KMT Q1 FY2027 earnings call transcript, November 4, 2026

KMT earnings conference.

Good morning. I would like to welcome everyone to Kenna Metal's first quarter fiscal 2027 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 would 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 PC, vice president of investor relations. Thank you, operator. Welcome, everyone. Thank you for joining us to review CanadaMetal's first quarter fiscal 2027 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 PC, 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'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 KMT's SEC findings. 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 on our Forum 8K on our website. And with that, I'll turn the call over to Sanjay.

Thank you, Mike. Good morning, and thank you for joining us. I will begin the call today with an overview of the quarter. I will also share some in-market commentary and updates on our strategic growth and lean transformation initiatives. From there, Pat will cover the quarterly financial results as well as the fiscal year 27 outlook and some commentary regarding our future estate margins beyond fiscal 27. Finally, I'll make some summary comments and then

we'll open the line for questions. Turning to slide three, let me frame the quarter around what we did well and where we have more work to do. First, what we did well. We delivered sales and earnings above the midpoint of our outlook, primarily driven by favorable trunks and price and cost timing alongside continued volume growth in metal cutting. Metal cutting delivered our fourth consecutive quarter of volume improvement, achieving mid-single-digit volume growth and continued progress in capturing share in aerospace and defense and energy, including power generation. We also continued pricing actions to address elevated tungsten cost and deliver $3 million. in restructuring savings. Where we have more work to do is addressing infrastructure volume and overall cash conversion. Infrastructure volumes decline in a low double-digit range, primarily in energy and earthworks. Let me go a little deeper about the reasons behind the decline and the steps. First, infrastructure is experiencing pricing pressures in certain price-sensitive applications. While we priced according to the rising raw material cost, we were temporarily ahead of the market. Going forward, we are selectively pricing to win targeted applications. Second, in mining, there were market slowdowns in China caused by the implementation of industry-wide safety regulations following a mining accident in May of this year. We anticipate that volumes will recover as mining activity resumes.

And third, we also saw product substitution in very limited applications. And we have identified other opportunities here to cover the shortfall. Our outlook assumes the volume recovery is weighted more towards the second half of fiscal 27. Cash conversion remains another clear priority for us. Higher tungsten costs, increased inventory values, and working capital to cover the shortfall. requirements, resulting in cash use despite strong reported earnings. Our focus is on improving inventory efficiency and cash conversion across the business. We'll go deeper on this as the call progresses. But let me say, I believe we have a real opportunity to improve our inventory turns and cash conversion. while also improving our customer responsiveness. We will continue to build on metal cutting's momentum, address infrastructure volume pressures, and improve cash generation. Pat will provide more detail on our results and outlook. Now let's move to our quarterly results, which again... exceeded the midpoint of the sales and EPS outlook we provided last quarter. Compared to the outlook, sales were primarily driven by increased price realization and better-than-expected volume in metal cutting, which was offset by lower volumes in infrastructure. EPS benefited primarily from the additional price raw timing of... ...89 cents, partially offset by lower volumes. Year-over-year, sales increased 54% organically. The growth was driven by additional price realization and continued volume increases in most end markets within metal cutting. This was partially offset by volume declines within the infrastructure segment that I...

I just described a moment ago. EPS increased to $3.48 compared to adjusted EPS of $0.34 in the prior year quarter. In terms of profitability, EBITDA margin was 51.9% compared to an adjusted margin of 15.3% in the prior year quarter. Free operating cash flow year-to-date was negative $212 million compared to negative $5 million in the prior year. As expected, free operating cash flow was adversely impacted by increased working capital requirements related to tungsten prices. And finally, we returned $15 million to shareholders through dividends. We're updating our EPS outlook for fiscal 27 to reflect the Q1 performance and the recent decline in tungsten prices. Pat will provide more details on the outlook shortly. In summary, we are pleased with this quarter's results and how the team is navigating these very good. very unique business conditions. We remain focused on delivering on our commitments throughout fiscal 27. Turning to slide four in our in-market update. As a reminder, our full-year outlook reflects forecasts of specific market drivers in general market conditions. The top half and the top half. Yeah. The top half of this slide reflects our sales outlook at the midpoint and includes price, volume, and market factors. In general, the full-year view of our market drivers remains relatively unchanged. I do want to point out some underlying trends that continue. In general engineering, IPI

