million from $654 million. On a percentage of sales basis, primary working capital increased to 32.4%. It’s important to note that from both an earnings and cash flow perspective, the business is operating as it normally would when the price of tungsten rises.

In periods of rising tungsten prices, we always experience favorable price raw timing effects in sales and earnings while we experience headwinds to cash flow as primary working capital grows based on tungsten valuation. What is unique about the current circumstance is the magnitude of the rise in tungsten prices. In no recent time have we experienced a 9-fold increase. Due to the uncertain nature of tungsten pricing and the corresponding pressure it has placed on working capital, we once again made the decision not to repurchase shares. Net capital expenditures decreased to $52 million compared to $67 million in the prior year quarter. In total, we returned $15 million to shareholders through our dividends. Inception to date, we have repurchased $70 million or 3 million shares under our $200 million authorization.

We remain committed to returning cash to shareholders while executing our strategy to drive growth and margin improvement. We continue to maintain a healthy balance sheet and debt maturity profile. At quarter end, we had ample liquidity to support the business with combined cash and revolver availability of approximately $742 million. As always, we remain well within our financial covenants. The full balance sheet can be found on slide 16 in the appendix. Now on slide 11, regarding our full year outlook. We now expect FY 2026 sales to be between $2.33 billion and $2.35 billion with volume ranging from 2%-3%, net price and tariff surcharge combined of approximately 16%. We anticipate an approximate 2% tailwind from foreign exchange.

The increased outlook reflects additional pricing actions related to the increase in cost of tungsten since our February call. Specifically, within the fourth quarter, we expect net price and tariff surcharges combined of approximately 35% compared to the prior year quarter. We now expect Adjusted EPS in the range of $3.75-$4.00. This outlook includes approximately $2.45 related to the timing of price raw benefit due to the rise in tungsten prices, the significant majority of which affects the Infrastructure segment. This effect increased $1.50 from the prior outlook.

On the cash side, the full year outlook for capital expenditures is now anticipated to be approximately $85 million, and Free operating cash flow is expected to be approximately negative 30% of adjusted net income, reflecting the working capital pressure from the rise in cost of tungsten as discussed earlier. It’s important to note our outlook does not include any effects from the conflict in the Middle East. The other assumptions in our outlook are noted on the slide. While it is earlier than normal, I would like to take a moment to provide a bit of a framework to help you think about FY 2027. First off, our current assumption is that tungsten prices will remain elevated for some period of time going forward. That implies there will be significant carryover pricing given the 35% price expectation for the fourth quarter.

This carryover pricing will diminish as FY 2027 progresses since we would fully lap it in the fourth quarter. Keep in mind that this assumption holds price at the fourth quarter level. Also, we would expect price raw timing benefits in a flat tungsten environment will continue through the first half of FY 2027 with the bulk of the benefit occurring in the first quarter. Outside of tungsten, we would expect normal cost inflation going into FY 2027. However, we would see performance-based compensation reset the target, providing a $20 million tailwind. We will also see additional savings from restructuring continuous improvement of $10 million. We will provide the rest of the details, including market expectations for FY 2027 on our call in August. Back to you, Sanjay.

Sanjay Chowbey, President and Chief Executive Officer, Kennametal: Thank you, Pat. Turning to slide 12. Let me take a few minutes to summarize. We have delivered 3 strong quarters so far in fiscal 2026, driven by price and modest improvements in various end markets, project wins on the commercial side, and productivity and cost improvement actions. Going forward, we will remain focused on the strategic growth initiatives and lean transformation we have underway, while also exploring ways to strengthen our portfolio over time. Additionally, we will continue to actively manage our tungsten supply chain. In summary, we remain confident in our plan for long-term value creation for shareholders. With that, operator, please open the line for questions.

Operator: Thank you. We will now begin the question and answer session. Today’s first question comes from Stephen Volkmann with Jefferies. Please proceed.

Patrick Watson, Vice President and Chief Financial Officer, Kennametal: Morning, Steve.

Stephen Volkmann, Analyst, Jefferies: Hi. Good morning, guys. Thanks for taking the question. Can we just start with, what do you think, Pat? What was the incremental margin on the volume in the quarter?

