Kennametal reports 3% organic sales growth and raises fiscal 2026 EPS guidance amid improving market conditions

OPERATOR - (00:02:42)

Good morning. I would like to welcome everyone to Kennametal's first quarter and fiscal 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 one on your telephone keypad. If you'd like to withdraw your question, please press Star then the number two. Please note that this event is being recorded. I would now like to turn the conference over to Michael Pisi, Vice President of Investor Relations. Please go ahead.

Michael Pisi - Vice President of Investor Relations - (00:03:16)

Thank you operator. Welcome everyone and thank you for joining us to review Kennametal's first 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 Pisi, Vice President of Investor Relations. Joining me on the call today are Sanjay Chaube, 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 would 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 to can be found at the back of the slide deck and on our Form 8K on our website. And with that, I'll turn the call over to Sanjay.

Sanjay Chaube - President and Chief Executive Officer - (00:04:30)

Thank you Mike. Good morning and thank you for joining us. I'll begin the call today with a brief overview of the quarter, including some in market commentary, followed by a spotlight on one of our growth focus areas, power generation. From there, Pat will cover the quarterly financial results as well as the fiscal year 26 outlook. Finally, I'll make some summary comments and then we will open the line for questions. Turning to Slide 3, let me begin by addressing some of the highlights from our strong first quarter. Our global commercial teams continued to advance our strategic growth initiatives in the quarter. Infrastructure secured two large project wins within our Earthworks end market. Both wins were a direct result of our team's efforts with those customers to deliver high quality technical support and superior product performance. That combination has and will continue to be a winning formula for us. In metal cutting, we won projects in energy, aerospace and defense and transportation. For example, we increased our share of wallet with an aerospace customer to provide high precision tooling solutions for machining military components. As you know, we continue to prioritize above market growth and these wins position us well in markets that are benefiting from long term secular growth trends. We also continue to respond to the evolving tariff landscape and we remain committed to fully offsetting the impact of tariffs through various actions including product moves, supply chain optimization and surcharges as appropriate. Separately, we have implemented pricing actions in response to the continuing rise in tungsten costs which have increased sales since August and are at historically high levels. We remain confident in our ability to price to offset the rising tungsten costs. On the cost improvement front, we realized $8 million in restructuring savings this quarter and we continue to execute our plans to lower structural cost by reducing employment costs and consolidating manufacturing operations. Now let's move to our quarterly results which exceeded the sales and EPS outlook we provided last quarter. Compared to the outlook, sales were primarily driven by better than expected volume across all end markets. EPS benefited from the additional volume and a lower than anticipated tax rate. Year over year, sales increased 3% organically. That's our first quarter of organic growth in two years and reflects modest relief from the broad market weakness that has impacted our end markets for the past eight quarters. As you may recall, historically down cycles tend to last four to eight quarters. Adjusted EPS increased to 34 cents compared to 29 cents in the prior year quarter. In terms of profitability, adjusted EBITDA margin was 15.3% compared to 14.3% in the prior year quarter. Cash from operating activities year to date was $17 million compared to $46 million in the prior year period. Free operating cash flow year to date was negative $5 million compared to $21 million in the prior year. And finally, we returned $25 million to shareholders through share repurchases of $10 million and dividends of $15 million. Today we are raising our sales and EPS outlook for fiscal 2026. This update reflects the modestly improved market conditions, additional price and tariff surcharges, and our favorable performance in in the first quarter. Pat will provide more details on our updated outlook shortly. In summary, we are pleased with this quarter's results and we continue to focus on delivering our commitments throughout fiscal 26. Turning to slide 4 and our end Market Update As a reminder, our full year outlook reflects forecasts of specific market drivers and general market conditions. I will focus on the bottom half of the slide and address the two markets that have changed since our last call. First, IHS estimates for transportation slightly improved from the previous estimate while still being in the negative low single digit range. Volumes in the Americas have improved from the prior estimate, partially offset by pressure that continues to impact emea. And secondly for aerospace and defense, expectations are improving as the aerospace industry has recovered from supply chain challenges and will benefit from the recent approval that will increase OEM production. Market factors remain mostly unchanged within the other end markets. Turning to Slide 5, we are seeing emerging opportunities in power generation driven by rising demand for both renewable and traditional energy sources to support the expansion of AI data centers. This is an expanding opportunity for kennametal across both of our segments and we are capitalizing on this trend. As we shared last quarter, we secured a key win in metal cutting connected to the backup generators that are providing energy security to those data centers. And it's our deep expertise in application engineering and machining complex engine components that is positioning us particularly well to support customers as they manufacture backup power generation systems and utility scale gas turbines. With respect to the gas turbines, these applications require the same capabilities that we have long applied in aerospace and defense, so this is also an area that we know very well. While this slide focused on metal cutting, the opportunity extends across both segments in infrastructure. Our wear resistant solutions and strong position in oil and gas extraction aligns with the growing need for natural gas as a reliable fuel source for uninterrupted power. So while our recent wins are in backup power systems, the opportunity is much broader and we're well positioned to capitalize on that as the trend continues. Now let me turn the call over to Pat who will review the first quarter financial performance and the outlook.

