Kennametal Q2 Earnings Call Highlights

Key Points

• Quarter topped expectations: Kennametal reported 10% organic sales growth, an adjusted EBITDA margin of 17.1% (vs. 13.9% a year ago) and adjusted EPS of $0.47, driven by pricing actions on high tungsten costs, customer buy‑ahead and about $8M of restructuring savings.
• Tungsten pressure hits working capital: Management said tungsten prices are up ~33% YTD and while supply is diversified, higher tungsten costs pushed inventory up $85M and primary working capital to 31.9% of sales, lowering YTD free operating cash flow to $38M and pausing share repurchases this quarter.
• Raised guidance and secular growth opportunity: Kennametal raised fiscal‑2026 sales to $2.19–2.25B and adjusted EPS to $2.05–2.45 (Q3 sales $545–565M; EPS $0.50–0.60), and highlighted power‑generation/electricity demand (about 17% of FY25 sales) as a multi‑year growth area.

Kennametal NYSE: KMT executives highlighted stronger-than-expected fiscal second-quarter 2026 results, driven by pricing actions tied to historically high tungsten costs, continued project wins in several end markets, and restructuring savings that lifted profitability. Management also raised full-year sales and adjusted earnings guidance, citing additional price benefit and favorable price-versus-raw-material timing effects.

Quarterly performance tops expectations

President and CEO Sanjay Chowbey said the company’s second-quarter results exceeded the sales and EPS outlook provided on the prior call. He attributed the outperformance primarily to higher sales volume—including a stronger-than-anticipated “buy-ahead” from customers ahead of tungsten-related price increases—along with modest end-market improvement and a lower-than-anticipated tax rate.

On a year-over-year basis, Kennametal reported 10% organic sales growth, marking the second consecutive quarter of organic growth. Chowbey said that excluding buy-ahead effects, sales volumes were “modestly positive,” continuing the gradual volume improvement the company has seen since the fourth quarter of fiscal 2025.

Profitability improved sharply year-over-year. The company posted an adjusted EBITDA margin of 17.1% versus 13.9% in the prior-year quarter, while adjusted EPS rose to $0.47 from $0.25. CFO Pat Watson said margins benefited from favorable price-versus-raw-material timing—particularly within Infrastructure—along with higher pricing and tariff surcharges in Metal Cutting, higher sales and production volumes in Metal Cutting, and $8 million in year-over-year restructuring savings. Those tailwinds were partly offset by higher compensation costs, tariffs and general inflation, and the absence of about $3 million of insurance proceeds that benefited the prior-year quarter.

Segment and end-market trends

Watson said total sales rose 10% year-over-year, including a 1% favorable currency effect, offset by a 1% headwind from a divestiture completed last year. Organic growth was led by Infrastructure (+11%) and Metal Cutting (+9%). On a constant-currency basis, sales increased 16% in the Americas, 9% in Asia-Pacific, and 2% in EMEA.

By end market on a constant-currency basis, Watson said aerospace and defense grew 23%, earthworks rose 18%, general engineering increased 8%, energy grew 4%, and transportation increased 3%.

• Metal Cutting: Reported sales rose 11% (9% organic). Adjusted operating margin increased 360 basis points to 9.6%, driven by pricing and tariff surcharges, higher volumes, and about $6 million of incremental restructuring savings, partially offset by higher compensation, tariffs, and inflation.
• Infrastructure: Reported sales rose 8%, including 11% organic growth, a 1% FX tailwind, and a 4% divestiture headwind. Adjusted operating margin improved 370 basis points to 12.3%, led by a $17 million favorable price-versus-raw-material timing effect and $2 million of restructuring savings, partially offset by higher compensation, inflation, and the absence of about $3 million in prior-year insurance proceeds.

Management said customer buy-ahead contributed meaningfully to the quarter. Watson said Metal Cutting had about $10 million of sales tied to buy-ahead, with roughly half in the Americas, a third in Asia-Pacific, and the balance in EMEA. Infrastructure had about $3 million of buy-ahead-related sales.

