Kennametal Inc Q4 FY2021 Earnings Call

Good morning. I would like to welcome everyone to Kennametal's Fourth Quarter Fiscal 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Please note that this event is being recorded. I'd now like to turn the conference over to Kelly Boyer, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Welcome, everyone, and thank you for joining us to review Kennametal's fourth quarter and fiscal 2021 results. Yesterday evening, we issued our earnings press release and posted our presentation slides on our website. We will be referring to that slide deck during today's call. I'm Kelly Boyer, Vice President of Investor Relations. Joining me on the call today are Chris Rossi, President and Chief Executive Officer; and Damon Audia, Vice President and Chief Financial Officer. After Chris and Damon'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 forward-looking statements. These risk factors and uncertainties are detailed in Kennametal's SEC filings. In addition, we will be discussing non-GAAP financial measures 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 Form 8-K on our website. And with that, I'll now turn the call over to Chris.

Thank you, Kelly. Good morning, everyone. And thanks for joining the call today. For today's call, I'll start with some general comments on the year, followed by an overview of the fourth quarter. From there, Damon will review the quarterly financial results and our outlook in more detail. And finally, I'll make some summary comments before opening the line for questions. Now turning to slide two. In fiscal year '21, despite the obvious COVID-19 challenges, we continued to operate safely to serve customers and invest in our commercial and operational excellence initiatives, including simplification and modernization. We ended the year on a particularly strong note, with positive momentum heading into fiscal year '22, enabled by continued market recovery and advancement of our strategic initiatives that are transforming the company. The additional simplification and modernization savings in fiscal year '21 brought the total savings achieved from the program to $186 million, in line with the target range we announced in our December 2017 Investor Day, despite lower volumes than we envisioned at that time. This is a notable achievement. And while fiscal year '21 may have marked the end of investment in our simplification and modernization program, we will continue to drive benefits from this investment. In fact, the structural cost savings for the program are already contributing to strong underlying operating leverage, as volumes recover, which we saw in Q3 and Q4 of fiscal year '21 and expect to continue in fiscal year '22 and beyond. In addition, our investment in modernized processes will drive future growth and share gain. These investments enable higher levels of customer service and new product innovation, some recent examples of which include the HARVI I TE end mill, which was a 2021 Golden Edge Award winner for Best Product Innovation at the China International Machine Tool Trade Show and is helping us gain share in aerospace and general engineering. Our new indexable milling platform, Mill 4-15, is designed to improve customer productivity to gain share, especially in general engineering. We also saw a major win in the electric vehicle space with our RIQ Reamer, which was selected over top competitors by a major electric vehicle manufacturer for motor casings. We would not have been able to make this tool without our investments in additive manufacturing, as part of modernizing. Finally, our fit for purpose products, which as a result of modernization, can now be produced at a price point and availability to win in a multi-billion dollar application space of metal cutting that we previously had not focused on. We are making excellent progress in this space with growth of our fit for purpose product portfolio outpacing the broader general engineering and market growth. We're also seeing success in renewable energy applications, such as the machining of components for wind turbines, and our infrastructure business segment is successfully leveraging their simplification and modernization investments to improve global reach and expand into mining adjacencies. Looking forward, we are excited and confident to deliver additional returns on our simplification and modernization investment as we leverage it for growth, share gain, and improved profitability throughout the economic cycle. Now let's review a summary of Q4 on slide three. We saw underlying momentum picking up across all our end markets, and in the fourth quarter we posted 29% organic growth versus a decline of 33% in the prior year quarter. On a year-over-year basis, all regions and end markets posted positive growth, except aerospace. It's worth noting, however, that on a sequential growth basis, aerospace was one of the leading end markets. Our adjusted EBITDA margin increased to 19.2%, driven mainly by increasing volume and associated absorption, incremental simplification and modernization benefits, partially offset by the reversal of temporary cost control actions taken in the prior year. Free operating cash flow was $66 million for the quarter and $113 million for the full year. Adjusted EPS was $0.53 for the quarter. Please turn to slide four to compare our margin performance to prior downturns. The graph on the left shows the sales level on a rolling four quarter basis through the downturn relative to our sales during the Great Recession. While the graph on the right shows the corresponding adjusted operating margin. The margins at the trough were 600 basis points higher through this downturn, illustrating our substantially improved cost structure. Also note that the current trend lines are showing an upswing in both revenue and margin. We believe that these trends will continue in fiscal year '22, supported by the strong operating leverage from our simplification and modernization investments, as demonstrated on slide five. You can see from the slide that on a sequential basis, we increased operating income by 57% on a 6% increase in sales. This strong operating leverage is also evident on a year-over-year basis. It's even more impressive when you consider the roughly $45 million of temporary cost actions we took in the prior year quarter. With that, let me turn the call over to Damon.