Patrick Watson, Vice President and Chief Financial Officer, Kennametal: Yeah, I think the volume incremental margin was pretty normal for us, Steve. I think there’s a couple things obviously in the quarter that are kind of masking that because we’ve got some big numbers being thrown around there. You got the $39 million worth of price/raw material timing benefit coming through. You know, in the prior year, we had that $8 million advanced manufacturing tax credit. Then I’d say the third component there that’s just unusual for us is variable compensation. Last year, you know, we would have been on the low side of accruing for variable compensation. This year, given performance, we’re a bit on the high side. You know, in the quarter, that’s like an $18 million number there in and of itself. Then, of course, you have some benefits coming through from restructuring.

When you pull all that back, volume leverage is pretty normal for the business.

Stephen Volkmann, Analyst, Jefferies: Okay. It sounds like you’ve adjusted price. You obviously have a big forecast for the fiscal fourth quarter. Are we, like, where we need to be today in terms of price? Or will there be more price that sort of flows through in the fourth quarter and maybe even later into the summer?

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

Patrick Watson, Vice President and Chief Financial Officer, Kennametal: I would just add to that, Steve. We did put price in here in the market, you know, you know, various dates by region, but effectively, in the April-May timeframe.

Stephen Volkmann, Analyst, Jefferies: April-May. Okay. All right. Thank you, guys.

Operator: The next question comes from Steven Fisher with UBS. Please proceed.

Patrick Watson, Vice President and Chief Financial Officer, Kennametal: Morning, Steve.

Steven Fisher, Analyst, UBS: Thanks. Good morning, and congrats on managing all the complexities here. Just to follow up on that last question. Just curious about the differences between Metal Cutting and Infrastructure. I know with Infrastructure it does tend to be fairly quick to capture that pricing. I’m just curious to confidence that you can really fully pass on the price increases within the Metal Cutting. You know, what the frequency of timing you can put that through. You know, essentially, you know, are the customers that are going to these distributors, are they really seeing a 35% increase on the shelf there from these products? Just curious if there’s any real differences there in dynamics between Metal Cutting and Infrastructure.

Sanjay Chowbey, President and Chief Executive Officer, Kennametal: Yeah, sure, Steve. I think first of all, like, in past, we have talked about the Metal Cutting is a list price business. Also when you look at the material flow, you know, there is more lag in that, you know, but Infrastructure sees that first. Based on the different product, you know, we also have like different content of how much tungsten is used. That will reflect, you know, when you look at the growth numbers, sales growth numbers, you know, by different end markets within the different, you know, like segments. You know, you will see in some cases very, very high number. Many cases, you know, those are driven by the higher content of tungsten. We have, you know, in Infrastructure, many customers who are on the index price basis, but many others are not.

We do move relatively quicker on Infrastructure pricing. In Metal Cutting, you know, there’s a three to six month lag generally. Based on, you know, the list price change, you know, we implement that.

Steven Fisher, Analyst, UBS: Okay. Then maybe just, a little more color on what you’re seeing in energy and how you see that evolving for the next few months. Just curious what you are hearing from your customers there, is that something you’re preparing for kind of a bit more of a ramp up?

Sanjay Chowbey, President and Chief Executive Officer, Kennametal: Yeah. On the energy, I’ll divide the question into two pieces here. First is the, you know, AI power generation related energy demands, which we see more so in the Metal Cutting side. Definitely, as you know, there’s a lot of industrial activities, driven around the world, but a lot in the U.S. also. And we are very well-positioned with our, you know, innovative solutions, application support, and custom solutions, you know, for our customers, and we are doing pretty good job in winning share there. And I do believe that that will continue. And as you have seen in the, you know, even this quarter report, you know, we talk about that quite a bit.

When it comes to the other side of energy, which is more or less, let’s say in oil and gas, it will definitely touch a little bit Metal Cutting, but a lot more in the Infrastructure side. As we talked about it, that there is a little bit of optimistic, you know, view, it’s cautiously optimistic view. The rig count projection right now has gone from 527 to 532. If you look in the market, you know, there are two camps. You know, there are people who are saying that there will be a lot more investment coming up here. There are people who are saying that, you know, this is temporary and things like that. Our overall conclusion based on what we see, the trough is behind us, and we should see some steady improvement going forward.

Steven Fisher, Analyst, UBS: Thank you very much.

Operator: Our next question is from Julian Mitchell with Barclays. Please proceed.