Pat Watson - Vice President and Chief Financial Officer - (00:11:48)

Thank you Sanjay and good morning everyone. I will begin on slide 6 with a review of the first quarter operating results. Sales were up 3% year over year on both a reported and organic basis. At the segment level, metal cutting and infrastructure both increased 3% organically and by end market on a constant currency basis, aerospace and defense grew 20%, earthworks grew 5%, energy increased 1%, general engineering was flat and transportation declined 1%. Regionally on a constant currency basis, sales in the Americas increased 7%, EMEA was flat and sales decreased 1% in Asia Pacific. The sales performance this quarter exceeded the outlook we provided last quarter. Relative to those expectations, share gains in Earthworks better than expected, auto build rates and overall modest volume improvements were the catalysts for the outperformance. I will provide more color when reviewing the segment performance in a moment. Adjusted EBITDA and operating margins were 15.3 and 8.2% respectively, versus 14.3 and 7.6% in the prior year quarter. The improved margin was driven by price and tariff surcharges and incremental year over year restructuring savings of $8 million, partially offset by higher compensation costs, tariffs and general inflation and a prior year benefit from net insurance proceeds of $4 million that did not repeat in the current year. Adjusted EPS was 34 cents in the quarter versus $0.29 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on slide 7. The year over year effect of operations this quarter was positive $0.05. This reflects incremental restructuring benefits, favorable timing of price, raw material costs, tariff surcharges and the advanced manufacturing tax credit partially offset by higher compensation costs, tariffs and general inflation. The headwind of $0.04 from the net insurance benefits received in the prior year due to the tornado that damaged our Rogers facility. The you can also see $0.04 of transactional gains related to preferential Bolivia exchange rates. Slides 8 and 9 detail the performance of our segments this quarter. Reported metal cutting sales were up 5% compared to the prior year quarter with 3% organic growth and favorable foreign currency exchange of 2%. Regionally excluding the effects of currency, the Americas increased 6%, EMEA increased 1% and Asia Pacific declined 1%. Looking at sales by end market, Aerospace and Defense increased 16% year over year from improved build rates in the Americas and easing supply chain pressures in EMEA. Energy grew 12% this quarter due to data center power generation wins. General engineering was flat year over year from lower production activity primarily in EMEA and lastly transportation declined 1% year over year due to project timing in the Asia Pacific and an overall slowdown in EMEA and the Americas. Metal cutting adjusted operating margin of 8% decreased 20 basis points year over year primarily from higher compensation costs, tariffs and general inflation. These factors are partially offset by higher prices and surcharges and incremental year over year restructuring savings of approximately $6 million. Turning to Slide 9 for infrastructure, infrastructure sales increased 3% organically with reported sales growth of 1% which was negatively affected 3 points from the divestiture which closed in June. Regionally on a constant currency basis, America sales increased 7%, Asia Pacific was flat and EMEA sales decreased by 3%. Looking at sales by end market on a constant currency basis, aerospace and defense increased 28% from defense orders driven by continued execution on our growth initiatives in both EMEA and the Americas. Earthworks increased 5% due to mining share gains in the Americas and higher global construction demand, partially offset by Asia Pacific mining market softness. General engineering was flat due to higher powder demand in the Americas and higher demand in Asia, partially offset by lower industrial activity in EMEA. And lastly, energy declined 5% mainly in EMEA, driven by project timing and from a lower US land rate count. Adjusted operating margin increased 190 basis points year over year to 8.8%. Adjusted operating income of $17 million increased primarily due to the favorable timing of pricing compared to raw material costs, partially offset by prior year net insurance proceeds of $4 million and higher compensation costs and general inflation. Additionally, we recognized year over year restructuring savings of approximately $2 million. Now turning to Slide 10 to review our free operating cash flow and balance sheet. Our first quarter net cash flow from operating activities was $17 million compared to $46 million in the prior year period. The change in net cash flow from operating activities was driven by working capital changes, including a higher investment in inventory, primarily from rising tungsten prices because sales volumes declined less than normal from the fourth quarter of FY25 and pricing and tungsten value was up. Working capital is a more challenging comparison this quarter. Our first quarter free operating cash flow decreased to negative $5 million from positive $21 million in the prior year, primarily from the lower cash flow from operations on a dollar basis. Year over year, primary working capital increased to $660 million and on a percentage of sales basis IT increased to 32%. Net capital expenditures of $23 million declined modestly from $25 million in the prior year quarter. In total, we returned $25 million to shareholders through our share repurchase and dividend programs. We repurchased 475,000 shares or $10 million in Q1 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. 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 with no near term refunding requirements. At quarter end, we had combined cash and revolver availability of approximately $800 million and were well within our financial covenants. The full balance sheet can be found on slide 17 in the appendix. Now on slide 11 regarding the full year outlook, we now expect FY26 sales to be between 2.1 and $2.17 billion with volume ranging from negative 1 to positive 3%, net price and tariff surcharge combined of approximately 7% and we anticipate approximately 2% tailwind from foreign exchange. We now expect adjusted EPS to be in the range of $1.35 to $1.65. The increased outlook reflects additional pricing actions related to the rising cost of tungsten and additional surcharges in place to address the changes in policy since our August call. The adjusted tax rate for the year is now 27% and as a result of the additional cash that we need to invest in inventory due to higher tungsten costs, free operating cash flow as a percent of adjusted net income is now 100%. All of the other elements of our outlook remain unchanged. Turning to Slide 12 regarding our second quarter outlook, we expect Q2 sales to be between 500 and 520 million dollars with volume ranging from negative 4% to flat price and tariff surcharge realization of approximately 7% and a 2% positive impact from foreign exchange. One comment regarding the adjusted effective tax rate this quarter. The rate of approximately 30% assumes a discrete item that is driving the rate higher in Q1 than our full year outlook. We expect adjusted EPS in the range of $0.30 to $0.40. The other key assumptions for the quarter are all noted on the slide and with that I'll turn it back over to Sanjay.

