Kennametal Inc Q2 FY2022 Earnings Call

Good morning. I would like to welcome everyone to Kennametal's Second Quarter Fiscal 2022 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, this event is being recorded.

Thank you, operator. Welcome everyone, and thank you for joining us to review Kennametal's second quarter fiscal 2022 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 throughout 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 statements. These risk factors and uncertainties are detailed in Kennametal's SEC filings. In addition, we will be discussing non-GAAP financial measures on the call today. Reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our Form 8-K on our website. And with that, I'll turn the call over to Chris.

Thanks, Kelly. Good morning everyone, and thanks for joining us. For today's call, I'm going to start with some general comments on our continuing strong results and highlight some recent strategic wins followed by comments on our expectations for Q3 and the full year. Damon will then go over the Q2 financial results and outlook in more detail. And finally, I'll make some summary comments before opening the call for questions. Beginning on slide 2 of the presentation, we posted strong results again this quarter by executing our commercial and operational excellence initiatives. Underlying demand continued to improve in all our end markets this quarter with the exception of transportation. Our sales performance was within the range of our expectations, as discussed on our last quarterly call, increasing 11% organically year-over-year and in line with our normal sequential seasonal trend, despite challenges in transportation in China. By end market, the strongest year-over-year performance was in aerospace and energy, both at 24% growth, followed by general engineering at 14%. Transportation decreased by 10% year-over-year, which was worse than we expected. While we believe underlying demand remains strong in transportation, supply chain availability is still an issue, due mainly to chip shortages. It's our expectation that chip shortages will likely continue through the balance of our fiscal year. On a regional basis, we saw year-over-year growth in all of our regions, led by the Americas at 16% and EMEA at 9%. Asia-Pacific also grew, but at a slower pace of 3%, reflecting weakness in China, mainly in transportation and energy related to wind turbines. The rest of Asia-Pacific performed well during the quarter. Despite these isolated end market and regional challenges, our commercial and operational excellence programs drove strong operating leverage once again this quarter. Adjusted EBITDA margin improved by 320 basis points year-over-year to 16.2%. Operating expense as a percentage of sales was effectively flat as compared to the prior year at 22%. Our target for operating expense remains at 20%. Adjusted EPS improved significantly to $0.35 compared to $0.16 in the prior year quarter. And free operating cash flow was $22 million. We also bought back $23 million of shares this quarter, up from $13 million in the previous quarter, reflecting the confidence we have in our growth and margin improvement initiatives and free cash flow generation. Looking ahead, we believe market demand is strong in all end markets. However in transportation, while the underlying demand for vehicles remains strong, the majority of our customers' production continues to be affected to varying degrees by supply chain bottlenecks, and we believe this effect is likely to continue for the balance of our fiscal year. Nevertheless, overall, we expect Q3 sales to be up 3% to 7% year-over-year, which is above our normal sequential growth pattern of 3% to 4%, and highlights the relative strength of our end markets outside of transportation. Inflation, supply chain bottlenecks, and other uncertainties present some challenges to our operations, but we believe to a far lesser extent than some of our customers and other manufacturers. In that regard, we benefit from our in-region/for-region local supply chain setup. In addition, our proactive pricing approach continues to dampen the effect of inflationary pressures. For example, we saw approximately a $12 million increase year-over-year in material costs, but still maintain positive price versus raw in the quarter, which Damon will provide more details on later. As always, we are focused on what we can control, and despite market uncertainties, we remain confident in our ability to drive strong underlying operating leverage for the full year. Now let's turn to slide 3 for an update on our commercial excellence initiatives aimed at gaining share. Some of our recent wins are shown on this slide, underscoring that our initiatives are continuing to deliver results by leveraging our application engineering expertise, product innovations, and improved customer service. We posted another major win with a large auto manufacturer in the EV space, further strengthening our leadership position. We also saw excellent performance with an aerospace supplier, leveraging our product innovations and technical support to convert customers to Kennametal Solutions. We continue to see share gains in the renewable space in wind energy, due to our innovative products focused on increasing customer productivity. Finally, in Infrastructure, we posted a large win in process industries. Our proprietary pelletizing die design and manufacturing technique beat the competition in supporting the customer's large expansion project. Those are just a few examples of how our product innovations and commercial excellence initiatives are driving share gains. Together with our operational excellence initiatives, we are confident we will continue to drive growth, strong operating leverage, and improve margins. And with that, I'll turn the call over to Damon, who will review the second quarter financial performance in more detail.

