Q4 2024 Summary
Published Feb 5, 2025, 6:38 PM UTC- Kennametal has achieved significant improvements in inventory management, leading to increased cash flow conversion and expects these improvements to be sustainable, providing continued cash flow benefits in fiscal 2025.
- The company is experiencing growth in Aerospace & Defense, driven by strategic wins and market share gains, having expanded beyond engines into components and structures, and acquired new customers at the tier level.
- Kennametal is on track to achieve $100 million in cost reductions, including $50 million in cost of sales improvements by the end of fiscal 2025, which should enhance margins and drive profitability.
- Continued market softness, especially in General Engineering, which comprises about half of the company's revenue, and negative sentiment in PMIs across major markets, could lead to lower sales volumes in fiscal 2025. The Transportation industry in EMEA is quite a bit down, and one of the aerospace OEMs is facing quality issues, affecting production. These factors may result in the company achieving the lower end of its volume expectations (down 3%).
- Potential pricing pressures in markets experiencing excess capacity, such as wind energy and earthworks, may force the company to reduce prices to maintain or win new business, which could negatively impact margins.
- Uncertainty in raw material prices, particularly tungsten, beyond the first two quarters of fiscal 2025 could lead to unexpected costs and impact margins in the second half of the year, as the company only has visibility about two quarters out.
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Portfolio Optimization
Q: What's your plan for optimizing the portfolio?
A: We are focusing on organic growth and continuous improvement before considering divestments. Our first step is to assess each business, evaluating investments, resource and working capital allocation, and returns. If certain businesses underperform, we'll implement organic actions to improve them before exploring inorganic options. Should any business be better served elsewhere, we'll consider that, but it's not our primary focus. In parallel, we're open to bolt-on acquisitions in strategic areas like Medical, Ceramics, and Aerospace & Defense to drive growth and enhance returns. -
Cost Savings Targets
Q: Are you on track with the $100 million cost-out program?
A: Yes, we're on track. By the end of fiscal '25, we'll have achieved about $50 million in cost savings, reaching the halfway mark. This includes exiting fiscal '24 at a $33 million run rate and fiscal '25 at $35 million in restructuring benefits, plus approximately $50 million improvement in cost of sales. We're confident we'll meet our targets with continued focus on continuous improvement. -
Demand Outlook
Q: How is the demand environment trending recently?
A: The market has been soft, and we expect continued softness in the first half of fiscal '25, with some recovery in the second half (calendar year '25). Despite this, we've performed slightly better than the market, especially in Metal Cutting. We're not seeing any major shifts in stocking or destocking among our channel partners and customers, and we don't anticipate significant destocking in the coming months. In Aerospace & Defense, growth in fiscal '25 will come from market growth (though at a slightly lower rate), strategic wins, and a modest price component. -
Pricing Strategy
Q: Can you maintain the +2% pricing guidance amid industry deflation?
A: We've recently implemented pricing actions that are now in the marketplace, and we'll continue to achieve year-over-year pricing improvements. We regularly adjust pricing across our portfolio based on value and market conditions. While we assume raw material prices like tungsten remain relatively flat, any changes could impact pricing. In areas with excess capacity, such as wind energy, we may competitively adjust prices, including potential reductions to retain or win business. -
Cash Flow Improvement
Q: What's driving the 125% cash flow conversion in 2025?
A: The significant improvement is mainly due to inventory reductions. We've introduced new processes, added talent, and made internal appointments to enhance our sales, production, and inventory management planning. By optimizing our global network—deciding where and what we produce, shipping frequencies, and warehouse inventories—we've achieved sustainable improvements. We're building on progress from '23 and '24, and we're confident in delivering further improvements in fiscal '25. -
Market Share Gains
Q: Is the 1%-2% market share gain included in your growth outlook?
A: Yes, we anticipate 1%-2% growth from market share gains, which is embedded in our model. We're not implying we've gained 1%-2% of the market share but that this growth will result from outperforming the market. Despite markets being down mid to high single digits, our initiatives in growth, productivity, quality, and inventory reduction position us well to capitalize when the market improves. -
Earnings Guidance
Q: What factors are impacting your Q1 EPS guidance?
A: Several factors contribute to the Q1 EPS outlook. A higher tax rate—from 21% to 27.5%—is a significant drag, amounting to about $0.04-$0.05. Pension costs and FX contribute a couple of cents. A volume decrease impacts EPS by $0.05-$0.06. We also have expenses related to trade shows, resource reallocations, and compensation timing. Despite these, we expect earnings to step up in a normal fashion throughout the year.