Thank you, Chris. And good morning, everyone. I will begin on slide six with a review of our Q4 operating results on both a reported and adjusted basis. As Chris mentioned, demand trends improved significantly year-over-year, and our results highlight the strong operating leverage we are now demonstrating from our continued focus on commercial and operational excellence. For the quarter, sales of $516 million improved 36% year-over-year and 29% on an organic basis from the low of $379 million in the fourth quarter last year. Foreign currency had a positive effect of 6% on sales, and business days contributed another 1%. Adjusted gross profit margin of 34.5% was up 680 basis points year-over-year. Adjusted operating expenses increased year-over-year to $108 million, reflecting the reversal of temporary cost actions taken last year. Nevertheless, we were able to hold our operating expenses at 20.9% of sales, close to our target of 20% this quarter. Adjusted EBITDA margin increased to 19.2%, up 150 basis points from the prior year quarter, and the adjusted operating margin of 12.8% was up 400 basis points year-over-year. The 19.2% adjusted EBITDA margin is another validation point related to the successful execution of commercial and operational excellence. The last time adjusted EBITDA margins were over 19% was in the third and fourth quarters of fiscal year 2019, and that was based on quarterly sales of approximately $600 million, or 15% higher than this quarter. This is yet another data point of the structural cost improvements we have made, confirming our ability to achieve the 24% to 26% adjusted EBITDA margin target as sales reach the $2.5 billion to $2.6 billion level. The improved year-over-year performance was related to higher volumes and associated absorption, benefits from simplification and modernization, and a slight positive from price and raw materials, partially offset by roughly $45 million of temporary cost actions taken last year and a modest mix headwind. The adjusted effective tax rate in the quarter was 24.3%, a more normalized level than the previous year due to higher pretax income, as well as a reduced effect of GILTI on the effective tax rate this quarter. The adjusted effective tax rate for the full year was approximately 23.6%, as expected. We reported GAAP earnings per share of $0.41 versus a loss per share of $0.11 in the prior year period. On an adjusted basis, EPS was $0.53 per share versus $0.15 in the prior year quarter. The main drivers of our adjusted EPS performance are highlighted on the bridge on slide seven. The effect of operations this quarter amounted to positive $0.02 compared to negative $0.68 in the prior year quarter and negative $0.33 in the third quarter of this fiscal year. The operations bucket turned positive for the first time since Q3 of fiscal year '19, reflecting improving volumes offset by approximately $0.26 related to the reversal of temporary cost actions in effect last year. Simplification and modernization contributed an incremental $0.13 in the quarter, bringing the total FY '21 simplification and modernization savings to $0.68 or $85 million and $186 million for the total program. The detailed full year results can be found in the appendix. Slides eight and nine detail the favorable performance and continuing progress we have achieved on our initiatives in our segments this quarter. Metal cutting sales increased 30% organically versus a 35% decline in the prior year period. All regions posted year-over-year sales increases, with the largest increase in EMEA at 37%, followed by the Americas at 30% and Asia Pacific at 23%. The slightly lower sales growth in Asia Pacific reflects the earlier timing of the recovery in China last year, as well as the ongoing challenges in India this quarter due to a surge in COVID-19 cases. From an end market perspective, on a year-over-year basis, the increasing strength in demand is broad-based. Transportation was the strongest end market with 50% growth, followed by general engineering up 35%. Energy was up 4% year-over-year despite slowing demand in China due to the reduced wind subsidies. Although aerospace declined 7% year-over-year, it showed the strongest sequential improvement, up 10%. In addition to aerospace, on a sequential basis, general engineering also showed strong signs of improvement, and energy was slightly positive. Transportation declined 11% sequentially due to the temporary supply chain challenges, which forced transportation customers to slow their metal cutting factories like engine plants to better align with their overall production. Based on comments from our customers, we expect these challenges to persist into our fiscal first quarter and to start to improve sequentially thereafter. However, the situation continues to be fluid and varies from customer to customer. Adjusted operating margin improved 540 basis points to 11.7% compared to 6.3% in the prior year quarter. The increase was primarily driven by volume and associated absorption, simplification and modernization benefits, and price and raw material benefits, partially offset by temporary cost actions taken last year and a modest mix headwind. Turning to infrastructure on slide nine. Organic sales increased 28% year-over-year