if- estimates in the U.S. and PMIs in China have both continued to improve, while EMEA has seen some modest weakening. IHS estimates for transportation improved again from the previous estimate, but remains down in the low single digit range. Volumes in EMEA, while it's still forecasted to be down, mid-single digit, are slightly better this forecast than prior. The recent EU-China agreement limiting Chinese hybrid imports could potentially benefit OEM production in Europe. The Americas improved modestly as well. And finally, Asia-Pacific declined slightly relative to our prior outlook. Energy saw U.S. land-based rig counts improve from our prior estimate, and customer sentiment remain focused on rig productivity and cost. Data center power generation continues to experience strong mid-teens growth. Market factors remain mostly unchanged from our previous outlook within the... the other end markets. Now let's turn to slide five and six, which highlight our focus on building a sustainable, repeatable model for driving above market growth and margin expansion through lean transformation. Slide five highlights some key growth initiatives that we have talked... about previously and our progress in strategic positioning, gaining share, and accelerating sales growth. It starts with identifying customer problems where our material science and engineering know-how can make a meaningful difference. We then make deliberate choices about where to compete...

and put the right resources behind those opportunities. That means we are focusing our commercial teams and technical talent on applications where we have a clear path to win. The initiatives on this slide reflect that approach. We have been expanding our U.S. defense presence, extending our aerospace capability... ...into airframes and components, pursuing hybrid and electric vehicle programs, and supporting power generation for AI data centers. The common thread is applying our expertise to demanding customer applications. And our goal is to help customers improve their manufacturing performance, giving them a compelling reason to... As you can see, we have demonstrated successes to build upon. U.S. defense revenue grew approximately 90% from fiscal 23 to fiscal 26 through share gains and deeper participation in defense programs. In aerospace, our 12% compound annual revenue... ...exceeded market growth of 9% over the same period. This was due to increased share of wallet, winning new customers, and high-value component wins. In transportation, light vehicle production grew just 1% from fiscal 23 to fiscal 26, while a more favorable mix... of internal combustion engine platforms helps sustain tooling demand. At the same time, we won new hybrid electric vehicle programs through our market-leading solutions and application support. We are positioned very well to compete and win as the market evolves. In energy, power generation revenue...

doubled from fiscal 25 to fiscal 26, including a startup tooling purchase for a customer's plant expansion versus approximately 14% market growth. This once again demonstrates share gain in this high growth area. While the starting baseline percentages for U.S. defense and power generation... ...were modest, this is nonetheless notable progress by the team. We see this approach as the sustainable, repeatable growth algorithm we are using to generate value. We identify opportunities where our expertise gives us an advantage, put the right resources behind them, and apply... ...our material science and engineering know-how to win. Each success creates a foundation for the next, helping us build lasting customer value and long-term shareholder returns. Now on slide 6, as you have heard me say, since the day I became the CEO, continuous improvement is something... I believe very strongly in. This is a multi-year journey to build a sustainable lean culture, and it is becoming increasingly integral part of how we run KenaMetal. Our lean transformation initiative is focused on strengthening the capabilities of our people through processes and tools. See further opportunity as this evolves and expands. Since the program began in fiscal 25, we have held more than 300 Kaizens involving over 3,000 employees and generating over $70 million in cumulative growth savings. Those measures reflect both the value of the work

and the breadth of involvement across the organization. And the savings generated have helped fund investments we have made in the business and will help us drive margin expansion. The specific examples captured on this slide illustrate how the combination of tools, training, and processes lead to improvements over time. In the first example, as part of the sintering process, teams are improving loading and material handling to increase asset utilization and reduce cycle time. Then for our round tools product line, an inventory pilot project is testing an approach to improve material flow within the plant. If the scope covers... about $20 million in work in process inventory. This pilot project is a proof of concept for potential application elsewhere. We'll build upon the momentum we're seeing in our lean transformation as we expand its reach across the enterprise and drive continuous improvement in safety, quality, delivery... inventory, and productivity. I would also add that this lean transformation is part of our margin expansion model. That model has four levers. Volume growth from both growing end markets and share capture, strategic pricing, the lean transformation process, and portfolio management.

