Q2 2025 Summary
Published Mar 7, 2025, 1:02 AM UTC- Kennametal is actively improving its product portfolio by pruning underperforming products and diversifying revenue streams, which is expected to enhance profitability.
- New leadership in both segments brings strong experience in commercial, product management, sales, marketing, and continuous improvement, which is anticipated to drive improvements in margin and working capital.
- The company is seeing sequential improvement in order inflow and billing rates across multiple end markets and regions, indicating a potential uptick in demand.
- Kennametal faces competitive pressures in its earthworks segment, leading to price pressures and loss of business, particularly in China due to lower capital investment and excess capacity, and in the U.S. due to reductions in production and construction.
- Despite multiple restructuring actions, operating margins are running around 8% to 8.5%, lower than the 10 or 20-year average, suggesting that more extensive measures may be needed to improve profitability.
- Sales have been flat for years, and the company may have an oversized footprint with too many plants, but there is no immediate plan to accelerate plant consolidation, which could hinder operational efficiency improvements.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | -3% from $495.3M to $482.1M | The decrease was driven by weaker demand in the Americas and EMEA, as well as unfavorable currency impacts. Additionally, continued softness in General Engineering and Transportation contributed to lower volumes. |
Cost of Goods Sold | -5% from $355.7M to $337.0M | Restructuring actions and operational efficiencies helped lower costs, while reduced production volumes further contributed to the decrease. These factors offset inflationary pressures in wages and raw materials. |
Operating Income | +11% from $28.5M to $31.7M | Improved price realization and cost containment measures lifted margins despite lower revenue. Restructuring savings and operational improvements in the Metal Cutting segment also supported the increase. |
Net Income | -22% from $23.1M to $17.9M | A higher tax rate, inflation, and temporary plant shutdowns in the Infrastructure segment compressed overall profitability. Although there were some insurance recoveries and restructuring benefits, they were insufficient to offset softer demand. |
EPS (Diluted) | -21% from $0.29 to $0.23 | Lower net income, combined with a less favorable tax environment, reduced earnings per share. Weaker volumes and inflationary headwinds weighed on results despite incremental restructuring benefits. |
EMEA Revenue | -5% from $153.6M to $145.5M | Despite some pockets of growth (especially in Aerospace & Defense), the region was impacted by soft demand in General Engineering and Transportation, particularly in Germany. Unfavorable currency also contributed to the decline. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Sales | Q3 2025 | no prior guidance | $480M – $500M | no prior guidance |
Volume | Q3 2025 | no prior guidance | –6% to –2% | no prior guidance |
Price Realization | Q3 2025 | no prior guidance | 2% | no prior guidance |
Foreign Exchange | Q3 2025 | no prior guidance | –3% impact | no prior guidance |
Adjusted EPS | Q3 2025 | no prior guidance | $0.20 – $0.30 | no prior guidance |
Interest Expense | Q3 2025 | no prior guidance | $7M | no prior guidance |
Effective Tax Rate | Q3 2025 | no prior guidance | 27.5% | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Product Portfolio Optimization & Diversification | In Q4 2024, the company detailed a systematic review of its portfolio including organic improvement actions and strategic diversification into higher‐margin markets. Q1 2025 briefly reiterated a commitment to portfolio optimization , while Q3 2024 focused more on product innovation rather than formal diversification steps. | Q2 2025 featured a focused discussion on pruning the current product mix, product SKU optimization, and considering targeted M&A to enhance revenue diversification. | More actionable and detailed initiatives are discussed in Q2 2025 compared to earlier periods, indicating an increased focus on actively reshaping the portfolio. |
Leadership Transformation & Restructuring Initiatives | Q3 2024 marked a leadership transition with the CEO retiring and new roles assigned, while Q4 2024 and Q1 2025 emphasized restructuring actions with realized cost savings and ongoing footprint optimizations. | Q2 2025 highlighted new leadership appointments (e.g. Faisal Hamadi as President of Infrastructure) and more aggressive restructuring measures including facility closures and an explicit run-rate savings target, reinforcing cost reduction and operational improvements. | Consistent focus across periods with a subtle acceleration in transformation efforts in Q2 2025, as evidenced by new leadership moves and more decisive cost-cutting actions. |