versus a 29% decline in the prior year period. FX and business days contributed positively to sales in the amount of 5% and 1%, respectively. Regionally, the largest increase year-over-year was in the Americas at 35%, then EMEA at 29%, and Asia at 14%. By end market, the results were primarily driven by general engineering and energy, up 42% and 41%, respectively. Earthworks was up 12%. The bright spots in our reports this quarter were in the Americas and agriculture and forestry and EMEA construction. Adjusted operating margin increased to 14.5% from 12.7% in the prior year quarter. The improvement was driven by higher volumes and associated absorption, simplification and modernization benefits, and a slight positive effect from price and raw materials, partially offset by temporary cost actions taken last year and mix. Now turning to slide 10 to review our balance sheet and free operating cash flow. We continue to maintain a very strong liquidity position, healthy balance sheet, and debt maturity profile. At fiscal year-end, we had combined cash and revolver availability of approximately $850 million. Primary working capital of $602 million was relatively flat year-over-year and down approximately $13 million sequentially. On a percentage of sales basis, it decreased to 33.4%, as our focus on working capital during the year continues to strengthen our free operating cash flow, even as sales have increased. Our primary working capital target remains 30%, which we expect to approach by the end of this fiscal year. Our fourth quarter free operating cash flow was $66 million, a significant year-over-year increase, reflecting higher income due to volume and strong operating leverage. This is similar on a full year basis with free operating cash flow of $113 million compared to negative $18 million last year. Net capital expenditures for the quarter were $30 million, a decrease of approximately $8 million from the prior year, bringing the total net capital spend for the year to $123 million, in line with our expectations. We also paid a dividend of $17 million in the quarter. The full balance sheet can be found on slide 18 in the appendix. Now let's turn to slide 11 to review our outlook in more detail. Starting with the first quarter, we expect sales to be in the range of $470 million to $490 million. At the midpoint, this implies year-over-year growth of approximately 20% and approximately 7% sequential decline, which is stronger than our normal Q4 to Q1 pattern. At the midpoint of the sales outlook, we have assumed there will be no significant sequential change in the supply chain challenges in transportation. We expect these challenges to persist into our fiscal first quarter and to start to improve sequentially thereafter. However, the situation continues to be fluid. Also, we do not expect to see demand adversely affected by additional lockdowns associated with the COVID-19 Delta variant. Lastly, we are planning for the typical EMEA first quarter extended vacation and summer shutdowns for our customers. Assuming our current outlook, we expect adjusted operating income to be a minimum of $45 million and to improve by at least 300% year-over-year, despite the $15 million in Q1 year-over-year headwinds related to temporary cost actions taken last year. Also, we expect the adjusted effective tax rate to be in the range of 25% to 28%, and depreciation and amortization will increase $3 million to $4 million year-over-year. Lastly, we expect free operating cash flow to be slightly negative, which is typical in the first quarter. Regarding the full year, visibility remains limited in the current environment, but at this time, we expect to exceed normal sequential growth patterns throughout the year. Furthermore, we are confident that we will continue to achieve strong annual operating leverage in any growth scenario. Keep in mind, this annual operating leverage is excluding approximately $25 million of year-over-year headwinds from temporary cost actions taken last year, of which approximately $15 million will return in Q1 and the remaining $10 million in Q2. It's also important to note that leverage may vary quarter-to-quarter. For example, in the first quarter, after adjusting for temporary cost actions, the operating leverage is expected to be higher than our normal annualized level, as Q1 has the greatest combined effect of raw materials and pricing compared to the remainder of the year. Moving on to other variables for the full year, we expect an adjusted effective tax rate of 25% to 28%. Depreciation and amortization is expected to increase $15 million to $20 million year-over-year to a range of $140 million to $145 million. Capital expenditures will be consistent with this year and in the range of $110 million to $130 million. As I mentioned earlier, we expect primary working capital to trend towards our 30% goal by the end of the fiscal year. Together, this will translate to free operating cash flow generation of approximately 100% of adjusted net income, in line with our long-term target, which further demonstrates our progress in transforming the company by continued execution of our operational and commercial excellence initiatives. With that, I'll turn the call back over to Chris.