Thank you, Chris, and good morning everyone. I will begin on slide 4 with a review of Q2 operating results on both the reported and adjusted basis. As Chris mentioned, we continue to leverage our modernized footprint to drive strong results this quarter. Sales increased by 10% year-over-year and 11% on an organic basis with business days contributing negative 1%. On a sequential basis, sales increased by 1%, in line with the normal Q1 to Q2 trend despite more challenging conditions in transportation in China. Adjusted gross profit margin increased 360 basis points year-over-year to 31.8%. On a sequential basis, adjusted gross profit margin decreased to 170 basis points as expected, mainly due to higher raw material costs flowing into the P&L and the timing of merit increases. Adjusted operating expense as a percent of sales was relatively flat at 22% compared to the prior year. Adjusted EBITDA and operating margins were up significantly by 320 basis points and 390 basis points, respectively. The strong year-over-year margin performance was due to higher volume and associated absorption, price more than offsetting raw material increases, mix, as well as strong manufacturing performance, including some remaining simplification modernization carryover benefits. These factors were partially offset by the removal of $10 million of temporary cost control actions taken in the prior year. The adjusted effective tax rate in the quarter increased from 24.7% to 26.5% year-over-year. We reported GAAP earnings per share of $0.37 versus $0.23 in the prior year period. On an adjusted basis, EPS was $0.35 versus $0.16 in the prior year. The main drivers for our improved adjusted EPS performance are highlighted on the bridge on slide 5. The effects of operations this quarter were $0.18 including approximately $0.04 of simplification modernization carryover benefits and the negative effect of approximately $0.09 from $10 million in temporary cost control actions taken last year. Factors contributing to a substantial improvement in EPS year-over-year are the same as the drivers of our strong margin performance this quarter that I just reviewed. Taxes affected the quarterly EPS year-over-year by negative $0.01 and there was no effect due to currency this quarter. Slide 6 and 7 detail the performance of our segments this quarter. Metal cutting sales in the second quarter increased 7% organically year-over-year versus a 14% decline in the prior year period. There was no effect due to currency and business days amounted to negative 1%. Regionally, the Americas led with year-over-year sales growth of 11% followed by EMEA at 8%. Asia-Pacific posted a decline of 4%. This decline was concentrated in China, due mainly to the effect of chip shortages in transportation and to a lesser degree reduced sales of renewable energy reflecting the elimination of government incentives in wind energy last year. Year-over-year, all end markets excluding transportation posted gains this quarter with aerospace leading at 24%, general engineering at 13%, and energy at 7%. Transportation declined by 10% year-over-year. As Chris mentioned, transportation was down more than expected due to continuing chip shortages and other supply chain challenges affecting our customers. We continue to believe underlying transportation demand remains strong, and as such we expect that a recovery will follow the resolution of the chip shortage. Sequentially, aerospace posted a 6% increase, general engineering a 2% increase, and energy at 3%. Transportation was a 6% sequential decline. Adjusted operating margin increased 270 basis points to 8.8%. The increase was driven by higher volume and associated absorption, favorable pricing versus raw material increases and manufacturing performance, including benefits from simplification/modernization carryover and mix, partially offset by temporary cost control actions taken last year. Our growth initiatives remain on track, including fit for purpose with sequential increases outperforming general engineering again this quarter. We're continuing our pricing actions to cover inflationary pressures in the current environment. Operational excellence is also on track as we continue to drive productivity and leverage our modernized facilities. Turning to slide 7 for Infrastructure. Organic sales increased by 18% year-over-year versus a decline of 14% in the prior year period. There was no effect due to business days and a foreign currency benefit of 1%. All regions were positive year-over-year with the Americas leading at 22%, EMEA at 15% and Asia-Pacific at 14%. As in Q1, the strength in the Americas was driven mainly by improvement in