Sanjay Chaube - President and Chief Executive Officer - (00:20:47)

Thank you, Pat. Turning to Slide 13, let me take a few minutes to summarize. We delivered a solid first quarter thanks to modest improvements in a couple end markets, project wins on commercial side and cost improvement actions. We continue to make steady progress on our strategic growth initiatives, lean transformation and structural cost improvement, while also exploring ways to strengthen our portfolio over time. In parallel, we are monitoring external drivers such as trade and monetary policies and raw material prices, and taking timely and necessary actions. We remain confident in our plan for long term value creation for our shareholders and with that. Operator, please open the line for questions.

OPERATOR - (00:21:41)

Thank you. If you would like to ask a question during this time, simply press Star then the number one on your telephone keypad. If you would like to withdraw your question, please press Star then the number two. Today's first question comes from Angel Castillo with Morgan Stanley. Please go ahead.

Angel Castillo - Equity Analyst - (00:21:59)

Hi, good morning.

Sanjay Chaube - President and Chief Executive Officer - (00:21:59)

Good morning, Angel. Good morning.

Angel Castillo - Equity Analyst - (00:22:01)

Congrats on a strong quarter here. I just wanted to touch base a little bit more on the end market outlook. I think you noted a little bit on the kind of prepared remarks about what you're seeing across end markets, but I think it kind of stood out to me that Some of the changes in slide 4 for each end market were quite notable in terms of going from down to up or materially more into the double digits. All the while some of the market factors that are listed below seemed a lot more muted to unchanged. Can you just clarify, I guess within each of these, what specifically is kind of driving the material kind of uplift? And in particular maybe also from a regional standpoint, how should we think about the mix of which regions are driving kind of the improved outlook for each of these?

