Good morning. I would like to welcome everyone to Kennametal's Second Quarter and Fiscal 2025 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. Now like to turn the conference over to Michael Pizzi, Vice President of Investor Relations. Thank you, operator.

Welcome, everyone, and thank you for joining us to review Kennametal's second quarter fiscal 2025 results. This morning, we issued our 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 Pici, Vice President of Investor Relations. Joining me on the call today are Sanjay Chowbey, 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 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 turn the call over to Sanjay.

Thank you, Mike. Good morning, and thank you for joining us. I'll start the call today with some remarks regarding our recent announcements followed by a review of the quarter and some end market commentary. Then Pat will cover the quarterly financial results as well as the fiscal 2025 outlook. Finally, I'll make some summary comments and then open the call for questions. Now let's start with the two announcements we issued in mid-January. The January fourteenth announcement highlighted actions we're taking to address our investor day commitments around plant closures and navigate current market conditions. In support of our commitment to long-term competitiveness, we announced actions to reduce our structural costs and our footprint. Within the metal cutting segment, we announced the closure of a facility in Greenfield, Massachusetts and the consolidation of two facilities near Barcelona, Spain into a single modern facility. The operations in Greenfield, Massachusetts are expected to cease in April 2025 and the plant closure is expected to be substantially complete by December 31, 2025. The consolidation of Barcelona and Spain facilities are expected to be substantially complete by June 30, 2025. Additionally, in an effort to mitigate the current market conditions, mainly in EMEA, we announced a global reduction in professional workforce. These combined actions are expected to deliver annualized run rate pretax savings of approximately $15 million by the end of fiscal 2025. We expect pre-tax charges of approximately $25 million in connection with the execution of these actions. The breakdown is as follows. Approximately $10 million is for cash-related facilities charges, approximately $5 million is for non-cash facilities charges, and approximately $10 million for severance-related cash expenditures. These facility closures and other cost actions keep us on track to deliver our commitment to close three to five plants and achieve $100 million cost savings by fiscal 2027 that we committed to at our investor day in September 2023. The second announcement was an organizational change within the infrastructure segment. Effective January twentieth, Faisal Hamadi was named President of the Infrastructure Segment reporting to me. Faisal succeeded Franklin Cardenas, who served in that role for the past five years. I want to thank Franklin for his contributions to Kennametal and wish him the best. Faisal has been with the company since July, serving as the Vice President of Value Creation Systems. Prior to that, he served in various roles with increasing responsibility at Eaton Corporation since July 2007. His most recent role at Eaton was as the general manager of its $600 million hydraulics and actuation portfolio. Additionally, he held positions in finance, sales, and manufacturing operations prior to his general manager role. Faisal is a great addition to the infrastructure team bringing strong and well-rounded business experience in commercial, operations, and general management. He's a strategic thinker and true collaborator and is already hard at work with the team as they continue to grow and improve our infrastructure business. Additionally, continuous improvement remains an important focus area for us. So Faisal's value creation systems responsibilities will be integrated with existing roles at Kennametal. This will provide a strong alignment. Our results worsened further in EMEA and that is impacting several of our end markets. Additionally, industrial production in the US remains soft. Together these factors led our sales to come in at the low end of our expectations for the quarter. As we have said before, while we cannot control external factors, we focus our efforts on things we can control. For example, the announcements in mid-January that I just talked about not only align with our longer-term objectives but also demonstrate our commitment to positioning the company for competitiveness and improved profitability. Now for our quarterly results, sales decreased 3% year over year. At the segment level, infrastructure decreased 4% organically while metal cutting was down 7%. On a constant currency basis, Americas sales were flat at 0%, Asia Pacific sales decreased 3% and EMEA declined 7% organically. This marked the fifth consecutive quarter of negative organic growth. Historically, cycles tend to last four to eight quarters. While managing near-term challenges, we remain committed to executing our strategic priorities, to drive above-market growth, continuous improvement initiatives targeting margin and working capital improvement, and to optimize our product and business portfolio. We have more work to do across all these areas and look forward to updating you as we make progress on each. Moving now to our end markets. By end market, aerospace and defense grew 14%, energy grew 1%, general engineering declined 4%, earthworks declined 7%, transportation declined 9%. Transportation and general engineering were largely impacted by market conditions in EMEA and to a lesser extent the Americas, primarily within the metal cutting segment. In EMEA, we have seen lower production volumes and the realignment of investments among our customers in response to changes in EV subsidies. In addition, there are two other contributing factors impacting the transportation end market broadly: consumer preference and EV infrastructure readiness. But remember, we remain very well positioned in this end market regardless of engine type, with strong product offerings and application support for internal combustion engine, hybrid, and full EV platforms. In infrastructure's earthworks market, we saw lower mining capital investment in Asia, while the Americas was impacted by lower mining activity. Turning to profitability for the quarter, adjusted EBITDA margin was 13.9% compared to 12.4% in the prior year. Adjusted EPS decreased to $0.25 from the prior year quarter. Cash from operating activities year to date was $101 million compared to $88 million in the prior year period. Free operating cash flow year to date was $57 million, up from $36 million in the prior year. And finally, we continued our share repurchase program with $15 million worth of shares bought back during the quarter. These results were at the lower end of our revenue expectations and in line with our EPS midpoint we provided last quarter. When looking at the current quarter results, a few general comments regarding the end market performance. First, aerospace and defense continues to perform well. We have seen slight improvement in aerospace as production moves forward after the resolution of the recent strike. Order timing has driven the performance within defense mainly in EMEA. Second, growth initiatives in energy offset the impact of lower rig counts in the Americas. Third, mining activity in Asia and Americas continues to be soft. Finally, the worsening market conditions in EMEA and the continuation of low PMI and IPI levels in the US put pressure on both transportation and general engineering. Turning to slide four, I want to take a moment to provide additional commentary on our end markets for the full year. As a reminder, our updated outlook for the full year reflects the forecast of specific market drivers and general market conditions both of which have weakened. These market drivers combined with a strengthening U.S. Dollar and associated higher foreign exchange impact were the main contributors to our lowered full year outlook. By the end market, the top section shows the assumptions we had in our prior outlook compared to our current outlook. The bottom of the slide shows some of the key factors and what has changed by end market. Let me call your attention to the general engineering, transportation, and aerospace and defense end markets those assumptions have changed. First, general engineering. The key factors that drive our expectations are external IPI forecasts for the US and EMEA and PMI data in China. As I noted earlier, we have seen conditions in India continue to worsen since the start of our fiscal year. Prior external forecasts for IPI in EMEA showed a slight improvement in the first half of calendar year 2025. That forecast has now shifted to down slightly. The U.S. IPI forecast was also previously expected to be up slightly in the first half of this calendar year, but that has not happened. In fact, the latest data indicates a flat US market. China IPI remains unchanged. Taken together at the midpoint, we now anticipate this end market to be down slightly year over year as compared to flat previously communicated. Second, transportation. The key external indicators we track are IHS light vehicle production. The prior IHS forecast was for vehicle production to increase 1% versus prior year. Now production is expected to be down 1%. Once again, the pressure is primarily in EMEA with a slight slowdown in the Americas. It has been well documented the pressure OEMs in the EMEA region are facing. Given these production forecasts and the customer challenges, we now anticipate that end market to be down year over year compared to up slightly as previously anticipated. Third, aerospace and defense is anticipated to increase slightly now as the aerospace supply chain and OEM production issues have been steadily improving. The forecasted production levels are expected to increase slightly compared to a moderate assumption previously. Defense continues to benefit from our growth initiatives. The order patterns with these customers tend to be lumpy period to period, but we do continue to see the benefits of our efforts. Finally, our expectations for energy remain relatively consistent with previous expectations. US land-based rig counts are forecasted to decline and sentiment remains cautious while earthworks continues to experience normal seasonality in construction and mining continues to decline. Now let me turn the call over to Pat, who will review the second quarter financial performance and the outlook.