Patrick Watson, Vice President and Chief Financial Officer, Kennametal: Hi, Julian.

Julian Mitchell, Analyst, Barclays: Hi, good morning. Hey, just maybe a first question just to try and clarify the tungsten related sort of tailwind to EPS. I think you said $2.45 for FY 2026 in aggregate. In the fourth quarter, is it around $1.75? Is that roughly the right math? Just wanted to check that.

Patrick Watson, Vice President and Chief Financial Officer, Kennametal: Yeah. I think if you, if you kind of back into that, Julian, I think we had about in EPS terms, about $0.16, I think in Q2, $0.39 here in Q3, and so you just force the rest out of Q4.

Julian Mitchell, Analyst, Barclays: That’s great. Thank you, Pat. Maybe, Pat, help us understand those moving parts around the sort of cash flow, year-ending leverage, when you might look to resume the share repurchase program. You know, help us understand what that free cash flow in the fourth fiscal quarter is looking like and you know, how quickly does it sort of reverse following that based on where tungsten is today?

Patrick Watson, Vice President and Chief Financial Officer, Kennametal: Yep. I would think, you know, think about it this way, and we talk about this from a, you know, how does the cost structure lag from an income statement perspective? That obviously the balance sheet’s following that too. As tungsten has ramped, we’re gonna continue to see inventory build on a valuation basis here, you know, in the fourth quarter. That’s really what’s driving that, you know, negative free operating cash flow for the full year. As that kind of builds up, you know, we would anticipate you get about a quarter or two out, again, from a change in tungsten, we would kind of get flatlined. The business would then move back to its normal, you know, pattern in terms of its cash generation ability.

Obviously, as I said, kind of in the scripted remarks here, the magnitude of what we’re dealing with here is just significantly larger than what we’ve seen in the past, right? Think about that from a share repurchase perspective. Look, you know, we’ve been very committed to returning cash to shareholders through the dividend program as well as through our repurchase program. You know, our desires have been at a minimum to offset dilution from equity compensation programs. We just fundamentally think that’s good housekeeping. You know, in the current environment, you know, what would we wanna see to really resume that? We’d really wanna see some stabilization and clarity about where tungsten is headed. You know, our obvious thesis here at the moment is that tungsten should be relatively stable. You know, that being said, it’s a very dynamic marketplace today.

Julian Mitchell, Analyst, Barclays: That’s great. Thank you.

Operator: The next question is from Steve Barger with KeyBanc Capital Markets. Please proceed.

Patrick Watson, Vice President and Chief Financial Officer, Kennametal: Hi, Steve.

Operator: Steve, you may be muted on your side.

Sanjay Chowbey, President and Chief Executive Officer, Kennametal: Yep, sorry. Thanks. Hey, Pat. You talked about good activity in aerospace and defense and some share gains in Infrastructure and Earthworks. At the same time, I think you said some competitors are turning away orders, presumably on price cost. Can you talk about what you think is happening with pre-buy and just, you know, people scrambling to get product due to inflation and then, you know, how does that map to the longer term durability of share gains? Yeah. Steve, this is Sanjay. I’ll take that first. First of all, you know, we did see some pre-buy. It was mostly in the Infrastructure’s Earthwork, you know, construction business. Beyond that, you know, there was not much material, you know, impact on pre-buys in the rest of the business.

We did see opportunities, you know, also in the Earthworks you know, business within Infrastructure and also in aerospace and defense in Metal Cutting, where we did see some evidence where we were able to capture where competitors were not able to either provide proper lead time or even just meet the demand. That’s how we saw that. Does that answer your question?

Steve Barger, Analyst, KeyBanc Capital Markets: I think, so, just so I’m clear, why do you think the competitors are not able to meet demand right now?

Sanjay Chowbey, President and Chief Executive Officer, Kennametal: Yeah. Well, we have seen some competitors are definitely having problem in getting raw material. If even if they’re getting raw materials, they are also pretty booked, and they are, you know, putting longer lead times. In some cases, you know, we are able to provide a better lead time, and that’s how we got it.

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

Sanjay Chowbey, President and Chief Executive Officer, Kennametal: Yeah.

Patrick Watson, Vice President and Chief Financial Officer, Kennametal: That’s what we’re going for here.

