Kennametal (NYSE:KMT) released third-quarter financial results and hosted an earnings call on Wednesday. Read the complete transcript below.

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Summary

Kennametal reported strong Q3 fiscal 2026 results with a 19% organic sales increase and adjusted EPS of $0.77, up from $0.47 year-over-year.

The company is advancing strategic growth initiatives, focusing on securing tungsten supply amidst rising prices, and capitalizing on market opportunities in aerospace, defense, and energy.

Kennametal raised its fiscal 2026 sales and EPS outlook due to increased pricing for tungsten and significant volume growth, while maintaining a focus on long-term value creation and strategic growth over restructuring in the near term.

Full Transcript

OPERATOR

Good morning. I would like to welcome everyone to Kennametal's Q3 fiscal 2026 earnings conference call today. All lines have been placed on mute to prevent any background noise. After today's speaker remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press Star then the number one on your telephone keypad. If your question has been addressed and you would like to withdraw it, please press Star then the number two. Please note that today's event is being recorded. I would now like to turn the conference over to Michael Pisi, Vice President of Investor Relations. Please go ahead.

Michael Pisi (Vice President of Investor Relations)

Thank you operator. Welcome everyone and thank you for joining us to review Kennametal's third quarter fiscal 2026 results. This morning 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 Michael Piesey, Vice President of Investor Relations. Joining me on the call today are Sanjay Chalbe, 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 in our Form 8-K on our website. And with that, I'll turn the call over to Sanjay.

Sanjay Chalbe (President and Chief Executive Officer)

Thank you Mike. Good morning and thank you for joining us. I will begin with an overview of the quarter, including end market commentary, followed by a discussion on unit volume trends. From there, Pat will cover the quarterly financial results and the fiscal year 26 outlook along with an early look at fiscal 27. Finally, I'll make some summary comments and then we'll open the line for questions. Turning to Slide 3, let me begin by addressing some of the highlights from our strong third quarter. Our global commercial teams continued to advance our strategic growth initiatives. The infrastructure team delivered solid growth in construction. We saw volume growth from strong product performance and the advantage we have as a secure source of tungsten in a tight supply environment. Additionally, we received large orders in our defense business, further securing ongoing growth in this market. As we head into fiscal 27 in metal cutting, we continue to increase our share of wallet with key accounts especially in aerospace and defense, and build upon our momentum in energy from Artificial Intelligence power generation initiatives. In general engineering, we have been winning new customers through targeted promotional campaigns and improvements to our digital customer experience, especially for our small to medium sized customers. As you know, we continue to prioritize above market growth as a strategic imperative and these wins position us well in our key end markets. Turning now to the broader tungsten environment, prices continued their unprecedented increase throughout the quarter, rising from approximately $900 per metric ton to $3,000 as the supply of material continued to be constrained. This tungsten price and supply environment have created both challenges and opportunities. On the challenges front, we have seen a highly competitive market for materials, but our supply chain has held up relatively well. We have and will continue to implement pricing actions in response to these rising tungsten costs and remain confident in our ability to secure that price. We are also focused on managing the working capital and balance sheet implications of higher tungsten costs. In terms of opportunities, our vertical integration has been a real strength in this market, providing us better supply chain control and flexibility compared to some competitors. For example, as competitors are turning away orders or extending lead times, we are well positioned to capture business that is aligned with our strategic priorities. During the quarter, we capitalized on these opportunities in each of our business segments, specifically Earthworks within infrastructure and Aerospace and Defense in metal cutting. These new opportunities also facilitate shaping our product portfolio away from lower margin to higher margin solutions. As such, we are seeing a unique combination of three factors that are opening the door to sales opportunities. First, continued market recovery. Second, solid execution on our strategic growth initiatives and third, a window of opportunity from the current tungsten market which is likely to persist in the near term. Given those dynamics, we are prioritizing our time and attention on growth opportunities over restructuring initiatives in the near term, and we are shifting the timeline for facility closure actions we had previously