Thank you, Sanjay. Good morning, everyone. I will begin on Slide five with a review of the second quarter operating results. Sales were down 3% year over year with an organic decline of 6% partially offset by favorable workdays of 3%. As Sanjay discussed, relative to the expectations we provided last quarter, most notably in EMEA and the Americas which impacted our general engineering and earthworks end markets. Energy was a bit stronger than we had anticipated due to project volume. Year over year, we experienced pressure in most end markets and regions, with the exception of aerospace and defense and energy. Adjusted operating expense as a percentage of sales increased 100 basis points year over year to 22.7%. Adjusted EBITDA and operating margins were 13.9% and 6.9% respectively versus 12.4% and 6% the prior year quarter. During the quarter, we realized approximately $6 million in savings from our previously announced restructuring program. This action has successfully delivered annualized run rate pretax savings of approximately $35 million. Lastly, foreign exchange was flat this quarter. The adjusted effective tax rate increased year over year to 26.9% primarily driven by discrete items recognized in the prior year quarter and unfavorable geographical mix, partially offset by an increase in the advanced manufacturing production credit under the Inflation Reduction Act. Adjusted earnings per share was $0.25 in the quarter, versus $0.30 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on Slide six. The year over year effect of operations this quarter was positive $0.06. This reflects the absence of unfavorable price raw in the prior year, and incremental restructuring benefits and two cents of an advanced manufacturing credit. Partially offset by lower sales and production volume, higher wages, and general inflation. We also received a net benefit of $0.03 of insurance proceeds related to the tornado that damaged our Rogers facility in the fourth quarter of FY '24. You can also see the effects of the tax rate on our results. The year over year change we noted on our prior call was anticipated to be and this was the largest driver impacting our EPS performance. Currency and pension impacts on EPS negative $0.01 respectively. Other reflects lower share count, which contributed $0.01. Slides seven and eight detail the performance of our segments this quarter. Reported metal cutting sales were down 4% compared to the prior year quarter, with a 7% organic decline partially offset by favorable workdays of 3%. By region, on a constant currency basis, the Americas were flat, Asia Pacific declined 1%, and EMEA declined 10%. Americas year over year performance this quarter was driven by the execution of our growth initiatives in aerospace and defense, offset by declines in the general engineering and transportation end markets. Asia Pacific's decline was primarily driven by lower production in the aerospace and defense end market and reflects a slight decline in China. EMEA's year over year decline reflects weakness in the transportation and general engineering end markets, partially offset by strength in aerospace and defense. Looking at sales by end market, aerospace and defense grew 7% year over year as our strategic initiatives continue to drive results along with easing supply chain challenges and improved build rates in EMEA. Energy declined 1% this quarter due to customer order timing in EMEA, general engineering declined 4% year over year due to lower production activity, primarily in EMEA, and project timing in the Americas. Lastly, transportation declined 9% year over year due to an overall slowdown in EMEA and the Americas, partially offset by Asia Pacific project orders. Metal cutting adjusted operating margin of 6% decreased 240 basis points year over year primarily from lower sales and production volumes and higher wages and general inflation. These factors were partially offset by pricing, lower raw material costs, and incremental year over year restructuring savings of approximately $4 million. Turning to Slide eight for Infrastructure. Reported Infrastructure sales were flat year over year with favorable business days of 3% and favorable foreign currency exchange of 1%, offset by an organic decline of 4%. Regionally, on a constant currency basis, EMEA sales increased by 5%, the Americas were flat, and Asia Pacific declined by 6%. Growth in EMEA was primarily driven by higher activity in earthworks partially offset by general engineering. Decline in the Americas was primarily from lower mining activity and mine closures in earthworks, offset by defense and energy project timing. The decline in Asia Pacific primarily reflects lower volume order timing in underground mining. Looking at sales by end market, we grew our aerospace and defense sales by 35% by continuing to execute on our growth initiatives in EMEA, and the Americas. Energy increased 2%, mainly in the Americas, driven by project timing, partially offset by lower U.S. land rig count. General engineering declined 2% from lower industrial activity in EMEA partially offset by ceramics in Asia. Lastly, earthworks declined 7% from a customer mine closure, lower mining activity in the Americas, lower mining capital investment levels in Asia Pacific, partially offset by higher activity in EMEA. Adjusted operating margin increased 670 basis points primarily due to a few factors. The absence of unfavorable price raw in the prior year, a net benefit of $2 million from insurance recoveries related to the tornado that struck Rogers, Arkansas facility in late fiscal '24, the advanced manufacturing production credit under the Inflation Reduction Act of approximately $2 million, and incremental year over year restructuring savings of approximately $2 million. These factors were partially offset by lower production volumes and