It will give us confidence that we can deliver long-term EBITDA margins of 16% to 19%, assuming a stable, elevated tungsten price environment. This margin target is consistent with our 2023 Investor Day baseline. We have only revised this target to reflect the impact of higher tungsten prices, which have increased eightfold since they were issued. Now let me turn the call over to Pat, who will review the first quarter financial process.

Thank you, Sanjay, and good morning, everyone. I will begin on slide seven with a review of our first quarter results. Organic and reported sales were up 54% year-over-year. At the segment level, infrastructure increased 97% and metal cutting increased 29%. Organically, regionally, on a constant currency basis, the Americas led with a 76% sales increase, while EMEA was up 34% and Asia-Pacific sales increased 31%. Buy-end market, on a constant currency basis, energy increased 126%. łem js�, Jeremy닝 adversa,ículos Intereger,嗟! For more you,�� risks. Content. Earthworks grew 80%, Aerospace and Defense grew 61%, General Engineering was up 39%, and Transportation increased 11%. As Sanjay referenced earlier, we experienced a mid-single-digit sales volume decline overall. I will provide more color when I review the segment performance. in a moment. EBITDA and operating margins were up to 51.9% and 49.4%, respectively, versus adjusted margins of 15.3% and 8.2% in the prior year quarter. The margin increase was driven by incremental favorable price raw of three hundred and twenty three million dollars, primarily within the infrastructure segment, non-raw material pricing and tariff income, increased sales and production volumes in metal cutting, an incremental four million dollar manufacturing tax credit and infrastructure, and year-over-year restructuring savings of approximately three million dollars.

These factors are partially offset by tariffs and general inflation, higher compensation costs, an impairment of an equity investment of approximately five million dollars, and a charge of approximately five million dollars related to the write-off of certain fixed assets in the current quarter. Earnings per share was three dollars and forty-eight cents. in the quarter versus adjusted EPS of thirty-four cents in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on slide eight. The year-over-year effective operations this quarter was ten cents. This reflects non-raw material price and tariff income, higher sales and production volumes in metal cutting, including productivity improvements and incremental restructuring benefits of three million dollars. These factors are partially offset by tariffs, general inflation, higher compensation costs, and an equity investment impairment and certain asset write-offs of five cents each. You will note on this slide, we've provided the price raw material effect of three dollars and fourteen cents this quarter, and for clarity, including the additional five-cent headwind from interest related to the working capital investment results in a net tungsten impact on the business of three dollars and nine cents. There was a four-cent tailwind from the manufacturing tax credit, and you can also see a ten-cent headwind from currency and transaction losses related to Bolivia devaluation. Lower taxes and other and pension effects largely offset each other. Flies nine and ten detail the performance of our segments this quarter. Reported metal cuttings

sales are up 28% compared to the prior year quarter with 29% organic growth partially offset by an unfavorable business day effect of 1%. We reported mid-single-digit volume this quarter which represents the fourth straight quarter of volume growth. Regionally excluding currency exchanges the Americas increased 40%, Asia-Pacific increased 30%, and EMEA increased 12%. Looking at sales by end market, energy grew 40% this quarter from delivering on our data center power generation focus and pricing execution. General engineering increased 3% of our data center power generation focus and pricing. EMEA increased 34% year-over-year due to price and share gains in the indirect channel in the Americas. Aerospace and Defense increased 32% year-over-year due to pricing and share gains in EMEA. And lastly, transportation increased 11% year-over-year due to price partially offset by weaker vehicles. Production, primarily in EMEA. Metal cutting operating margin was 29.7% compared to 6.9% in the prior year from favorable raw material price and cost timing of approximately $65 million, non-raw material-related pricing and tariff income, higher sales and production. volumes, as well as restructuring savings of approximately $2 million. These are partially offset by an impairment of an equity investment of $5 million, higher compensation costs, tariffs, and general inflation. With regard to tariffs, while the IEPA tariffs have ended, the new Secretary of State's Office of the United States has a new financial crisis.