Sanjay Chowbey, President and Chief Executive Officer, Kennametal: Yeah, one more thing, Steve, I will add to that. I think, you know, for investors who may be, you know, listening to us first time, I do wanna mention that this situation that we have with tungsten is not driven by higher demand. It is driven by supply constraints. As in past, you know, you have seen some of the times tungsten went up. At the same time, oil and gas and some of the other industry which consumes a lot of tungsten went up. This time it is because of supply constraint and also export controls. Just simply in a big portion of market, there is less supply right now.

Steve Barger, Analyst, KeyBanc Capital Markets: Yeah, understood. That actually is a good segue to my next question. If I heard you right, you’re slowing facility closures and the last quarter you expected restructuring savings of $125 million, now that’s $110 million. Are those two things related? If so, why? I Maybe I missed it. Why are you slowing facility closure?

Sanjay Chowbey, President and Chief Executive Officer, Kennametal: Yeah, very good question. As we said in the prepared remarks, and I will clarify that a little bit more, obviously, you know, we are seeing right now more, you know, growth opportunities, which is driven by all three factors: market improving, then also, you know, share gain through our routine strategic growth initiatives that we have talked about it in past. On top of that, you know, and window of opportunity from the tungsten situation. We look at how we can create the best value for all our stakeholders, and we feel right now that allocating more resources on growth opportunities and, you know, driving our, you know, routine business leverage will create more shareholder value for now, and that’s how we are, you know, making the shift. However, we are not stopping the work on footprint optimization.

We’ll continue to work on it. Timeline will shift a little bit. We’ll come back and give you more information on that at appropriate time.

Steve Barger, Analyst, KeyBanc Capital Markets: Got it. Thank you.

Operator: Our next question is from Tami Zakaria with JP Morgan. Please proceed.

Sanjay Chowbey, President and Chief Executive Officer, Kennametal: Hi, Tami.

Tami Zakaria, Analyst, JP Morgan: Good morning. Thank you so much. First question is on tariffs. I think IEEPA got struck down. Do you expect to file any refunds? If so, what kind of what amount of refund would you expect to collect?

Sanjay Chowbey, President and Chief Executive Officer, Kennametal: Tami, morning. First of all, as you know, this is also one of the very dynamic situation. We still have, you know, tariffs in place, we are not, you know, taking any hasty action on this yet. I think we’re continuing to, you know, monitor, based on that, you know, we’ll make decisions. Nothing more to share at this point in, you know, today’s call.

Tami Zakaria, Analyst, JP Morgan: Understood. That’s fair. My second question is, for the fourth quarter, just wanted to clarify, do you expect volume growth to be in that 2%-3% full year range or it could come in above that?

Sanjay Chowbey, President and Chief Executive Officer, Kennametal: Yes, it’s the full year range.

Patrick Watson, Vice President and Chief Financial Officer, Kennametal: I would say it’s depending on where you’re at in that range, Tami, it’s gonna be low to, like, the high end, maybe up into the mid-single digits. You obviously factor in 35% price we talked about from a script perspective. You know, don’t forget we had a divestiture in the prior year, and you got a little bit of FX in there as well. That kinda is the math there in terms you think about the top line. I would emphasize, you know, as we just think about, you know, the profitability, you know, that obviously we’re going to see sequentially profitability step up pretty significantly here based on that price raw.

You know, given the circumstances that we’re in today, again, this is unusual, we’re gonna have some of that price raw realization in Metal Cutting too. When you think about, again, the margin performance of the business as a whole and the two segments, pretty big ramp up for both of them.

Tami Zakaria, Analyst, JP Morgan: Understood. It’s helpful. Thank you.

Operator: The next question comes from Angel Castillo with Morgan Stanley. Please proceed.

Angel Castillo, Analyst, Morgan Stanley: Hi, good morning. Thanks for taking my question. Just maybe first wanted to start out on the market share gains. That’s been a meaningful driver, I guess, of the organic growth that you’ve been seeing. Just curious if you could unpack that a little bit more. I guess I’m trying to understand, you know, if it’s possible to, I guess, separate how much of the share gains you think was maybe driven by kind of value proposition or, you know, project wins that tend to be a little bit stickier versus where it’s maybe related to kind of competitor supply constraints.