Thank you, Damon. Before we open the line for questions, I'd like to make some closing remarks. Please turn to slide 12. Looking ahead in fiscal year '22, we are excited to build off Q4's momentum by leveraging our modernized footprint and strong operating leverage to drive growth and higher profitability, as well as cash flow at approximately 100% of net income. We expect the end market recovery to continue, and though visibility remains limited right now, we expect growth to outpace our normal quarterly sequential trends throughout the year. This sales performance will be driven both by market growth and our commercial excellence initiatives aimed at gaining share in targeted end markets, including growth of our fit for purpose offering. In summary, I believe fiscal year '22 will be a year where we further demonstrate the ability to achieve our adjusted EBITDA target when sales reach $2.5 billion to $2.6 billion by continuing to execute on our strategic operational and commercial excellence initiatives. I look forward to further outlining the details of these strategic initiatives at our next Investor Day, which is tentatively planned for early next calendar year. We'll provide more details on that as we get closer to the date. And with that, operator, please open the line for questions.

Thank you. Our first question comes from Stephen Volkmann from Jefferies. Please go ahead.

Hi. Good morning, guys. I wonder if we can spend a minute on sort of the distributor channel, what are you seeing there relative to growth? And also any comment on kind of inventory levels or shortages or lack thereof in the distributor channel specifically? Thanks.

In terms of restocking, Steve, I think that in metal cutting, we're starting to see modest restocking activity mainly in Asia Pacific and EMEA and a little more modestly in the U.S. But overall, I think customers still have this attitude of being a little cautious in trying to align inventory with demand. On the infrastructure side, we think the customer inventory levels appear normal across really all the end markets. But again, the big issue for metal cutting is, as you know, in the industry when there's a recovery, there can be a snapback caused by a lot of restocking. But we don't see that. We see a little bit more methodical approach but still moving in the right direction.

Okay. Great. And then maybe, Damon, can you just take us through some more detail on kind of price cost? It looks it was positive in both segments. And can you just sort of take us through that and your outlook for the next few months?

We were positive in both of the business units marginally in the fourth quarter, as we had mentioned on the third-quarter call. The team had put some pricing actions in place in both sides of the business. The raw materials that increases that we were seeing normally have about a two quarter lag for us, and so we did see some positive price versus raws in Q4. I think as you heard in my pre-remarks here, we will see that benefit as well here in Q1, as those pricing actions are now in place in the first quarter; the raw materials were really not going to start to flow into our cost of goods sold until Q2. Our expectations are that price versus raws, as we've said in the past, that price will offset raws, but you will see a slight benefit here in Q1.

Great. Thank you so much. I'll pass it on.

The next question comes from Steven Fisher from UBS. Please go ahead.