Innovation & Modernization in Product Development | Q3 2024 extensively discussed how modernization enabled launching new products (e.g. the universal turning grade with KENGold technology) and recovering previous lags in product development. In Q1 2025, new product introductions in mining and micro machining underlined this focus. | Q2 2025 does not provide specific details on innovation and modernization but instead emphasizes portfolio and SKU optimization, suggesting a shift from product development narrative to execution of product mix improvements. | Reduced direct emphasis on innovation in Q2 2025 compared to earlier periods, implying a strategic shift toward optimizing existing portfolios rather than highlighting new product development. |
Margin Improvement & Cost Reduction Strategies | Across Q3 2024 and Q4 2024, the company highlighted restructuring savings, cost takeout programs, and operational excellence measures to improve EBITDA and margins. Q1 2025 included temporary shutdowns and the commencement of a $100M cost improvement plan. | Q2 2025 continues the focus with detailed discussions of continuous improvement events, plant closures for structural cost cuts, non-headcount cost actions, and revised targets for savings. | A consistent emphasis on cost reduction is evident across periods, with Q2 2025 possibly taking a slightly more aggressive or refined approach through focused continuous improvement initiatives. |
Global Market Dynamics & Regional Demand Trends | Q3 2024 and Q4 2024 provided detailed segmentation of regional performance and end-market variations. Q1 2025 also discussed global megatrends with specific challenges noted in EMEA, Americas, and Asia-Pacific. | Q2 2025 outlines challenging market conditions—highlighting softness in U.S. industrial production, deteriorating conditions in EMEA (especially affecting transportation and general engineering) and nuances in China and India. | Steady and consistent concern with regional dynamics across periods; Q2 2025 reinforces ongoing challenges in key regions, underpinning the persistent uncertainty in global macro trends. |
Competitive Pressures & Pricing Challenges | Q1 2025 mentioned strategic pricing actions (including a Metal Cutting price increase) and relatively stable tungsten pricing. Q4 2024 detailed competitive pressures in segments such as earthworks and adjustments in pricing strategy. Q3 2024 touched indirectly on pricing dynamics in the context of cost timing and price realization. | In Q2 2025, the discussion centers on competitive pressures in specific end markets like earthworks, with added emphasis on how regional market conditions (e.g. in China and the U.S.) are leading to price pressures and lost/gained customer segments. | A slightly intensified focus in Q2 2025 with more granular commentary on the pressures in competitive segments, suggesting cautious sentiment amid a more challenging competitive environment. |
Inventory Management & Cash Flow Enhancement | Q3 2024 and Q4 2024 highlighted improvements in primary working capital as a percentage of sales, strong free cash flow performance, and effective inventory management through new processes and talent. Q1 2025 reported efforts to reduce inventory to 30% of sales and noted improved free cash flow performance. | Q2 2025 indicates that while inventory levels remain elevated, the company is actively constraining production to drive working capital toward a 30% target by fiscal year-end, accompanied by robust free operating cash flow and shareholder returns. | Consistent emphasis and progress over all periods with ongoing efforts to optimize inventory levels and enhance cash flow, reflecting a stable strategic focus on operational efficiency and shareholder return. |
Trade Policy Resilience & Global Production Strategy | Q1 2025 contained clear discussion on the company’s global manufacturing footprint and local production strategy to mitigate tariff impacts. Q3 2024 and Q4 2024 did not address this topic. | Q2 2025 does not mention trade policy resilience or global production strategy at all. | The topic has dropped out of the current period’s discussion, indicating that trade policy issues may have become less immediately pressing. |
Sector-Specific End Market Trends | Each period from Q3 2024 to Q1 2025 offered detailed breakdowns: Q3 2024 provided segmented data across automotive, aerospace, mining (earthworks), and construction with nuances per region ; Q4 2024 layered in additional detail regarding performance and future projections ; Q1 2025 discussed mixed performance with strong aerospace & subdued transportation growth. | Q2 2025 offers detailed metrics by sector—highlighting a 9% decline in automotive/transportation, a 14% growth in aerospace & defense, and a 7% decline in earthworks—with clear regional and end market commentary. | A consistently critical topic with regular deep dives across all periods. The data remains pivotal for gauging strategic positioning, particularly as aerospace continues to show growth while automotive/transportation and earthworks face challenges. |