In particular, I guess to the latter bucket, curious if you kind of expect that, you know, as over time, as kind of supply, perhaps normalizes, if you would expect to kind of give that back or if there’s any kind of stickiness to, you know, some of those shifts that we might be seeing on the kind of supply-driven angle. Also, if you could comment on the promotional campaigns you talked about as well, that’d be helpful.

Sanjay Chowbey, President and Chief Executive Officer, Kennametal: Yeah, sure, Angel. First of all, you know, again, it is a combination of all 3 factors. You know, market improving, and we think that that should continue. Second will be in our strategic growth initiatives, we have talked about in past, you know, those will include, for example, what we have done in aerospace and defense, energy and in general engineering, Earthworks and so on and so forth. How we have gone about winning bigger share of wallet with existing customers, also, you know, going out and winning business at different tiers of the supply chain or our customer value chain. Those I will tell you that are very sustainable because we are winning those using our core competencies from product and innovation and our commercial excellence and our operational capabilities.

The third piece of the volume that we have also talked about, you know, the window of opportunity we have from Tungsten Dynamics. We also think that those are sustainable, at least in the near term, that we see that. In the long term, we’ll see how that, you know, plays out. We are being very strategic about which opportunities that we go and capitalize. We are selective on what opportunities we think are gonna be longer term sustainable for us. All in all, of course, it’s a mix of three things, and I won’t be able to quantify, you know, break down or don’t wanna disclose it, you know, in public domain on that.

I can tell you that as we have talked about in past, that driving growth above market has been one of our strategic imperative, and it will continue to be. In last, you know, 2 years, 3 years, you know, actually I would go a little bit beyond that. We have shown our ability to outperform or at least, you know, hold our own in our Metal Cutting business where we have in public peer data. This is gonna continue to be one of the focus. In short, I will just say that it is gonna be a meaningful piece of our overall volume story.

Angel Castillo, Analyst, Morgan Stanley: Very helpful. Thank you. If you could bear with me, I guess a three-part question here just on tungsten. Hoping to better understand, I guess a couple of things. One, any more color you can add in terms of the sourcing that you’re doing and how that differs versus competitors that allows you know, in a market that you described as very competitive, in terms of sourcing to make sure that you’re able to have the right amount of supply. Just any color you can add that, on that. Maybe a little bit more longer term or medium to longer term. On the tungsten side, I think your preliminary fiscal year 2027 outlook talked about that as being kind of stable at current levels.

Just anything you can add in terms of the supply demand that you’re seeing progressing from here in terms of, I think there might be some capacity that’s coming online in 2027. To the extent that, I guess any implications from that or the recently kind of lower prices of tungsten in China, as to what, you know, where that commodity heads in 2027. Lastly, you know, implications of that to the price and the market share gains that you talked about on the supply basis?

Patrick Watson, Vice President and Chief Financial Officer, Kennametal: Yeah, certainly. I’ll try to take each one of those in terms. You know, when I think about the advantages we have, you know, I want to go beyond, quite frankly, just the sourcing aspect. Like from a sourcing perspective, you know, as we’ve talked about in the past, we do not use significant amounts of Chinese material outside of our Chinese operation. You know, outside of China, you know, we’ve got a diversified supply base and partners we’ve been with for a long period of time and getting material from Bolivia, other East Asian sources and as well as a nice slug of recycled material. A lot of the strength that we have as a company vis-a-vis some of the competition that’s out there is also the integrated nature of our supply chain, right?

We have the ability basically to take in tungsten materials at various stages and turn them ultimately into a final product. You think about that from a, from, you know, our ability to take raw materials, which is virgin ore in and process that, there is only a handful of companies in the industry that can do that as well. That provides us, I think, a durable strategic advantage here in this set of circumstances. You know, as you think about where it is from an overall pricing perspective, yes, our assumption at the moment is that tungsten prices are stable.

You know, I think the, you know, the, the last couple of quarters that we’ve gone through in terms of, you know, the magnitude of this price change, I don’t think that many market participants would have envisioned us going from $200 a ton to over $3,000 a ton, excuse me, as we have over the last 12 months. You know, certainly there has been some softening in China the last week or so in terms of the prices. Unclear at the moment in time whether or not that’s indicative of a larger trend that would be more durable. We’ll obviously continue to monitor and watch that. Your last question, in terms of what supply is coming online. Yep, there’s a variety of new mine projects that are out there that will come online.