higher wages and general inflation. Now turning to Slide nine, to review our free operating cash flow and balance sheet. Our second quarter year to date net cash flow from operating activities was $101 million compared to $88 million in the prior year period. The change in net cash flow from operating activities was driven primarily by working capital changes, partially offset by lower net income compared to the prior year period. Our year to date free operating cash flow increased to $57 million from $36 million in the prior year. Primary working capital this quarter was down from the prior year. The company continues to focus on optimizing inventory levels and remains focused on driving improved working capital. On a dollar basis, year over year, primary working capital decreased to $592 million and on a percentage of sales basis, primary working capital decreased to 31.3%. Compared to $52 million in the prior year quarter. In total, we've returned $31 million to shareholders through our share repurchase and dividend programs. We repurchased 525,000 shares or $15 million in Q2, under our $200 million authorization. And as we have every quarter since becoming a public company over fifty years ago, we paid a dividend to our shareholders. Our commitment to returning cash to shareholders reflects confidence in our ability to execute our strategy to drive growth and margin improvement. 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 availability of approximately $821 million and were well within our financial covenants. The full balance sheet can be found on slide fifteen in the appendix. Turning to Slide ten, regarding our third quarter outlook. We expect Q3 sales to be between $480 million and $500 million with volume ranging from negative 6% to negative 2%, price realization of approximately 2%, and a 3% negative impact from foreign exchange. Let me share some details on the sales assumptions and trends impacting the Q3 outlook. Our Q3 range at the midpoint reflects growth that is slightly below our historical norms due to the current market conditions. The high end of our range remains in line with our normal sequential trends. On a year over year basis, aerospace and defense growth continues, albeit at a slower pace as North American OEM production takes time to recover. Energy and general engineering are anticipated to be down slightly. Transportation is expected to decline, mainly from lower volumes in EMEA and earthworks declined slightly due to continued competitive market conditions. Foreign exchange and non-cash pension expense are expected to have a negative impact of approximately $3 million and $1 million respectively on a pre-tax basis. Interest expense is assumed to be approximately $7 million and an effective tax rate of approximately 27.5%. Lastly, we expect adjusted EPS in the range of $0.20 to $0.30 per share. Now on Slide seven, regarding the full year outlook. We now expect FY '25 sales to be between $1.95 billion and $2 billion with volume ranging from negative 5% to negative 2%, net price realization of approximately 2%, and we anticipate an approximate 2% year over year headwind from foreign exchange. As Sanjay noted in his prepared remarks, the worsening market conditions in EMEA and the continued stagnation of industrial production in the U.S. coupled with the strengthening U.S. Dollar are the key factors behind the updated outlook. Foreign exchange sales headwinds are approximately $40 million at the midpoint of our updated outlook. Using the euro as a proxy for U.S. Dollar strength, we've seen the dollar strengthen from approximately $1.00 rate to the euro in the first and second quarters to a range of $1.03 to $1.05 in January. Year over year, we expect aerospace and defense to have slight growth, transportation to decline, general engineering to slightly decline, and earthworks and energy to decline slightly. From a cost perspective, we expect to offset raw material wage and general cost increases on a dollar basis and that foreign exchange and non-cash pension expense are expected to be headwinds of $8 million and $4 million respectively, on a pre-tax basis. Approximately $14 million of rollover savings from our previously announced restructuring initiative has been included and is anticipated to have a slight impact in the second half of the fiscal year. Our outlook also includes the effects of the plant closures and the new restructuring actions combined are anticipated to generate approximately $15 million of annualized rate savings. For fiscal 2025, we've included approximately $6 million in savings related to these actions. From a timing perspective, we anticipate a significant majority of savings to be recognized in the fourth quarter. Our current outlook concludes the $0.02 associated with the Advanced Manufacturing Credit as part of the Inflation Reduction Act. We anticipate that we will be eligible for similar credits in the future assuming there are no changes to the existing legislation. Depreciation and amortization is expected to be approximately $135 million. We expect interest expense of approximately $27 million and an effective tax rate of approximately 27.5%. We expect adjusted EPS to be in the range of $1.05 to $1.30. On the cash side, the full year outlook for capital expenditures is now approximately $100 million and the outlook for primary working capital is approximately 30% by fiscal year end. Taken together, we continue to expect free operating cash flow to be greater than 125% of adjusted net income. Lastly, as it relates to the outlook, I do want to comment on the developing trade situation. The outlook we provided today does not consider any additional costs, favorable or unfavorable market developments that may occur as a result of the changing international trade landscape. And with that, I'll turn it back over to Sanjay.