Section 301 tariffs apply to a broader base of imported goods. Overall, metal cuttings tariff costs are up approximately 30% from the run rate we experienced while IEPA tariffs were in effect. As we've discussed in the past, we intend to fully offset the cost of tariffs either through operational or through operational. Lovers cost reduction efforts or surcharges. Now turning to slide 10 for infrastructure. Reported infrastructure sales increased 98% year-over-year with an organic growth of 97% and favorable foreign currency exchange of 1%. As Sanjay discussed earlier, infrastructure reported low double-digit volume decline. Regionally, on a constant currency basis, America's sales increased 123%, EMEA sales grew 93%, and Asia-Pacific increased 32%. Looking at sales by end market on a constant currency basis, energy increased 180%, mainly driven by price in the Americas, partially offset by volume declines due to limited tungsten substitution with certain price-sensitive applications. Aerospace and defense increased 125%, driven by price and continued focus on growth initiatives. in the Americas and EMEA. Earthworks sales increased 80% due to price. This was partially offset by lower volume, primarily from price sensitivity and mining slowdowns in China. And lastly, general engineering increased 50% due to price, partially offset by low volume. Lower volumes in the Americas. We have taken additional steps to address infrastructure's lower volume, including price adjustments, to compete and win. Our outlook assumes modest volume recovery in Q2, with the majority of the anticipated recovery in the second half. Operating margin was 70.6.

7% compared to 8.9% in the prior year quarter. The increase in operating income was driven by the favorable timing of raw material-related pricing compared to costs of approximately $258 million, non-raw material-related pricing, and an incremental benefit of approximately $4 million. from the Advanced Manufacturing Production Credit under the Inflation Reduction Act. These factors were partially offset by lower sales and production volumes, tariffs and general inflation, higher compensation costs, and a charge of approximately $3 million related to the write-off of certain fixed assets in the quarter. Now turning to slide 11 to review our free operating cash flow and balance sheet. Our first quarter year-to-date net cash flow from operating activities was negative $201 million compared to $17 million in the prior year period. The decline was driven primarily by working capital requirements, including increased inventory values resulting from the unprecedented price of tungsten, as well as advanced payments required by certain suppliers to secure raw material. These working capital requirements were partially offset by higher net income during the year. The key distinction here is timing. Our P&L benefits from price realization relative to the costs recognized in earnings, while cash is being invested in higher cost inventory and supplier advances to meet our customers' needs. Additionally, the value of our inventory balance has grown 3x over the last 18 months, not because we have seen a three-fold increase in physical

quantities, but mainly because of tungsten prices. It is a substantial use of capital and a central focus of our cash conversion work, which I'll talk about in a moment. Our first quarter year-to-date free operating cash flow decreased to negative $212 million from negative $5 million in the prior year. Due primarily to working capital changes, including the increase in inventory I just referenced, partially offset by higher net income and lower capital expenditures compared to the prior year period. This result was in line with the $200 million outflow we expected for the quarter. On a dollar basis, year-over-year, primary working capital increased to $1.66 billion. On a percentage of sales basis, primary working capital increased to 37.9%. As I just mentioned, we are actively working on initiatives that will help improve all key cash conversion drivers. We are also looking at ways to improve inventory efficiency throughout the supply chain. Improving inventory efficiency is our greatest potential cash conversion driver. Initiatives include optimizing payment terms through extended supply chain financing, reducing raw material transit times, optimizing intermediate product movements, and standardizing payment terms consistent with industry practice. To help us accelerate this work, we've engaged some outside partners and subject matter experts to support us in this project. Net capital expenditures decreased to $10 million compared to $23 million in the prior year quarter.