planned to complete in fiscal 27. We will provide additional detail on the restructuring timeline as appropriate. Even with that shift, we are still targeting approximately $110 million in savings from cost takeout actions by the end of fiscal 27, which is $10 million above what we outlined at Investor Day. Now let's move to our quarterly results, which once again exceeded our sales and Earnings Per Share (EPS) outlook. Compared to outlook, sales were mostly driven by increased price realization and better than expected volume in both segments. Earnings Per Share (EPS) benefited from the additional price draw timing of $0.09, positive volume and lower than anticipated tax rate. Year over year, sales increased 19% organically. Please note this was our third consecutive quarter of organic growth driven by additional price realization, strategic growth initiatives and continued recovery in several end markets. Adjusted Earnings Per Share (EPS) increased to $0.77 compared to $0.47 in the prior year quarter and adjusted EBITDA margin was 20.8% compared to 17.9% in the prior year quarter. Cash from operating activities year to date was $70 million compared to $130 million in the prior year period. Pre operating cash flow year to date was $18 million compared to $63 million in the prior year. Free cash flow was adversely impacted by increased working capital requirements related to tungsten prices. Finally, we returned $15 million to shareholders through dividends. As it relates to our outlook today, we are raising our sales and Earnings Per Share (EPS) outlook for fiscal 26. This update reflects the additional price due to the continuing rise in tungsten and additional volume. Pat will provide more details on our updated outlook shortly. In summary, we are pleased with this quarter's results and how the team is navigating these unique business conditions. As I mentioned, there are opportunities and challenges in this market and we remain focused on delivering on our commitments throughout fiscal 26 and setting ourselves up for a successful fiscal 27. Now let's turn to slide 4 for an end market update. As a reminder, our full year outlook reflects forecasts of specific market drivers and general market conditions. The top half of this slide reflects our sales outlook at the midpoint and includes price, volume and market factors. My comments will focus on the bottom half of the slide and address transportation and energy which are the only end markets that changed since our last call. IHS estimates for transportation slightly improved from the previous estimate up in the low single digit range, mostly driven by improvements in Asia Pacific market. Energy improved slightly relative to our prior outlook as customer sentiment improved. The tone is now cautiously optimistic which is an improved stance compared to what customers were previously signaling. Turning to slide five as we have talked about over the last several years, customer activity rates and our sales volumes have been below the pre Covid peak. I want to take some time to provide insight into unit volume and how those trends have improved over the last few quarters. This chart uses units sold volume and excludes the impact of price and foreign exchange. It also excludes infrastructure defense sales as these are lumpy and not tied to industrial production metrics. Now let me spend a moment on what is driving the volume recovery and just as importantly, why we believe it's Sustainable. As the call out indicates, we are now experiencing the second consecutive quarter of year over year trailing 12 month unit volume growth despite a macro backdrop that has been uneven. Volumes are strengthening in the Americas and Asia Pacific, but EMEA continues to lag and that is consistent with what we are seeing in PMI and industrial production data. A key driver continues to be aerospace and defense which remains strong across both metal cutting and infrastructure. Importantly, this strength isn't simply tied to OEM build rates which are still roughly 20% below pre Covid levels, but rather to share gains and deeper penetration with tier suppliers. That gives us confidence there is still additional Runway as production rates normalize over time. We are also starting to see early signs of stabilization in general engineering and energy. Even while headline indicators remain soft in energy, power generation continues to see meaningful momentum and while US land rate counts are still about 30% below pre Covid levels, we are seeing enough stabilization to suggest we are past the trough in infrastructure. Earthworks has delivered volume gains for two consecutive quarters driven by share gains. Stepping back, if you look at the chart, global volumes are now up approximately 3% from the Q1 fiscal 26 trough following 36 months of stagnant industrial production. Our performance is not just the result of a market recovery, it's shaped by where we compete, how we allocate resources and where we are winning share. We know we operate in cyclical end markets, but we are quite confident in the long term growth potential of these markets and our ability to capture share within them. Now let me turn the call over to Pat who will review the third quarter financial performance and the outlook.