Sanjay Chaube - President and Chief Executive Officer - (00:22:53)

Yeah, thank you Angel. Good question. So let me walk you through that slide which is a slide 4. Just first of all, as a reminder on that slide, the top half of the slide is basically reflecting our sales trend and the bottom half of the page reflects what is the external factor, which is the market. So in all of these end markets, the three pieces, first one is APT and surcharge, APT related price increase and surcharges. Second is market itself, whether market improved or stayed flat. And the third piece is project wins and share gains. So as we discussed in our prepared remarks, there were definitely some markets where we had bigger benefit of project wins. For example in aerospace and also in energy, especially in the power generation side. Now let me walk you through the other factors. So like I said, APT and surcharge related price affects all end markets. Specific to where we saw changes in end market, in transportation, in aerospace where we saw the biggest changes. Let me walk you through that a little bit. So for transportation we saw Americas coming out a little bit stronger in the Q1 and we have outlook at this point also for the full year and based on even IHS data that we expect while still being in the low single digit in a negative territory. The transportation IHS forecast at this point is improved from the prior outlook we had three months ago. In aerospace, the customer build rate and also supply chain constraint easing up and also from a defense perspective, definitely we are seeing market to be stronger in that regard. Earthworks, when you see the arrow going up in, you know, on the top of the half of the page that is mostly driven by share wind, same thing in energy. Energy is more or less staying flat with respect to oil and gas. If you look at the rig counts and all that about the same as what we anticipated three months ago. But we have had good project wins when it comes to the power generation and that helped in the energy and in general engineering we are seeing improvements. In Q1 we have seen some, but when you look at the full year other than China, more or less, I Think we're saying slight improvement or flattish type situation in the gen eng when it comes to ipi. So that's really what we have at this point. Again in summary, Apt and surcharge helping and sharewinds are also helping along with that and modest improvement in couple end markets.

Angel Castillo - Equity Analyst - (00:25:33)

That's very helpful, thank you. And maybe just as my follow up just to kind of double click on some of these numbers, but maybe on the market share dynamic, could you just give us a little bit more color as to, you know, is that because the kind of cadence of wins here may be seemingly accelerating in some of these end markets is, is there something about either the product that's really resonating with customers, is it more related to being competitive advantages to being a domestic producer and then as it relates to this or maybe more to the price dynamic that's driving some of these improvements. Any concerns here that as you look at tungsten prices or kind of you're passing through higher prices here, any concerns that people start to consider either trading to other non tungsten equipment or I guess anything that you would notice as it pertains to kind of elasticity of the customer to be willing to continue to kind of take these higher prices?

Sanjay Chaube - President and Chief Executive Officer - (00:26:30)

Sure. So first of all, with respect to share gain, it is definitely driven by what we have discussed before, the three main drivers. First, innovative solutions. Secondly, our commercial excellence, which includes our engagement with customers and application support. And third, operational excellence, our overall operational performance at this point, including safety by the way, safety, quality on time delivery has been very good. You know, we continue to make good progress on that. So I think all of those combination definitely helping us in share gain. With respect to, I think just to confirm your second part of the question was can you remind me moving people moving away from. Okay, yeah, sorry, yeah, yeah.

Angel Castillo - Equity Analyst - (00:27:18)

Just the elasticity of the customer to the price increases. Tungsten.

Sanjay Chaube - President and Chief Executive Officer - (00:27:21)

Got it. Yeah, tungsten. Yes, we have looked at that from our perspective what we provide in terms of the innovative solutions, I believe that the value customer get through our solutions is very strong in terms of like even with higher tungsten prices, it will make more sense for them to continue using that rather than changing it to stainless steel or some other type. Because the performance that they receive from our solution will more than offset even the increase that they're going to see from the tungsten prices. So we don't see a big risk from that. But angel, to your broader question, as you look at some of the end markets, they're still on the fence. Can things get worse yes, you know, like we know there is a monetary policy, trade policies and things like that, so things can get worse. But overall we have taken a very balanced approach in terms of what we see from the market and also from price dynamics and on top of that overall our share gain initiatives.