In total, we returned $15 million to shareholders through dividends. Due to the historically high tungsten prices and the pressure it has placed on working capital, our share repurchase program has remained paused. As discussed last quarter, we will revisit the program once free operating cash flow becomes positive. From inception to date, we have repurchased $70 million or 3 million shares under our $200 million authorization. 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 of availability of approximately $1.1 billion and were well within our financial covenants. Our full balance sheet can be found on slide 18 in the appendix. Now on to slide 12 regarding our full year outlook. We still expect FY27 sales to be between 3.33 and 3.45. billion dollars with volume ranging from 1 to 4 percent, net price and tariff surcharge combined of approximately 40 to 43 percent, and we anticipate foreign exchange to be neutral. As Sanjay noted earlier in his remarks, most end market indicators have positive momentum and are substantially unchanged from our last outlook. The outlook does reflect the recent decline in tungsten prices and assumes that prices will remain stable at the current approximately $2,700 level. Should tungsten prices remain at this level, we could expect price and tariff realization to be towards the lower end of our pricing range.

We continue. to assume that there is no material effect on customer activity as a result of the conflict in the Middle East. Our interest and tax rate assumptions are unchanged from our prior outlook. As a result of our first quarter performance and reflecting the current price of tungsten, we now expect adjusted EPS in the range of $5 to $6. This outlook now includes an approximate $0.97 tailwind related to the timing of price raw due to the moderation in tungsten prices. This impact increased $0.58 from the $0.39 tailwind we provided in the prior outlook. Let me provide you the quarterly cadence for this. In Q2, we expect a benefit of $1.00. In Q3, a headwind of $0.55. And in Q4, a headwind of $2.62. Last quarter, we stated if tungsten prices were to remain stable, we would be price-cost neutral in Q3 and exit Q4 with mid- teens EBITDA margin. With tungsten at $2,700, we now expect headwinds from price-cost to extend into Q4 and exit Q4 with a low double-digit EBITDA margin. This information will provide you with the ability to consistently bridge our results, excluding the effect of tungsten. and timing elements, whether they are positive or negative. The expected second-half headwinds reverse a substantial first-quarter benefit. On the cash side, the full-year outlook for capital expenditures and free operating cash flow remain unchanged. This cash outlook reflects the working capital

burden from the earlier rise in tungsten costs, including higher inventory values and supplier advances. The recent market price decline does not immediately unwind those investments. Improving inventory efficiency remains important, but the outlook does not assume that the cash conversion challenge is resolved this fiscal year. The other assumptions in our outlook are noted on the slide. Our second quarter outlook can be found on slide 13. We expect second quarter sales to be between $785 million and $815 million, with volume ranging from 1% to 4%, price and tariff surcharge. in the range of 47% to 50% and neutral foreign exchange. Let me share some details on the sales assumptions affecting the Q2 outlook. Once again, similar to the full year, the combination of improving end market conditions, our focus on share gain initiatives, and price, we anticipate each end market to be up high. double digits on a constant currency basis. We also anticipate some modest recovery of the lost infrastructure volume, with the majority to be realized in the second half of FY27. Foreign exchange is neutral on both the sales and an operating income basis. Interest expense is assumed to be approximately $11 million. And an effective tax rate of 25%. We expect adjusted EPS in the range of $1.20 to $1.50, which includes approximately $1 of favorable timing of raw material pricing compared to cost. This Q2 impact is generally in line with the amount we provided last quarter, reflecting the recent decline.

In tungsten price. And with that, I'll turn it back over to Sanjay.

Thank you, Pat. Turning to slide 14, let me take a few minutes to summarize. We're strengthening repeatable commercial processes to drive share gain. We remain committed to expanding our lean transformation journey with a good path to raising the profitability of the business. We continue to adapt to a fluid and dynamic tungsten pricing environment while also actively managing our tungsten supply chain and working to improve our cash conversion drivers. And as I described earlier, the four margin expansion levers of volume growth strategic pricing, lean transformation, and portfolio management mean that we are well positioned to deliver 16 to 19 percent EBITDA margin beyond fiscal 27, assuming tungsten stays at current levels. We are off to a good start with our performance in the first quarter of fiscal 27. We have a defined path to improve certain areas of infrastructure while advancing the business's focus on growing defense applications in the Americas. We expect volume growth and share gains in metal cutting to continue. End markets remain supportive, and we are confident. That our strategy will result in long-term value creation for our shareholders.