Great. Thanks. Wondering if you could just talk a little bit about how mix affected margins in this quarter and what you expect over the next couple of quarters or whatever you have visibility to. I know there's been some relative drag from auto strength versus aerospace and energy. But it seems like the tide might be turning there. So maybe just kind of give us a little color on mix?

In fact, the Q4 results were a little differently than what we had thought. It's one of the reasons why we had better margins. In particular, Steven, we thought that for metal cutting, that we knew the transportation would be down and affected by the chip issue, but we tried to estimate what that might look like. We underestimated the fact transportation was actually lower than we thought. But the good news is that general engineering was actually stronger than we thought. Since general engineering carries a higher margin than transportation, you saw improved margin performance on metal cutting from what our expectations were. Something similar happened in infrastructure. Normally, the fourth quarter is the high construction season. While that's good business, it's actually less profitable than Energy. Oil and gas surprised us, and it surprised our customers because we do a fair amount of detailed customer voicing, and it surprised them, too, that oil and gas bounced back as strongly as it did. Since oil and gas has higher margins, that helped to raise the margin above what we thought was going to happen on the infrastructure side.

Okay. That's very helpful. And also just maybe a follow-up on Steve's question. Really just kind of looking to understand how much the operating leverage could be less robust in the second half of the year versus the first half. I'm not sure if there's any way you can kind of quantify that. But maybe also related, if you could just give us a sense of what's happening with tungsten capacity because I imagine that's going to have an impact on what the direction of that input cost might be?

I think we are expecting that tungsten prices will increase as demand increases. We think we've factored in, in terms of our outlook so far, we've factored in what we think tungsten's going to be, and that's kind of in our estimates, especially for the first quarter. Beyond that, we know that this industry, and we've demonstrated in the past that if there's a big move in tungsten prices, we have the ability to raise prices and adjust accordingly. That's been the history of this type of industry, where price covers raws. As you know, on the infrastructure side of the business, some of that is indexed to the price of APT. We feel pretty good that even as APT rises, the good news is that if it's not going up, that means demand for our product is going up. We believe that we can cover that with price over the course of the year. Damon, do you want to talk about the operating leverage?

What we've said is we would expect to have strong operating leverage for the full year. As we've said on some prior calls, it's 40% plus some absorption. We've been using that 50% kind of rule of thumb. As we look at the full year FY '22, we would expect to leverage at around that 50% mark. I think, to your point, we will see a little bit higher leverage here in the first quarter and the first half, then as certain costs come back into the system. For instance, as we go through our annual merit, we'll have inflation that we'll deal with. Travel will start to flow back into the system throughout the course of the year. It's very hard to predict the second half of our fiscal year. We would expect probably slightly weaker leverage in the second half versus the first half, given some of those costs that would flow back in.

Overall, for the year, the model that many of you have been using is this 40% plus some fixed cost absorption, and many of you are using around 50%. So we expect that even though the operating leverage might be higher in the first half, net across the year, that 50% model is a pretty good estimate.

Terrific. Thanks very much.

The next question comes from Julian Mitchell from Barclays. Please go ahead.

Hi, good morning. Thank you for that color just now on the operating leverage. I just want to focus on it a little bit and maybe help us understand within that sort of 50% number for the year and I understand it's higher than that in the first half by the sound of it. What's embedded maybe in the half and the year from pricing and raw materials? You noted, I think, 100 basis points benefit in Q4 from raw materials. But if we look at the sort of combination of price and raws, how much of a margin tailwind is that embedded in the guide, please?

We don't give specifics related to pricing and raws. But I guess what I would tell you is the raw material cost increases that we're seeing with tungsten escalating really won't flow into our cost of goods sold starting until Q2. Then it would sort of be a run rate at that point in time. The pricing activities that the teams have put in place here started either in late fourth quarter or early first quarter here; we'll start to see that materialize in the first quarter. So again, we think from a leverage standpoint, price and raws will be a positive contributor to the leverage here, the delta between those two in the first quarter. As the raw material cost starts to increase into our cost of goods sold, it will negate itself more into the second quarter and in the back half.