Angel Castillo - Equity Analyst - (00:28:23)

Very helpful, thank you.

OPERATOR - (00:28:26)

Thank you. And our next question today comes from Tammy Zachariah with JPMorgan. Please go ahead.

Tammy Zachariah - Equity Analyst - (00:28:33)

Hi, good morning. Very nice quarter. I wanted to ask you about the $250 million TAM from engines, large engines, which I thought was very interesting. How much of this 250 million is simply volume or does it also include pricing? And I may have missed it, but what share of that 250 million do you realistically expect to gain over the next three years? Yeah Tammy, good question. So first let me explain that the 250 million that we have carved out to show as a TAM for power gen, some of this used to sit within either energy or transportation. Now we have carved it out to say what is it so that we can really focus on that. And then how much is the growth initiative here at this point? As we pointed out there, if you look at last two, three years that market has been growing in high single digit range and we are still projecting it to grow at 10% rate for next few years. So that's how we see it at this point. Of course the $250 million does include the latest price dynamics in that but in the bigger picture it does have, you know like the historical trend is there from that perspective. And as far as we are concerned market share wise, we don't disclose at this point about that, you know, that information. However, we are very confident that our solutions and our overall value proposition with application support and custom solutions that we're very well positioned to win in this. Understood, that is very helpful. I wanted to ask you about the energy end market outlook a bit. I think it improved to mid single digit from flat if I'm reading it correctly. What's really driving this improved outlook for energy? Rig counts are still down. Is it? Well, so could you just elaborate on that a little bit? Yes. As you look at that again slide 4 in the bottom half of the page, we are clearly telling you that oil and gas stays about the same, right? It's not getting worse, that's good news. But overall sales which is in the top half of the page, we are saying it's improving because we have definitely impact of APT related price increase and also surcharges if applicable. And as you know a lot of products that is used in oil and gas does have very heavy content or greater content of the raw material. Just to tack onto that Tammy, keep in mind that across our energy portfolio, you know, at the, you know between both businesses it's pretty diversified. So beyond having the exposure in oil and gas which we think of primarily in infrastructure, metal cutting has some exposure there as well. You know obviously we've been talking about the opportunities we have in reciprocation power gen and more traditional power gen sources and you know as you followed us over the last couple years, you know the great position we have in wind power as well.

OPERATOR - (00:31:47)

Thank you. And our next question today comes from Steven Fisher at ubs. Please go ahead.

Steven Fisher - Equity Analyst - (00:31:54)

Thanks. Good morning and congrats on the quarter. Just to come back to the share. Gain dynamics a little bit, I know this is something obviously embedded in your multi year outlook since 2023. So it's nice to see it coming through. I guess just now that we're starting to see this a little bit more visibly started to talk about it more. What visibility do you have to anything. Else in kind of lined up that. Could materialize in some program wins over. The next couple of quarters?

Sanjay Chaube - President and Chief Executive Officer - (00:32:29)

Yeah, again good question Stephen. Let me start by first addressing some of the higher growth end markets that we see right now from aerospace and defense. We have had success in that for last two, three years actually we have talked about it all the way back in the investor day and we have good pipeline of projects that we continue to work on. Then when it comes to power generation we already talked about a little bit. So that also has good pipeline. When it comes to transportation we will position ourselves very well as the transportation industry was going through quite a bit of dynamic shift in terms of the power trend. And we have solutions which will support whether a customer launches new internal combustion engine or hybrid or plug in hybrid or battery only electric vehicle. We have good solutions and we have very good strong application support for that. So well positioned on that. And in parallel we continue to work on Earthworks. As you saw some of the project wins we reported in Q1. And finally coming to general engineering, our strong relationships with our channel partner and really working together to do what's best for our end customers have also bode well for us and we'll continue to work on all of these in our five end markets.

Steven Fisher - Equity Analyst - (00:33:49)

That's really helpful. And then I guess just on the tungsten price, can you just talk about how much of that top line benefit. And margin dynamic you saw in Q1. Relative to what might still be Ahead, what could you still see there in Q2? And are you expecting to see things.