the US oil and gas market, as seen in the continued increase in the US land only rig count. By end market, energy was up 33% year-over-year, general engineering was up 17% and earthworks was up 11%. All end markets were up sequentially. Adjusted operating margins improved by 570 basis points year-over-year to 10.1%. This increase was driven by higher volume and associated absorption, mix and manufacturing performance, partially offset by temporary cost control actions taken last year. Price of raw material increases were effectively neutral this quarter, as expected, as material cost increased on a sequential basis. As in the case with Metal Cutting, we remain on track with our commercial and operational excellence initiatives. Now turning to slide 8 to review our balance sheet and free operating cash flow. We continue to maintain a strong liquidity position, healthy balance sheet, and debt maturity profile. At quarter end, we have combined cash and revolver availability of $793 million and we're well within our financial covenants. Primary working capital decreased year-over-year to $620 million, but increased by $12 million on a sequential basis due mainly to an increase in inventory. On a percentage of sales basis, primary working capital was 31.3%, a significant decrease on a year-over-year basis and an 80-basis point improvement sequentially. Net capital expenditures were $20 million, a decrease of approximately $9 million from the prior year. We now expect fiscal year 2022 capital expenditures to be in the range of $110 million to $120 million. Our second quarter free operating cash flow was $22 million versus $29 million in the prior year quarter, reflecting strong sales and operating performance this quarter, offset by an increase in working capital. We also paid the dividend of $17 million in the quarter. Finally, as Chris noted, we repurchased $23 million of shares during the quarter under our previously announced Repurchase Program and since the inception of the program, we are at $35 million in total shares purchased. The full balance sheet can be found on slide 14 in the appendix. Now let's turn to slide 9 to review the Q3 outlook. We expect sales to be up approximately 3% to 7% year-over-year, and in the range of $500 million to $520 million. This sales range also implies sequential growth of 3% to 7% versus our normal seasonal trend of around 3% to 4%. This outlook reflects our belief in the underlying strength in the economy, but also the continuing challenges in transportation in China. We do not expect supply chain disruptions to worsen and at the midpoint, have assumed transportation sales will be relatively flat. Lastly, we aren't forecasting meaningful restocking since we believe customers will continue to maintain their cautious behavior. Adjusted operating income is expected to be a minimum of $55 million, up 32% year-over-year, implying continued strong operating leverage year-over-year. Sequentially as discussed on previous earnings calls, higher raw material costs are flowing through the P&L as expected. Lastly for Q3, we expect the adjusted effective tax rate to be in the range of 26% to 28% and free operating cash flow to be positive. Regarding the full-year outlook on slide 10. We still expect sales in the second half to exceed normal sequential patterns and strong year-over-year annual operating leverage despite temporary cost control headwinds from the prior year. In terms of the sequential cadence for the full year, the significant operating leverage we experienced in the first half will begin to normalize in the second half based on raw material increases. The fourth quarter will also be affected by the above normal leverage we saw in the fourth quarter last year, related to the timing of net price versus raw material benefits. Nevertheless, we are committed to drive strong operating leverage for the full year, while recognizing the unevenness that can occur in year-over-year operating leverage comparisons from quarter to quarter. This is why we believe that looking at leverage over a longer time frame such as a full year is a better measure of the underlying performance of the business. Moving onto the other variables, we expect depreciation and amortization to be approximately $135 million, increasing approximately $10 million year-over-year. Capital expenditures to be in the range of $110 million to $120 million and primary working capital as a percentage of sales to trend towards our 30% goal by fiscal year-end. These assumptions together translate to free annual operating cash flow generation of approximately 100% of adjusted net income, in line with our long-term target.