And with that, operator, please open the line for questions. 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.

The first question today comes from Tammy Zachariah with JPMorgan. Please go ahead.

Good morning, Tammy. Let me take the lead on that and Pat can add as needed. To answer your question, I will first start with a baseline. If you go back to fiscal 24, fiscal 25, we delivered despite low volume. EBITDA around 15%. And then in fiscal 26, we saw the volume improve. But of course, fiscal 26 introduced a lot of noise from rising tungsten cost. And that same noise, you know, we have seen even this year. But what you, the information we have given to all of you, based on that, you can get to a number for normalized EBITDA numbers, even for fiscal 27 and fiscal 26, right in the mid-teens. What we think that from that baseline, and then now, you know, looking at our four levers that we just talked about, volume growth, which again will be supported by market growth. And in general, as we have just talked about it, markets are mostly either neutral or positive. Then we have shown a share gain opportunity for 100 to 200 basis points. Then on top of that, when you put the cost structure improvement, including restructuring and productivity, and then also strategic price. And then as necessary, where needed, we will make adjustments in some of the portfolio. We do have a clear line of sight to get to 16% to 19% with that gain plan. Kami, let me just add a couple things to Sanjay's comments there. I think as you heard us talk about on the last call we had, just in this current environment where tungsten prices are elevated, our expectations for operating leverage on volume is in the mid-30s today. So you can use that kind of to get towards how much of that's really coming from a volume perspective. I'd also say in terms of our end market.

expectations here and our share capture expectations, nothing really has changed in terms of our long-term view. Our long-term view from an in-market growth potential here has been we're going to be in that 1% to 2% compound annual growth rate from a market perspective. And we believe based on the things we're doing. commercially that we can add a point or two to that as well. So that's basically the, I'll say it, the volumetric growth pattern over the next couple of years. And then the last thing I'll just add here is in terms of as we think about FY27, 90 days ago, we had anticipated that Q4 was going to be a normal quarter for us, right, with no price raw tailwinds or headwinds going on in terms of Q4. Obviously, we've had some price come down here from a tungsten perspective. That's going to put a little bit of deflation. In the business from a margin perspective, that's going to be a headwind for us here in the back half. In that fourth quarter, in terms of our prior expectations was, this is in EPS terms, about a $2.43 headwind. In my prepared remarks, I said our current expectations. About a $2.62 headwind. So you can see in there, that's basically all that price raw phenomena. So you translate that into margin points. It's about 200 basis points, a little bit more than that of margin. And so our expectation that we'll end this year, again, I'll call it organically. We had a mid-teens EBITDA. That remains the case here as well, once you kind of pull out some of the pricing action going on from a tungsten perspective.

Understood. That's super helpful color. And then on tungsten, I appreciate all the color. And from an investor's seed. It's sometimes hard to unpack what's really going on underneath. So your tungsten price, or in the global markets, in China specifically, tungsten came down. Outside China, it came down not a lot, but a bit. But then your price cost tailwind in the quarter was actually much higher than you previously. And so why is that? Are you making operational changes that are structural to reduce your dependency on new tungsten and using more recycled? Or what really explains tungsten prices coming down, but then the price cost tailwind? The wind you saw was better than what you thought. Yeah, Tammy, I'd say two things. Simply, you know, we overachieved our price for the quarter. I think that's a reality. I'd say the second thing here, just in terms of that timing element, recall that what happens in our P&L. It tends to lag what's going on from an index perspective, right? So while we did see tungsten come down, you know, much of that has been, I'll say, in the September and into October timeframe here. And so that's not really a P&L effect at this point in time. It will be as we get into the second half. Which is why we're, you know, we're talking about this from a headwind perspective, additionally, as we get into the second half of the year. But it's not really an impact in Q1.