We would anticipate in the fullness of time, that would help moderate the tungsten prices here a little bit on a global basis. I think, you know, the other reality of the situation here is in particular, you know, we’ve got the export controls in China that are in place, number 1. Number 2, we’ve got lower Chinese mine production over the last 2 years, as it relates to, you know, based on some information from public domain, you know, lower quality ore potentially out there as well as I would emphasize lower mining permits provided by the Chinese government. You know, the market has been in a period of shortage.

Additional supply obviously would help alleviate some of that, you know, and as that market continues to unfold, obviously that will inform our pricing decisions and, you know, how we set, I’ll say, our inventory objectives here in terms of holding inventory as well.

Angel Castillo, Analyst, Morgan Stanley: Very helpful. Thank you so much.

Operator: The next question is a follow-up from Steve Barger with KeyBanc Capital Markets. Please proceed.

Steve Barger, Analyst, KeyBanc Capital Markets: Hey, thank you. Pat, just to level set expectations for the models. You said price/raw material timing benefit from tungsten flows through into the first half, mostly in 1Q. Is the right way to think about FY 2027 kind of reverse order from this year, high point by far in 1Q trailing back down to your, you know, quarterly average of like $0.40 towards the end of FY 2027?

Patrick Watson, Vice President and Chief Financial Officer, Kennametal: Yeah. Here a couple ways that I think about that, Steve. First off, just let me give you some like the basic walk, and I’ll start from the midpoint, right? Midpoint of the outlook this year is $3.88. You know, we said we got $2.45 a price raw in there. You know, probably have about $0.20 worth of variable compensation that would reset. Let’s think of like a, you know, a clean FY 2026, removing those items about $1.63 in EPS terms, right? Kinda moving forward next year, you’re gonna add $0.10 in for the additional restructuring that we talked about. That gets you down to like about $1.73 before you get to what I’ll call as additional price raw, which again should exist in that first half, right?

Steve Barger, Analyst, KeyBanc Capital Markets: Yeah.

Patrick Watson, Vice President and Chief Financial Officer, Kennametal: Whatever the volume assumption is that you guys make at this point in time. Obviously, we’ll give some clarity about that in August. The second thing I would say about that in terms of now taking that cadence and thinking about the year, yeah, I think the right way to think about this, again, this is assuming a relatively stable tungsten environment, would be first half we’re gonna see the benefits of price raw. Back half of that year, we’ll get back to what I would call it as a normal level of profitability, right, absent the price raw tailwinds.

Steve Barger, Analyst, KeyBanc Capital Markets: Super helpful. Thank you.

Operator: The next question is a follow-up from Julian Mitchell with Barclays. Please proceed.

Julian Mitchell, Analyst, Barclays: Much. This will be a quick one. Maybe just flesh out a bit more the cadence of kind of volume demand. You had that very interesting chart on cumulative volumes going back several years. That was interesting, and you’ve clearly seen a pickup, as you said, a couple of times. There’s some pre-buy, I suppose, in that. Maybe give us any color you can on sort of how base volumes are performing if you can really get to that level of detail from your channel partners and so forth. Have you seen an improvement in base demand in the last couple of months, or it’s difficult to disentangle that from pre-buy movement?

Patrick Watson, Vice President and Chief Financial Officer, Kennametal: I’ll take that first, and then Sanjay will, he’ll hit most of it. Just to clarify that chart to make sure we’re all talking about it the same way, right? That chart is based on a 12 trailing months basis, Julian. Based on that, you can think about it as an annualized chart. It’s going to kind of flatten out any sort of short-term pre-buying issues, right? Again, we’re talking about an annual type number. With that, I’ll turn it over to Sanjay here.

Sanjay Chowbey, President and Chief Executive Officer, Kennametal: Yeah, Julian, with regards to, you know, rest of the drivers, at this point, Q4, we are confident in what we are saying, you know, that we do see impact from improving market condition, which is again, moderate. Then on top of that, you know, our share gain opportunities that we have, those will definitely play out. I think with respect to fiscal 2027, we’ll come back and talk about that in August, but the, you know, initial signs are, you know, seems like things are definitely stabilizing.

Julian Mitchell, Analyst, Barclays: Great. Thank you.

Operator: This concludes today’s question and answer session. At this time, I would like to turn the conference back over to Sanjay Chowbey for any closing remarks.

Sanjay Chowbey, 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.

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