Pat Watson - Vice President and Chief Financial Officer - (00:34:11)

In balance between what you're passing along and what you're experiencing by say Q3? Yes, if we think about that phenomena. So we saw a modest amount of tailwind, I would say, Steve, in the first quarter. And then what you're going to see here as we go into Q2 now, Q2, we'll see a little bit of ramp up there. Price will go up, we'll get a little bit of tailwind from that. We did see, we thought a little bit of advanced buying here in Q1, you know, call that, you know, low single digits that might be flopped between Q1 and Q2 from a volume perspective. And that's part of what's animating, I'll say our volume outlook for Q2. But as you think about Q3, Q3, we should see a pretty significant step up in price raw if tungsten prices were to stick around where they are currently. We probably have our strongest EPS quarter in Q3 as we get into Q4, get into basically price raw neutrality at this point in time, you know, and as we've talked about on prior calls, you know, we tend to what flows through the P and L tends to lag the market by about 2/4. You know, if we were to see increases in tungsten prices throughout this quarter, that would tell us that that period of favorable price raw would continue more into the fourth quarter. Obviously, if we were to see some of that tungsten price roll off, you know, we would start seeing some of that fall through in Q4 as well. But you know, right now our outlook assumes stable pricing for the balance of the year from a tungsten perspective. Fantastic. Thank you.

OPERATOR - (00:36:04)

Thank you. And our next question today comes from Steve Barger at Keybanc Capital Markets. Please go ahead.

Steve Barger - Equity Analyst - (00:36:11)

Thanks. Good morning. Morning. Going back to Data center, you said some of that TAM used to sit. In energy or transportation. So what is the incremental machining opportunity you see from data center? And you know, can you frame up, does it add single digit millions of. Revenue, double digit millions? How are you thinking about that?

Sanjay Chaube - President and Chief Executive Officer - (00:36:32)

Yes, Steve, it's definitely built into that 250 at this point. You know, over last few years, you know, we have seen that in the $100 million range and then we're raising it to a 10% CAGR.

Steve Barger - Equity Analyst - (00:36:48)

Got it. Okay, thanks. And then Sanjay, going back to your comment on some higher expectations for general. Engineering, I think everybody's looking for the turn there. So is your outlook based on expectations for improvement just due to how long this downturn has been? Or is it customers saying they want. To restock or are they seeing actual demand pickup that they're either seeing it. Or they're planning for it.

Sanjay Chaube - President and Chief Executive Officer - (00:37:15)

Can you just frame up that comment? Yeah, sure, Steve. When it comes to general engineering, I think at this point, by region, I'll comment a little bit. In US and Americas in general, we saw slight improvement. By the way, you'll hear the word slight quite a bit here. Just because we're on the fence, I can tell you that even if you look at our outlook, the way we have framed it, overall volume for the full year we are saying at midpoint is 1%. So that gives you the idea that we're right on the fence. Slight bit of improvement in IPI will help us. And that's what we have built because that's what we have seen from external projection perspective in recent months. We have seen some improvement in Americas EMEA in Q1 we saw. But the projection for rest of the year is more flattish. And in China we have seen positive projection. Slight bit of positive projection. Understood. Thank you for that clarification.

OPERATOR - (00:38:19)

Thank you. And our next question today comes from Chris Dankert at Loop. Please go ahead.

Chris Dankert - Equity Analyst - (00:38:25)

