Q1 2025 Summary
Published Feb 5, 2025, 7:04 PM UTC- Kennametal expects a slight recovery in industrial production and oil rig counts in the second half of Fiscal 2025, with auto production improving globally, especially in the U.S. and China, which could enhance performance in key end markets.
- Despite current market pressures, Kennametal is well-positioned to support customers across different automotive powertrain technologies—including internal combustion engines, hybrids, and battery electric vehicles—and expects to continue achieving above-market growth in Europe.
- The company's global manufacturing footprint and local production strategy minimizes the impact of tariffs and trade policy changes, enhancing resilience and competitiveness in international markets.
- Continued weakness in key markets, including the European Transportation end market and mining and construction sectors, is expected to persist into the second quarter, putting pressure on sales growth.
- Recovery in the Aerospace & Defense market may be delayed, with improvements from the recently resolved labor dispute not expected until calendar year 2025, impacting near-term growth prospects.
- Restructuring benefits are expected to be lower in the second half of the fiscal year, which may limit margin improvement and profitability.
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Sales | Q1 2025 | Expected to be between $480M and $500M | $481.95M | Met |
Adjusted EPS | Q1 2025 | Expected to be in the range of $0.20 to $0.30 | $0.28 | Met |
Interest Expense | Q1 2025 | Assumed to be approximately $7M | $6.31M | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
General Engineering Market Softness | Mentioned repeatedly as softness from multiple regions with persistent PMI weakness, noted declines of 1–4% YOY and cautionary demand in EMEA and the Americas. | Declined by 3%; still facing challenging conditions in EMEA/Americas, with modest offset from Asia Pacific. | Continues to be a headwind, with no major improvement. |
Tungsten and Raw Material Price Volatility | Highlighted as an uncertainty factor, with short-term cost visibility (about two quarters) and fluctuating prices. Initially seen as a possible tailwind but later recognized as ongoing volatility. | Prices remain stable in the $3.05–$3.25 range; not a significant near-term headwind or tailwind. | Stabilized compared to prior volatility, still monitored closely. |
Restructuring and Cost-Saving Initiatives | Consistently discussed for margin improvements; annualized run rate savings targeted at $35 million. Benefits front-loaded in FY25 but decline in the second half. | Realized $5 million in Q1, projecting diminished benefits in the latter half of FY25. | Ongoing, but benefits moderate in H2 FY25. |
Modernization Driving Faster Product Innovation | Featured prominently in Q2/Q3 FY24 calls, citing faster product launches (e.g., coatings, tooling) and 7-8 year development cycles reduced to more frequent releases. | No specific mention in Q4 FY24 or Q1 FY25 [documents confirm no direct references]. | Not referenced recently, though prior calls emphasized its importance. |
Aerospace & Defense Sentiment | Optimism in Q3/Q4 FY24 from market share gains; growth tempered by OEM supply chain and labor constraints. | Cautious due to delayed recovery (recent labor dispute), though still grew 13% YOY. Improvements expected in calendar year 2025. | Near-term caution, but remains a long-term growth driver. |
Automotive Sector Diversification (ICE, Hybrid, EV) | Repeatedly underscored shift to EV/hybrid, with project wins in EMEA offsetting weaker ICE demand. Considered a growth opportunity amid changing propulsion trends. | Continues to see balance between EV, hybrid, and remaining ICE demand; overall transportation declined 2% YOY in part due to tough comps and regional softness. | Still transitioning, presenting both risks and growth potential. |
Infrastructure Segment Margins | Persistent focus; margins often impacted by volume challenges, raw material timing, and tungsten cost. Improvement discussed each quarter but uneven due to external factors. | Margins declined 110 bps to 6.9% amidst maintenance shutdowns, higher wages, partially offset by insurance proceeds and restructuring. | Gradual improvement hindered by ongoing volume softness. |
Volumes 15% Below 2019 Levels | Cited in Q2 FY24 as a key metric (reference to volumes being down ~15% vs. 2019). | No further mention in Q3/Q4 FY24 or Q1 FY25 [no documents referencing the same metric]. | No longer referenced after Q2 FY24. |
Pricing Pressures & Excess Capacity | Emerged in Q4 FY24 for wind energy and earthworks (excess capacity, competitive pricing). | Not specifically referenced in Q1 FY25; broader mention of regional softness in Earthworks and stable tungsten pricing, but no direct comment on wind energy pricing. | Limited current mention, was more prevalent in Q4 FY24. |
Global Manufacturing Footprint & Local Production | Not addressed in earlier quarters; no specific mention of trade and tariff mitigation strategy [no references in Q2/Q3/Q4 FY24]. | Discussed as a newer topic; the strategy to produce locally mitigates tariff risks and supports customers in-region. | Newly introduced in Q1 FY25 to address trade risks. |
Inventory Management Capabilities | First highlighted in Q4 FY24 for cash flow gains. Emphasis on production planning and lowering working capital also noted in Q3 FY24. | Continues as a key driver of cash flow; focus on reducing inventory to 30% of sales, stronger sales & ops planning. | Sustained focus, providing ongoing FCF improvements. |
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Margin Outlook
Q: What are your margin expectations for Q2?