Yeah, I'll just add to that, Tammy, that like you said, you know, the price of raw tungsten coming from mines or versus the recycled, that there is a dynamics on that. But then again, our overall approach, how we are handling that, you know, we have global operational footprint. We have global supply chain and sourcing network. So we are working through all of those to make sure that we have a good cost position and we can compete and win. Understood. Thank you.

The next question comes from Angel Castillo with Morgan Stanley. Please go ahead.

Yeah, thank you, Oliver. As I mentioned in my prepared remarks, there are. Three pieces to that and let me go through, you know, one by one here. First one, the bigger piece of the three is the price sensitiveness in certain applications. As we talked about in the earthworks and also in general in the energy where the tungsten usage per product is much higher. So that puts a lot more burden on customer just because, again, you know, when tungsten has gone up eight or nine fold, it translates to a much higher price increase. In some cases, what we found that even though in our own view, we were running the business the way we should run it, you know, based on. the actual material cost, and we priced accordingly. But then we were slightly ahead in the market compared to some other players. We have seen the dynamics of that. We've already started to work accordingly. And then we are also using our global supply chain footprint, including our own operations in China, to make sure that we have the best cost position, and then we can compete, and we're taking actions. We are already seeing some positive results of that. As we said in the prepared remarks, we will see more recovery of that in the second half, but we've already started to see some recovery of that in this quarter, second quarter. Now, coming to the second bullet point I had, you know, China-related data. Coal especially and mining, you know, decline. It was driven by an accident that happened in the May of this year, where you might have seen the news, about 100 people died. And then from that, you know, there has been restarting of those mines have been a little bit slower. And as that happens,

we do expect to get full recovery from that side. There is no loss of business. We're very competitive. We have very good products in that. Finally, coming to the product substitution, as I mentioned in the prepared remark, very, very limited applications. We expected some of that. Again, it ties back to, again, where the steel solutions could work, gives good enough solutions. Not the comparable, but good enough. I do believe that we have other opportunities that we will be going after. We have identified those opportunities that will help us recover from that also. So overall, we are confident in the full year outlook as we progress through the quarters. Got it. That's really helpful. And then maybe just to follow up on the tungsten prices or costs. I mean, you guys are a big procurer of tungsten, obviously. You know, do you think that flat price assumption is fair? I mean, you know, what do you guys see in kind of the supply demand of what you guys are procuring? Yeah. A couple things about that. You know, number one is the outlook assumption is flat. And we appreciate that reality is always not necessarily that simplistic. You know, that being said, I think it's the easier way, quite frankly, for us to all to understand what's kind of going on in the business. Right now, we're tied out in our outlook to where the current market is. And so, you know, we don't really have a great crystal ball on where this is going to go. I would just say our thesis here at the moment is supply is tight. And because supply is tight, we've seen one mine come on, but that volume is all primarily been spoken for.

We're not anticipating a lot of additional supply to come into the marketplace. It's a marketplace that today, if we look at the demand side, industrial demand globally is pretty good. It's very strong here and nice in the U.S. If we think about other places in the world, we know we could use some. Further industrial strengthening, let's say, in Central Europe. But industrial demand is good. Demand from a defense application is strong and growing. And so our view of the tungsten requirements in the market is that over the near term here, we're actually going to see more demand of units. And that should be supportive of high prices, right? Now, how this all kind of works its way out, I think that time will tell. If we went back a year ago and we're having this conversation, I don't think we would have conceived that it was going to get to $3,000. It did. At the moment, I would say the market appears to be relatively stable. Oliver, I'll just add to that. This has been our general approach. We use the current market price as the assumption for the modeling. That is, I believe, right way to do this for all different stakeholders. However, we know that things can be different from that. We have different scenario planning. We are very confident that whichever way it goes, we are very well positioned with our global operations, global sourcing, and supply chain network, and then also very strong material science capabilities and

technology to stay very competitive in that. So I know in short term, it does create quite a bit of noise, but with the things we are doing, we are very confident about our ability to compete and win in the long term.

Understood, and thanks very much.