Thank you, Pat. Turning to slide twelve. Let me take a few minutes to summarize. As I discussed at the top of the call, we have clearly faced challenging market conditions so far this year and have been actively managing those challenges. That said, I'm still disappointed with our most recent results. And even though we didn't see progress this quarter, we remain committed to above-market growth and margin improvement. As it relates to growth, we are confident in our competitive position and are performing better or keeping pace with the overall market. We continue to advance initiatives targeting customer wins in all our focused growth areas. Now add it to the list to margins. Continuous improvement is a key strategic lever to improving our profitability. For example, we recently hosted special Kaizen events in several of our large plants focused on process and efficiency improvements. Those events yielded tangible results and played an important role in the evolution of our culture to one that prioritizes continuous improvement in everything we do. We have also recently taken actions which will help us achieve the targets we laid out at our September 2023 Investor Day. Specifically, the $100 million structural cost improvement plan by the end of fiscal 2027. By the end of this fiscal year, we anticipate to be about 65% complete on achieving those run rate savings. We'll also continue to monitor market conditions and take appropriate mitigation actions as needed. These actions taken together demonstrate progress. But we certainly know we have more to do. We'll continue to work on actions within all three pillars and leverage our competitive advantages to deliver long-term shareholder value. With that, Operator, please open the line for questions.