Hey, morning. Thanks for taking the questions. Yeah, I guess just to circle back to the earlier question, can you kind of help frame for us what the assumed price cost impact actually is in the guide? Are we assuming dollar neutrality for the year? Is it dollar positive margin neutrality? Can you just kind of walk us through what's actually assumed in your guide from a price cost perspective here? Yeah, So I would say for the full year there will be positive price raw. All right. And you just kind of have to look through where the volume is because again, you know, volume at this point in time on a full year basis, as Sanjay just Talked about, it's up 1% right at the midpoint of the guide. Right. In addition to that, I would just point out to you that, you know, think about some of the comments we had last quarter in terms of some of the tailwinds we had in the prior year that are just not repeating here this year. So when we just think about that overall profitability in EPS walk, yes, we're going to have very modest amount of positive volume, not quite frankly enough to write home about. From a leverage perspective, we will have some benefits obviously from the restructuring coming through. We're going to have significant amounts of cost inflation here coming through in the business, whether that relates to tungsten tariff costs as well, as I would say, the normal salary inflation that comes about in addition to some of the headwinds that we've got in, in terms of 15 million that we talked about in the prior quarter, in terms of, excuse me here, net tornado benefits that occurred in the prior year and some additional tax credits that came through from a tungsten perspective, as well as, you know, about a $5 million pension headwind. So, you know, we'll see that positive price raw here in, you know, really in Q3. And as we just talked about previously, when we get out to Q4, we'll really get to a more neutral basis. Okay, okay, that's, that's helpful. And then as we're thinking about those restructuring savings, any additional color either in terms of the ratability there or maybe just even how to think about what the key programs are inside that restructuring savings? Yeah, I'd say it's, it's pretty ratable throughout the year, maybe with a little bit of a trail off in Q4 as we start lapping some stuff, you know, in terms of what's, what's in that program, you know, we've done some shifting of resources that's been able to unlock some cost as well as, you know, in the last year talked about the closure of two facilities, one here in the US and the consolidation of two locations in Spain that are driving that.

Pat Watson - Vice President and Chief Financial Officer - (00:41:13)

Yeah, we are on track for the $35 million that we have projected for the year.

Chris Dankert - Equity Analyst - (00:41:20)

Got it. Thanks so much, guys.

OPERATOR - (00:41:24)

Thank you. And our next question today comes from Julian Mitchell of Barclays. Please go ahead.

Julian Mitchell - Equity Analyst - (00:41:32)

Hi, good morning. Good morning. I just wanted to, to try and dial in again a little bit on the sort of EPS guide change and the moving parts there. So I think the guide midpoint went up by sort of $0.40 or so. Maybe $0.05 of that is the lower tax rate. So we write in thinking that sort of the price cost part of that 40 cents is kind of more than half of it. So maybe, I don't know, 20, 30 cents tailwind from price cost versus the prior guide. And then it sounds like a lot of that comes in the third fiscal quarter. And as we look ahead simplistically, if the tungsten price stays where it is today, is it sort of neutral after this year or does it sort of flip to a kind of headwind as your cogs catch up? Just trying to understand that dynamic, please.

Pat Watson - Vice President and Chief Financial Officer - (00:42:35)

Yeah, good questions, Julian. I would say the best way to think about the change in the outlook is, you know, you got outlook to outlook. There's really two primary changes, one's volume and second one is price. Right. And so there is some, there is some incremental volume in there in terms of the change and you can probably call that, you know in EPS terms 20 ish 2530 cents. Right. I think that tax number is probably a little bit hot. So it's probably closer to $0.03 a tax ETR to ETR when you do the math Julian. And then so you'll have some remainder in that and they're included in that is price Roth favorability that's in the year but you've also got some muting of that is some higher variable compared to. Okay. That's also nestled in there. So as you think about Q4 I'm going to switch now to talking about this sequentially because I think on a year over year basis becomes a little more difficult. Q4 Effectively what's in the outlook is neutrality and unless there's a change in tungsten. Right. We would expect the price raw neutral on that piece going forward. From that as you think about the following fiscal year.

Julian Mitchell - Equity Analyst - (00:43:53)

Right.

Pat Watson - Vice President and Chief Financial Officer - (00:43:53)

As we think about that from a headwind perspective. Yep. There is, there is some favorability this year that we will have on price raw that won't repeat next year. Right. When you do that from a year over year perspective I appreciate that would be seen as a headwind but if you think of it sequentially we'll be on the same basis.

Julian Mitchell - Equity Analyst - (00:44:15)

That's helpful. Thank you Pat. So you've got sort of that as you said it's sort of 20 to 30 cents price cost tailwind this year, is that right?

Pat Watson - Vice President and Chief Financial Officer - (00:44:25)

Yeah, I go back to the math I just kind of gave you there Julian. So yeah I think Julian, keep that in mind. As Pat said that volume which again if you look at prior outlook versus this outlook has improved by 350 basis points. Price improved by 300 basis points average was 4% now it's 7%. So it gives you idea that volume is playing a role in epsilon and within the volume you got project wins you got some improvement in market and then also I think those are the two main component of that.