Thanks, Damon. Turning to slide 11, let me take just a few minutes to summarize. We posted another excellent quarter as demonstrated by our strong operating leverage. Our product innovations and commercial and operational excellence initiatives are positioning us well to drive further share gains and improve margins as markets continue to recover. Although supply chain bottlenecks and other uncertainties continue to affect the transportation end market and China is challenging to forecast, our other end markets are showing strong signs of improvement. Furthermore, although we have not yet seen significant restocking, we believe underlying demand is strong and the restocking remains upside for us in the future. We continue to expect to exceed normal sequential quarterly growth patterns in the second half of fiscal year 2022 and are confident in driving strong full-year operating leverage. Our strong balance sheet and free operating cash flow allow us to have the flexibility to both continue investing in all our strategic initiatives and optimize the balanced capital allocation strategy. I remain fully confident we will meet our adjusted EBITDA profitability target of 24% to 26% when sales reach the range of $2.5 billion to $2.6 billion. And with that, operator, please open the line for questions.

Thank you. The first question today comes from Steve Volkmann with Jefferies. Please go ahead.

Hi, good morning guys. Thanks for taking the question. Since transportation was kind of the standout, I apologize, I'm going to start there. You talked about a sequential decline, I believe of about 6%. And I'm just curious, that's not really what we're hearing from the various transportation markets we look at. Although I'm sure I don't see everything. But I'm wondering if this is kind of an inventory situation where some of these transportation companies are kind of getting product out the door that may have been actually produced in previous quarters or something, and so maybe they don't need you as much right now and therefore it is somewhat temporary, or do you think there is something more going on here?

I believe that's a fair evaluation. There is often a slight delay when they begin production. We will experience some lag in terms of when we start receiving the consumables, but I think you are largely correct.

And when you say transportation, are we really kind of talking about automotive, or is there something else in there that might be?

It's really light vehicles.

And the final one there, and I'll pass it on. Are you fairly confident that there is nothing going on here from a sort of market share perspective?

We're absolutely confident. There's no question in my mind about it.

Next question comes from Tami Zakaria with JP Morgan. Please go ahead.

Hi, good morning. Thank you for taking my questions. So my first question is, you said you expect to drive market share gains across regions. Where are the biggest opportunities? And how do you measure share gains in this environment?

Good question. I think the biggest opportunities I would say, for example, are in aerospace. Tami, I think you're new to following Kennametal, but part of our history was, we had focused a lot of our engineering resources on automotive and we redirected that over the last few years to aerospace customers, they require high end, high-performance tooling. So we feel confident that we're getting traction there, and the way we measure that is, since we had a reasonably low share and we have a process by which we target particular customers, we actually reward our sales people based on the increase in share of wallet of those customers. So we have metrics to say this is how much business we have with the customer last year, this is what it is this year, and then we also account for any increase just due to normal market. So it's almost measured on a sort of project-by-project basis. We have several metrics that we use on a project-by-project basis, which works well for areas like aerospace. However, for general engineering, which is much broader, we recently rebranded and repositioned our video product portfolio to focus on tools that are fit for purpose. These tools are not highly specialized but rather more general. We measure our success by assessing the overall performance in general engineering and metal cutting while also examining our growth in the fit for purpose segment. For instance, last quarter, our growth in the fit for purpose area significantly outpaced the broader general engineering market, giving us confidence that we are headed in the right direction. In many regions worldwide, people report their sales in sectors like metal cutting or infrastructure to associations, and we compare our sales with theirs. We also receive valuable feedback from our distributors, as many of our agreements incentivize them to increase our share of their business, which we track. Tami, it's a somewhat complex but important question. We are focused on this because we truly believe that the foundation we have built through modernization over the past few years positions us well for growth as the markets recover, and we feel we are well positioned to capture market share. This is something we are actively measuring and holding ourselves accountable for.

Great. That's all from me. Thank you so much.

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

Hi, good morning. I wanted to start with a question about your revenue guidance. The guidance for the March quarter suggests a slowdown into the mid to high single-digit organic growth range, which is a significant decline compared to what you experienced a couple of quarters ago. Could you provide insight into your expectations for metal cutting versus infrastructure growth in the current quarter? Are there any differences in trends compared to what we observed in December?

I think broadly speaking, we discussed transportation, and there is significant demand for cars right now. We believe this is due to pent-up demand, and it will take time to replenish the necessary cars and meet that demand. This presents an opportunity for us moving forward, and it will also have a positive impact on general engineering. It's noteworthy that even though the PMIs have decreased in many countries, they still indicate growth in most cases, except for China. We anticipate that growth will continue, and aerospace is still positioned for further recovery. You asked about the relationship between Metal Cutting and Infrastructure and how to consider that. I would say that we discussed a sequential growth range of 3% to 7%. Metal Cutting is likely to see growth at the higher end of that range, while Infrastructure will be nearer to the lower end. Regarding Infrastructure, we have seen a significant increase and recovery in that area. For example, in the energy sector, particularly oil and gas, we anticipate further expansion, but it's important to note that this growth is from a high recovery level. We are optimistic about this growth and believe that there will also be robust demand in met coal and mining sectors, which have recovered well, leading to steady continuous growth.

That's helpful. Thank you. And then, just wanted to sort of circle back on the cash flow generation and uses of cash. So you talked about the inventory increase weighing on the working capital side of cash flow just now. Just wondered about the pace at which you think that inventory to sales ratio can come down. I think it's in the high 20s right now as a share of sort of trailing 12-month sales. How quickly can you liquidate that? And on the uses of the cash. You do have the sort of the buyback program. You look at your main global peer, they have been using their cash to sort of upgrade the portfolio, put more money into software acquisitions and sort of move away from traditional tooling, just wondered how tempted you were if at all by that approach to cash usage?