Our first question will come from Julian Mitchell with Barclays. You may now go ahead.

Hi, good morning. Maybe just the first question around the sort of current demand environment, I suppose, particularly in general engineering. It seems as if the sort of soft data and things like surveys have been better for a couple of months. You know, several short cycle industrial peers of yours have talked about improving customer sentiment and some distributors have mentioned that as well. Just wondered sort of what you're seeing in general engineering by region. You know, realize it's a pretty tough environment, but you didn't change your sales outlook much for that piece. So maybe just some update there and how demand has trended in the last couple of months in that piece.

Yeah. Hi. Good morning, Julian. Let me just first comment on overall what we are seeing right now. Definitely some improvement especially as we have gone to the second half of January. Our order incoming rates have improved and of course, our billing rates also. So there is definitely sequential improvement we are seeing. However, one of the things that you see in the outlook that was based on our assumptions, you know, early in the year in August when we talked. I had assumed much more improvement in the US and also in our compute improvement in China. India continues to grow. Europe at the time, you know, we were thinking that it will be challenges. Actually, no. We kind of pointed that out. But things have gotten a little bit more challenging in Europe. So I think that's why we reduced our overall outlook in terms of, like, second half. But we are seeing definitely things improving in the recent weeks.

That's great. Thank you. And then just my follow-up question. When you're thinking Sanjay, more broadly about the cost structure at Kennametal and you have the extra measure announced January fourteenth. But, you know, sort of overall, looks like operating margins this year for the total company, you know, maybe running around sort of, you know, eight to eight and a half percent or so. Yeah. That's lower than the ten or twenty year average, and that's with a lot of restructuring actions in the past ten plus years. Realized demand is soft and, of course, that's pushing margins down a bit short term. But is there a sort of a view that maybe another much broader plan might be needed with sort of multiple plants to get the through cycle margins higher?

Yes, Julian. First, let me summarize again the things that we have done and also in process right now. As we mentioned, you know, that we laid out a $100 million cost structure type of actions in the Investor Day. The recent actions and announcements will get to $65 million worth of that. And of course, like you said, when we have a shortfall in volume, not all of that is gonna show up in the bottom line. But we know that these are the right things to do and we continue to do that. Along with what you see in the restructuring numbers and all that, we also have been managing what I will call, you know, non-headcount-related actions, you know, where restructuring may not be involved. For example, short work week and other tools that we have at our disposal. So we continue to work on that. At this point, we will continue to monitor the market conditions and take necessary actions. But in parallel, like I've always talked about, that with continuous improvement pillar, we'll continue to improve our overall margin and working capital.

Our next question will come from Angel Castillo with Morgan Stanley. You may now go ahead.