Tungsten pricing and supply in focus

Executives repeatedly pointed to tungsten costs as a key dynamic. Chowbey said the company implemented pricing actions in response to rising tungsten costs, which he described as “historically high.” During Q&A, management said tungsten prices were up 33% year-to-date, and noted that January included a “modest” mid-single-digit price increase.

Chowbey said some parts of the business reprice quickly—such as spot buys and indexed arrangements—while Metal Cutting is largely list-price based, which takes longer. In a later question, he said list-price changes in Metal Cutting generally have about a three-month lag.

On supply risk, Chowbey said Kennametal has multiple sources and, in many cases, long-term agreements, and that the company feels confident in its ability to secure tungsten needed for the outlook provided. Watson added that Kennametal uses a diversified mix of recycled materials and referenced its facility in Bolivia, stating that outside of China the company does not have a dependence on Chinese material to satisfy those operations. Watson characterized the tungsten price increase as “supply-driven” across the industry and said additional mine and project activity, including government involvement, could support longer-term supply coming online. Chowbey also said Kennametal continues to look for ways to use tungsten more efficiently in its products through material science and design choices.

Power generation and electricity demand highlighted as growth opportunity

Chowbey used part of the call to expand on Kennametal’s view of rising global electricity demand and the company’s exposure across the energy value chain. He said electricity demand is projected to grow about 3% annually through 2030, driven by AI data centers, electric vehicle adoption, and grid build-out. Chowbey said the “source to generation” opportunity represented approximately 17% of Kennametal’s fiscal 2025 sales and that the company anticipates this market to grow low single digits through 2030, with some areas such as gas and combustion turbines expected to grow faster.

He also cited projections for gas turbines growing at a 15% CAGR and combustion engines for backup generators at a 10% CAGR, stating Kennametal is positioned with existing products and customer access to capitalize on those trends.

Cash flow, restructuring progress, and updated outlook

On cash flow, Watson said year-to-date net cash from operating activities was $73 million versus $101 million in the prior-year period. Year-to-date free operating cash flow fell to $38 million from $57 million, primarily due to working-capital changes tied to higher tungsten prices, partially offset by lower capital expenditures. Inventory rose $85 million year-over-year to $690 million, contributing to a $97 million increase in primary working capital, which rose to 31.9% of sales.

The company returned $15 million through dividends but did not repurchase shares in the quarter due to higher tungsten-driven working capital needs. Watson said Kennametal has repurchased $70 million, or 3 million shares, under its $200 million authorization to date. He also said the company amended and extended its revolving credit agreement to November 2030, with $650 million of capacity, and ended the quarter with about $779 million of combined cash and revolver availability.

For fiscal 2026, Watson raised guidance for sales to $2.19 billion to $2.25 billion, with volume ranging from flat to +3% and an expected ~2% FX tailwind. The updated range includes $30 million of restructuring savings, reflecting that some actions will take longer to execute than previously expected. Kennametal now expects adjusted EPS of $2.05 to $2.45, including approximately a $0.95 year-over-year benefit from price-versus-raw-material timing. Free operating cash flow is expected to be about 60% of adjusted net income, reflecting added working capital needs from higher tungsten prices.

For the fiscal third quarter, the company guided sales of $545 million to $565 million and adjusted EPS of $0.50 to $0.60. Management said the sales outlook reflects the second-quarter buy-ahead, with volumes expected to range from -4% to flat; adjusting for buy-ahead, volume at the midpoint would be +1%.

About Kennametal NYSE: KMT

Kennametal Inc is a global industrial technology company that designs and manufactures advanced materials, tooling systems, and engineered components for a range of demanding applications. Its solutions support precision metalworking, earthmoving, and wear-resistant environments, catering to customers seeking enhanced productivity, longer tool life, and reduced operating costs.

The company's product portfolio spans indexable cutting tools, solid round tools, tool holders, metalworking fluid systems, wear parts, ceramics and composites, and custom-engineered components.

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