That's very helpful. Thank you. Also, just sort of wondered around the operating leverage across the two divisions. I think you called out some surprises on mix, specifically in the fourth quarter within metal cutting and infrastructure. But as you're looking at the sort of mix today and your assumptions, how are you thinking about operating leverage between the two segments for the balance of '22?

Metal cutting is more labor-intensive. That's one of the reasons why we're so focused on modernizing the factories. We are less dependent on labor today than we were before. You still need more volume to run through those factories; they have a larger sales expense. We would expect that metal cutting margins will overtake the infrastructure margins by the time we get to the end of the year based on our current volumes.

Great. Thank you.

The next question comes from Joel Tiss from BMO Capital Markets. Please go ahead.

Hey, guys. How is it going?

Hi, Joel. Good morning.

I wonder if we could take a little bit of a different direction. Can you highlight some of the markets or the customers where you feel like you're really gaining momentum? This is sort of tangentially related to your not great visibility for 2022. I just wondered if maybe some of the pieces you might have better visibility on?

In the general engineering space, we launched our fit for purpose product portfolio, which affects customers in all markets. In general engineering, they have high-end, high-performance needs for tooling, but they also have what we call fit for purpose. The fit for purpose segment was never one that Kennametal really focused on. Now that we're nearing the end of our modernization journey, we're able to sell at the right price point and make acceptable margins. Customers have a consistent need for this tooling, but they never necessarily considered Kennametal. They're starting to see we can offer this tooling, we already have the brand recognition, and they're feeling good about that. In general engineering, we expect that to continue to strengthen from Q4 to Q1 and throughout the year across all the regions. We've given existing distributors access to this portfolio, and we're displacing some of their other metal cutting products. In some cases, we've added new channel access to customers, and we have a program where we have target accounts. We have a list of top accounts in general engineering, aerospace, and energy. We're looking at our entire product portfolio. We're keeping track of wins where we've gone from maybe 5% share to 30% share due to our approach, particularly with the fit for purpose tooling. These changes indicate we are gaining market share and have positive traction.

That's awesome. With your balance sheet rapidly repairing, can you talk a little bit about are you looking at acquisitions, or are you going to be more focused on share repurchase? In terms of acquisitions, what would make sense, or maybe it doesn't make sense at this point because you don't want to layer on to all your modernization benefits?

In terms of capital allocation, we believe the best use of our excess cash is to invest in the business. While we launched the initial simplification and modernization program and will continue to leverage that, we will not stop investing in internal processes. Every investment must have required returns. We also consider acquisitions. They need to be well aligned with our strategy, so this would generally be a bolt-on scenario to target a specific market segment we want to enter more quickly or grow faster. Finally, returning cash to shareholders is a priority. We have announced share buybacks to help offset dilution. Our priority sequence is to invest in our organic business, evaluate acquisitions, and provide a return to shareholders.

The next question comes from Dillon Cumming from Morgan Stanley. Please go ahead.

Great. Good morning, guys. Thanks for the question. I guess just to start, this might be a bit harder to quantify. But I was curious if you can give us a sense of what growth would look like over the next quarter if some of these transportation issues moderate a bit faster than expected or if they are already accounted for in the high end of the outlook range. What’s your view on whether those supply chain, transportation side, actually do kind of improve faster than expected?

We expect that transportation issues will stay about the same level as we saw in Q4. If they alleviate more readily, we should move towards the higher end of our guidance. That applies to the whole year. We said we should outperform given our current view of market conditions and face a challenge because of uncertainty. Generally, we believe we should be able to achieve sales greater than normal sequential growth. If the markets strengthen sooner or supply chain shortages are alleviated, that's only a positive.

Yeah. No, certainly understandable. I appreciate that color. Lastly, you had called out wind a few times in your prepared remarks. Just curious what level of growth you're seeing out of that business today in light of some government subsidy headwinds you called out and what you're kind of penciling in for fiscal '22 in terms of growth out of that business?