Good morning and thanks for taking my question. Sanjay, I was hoping we could just go back to that first commentary around improvement that you've seen in orders in the second half of January. Was that specific to general engineering? Was it more broadly? If it was just specific to general engineering, could you talk about the order trends you're seeing and some of the other key end markets in January as well as same kind of question before regionally, was that order pickup in any particular region? Versus a broader trend you're seeing?

Yeah, Angel, first of all, yeah, that definitely consisted of both general engineering and also other industries that we serve and market we serve. One area where, you know, we have, again, continue to monitor more closely is the EMEA. There also we have seen improvement in the last couple of weeks of January. But it is overall across the board.

That's helpful. Thank you. And then maybe just in terms of the implied kind of fourth quarter guide, I think the EPS pickup is a little bit more substantial than you would normally see based on your 3Q guide. And I think if I'm reading this correctly, the bridge would just be some of the savings that you start to get, you know, in the fourth quarter. So just could you just help us understand maybe how much of it is just these savings starting to flow through versus any kind of, you know, assumed start kind of a rebound in end market demand?

Yeah. Angel, I would say a lot of that is going to be the savings from the additional restructuring program that really drives that improvement. I would say beyond what we would normally experience in Q4. As you know, Q4 is normally our strongest profitability quarter. In particular, just overall sales volumes tend to be higher, and as well as in the infrastructure business, that tends to be the heavy quarter for construction season, which drives some additional volumes from the infrastructure business.

Our next question will come from Steve Barger with KeyBanc Capital Markets. You may now go ahead.

Thanks. Sanjay, you've replaced both segment heads in the past six months. Can you just give us some specifics for each of their plans for what they expect to do differently going forward? Just trying to get a sense for how that management change should result in broader changes.

Yeah. Thank you, Steve. I think the focus areas will be pretty much aligned with what I have laid out in the slides, like the last slide, which talks about our delivering growth. They both bring very good commercial and strong experience, you know, in product management, sales, marketing. And also, you know, in continuous improvement because they have both been practitioners of that. So we expect, you know, to continue to see improvements in margin and working capital through that. And then on portfolio, in terms of overall, in portfolio, we'll look at all different things, you know, like we have talked before, our product SKU optimization and all of that along with, you know, what we need to do in terms of pruning the portfolio we have and along targeted M&A that really, really clear shareholder value. So I think over and the foundational element in building further strengthen our talent, those will be the focus areas.

So to that point, we've been talking about commercial excellence for years now. Do you have product lines that are consistently breakeven or loss-producing? That are dragging on new product wins and if so, why not start to divest those or shut them down?

Steve, as we have mentioned, that we do not disclose by product line margin and all that. But just to give you a directional, you know, answer here, yes, we are looking at that. And we are taking some actions. And there are more things, you know, in the works right now and we'll communicate as we go forward, you know, when we get to a point, we have a little bit more solid action and, you know, date, but I can assure you that our overall goal here is to definitely improve our portfolio mix with both, you know, pruning of current portfolio that we have and also in building and diversifying our overall revenue mix.

Got it. Now, but if I could just get one last one. We've talked a lot over the years about the footprint potentially being too big, just too many rooftops. Sales have been flat for quite a few years now. Is there any thought to accelerating that process and consolidating plans at a faster rate?

We are working very diligently on that, Steve. I think, you know, we have to balance between making sure that we maintain customer service and not lose business because of that. So I think overall, we'll continue to work on it as you said. Yeah. With lower volume, that definitely has been one of the focus areas for us also.

Our next question will come from Michael Feniger with Bank of America. You may now go ahead.

Hey, guys. Thanks for good morning, everyone. Thank you for taking my question. Just on the tariff side, I understand it's a very fluid situation. You know, we're seeing some short cycle suppliers kind of starting to already think about the China piece. Just any color you could kind of help us on when we think of the China piece, but also, you know, Mexico, Canada, you know, how we kind of think about where your footprint fits and how much gets imported to the US. Is there any color there in how that would change your view on the pricing side versus the cost side, as we kind of monitor this dynamic situation?