We still believe there are ample internal investment opportunities within the company that can help drive higher sales growth, particularly through our digital platform and the associated investments. Additionally, we have many productivity initiatives that are forthcoming. These projects need to independently generate the appropriate returns. We have also activated our M&A function over the past year, with a strong emphasis on our core business. We will be actively seeking opportunities for bolt-on acquisitions that align closely with our core operations. These may help accelerate growth or introduce new technologies that will be significant in the future. Our focus remains on these areas, alongside our commitment to return capital to shareholders through share buybacks or dividends. Now, regarding your inventory question, I'll let Damon address that.

Yeah, I think Julian to your point, Inventory on the balance sheet is up, given the cost of our raw materials has risen significantly as you know. And I think, as we've said on some prior calls, we also have a little bit more inventory due to transit times for some of the ore coming out of Bolivia, safety stock given some of the disruptions in the supply chain. When I look at the second half of our fiscal year, I don't see Inventory as an absolute number really moving materially, it will probably drop in the fourth quarter as you know, which is our stronger selling quarter with Infrastructure. But as from a percentage of sales standpoint, what we've talked about is working capital continuing to trend down here from the second quarter. So if you remember Q1, we were just over 32%, now in Q2, we're just over 31%. We'll continue to see that improvement as sales hopefully start to continue to pick up here in Q3 and Q4.

Great. Thank you.

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

Hey, good morning guys. How much of revenue growth was price versus volume in the quarter? Can you talk about that for 3Q as well, just given the mid-single digit kind of range, how much of that is price?

Yes, Steve. We won't disclose specific pricing information as it's sensitive, but I can say that most of the growth comes from market expansion or share gains, although there is a significant portion related to pricing. You can estimate that a bit since we mentioned $12 million in cost challenges that we successfully offset through pricing. This should give you a rough idea if you wish to calculate it.

And I'm sorry if I missed this, you expect a similar kind of cost headwind in 3Q and 4Q, or is that moderating?

Yes. From a sequential perspective, the operational costs and other expenses we discussed will remain stable from Q2 to Q3 and Q4. Material costs are expected to keep rising as we progress through the fiscal year. The price of tungsten, which we have mentioned in the past few quarters, continues to increase, currently sitting at around $325 compared to approximately $310 a quarter ago. These costs will gradually impact our expenses for the remainder of the fiscal year. However, as Chris has indicated, our team is confident in implementing price increases to more than counterbalance the challenges posed by rising raw material costs. Therefore, we are optimistic that the pricing strategy will be favorable against raw material costs for us this fiscal year.

Got it. And for the organic growth rate in metal cutting, you said fit for purpose grew at a much higher rate. Can you quantify that a little more? Is legacy Metal Cutting outside of transportation still positive?

Yes. It's definitely positive. I guess what I was looking at is, if you look at sort of general engineering as a segment, a lot of it fit for purpose tooling is geared towards that type of industry where you have sort of machine shops, regardless of the size that are doing sort of broad-based application. So our theory there Steve, is that, if the fit for purpose tooling, which we can measure exactly what's happening because it's a specific portfolio. If those sales are increasing faster than sort of that broader market and what we see in the broader metal cutting, then that tells us we're picking up traction. That's the basic premise of the measure.

And can you just remind me real quick. This fit for purpose mix is down on the segment or is there much of a margin difference between some of the legacy product lines and the newer product lines?

The fit for purpose mix was a shift in video, which typically had a lower margin. What we are discussing is the overall blended margin, which remains consistent with the margins from the video portfolio.

Margins for the Kennametal branded under industrial is around 25%, video was around 18% as we've repositioned fit for purpose into the fit for purpose segment of the market, we think that the margins will be relatively similar there.

Understood. Thanks.

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

Hey, good morning, guys, thanks for the question. I guess just to start, you mentioned that China is going to work the wrong way in the quarter. I think you mentioned both transportation and wind will get more challenged. But I think some of your peers have told that they have kind of broad expectations for the back half calendar year recovery. I'm just curious if that's going to look like what you're seeing there and if you'd kind of expect those markets to stabilize over the next few quarters?

Dillon, I had a lot of trouble hearing you. You're talking about energy in China being difficult.