We talked about the subsidy going away in China, which has cut growth, but it is still significant. It's still growing year-over-year and remains a good growth engine for us. While we would love to have the subsidies back, we feel it's a robust business and it's continuing to grow at a substantial rate.

Got it. Thanks for the time, Chris.

The next question comes from Steve Barger from KeyBanc Capital Markets. Please go ahead.

Hey. Good morning, guys. Chris, going back to the commercial excellence and increased opportunity from fit for purpose, what do you think your growth rate should be relative to domestic or global industrial production? Is there a relationship you think about there for gauging performance?

We measure how our fit for purpose portfolio is performing. Since it's a fixed portfolio, we know exactly what we're selling at any given point. We have models of how the overall general engineering market is moving, including our existing Kennametal brands. The fit for purpose segment's growth is outpacing the general engineering growth. It's significant. Although we’re starting with a low base, we track this quarter after quarter. We're encouraged that growth is outpacing fit-for-purpose gains compared to normal general engineering space. We have customer tracking measures that demonstrate we’re progressively winning in this space.

So I guess if you think about the portfolio on a consolidated basis, if we assume IPI growth of 4%, what do you think the relationship to Kennametal's growth is? Is it in line with IPI? Is it two times?

If you're looking at IPI, it's primarily affecting the general engineering space. If you had a specific IPI in mind of around 5%, that would be slightly more than what we're assuming in our full year forecast. If IPI is projected higher, we'll see general engineering growth beyond our guidance. If it’s slightly less, we may be closer to our anticipated range.

All right. Understood. Thanks for the color.

The next question comes from Walter Liptak from Seaport. Please go ahead.

Thanks. Good morning, guys.

Morning, Walt.

I wanted to ask about maybe a follow-on to some of these full year and longer-term growth questions. But the infrastructure bill that's on the table, what do you think the benefits would be from that? It looks like there's going to be a 5-year road bill that comes back, and you've got some exposure there and some of the other infrastructure could help some of the construction markets. How are you thinking about that as you get into the end of 2022 or into 2023?

The infrastructure bill is a net positive for us for sure. It depends on how much money is allocated to road rehabilitation. We're also involved in trenching and drilling, which are crucial for expanding the Internet infrastructure. We're quite optimistic that it might actually happen; people have been talking about it for a long time, but that will be a very good thing for our infrastructure business.

The next question comes from Adam Uhlman from Cleveland Research. Please go ahead.

Hey, guys. Good morning.

Hi, Adam.

Damon, on the working capital goals for the year, what are the main levers that you're looking to pull to get to 30% of sales by year-end?

We're generally not going to see our inventory significantly shift. It's more that the sales growth over the course of the year will help reduce the percentage as a percent of sales. I would expect a slight use on AR and inventory, offset by a slight positive. When looking at the numbers, trending to that 30% mark, working capital may use slight cash for fiscal year '22, but not significantly.

Got you. Unrelated to that, can we go back to what you guys are seeing in the business in China, outside of the wind energy market? What sectors are you excited about and seeing optimism in? Are there signs of slowing in other sectors that you serve?

In China, we still see that general engineering is on an uptick. They were affected by shortages from transportation but are on an upward trajectory overall. Transportation should regain its footing. China's growth rate may slow relative to other markets; however, we still view it positively for this year.

This concludes the question-and-answer session. I'd like to turn the conference back over to Chris Rossi for closing remarks.

Thanks, operator. Thanks everyone for joining today’s call. As we discussed today, we've made significant progress this year on our transformational journey. We remained focused on advancing our strategic initiatives and demonstrated the type of leverage that we contain with our newly modernized equipment as volumes recover. I look forward to hosting the Investor Day early next year to present more details on our strategic plans for continued profitability improvement and growth outpacing our markets. It will also be an opportunity for you to meet our segment Presidents and Chief Technology Officer and view some of our newest product innovations. Please look out for our second annual ESG report, which will be released along with our annual report and proxy later this summer. We appreciate your interest and support for Kennametal. If you have any questions, please reach out to Kelly. Thank you.

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