A: We anticipate margins to remain flat from Q1 to Q2, excluding the Q1 insurance proceeds. Factors influencing this include benefits from plant shutdowns ending, reduced trade show expenses, and a modest increase in compensation due to annual salary adjustments on October 1. -
Second Half Recovery
Q: Where is your confidence in second-half recovery?
A: We expect a slight improvement in industrial production and oil rig counts in the second half of calendar year 2025. Oil rig counts are projected to stabilize around 590-600, up from the current 565. Auto production is also anticipated to improve globally, especially in the U.S. and China, though Europe continues to face pressure. -
Inventory Management
Q: How are you managing inventory relative to demand?
A: We're aiming to reduce inventory, targeting primary working capital as a percent of sales down to about 30% by fiscal year-end. This involves constraining production slightly below demand and making sustainable improvements in sales operations planning and supply chain. -
China Revenue Trends
Q: What's the outlook for China revenue?
A: Despite pressures in construction and mining, other key markets in China are stable and slightly improving. India continues to be strong. Overall, we expect Asia Pacific to remain stable with slight improvement. -
Price/Cost Dynamics
Q: How are tungsten prices and cost inflation affecting you?
A: Tungsten prices have remained steady between $3.05 to $3.25. We don't anticipate significant price cost tailwinds or headwinds in the near term. Inflation rates have generally moderated, though some suppliers are still pushing price increases. We implemented price increases in July to offset inflation. -
Metal Cutting Margins
Q: What's impacting Metal Cutting margins and decrementals?
A: The Metal Cutting segment faced a significant volume reduction in Q1, leading to higher decrementals. Temporary costs from trade shows and the absence of a prior year's one-time gain also affected margins. Restructuring benefits partially offset these impacts. -
Metal Cutting Share Gains
Q: Will you maintain Metal Cutting share gains in Europe?
A: Despite ongoing market pressure, we believe we can sustain above-market growth. We are well-positioned to support customers through shifts towards hybrids and electric vehicles, regardless of powertrain choices. -
Potential Plant Closures
Q: Can you accelerate plant closures for cost savings?
A: Current temporary plant shutdowns are short-term, focusing on maintenance and process improvements. Footprint optimization is a separate initiative planned for the later part of our timeline. -
Near-term Market Trends
Q: What are the recent trends across end markets?
A: Industrial production and oil and gas are expected to remain stable or flattish in Q2. We continue to see pressure in Europe's transportation market and in mining and construction. Globally, conditions are viewed as stable. -
Impact of Fed Rates
Q: How do Fed rate cuts impact your business?
A: Lower rates are constructive but typically impact us with a lag of several quarters. So far, customer sentiment hasn't shown improvement, as indicators like the U.S. PMI haven't turned positive yet. -
Restructuring Savings
Q: What were the realized restructuring savings this quarter?
A: We achieved $5 million in savings year-over-year this quarter. Since inception, the program has a run rate of $35 million annually. -
Election and Trade Policies
Q: Any implications from the recent election and tariffs?
A: It's too early to tell, but we'll monitor how policies affect industrial production, which has the biggest impact on us. Operating globally with local production minimizes direct tariff effects. Material costs might be impacted, but it's premature to provide details. -
Business Days Impact
Q: How should we model business days for the year?
A: In Q2, there are about 0.5 more days year-over-year. Q3 and Q4 each have about 0.5 fewer days, making it roughly a wash overall.