The next question comes from Steve Barger with KeyBank.

So there is room for product redesign because, you know, obviously you can't predict what tungsten prices are going to do over a long period of time. But if they stay elevated for an extended period, you're saying there is opportunity for product redesign to reduce tungsten. content. We have been already working. Some of those have been already implemented, but there is more that in our roadmap. Yes. Okay. And then thinking about the four levers and being committed to the 16 to 19% adjusted EBITDA margin. If you adjust for tungsten, what percentage of the portfolio is running below 16 to 19% EBITDA margin? Because I think you've had some lower contributors for a long time. Is this the thing that finally gets you to kind of pull the trigger on some of those products that have historically not contributed as much? Just some of the core? Very good question, Steve. First of all, almost two years ago, we did take a very much bottoms-up approach on our overall footprint portfolio and then also our product portfolio. We identified and we have taken actions. Our actions are either... We're going to fix it from an organic perspective or we will take some inorganic action. And we have actually made very good improvements. And I'll just give you a couple examples we have done and then I'll give you a little bit what to expect in the future. We did address our TAPS business, which used to be low margin. We changed the business model.

As a result of that, eventually we did move some production to other locations, but then we closed the factory in Massachusetts. Now moving on to some of the other businesses, we took actions of selling the Goshen business that was part of the infrastructure portfolio. And there are other areas in the business where we have seen the Goshen business model. And taken actions over the last two years to improve our overall performance. On a high level, when you look at the total portfolio, in my 16 to 19, you will expect metal cutting to be on the higher side of that, infrastructure to be on the lower side of that. And then we'll continue to make sure that, you know, we are taking right actions to improve our overall. But in the meantime, or in parallel, I should say, we're definitely working on winning more business, strategic growth on both segments, then we're doing strategic pricing, and then we're applying the lean transformation tools to improve our overall cost position. Yes, let me just add on a couple of things that, you know, I guess the world of... false, right? We do that work on a regular basis, and we revisit things and reevaluate whether or not the growth initiatives, the pricing initiatives, the cost initiatives we have are suitable, and whether or not we're going to get the required return on capital out of the business. You know, I would also say... Steve, and I know that in this environment, it's difficult for everyone to get their head around what's happening from a business perspective, you know, but I would say I think we've improved the actual underlying run rate of the EBITDA of this business over the last couple of years.

You know, I'll just give a simple, you know, kind of explanation in terms of how you can kind of... get there and understand that, you know, if you really look at where this business is projected to perform in our outlook around the midpoint, right, and you kind of walk back the EPS and, you know, back into an EBITDA number. I know that we haven't guided that, but you're going to get about $760 million of EBITDA, right? And... Obviously, that includes some price-raw benefit, but in terms of what's out there today, you know, last year we had about a little over $300 million, and this year we expect to have a little bit over $100 million. So once you kind of pull that out, the EBITDA run rate, let's say, sits around $350-ish, right? At the same point in time, I think it's fair then to adjust the sales, right, for the incremental price just to get it on an apples-to-apples basis. You know, if you do that, and obviously we've got an outlook out there for price this year, you know, and that basically comes out to just under $1 billion worth of price at the midpoint. And last year, if you looked at where we expected price to be for the full year, just over $300 million. So you're going to end up around $2.1 billion worth of sales. So, you know, at that midpoint of the outlook this year, you're talking about, you know, 16, 16.5% EBITDA. And that just kind of removes some of that noise in terms of what's going on from a tungsten perspective.

It kind of reverts the business back to a $350, you know, pre-run up in tungsten price from a margin perspective.

Got it. Okay. Yeah, you provided a lot of numbers. I'm sure we all look forward to it.

I appreciate the detail. Thanks. This concludes the question and answer session. I would like to turn the conference back over to Sanjay Chowby for closing remarks. 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. A replay of this event will be available approximately one hour after its conclusion. To access the replay, you may dial toll-free within the United States 855-669. Outside of the United States, you may dial 412-317-0088. You will be prompted to enter the conference ID, 3815621, then the pound or hash symbol. You will be asked to record your name and company. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.