Yeah, Mike. A couple of things, that I think are worth going over there. I think, you know, everyone's aware in terms of our absolute China exposure runs about 10% of the total portfolio. Canada is about half of that, and Mexico is around, you know, $40 million. Right? So in terms of the size of all three of those. You know, I think a couple of things that are important as you put those numbers in context, and that is on any of those trading relationships, you know, that's tends bilateral. So we tend to import some products we export some product from the U.S. as well. You know, one of the things that as we think about potential responses to, you know, any tariff regimes that would be put in place would be we do have footprint, our ability to leverage that global footprint to offset potentially some of the cost of that. As well as in terms of what's happened here over the last couple of days, you know, obviously, looking for you know, where are the exclusions? Are they gonna be broad-based? Are they gonna be more targeted? And then lastly, you know, what's the competitive environment for the product? So, you know, we're monitoring that situation. Those are kind of all the factors that we're taking into consideration. You know, obviously, we service global customers globally. We want to be able to remain and do that and to do that responsibly to their needs, and that good pricing and good cost for us. And so we'll try to balance all those operational considerations out as this landscape evolves.

Helpful. And just inventories, it did seem like there was a little progress on the inventory side for your own inventories. Just can you help us understand as you go to the end of the year and we kind of go and think about Q3 in the back half. Or you think your inventories are gonna end up for the year you still take some out? And then just a follow-on question with that. Given some of the reset on the end market commentary, how you feel like your customers' own inventories or distributors are kind of feeling right now as we're kind of heading into, you know, the first half of 2025 or for you guys to come back half of your fiscal year.

Yeah. So just in terms of inventory, I'll put this in the context, you know, I'll also Mike, in terms of the outlook. So, yeah, I'd say, you know, given where sales developed here in the quarter, you know, our inventory levels are probably a little bit elevated to where we would like them to be. We're gonna take some action here as we move through the balance of the fiscal to constrain production a bit and bring inventory levels back to where we would want them to be. Again, I'd say our objective as we think of total working capital is to drive that primary working capital to approximately 30% by the end of the year. Now obviously in doing that, you know, we're prioritizing generating the cash from inventory efficiency. You know, overall, say, the noncash benefit associated with some fixed cost absorption. So that's kind of how we'll think about that. Over the course of the year, you'll see a little bit of that happen in Q3 from an inventory reduction perspective. And then some additional happened here in Q4 as well. As we think about inventory that's out there in the channel, I don't think at this point in time, based on what we're hearing from customers, the inventories are misaligned to where demand is. I think inventory at the customer level is, you know, pretty well controlled. Even in spite of some of the changing market conditions.

Our next question will come from Steven Fisher with UBS. You may now go ahead.

Thanks. Good morning. Just wanted to follow-up on a comment I think you made about competitive dynamics in Earthworks. Sounded like there was some additional pressures there. Can you just provide a little more color on that? Is this a new source of competition? Is it new dynamics that you hadn't been seeing before? Can you just talk a little bit more about that, please?

Yeah. It's not necessarily something new. I mean, there are two parts of the equation here. One is in China. I think overall capital investment has been down. So when that happens, you know, that puts a little bit more pressure because the market has excess capacity. And also some of the things that we supply including our drums products, you know, those are more expensive, you know, almost falls in the CapEx type of category. So we are seeing some pressure there, but we are, you know, holding our own and competing quite well. In the US, you know, there is definitely some reduction in production and also construction. That's where we have seen some of the price pressure. And we compete at times, you know, we have actually also, you know, lost some business, but in many cases, customers have come back to us because of our overall value proposition. So we do see some dynamics there.

Okay. That's helpful. And I apologize if you covered this earlier in the call, but just in the context of your broader guidance for this year that's now updated, in terms of the organic growth. Thinking back to your investor day, framework of contributions from new products and market penetration. Can you just update us on how you're thinking about that contribution for this year embedded within your organic growth targets?

Yeah. I think what we discussed during the investor day roughly, let's just say 2% market, 2% strategic growth, and 2% price. At this point, we still feel very confident about, you know, approximately 2% on price. And approximately 2% on organic growth, but the market has been a bigger headwind. So as we see, the unit volume definitely is affected by that. So I think we're still thinking that way. And overall, when you look at the peer data and all that, you know, that will also indicate that we are maintaining or performing slightly better.

This concludes our question and answer session. I'd like to turn the conference back over to Sanjay Chowbey for closing remarks.

Yes. 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.

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