Yeah, I'm sorry. Maybe I just to repeat it, if you can hear me better now.

That's a lot better Dillon, thanks.

Okay. Yeah, sorry about that. You just mentioned that China kind of went the wrong way in the quarter. and you were talking global transportation when being a bit weaker than expected, but I think some of your peers have kind of started to lay out expectations for the back half kind of calendar year recovery. So just curious if that kind of consistent with what you're seeing? And if you would kind of expect those markets will stabilize over next few quarters?

I think our assumption on China is that it won't get worse. We took a conservative view and expect it to remain flat over the next two quarters. That's our thought process. I've also heard similar sentiments as you regarding the potential for improvement, which would certainly be a positive development, but that's what we've incorporated into our forecast for now.

Okay, that makes sense. If I could switch back to the EV side for a moment, you mentioned a significant win with a major OEM customer. I'm curious about when that became clear and if there are any differences between EV and internal combustion engine content that might influence thinking. I would also like to ask a related follow-up regarding Steve's earlier question. Do you believe that any shift in the mix at the OEM level between electric vehicles and internal combustion engines is causing any underperformance in the transportation sector?

I don't believe there is any underperformance in transportation related to that. The transition to electric vehicles is still in its early stages, with EVs accounting for around 5% of the world's vehicles. We view this transition as a significant opportunity. Over the next decade, we expect an overall increase in demand for light vehicles regardless of market conditions. Furthermore, there has been a noticeable rise in advertising for hybrid vehicles, which actually require more metal cutting than traditional internal combustion engines because they incorporate both EV equipment and an engine. This factor suggests that we could see an increase in metal cutting demand in the coming years. Additionally, customers are beginning to ramp up production lines for EVs, which is crucial for our future rollouts. We are succeeding in this space not by focusing on low pricing but by providing substantial value to future production lines. This transition to EV should be beneficial for our business, and we are well-equipped to seize these opportunities. In certain instances, our additive manufacturing technology allows us to produce tools for prototypes in months instead of years, enabling companies to set up new production lines more quickly. We are leveraging our innovation and technology to secure these early EV orders because once we are established, it becomes challenging for competitors to replace us. This is our strategy moving forward.

Okay. That's great color. Thanks for the time.

The next question comes from Chris Dankert with Loop Capital. Please go ahead.

Hey, good morning guys. I guess a bit more of a North America centric question maybe, but just can you highlight what the impact of labor availability and absenteeism was, kind of on factory absorption in the quarter? And I guess is that dynamic improving as we move into fiscal 3Q here?

It certainly had an effect during the quarter. If you examine the Metal Cutting margins, we anticipated a decline due to the decrease in transportation volumes, which was the primary factor impacting margins. Additionally, the Omicron variant influenced factory operations, especially in December, leading us to work more overtime. This situation also affected our suppliers and freight deliveries, resulting in higher premium freight expenses than we had anticipated. While it definitely impacted us, things are starting to return to normal levels. The positive aspect is that we accounted for these inflationary factors, such as increased overtime and supply chain disruptions, in the price increase implemented in January. Looking ahead for Metal Cutting, we believe we are well-prepared. Damon, do you have anything to add?

I think Chris, we're not immune to any of the issues you're reading out there. We have a lot of these costs, training costs as we're hiring workers in a lot of our factories as you would guess, they're not as productive as some of our experienced workers. We are dealing with some levels of inefficiency as we work to continue to serve customer's needs. But overall, the team has done a phenomenal job in driving productivity to help offset that and managed through that. So you're not quite seeing that in our P&L because of the good work that team is doing, both on the pricing side and on the manufacturing side to help offset some of those challenges.

Got it. That's really great color. Thanks so much for that guys. And then we touched on mix. I guess as we move into the third quarter here, general engineering, I think probably the biggest driver of the softening in growth. I guess are we contemplating negative mix in the guide at this point?

No, I wouldn't characterize it like that.

Okay. So principally at this point, it's price cost of staying positive on the raw side, but really mix is not a factor. Okay. Thanks so much guys. Appreciate the time.

Welcome, Chris.

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

Thanks, operator. And thanks everyone for joining us on the call today. I look at this quarter and I think it's another proof point that our strategic initiatives are working. We're driving strong operating leverage and share gain, and margin improvement. As always, we appreciate your interest in the company and your support. And don't hesitate to call Kelly if you have any questions after today's call. Thanks, everybody, and have a great day.

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