Julian Mitchell - Equity Analyst - (00:45:01)

That's helpful, thank you. And then just my sort of second question would be around. Just the sort. Of power gen exposure and you have that helpful kind of slide five that you've touched on a couple of times already. Just wanted to understand what is your revenue sort of exposure as pertains to that slide 5 material. What was your dollar revenue in the last 12 months or fiscal 25 or just trying to understand what your sort of jumping off point is today in revenue as we look ahead to that TAM expansion.

Pat Watson - Vice President and Chief Financial Officer - (00:45:43)

Yeah, Julian, we are not disclosing that deeper detail, but let me just tell you the information you have. If you look at the metal cutting slide, you will see that metal cutting energy had improved by 12%, whereas infrastructure and energy had a decline. This is Q1 by 5%. That will tell you, you can do some math in that. And you can see that some of the increase in metal cutting energy revenue is driven by some of those projects.

Julian Mitchell - Equity Analyst - (00:46:12)

That's great. Thank you.

OPERATOR - (00:46:16)

Thank you. And our next question today comes from Joe Richie at Goldman Sachs. Please go ahead.

Joe Richie - Equity Analyst - (00:46:22)

Hi, Joe. Hey, guys. Good morning. Yeah, nice to see the strong start to the year. Just a couple quick ones. I know we've talked a lot about tungsten. It's interesting to me the tungsten prices were up materially this past quarter. And Pat, you talked through the dynamics. That typically takes a couple quarters. I just wondering, has anything changed from a timing standpoint in your ability to pass through price earlier than you have historically? Just seems like the dynamics have gotten perhaps a little bit better on the margin there. Just any thoughts around that would be helpful? Yeah, I think two things to think about there as it relates to pricing. You know, we've got two semi unique circumstances going on simultaneously here. One is, you know, where tungsten sitting at today is a historical high. Right. You know, and then secondly, I would say, you know, we've got the tariff surcharges that are in place, which are a unique event for us and many other companies in terms of how they've had to deal with some of the tariff costs. So I think the situation is pretty unique that we're in at the moment. I do credit the commercial teams. You know, they have gotten out there and been aggressive, you know, where they can be, and smart about where we can make sure we're raising prices to cover the costs. And, you know, that's never an easy conversation with the client. No client ever really wants to have their price raised. But, you know, as Sanjay talked about previously, we remain very confident in our ability to go out there and get the cost and make sure we're covering for it. We've had a track record of doing so. And I think some of the commercial capabilities that as an organization that we've developed over the last couple years, not only do they help us in terms of going out and winning market share, but they also help us in terms of, you know, making sure we're accurately Pricing for the product that we have and the value we're creating for the customer. Got it. That's helpful. And I guess just maybe following up on that tariff discussion, to the extent that you're putting surcharges through, how are you guys thinking about, you know, a situation in which, you know, tariff or potentially roll back, what does that ultimately mean for kind of like the price cost equation that you have baked into the guide for the year?

Sanjay Chaube - President and Chief Executive Officer - (00:49:01)

Yeah, sure, Joe. I think first of all, tariff situation, as you guys know, has been very dynamic. And we have taken in a very broad set of actions, starting with like production moves, supply chain optimization, and where necessary, we did implement surcharges. And as things have changed, those surcharges also have been very dynamic from our side. For example, you know, when the tariff for products going from US to Canada, you know, that was taken down, we took the surcharges out. So we are very quickly adopting and doing what we need to do to recoup the cost that we need to, but at the same time being very, very competitive in the market. So we'll continue to do that. And in the long term, let's say some of the tariffs that we get to a point where they become permanent, then we will make those changes in the permanent prices. So that's the way we are looking at it.

Joe Richie - Equity Analyst - (00:50:04)

Okay, thank you very much.

OPERATOR - (00:50:08)

Thank you. This concludes the question and answer session. I'd like to turn the conference back over to San Calbe for closing remarks.

Sanjay Chaube - President and Chief Executive Officer - (00:50:16)

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.

OPERATOR - (00:50:30)

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