Raw Material Price Volatility & Supply Chain Uncertainty | Q3 2024 provided detailed information on tungsten price fluctuations and the effects of timing between pricing and raw material costs ; Q4 2024 offered extensive commentary on tungsten stability, raw material cost swings, and proactive approaches to mitigate these effects. Q1 2025 did not offer specific details on this topic. | Q2 2025 does not explicitly discuss raw material price volatility or supply chain uncertainty, although there is a brief reference to lower raw material costs partially offsetting other cost pressures. | Reduced emphasis in Q2 2025 compared to Q3 and Q4 2024 suggests that raw material pricing may have stabilized somewhat, or that management is shifting focus to other priorities, even though it remains a critical factor under normal market conditions. |
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Cost Structure and Margin Outlook
Q: Do you need broader restructuring to improve margins?
A: Management emphasized they have laid out $100 million in cost actions, with recent measures bringing them to $65 million. Despite volume shortfalls affecting the bottom line, they believe these are the right actions and are also managing non-headcount-related costs like short work weeks. They continue to monitor market conditions and are prepared to take necessary actions to improve margins and working capital through continuous improvement. -
Demand Environment and Outlook
Q: What's the current demand trend, especially in general engineering?
A: The company is seeing some improvement, particularly in the second half of January, with increased order rates and billing. However, Europe has become more challenging, leading them to reduce their overall outlook for the second half, despite improvements in recent weeks. -
Order Improvement in January
Q: Was the January order improvement broad-based?
A: The improvement in orders was across both general engineering and other industries they serve. Even in EMEA, they have seen improvement in the last couple of weeks of January. -
EPS Guidance Drivers
Q: What's driving the stronger Q4 EPS guidance?
A: The expected EPS improvement is largely due to savings from the additional restructuring program. Q4 is typically their strongest profitability quarter, with higher sales volumes and increased activity in the infrastructure business due to the construction season. -
Tariff Impact Considerations
Q: How might tariffs affect your costs and pricing?
A: With about 10% exposure to China, 5% to Canada, and $40 million to Mexico, the company is evaluating potential tariff impacts. They have a global footprint that can help offset some costs, are watching for exclusions, and are considering the competitive environment for their products. -
Inventory Levels and Working Capital
Q: How are you managing inventory levels?
A: Inventory levels are slightly elevated, so they plan to constrain production to reduce inventories and aim for primary working capital of approximately 30% by year-end. They are prioritizing cash generation from inventory efficiency over non-cash benefits from fixed cost absorption. Customer inventories appear well-controlled despite changing market conditions. -
Management Changes and Strategy
Q: What are the plans of the new segment heads?
A: The new leaders bring strong experience in product management, sales, marketing, and continuous improvement. They will focus on improving margins and working capital, optimizing the product portfolio, and pursuing targeted M&A to create shareholder value. -
Product Line Rationalization
Q: Will you divest or shut down underperforming product lines?
A: While not disclosing details, management is reviewing the portfolio and taking actions to improve the mix. They are considering pruning current offerings and diversifying revenue, with more actions in progress. -
Competitive Dynamics in Earthworks
Q: Are you facing new competition in earthworks?
A: In China, decreased capital investment has led to excess capacity and pressure on pricing, especially for capital-intensive products like drum cutters. In the U.S., reductions in production and construction have led to price pressures, but they are competing effectively and maintain customer loyalty due to their value proposition. -
Organic Growth Contributions
Q: How are new products contributing to organic growth?
A: The company maintains confidence in achieving approximately 2% price contribution and 2% strategic growth. Market headwinds have affected unit volume, but they believe they are maintaining or slightly outperforming peers.