Kennametal Inc. (KMT) Earnings

Management highlights

### Full Year Fiscal 2026 Performance - Full year organic sales increased 19% year-over-year, driven by higher price realization to offset elevated non-Chinese tungsten costs and modest volume growth. All end markets posted constant currency growth. - Adjusted EPS increased to $4.57 from $1.34 prior year; adjusted EBITDA margin expanded to 26.9% from 15.2% prior year. - Free cash flow was negative $79 million due to increased working capital requirements tied to high tungsten prices; $71 million was returned to shareholders ($61 million in dividends, $10 million in share repurchases, with repurchases paused during Q4 to preserve working capital). - The company achieved $27 million in restructuring savings in FY26, remains on track to hit $110 million in total savings by the end of FY27. ### Strategic Growth Initiatives - Leveraging core competencies in material science, process engineering, and secure global supply chain to capture new growth across end markets, with recent wins in AI data centers, defense programs, mining projects, and next-gen vehicle powertrains. - Highlights growth opportunity in diamond-coated cutting tools for carbon fiber reinforced plastics (CFRP), a $500 million aerospace market growing 9% annually through 2028. The segment offers higher recurring revenue (double the consumption rate of aluminum cutting tools, no reconditioning) and the company has already won new business from competitors facing supply disruptions, with opportunities to expand into transportation and general engineering. ### End Market Demand Environment - **Aerospace & Defense**: Structural growth engine, commercial aircraft build rates are recovering as supply chains normalize; U.S. defense budget increases and NATO spending hikes create durable multi-year demand. A&D is now projected to be Kenna's third largest end market. - **General Engineering**: Stable, with low single digit production growth projected in the U.S. and Europe, and modest expansion in China. - **Energy**: Forecast to grow strongly, with U.S. land rig counts now projected to rise high single digits (up from a prior forecast of mid-single digit decline), supported by rapid expansion in AI data center power generation demand. - **Transportation**: Soft, with global light vehicle production projected to decline ~1% in FY27. - **Earthworks**: Mining share gains are partially offset by soft core construction markets in the U.S. and China, though customers are increasingly consolidating supply with reliable providers like Kenna. ### Balance Sheet Actions - Completed refinancing to extend debt maturities, with the nearest debt maturity now in 2029 and public notes extended to 2031 and 2036. Secured a new $500 million term loan to support working capital needs for elevated tungsten prices, providing full liquidity to capture growth opportunities.

Guidance

• **Fiscal 2027 Full Year**: Total sales are projected between $3.33 billion and $3.45 billion, with volume growth of 1% to 4%, price and tariff surcharges of 40% to 43%, and a neutral foreign exchange impact. Adjusted EPS is expected between $4.15 and $5.15, with a midpoint of $4.65, roughly flat year-over-year as operational momentum offsets non-operational headwinds. • **Fiscal 2027 First Quarter**: Sales are projected between $745 million and $775 million, with 1% to 4% volume growth, 50% to 53% price/tariff surcharges, and neutral FX. Adjusted EPS is expected between $2.50 and $2.80, including ~$2.25 in favorable raw material pricing timing. • **Raw Material & Margin Cadence**: Tungsten is assumed to remain stable at current elevated levels through FY27. The favorable raw material pricing timing benefit will be concentrated in the first half of FY27, and will be materially behind us by Q3 FY27, with pricing and costing aligned in the second half. Q4 FY27 adjusted EBITDA margin is expected to hit the mid-teens, representing a normalized baseline for modeling FY28 and beyond. In a sustained high tungsten price environment, volume leverage is expected to reach the mid-30s. • **Cash Flow**: Capital expenditures are projected at $85 million for FY27. Free operating cash flow is expected to reach ~20% of adjusted net income, and turn positive in the second half of FY27 as working capital peaks in Q2. • Key assumptions: No material impact from the Middle East conflict on customer activity, 25% effective tax rate, ~$50 million annual interest expense, and $10 million in incremental restructuring savings.

Segment performance

Kenna Metal operates two core product segments in Q4 FY26: 1. **Metal Cutting**: Organic sales grew 22% year-over-year, reported sales grew 24% year-over-year. This segment contributed 33.6% of total Q4 organic sales growth. By region (constant currency), the Americas grew 29%, Asia Pacific grew 20%, and EMEA grew 16%. Adjusted operating margin reached 27.3%, up from 7.9% in the prior year quarter, driven by $54 million in favorable raw material pricing timing, non-raw material pricing/tariff surcharges, higher volumes, and $4 million in restructuring savings (partially offset by higher compensation and inflation). 2. **Infrastructure**: Organic sales grew 74% year-over-year, with 1% favorable foreign exchange and 1% favorable business day effect partially offset by a 3% divestiture impact. This segment contributed 66.4% of total Q4 organic sales growth. By region (constant currency), the Americas grew 103%, EMEA grew 46%, and Asia Pacific grew 40%. Adjusted operating margin reached 58.4%, up from 6.8% in the prior year quarter, driven by $198 million in favorable raw material pricing timing (partially offset by lower volumes, higher compensation, and inflation).

Risks & headwinds

• Sustained elevated tungsten prices create ongoing working capital pressure that weighs on near-term free cash flow. • Soft end market demand in transportation and U.S./China construction creates headwinds to overall volume growth. • Higher compensation costs, general inflation, and tariffs create margin pressure that partially offsets pricing benefits. • Non-operational headwinds from the end of Bolivia's preferential exchange rate program and higher interest expenses from new debt to fund working capital pressure near-term EPS. • Limited processing and tungsten supply capacity requires deliberate allocation of capacity to higher-return opportunities, which means the company forgoes lower-margin sales even if overall supply is sufficient.

Analyst Q&A

• Q: What is the current underlying normalized EPS run rate for Kenna, after accounting for raw material timing impacts? /

  A: Management clarified that after pulling out the full $3.11 of FY26 raw material timing benefit and the $0.39 of FY26 raw material timing benefit, plus the 23% Bolivia FX headwind from the ended preferential program, the normalized underlying FY27 run rate aligns closely with the prior estimate of ~$1.64 per share, just 1 cent higher than the prior 90-day forecast. The large raw material benefit from FY26 will not repeat in the second half of FY27, creating a year-over-year headwind starting in Q3.

• Q: Is Kenna short tungsten material, and are you losing sales due to capacity constraints that require prioritizing higher return projects? /

  A: Management stated Kenna is not technically short of tungsten, but is deliberately allocating existing ore and processing capacity to higher-return end markets (aerospace & defense, energy) to maximize shareholder returns. While Kenna could take on more business if additional tungsten were available, it has secured sufficient supply to meet its prioritized plan, and capacity allocation is a deliberate strategic choice, not a forced shortage.

• Q: How much of the 1% to 4% FY27 volume growth guidance comes from market growth versus share gains? /

  A: Management confirmed that of the 1% to 4% total volume growth range, 1% to 2% comes from strategic share gains, consistent with the company's long-term target of outperforming the overall market by 100 to 200 basis points annually. The remaining portion of volume growth comes from underlying market expansion, with the strongest volume growth expected from aerospace & defense, followed by energy, then general engineering.

• Q: When will free cash flow return to normalized levels after the working capital build for high tungsten prices? /

  A: Management expects a ~$200 million cash draw in Q1 FY27, which will be the high watermark for working capital. Cash draws will step down in Q2, and free cash flow will turn positive in the second half of FY27. After FY27, Kenna will return to a normalized long-term free cash generation profile once working capital adjusts to the stable elevated tungsten price level.