Pat Watson (Vice President and Chief Financial Officer)

Thank you Sanjay and good morning everyone. I will begin on slide 6 with a review of our Q3 operating results. Sales were up 22% year over year with an organic increase of 19% and favorable foreign currency exchange of 5% which was slightly offset when adjusting for the divestiture which concluded last year. Sales volume in the quarter was up low single digits. At the segment level, organic sales increased 30% in infrastructure and 12% in metal cutting. On a constant currency basis, America sales increased 27%, Asia Pacific sales increased 25% and EMEA was up 2%. The sales performance this quarter exceeded the expectations we provided last quarter on higher sales volumes from better market conditions and share capture. We also had higher than expected price, primarily in infrastructure from the continued rapid increase in tungsten prices by end market. On a constant currency basis, earthworks grew 43%, energy increased 28%, aerospace and defense grew 23%, general engineering grew 14% and transportation increased 1%. I will provide more color when reviewing the segment performance in a moment. Adjusted EBITDA and operating margins were 20.8% and 13.8% respectively versus 17.9% and 10.3% in the prior year quarter. The margin increase was driven by favorable price raw of $39 million within the infrastructure segment. Pricing and tariff surcharges in metal cutting, increased sales and production volumes and year over year restructuring benefits of $7 million. These are partially offset by higher compensation costs which are mostly performance based tariffs and general inflation and a prior year benefit from an advanced manufacturing tax credit of approximately $8 million that did not repeat in the current year. Adjusted earnings per share was $0.77 in the quarter versus $0.47 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on Slide 7. The year over year effective operations this quarter was positive $0.36. This reflects approximately $39 million of favorable timing of price, raw material costs, price and tariff surcharges in metal cutting, higher sales and production volume and incremental restructuring benefits of $7 million. These are partially offset by higher compensation costs, tariffs, general inflation and higher raw material costs in metal cutting. There was a headwind of $0.08 related to the net prior year manufacturing tax credit. You can also see the $0.02 of transaction gains related to preferential Bolivia exchange rates, Currency other and pension impacts offset each other. Slides 8 and 9 detail the performance of our segments this quarter. Reported metal cutting sales were up 18% compared to the prior year quarter with 12% organic growth and favorable foreign currency exchange of 6%. Regionally excluding currency exchange, Asia Pacific increased 18%, the Americas increased 17% and EMEA increased 3%. Looking at sales by end market on a constant currency basis, Aerospace and defense increased 27% year over year due to improved build rates in Americas and easing supply chain pressures in emea. Combined with our global focus on deeper market penetration. Energy grew 17% this quarter from data center Power generation wins. General Engineering increased 13% year over year due to price volume gains in Asia Pacific and stronger distribution sales in the Americas. And lastly, transportation increased 1% year over year due to price and market softness primarily in EMEA. Metal cutting adjusted operating margin of 11.2% increased 160 basis points year over year primarily due to higher price and tariff surcharges, higher sales and production volumes and incremental year over year restructuring savings of approximately $5 million. These factors were partially offset by higher higher compensation tariffs and general inflation and higher raw material costs turning to slide 9 for infrastructure. Reported infrastructure sales increased 29% year over year with organic growth of 30% and favorable foreign currency exchange of 4%, partially offset by a divestiture effect of minus 5%. Regionally on a constant currency basis, America sales increased 42%, Asia Pacific increased 35% and EMEA sales were flat. Looking at sales by end market on a constant currency basis, earthworks increased 43% from higher demand in construction as we were able to provide product to customers who are unable to source product from other players and share gain in underground mining energy increased 34% mainly driven by price. General engineering increased 18% due to price and higher powder demand in Asia Pacific partially offset by lower demand in EMEA. And lastly, aerospace and defense increased 17% due to defense orders driven by continued focus on growth initiatives and timing. In the Americas, adjusted operating margin increased 680 basis points year over year to 18.3% primarily from the favorable timing of pricing compared to raw material costs of $39 million and year over year restructuring savings of $2 million. These items were partially offset by higher compensation costs and a prior year manufacturing tax credit of $8 million that did not repeat in the current year. Now turning to Slide 10 to review our free operating cash flow and balance sheet. Our third quarter year to date net cash flow from operating activities was $70 million compared to $130 million in the prior year period. This change was driven primarily by higher working capital from higher tungsten prices and increased volumes of tungsten to secure our supply chain. Our third quarter year to date free operating cash flow decreased to $18 million from $63 million in the prior year primarily due to the increased primary working capital capital changes I just referenced. Partially offset by lower capital expenditures on a dollar basis year over year, primary working capital capital increased to $819 million from $654 million. On a percentage of sales basis, primary working capital capital increased to 32.4%. It's important to note that from both an earnings and cash flow perspective, the business is operating as it normally would when the price of tungsten rises. In periods of rising tungsten prices, we always experience favorable price raw timing effects in sales and earnings while we experience headwinds to cash flow as primary working capital capital grows based on tungsten valuation. What is unique about the current circumstance is the magnitude of the rise in tungsten prices. In no recent time have we experienced a nine fold increase due to the uncertain nature of tungsten pricing and the corresponding pressure it has placed on working capital. We once again made the decision not to repurchase shares. Net capital expenditures decreased to $52 million compared to $67 million in the prior year quarter. In total, we returned $15 million to shareholders through dividends. Inception. To date, we have repurchased $70 million or 3 million shares under our $200 million authorization. We remain committed to returning cash to shareholders while executing our strategy and to drive growth and margin improvement. We continue to maintain a healthy balance sheet and debt maturity profile. At quarter end, we had ample liquidity to support the business with combined cash and revolver availability of approximately $742 million and as always, we remain well within our financial covenants. The full balance sheet can be found on slide 16 in the appendix. Now on slide 11 regarding our full year outlook, we now expect FY26 sales to be between 2.33 and $2.35 billion with volume ranging from 2 to 3%, net price and tariff surcharge combined of approximately 16% and we anticipate an approximate 2% tailwind from foreign exchange. The increased outlook reflects additional pricing actions related to the increase in cost of tungsten since our February call. Specifically, within the fourth quarter, we expect net price and tariff surcharges combined of approximately 35% compared to the prior year quarter. We now expect adjusted EPS in the range of $3.75 to $4.00. This outlook includes approximately $2.45 related to the timing of price raw benefit due to the rise in tungsten prices, the significant majority of which affects the infrastructure segment. This effect increased $1.50 from the prior outlook. On the cash side, the full year outlook for capital expenditures are now anticipated to be approximately $85 million and free operating cash flow is expected to be approximately negative 30% of adjusted net income, reflecting the working capital pressure from the rising cost of tungsten. As discussed earlier, it's important to note our outlook does not include any effects from the conflict in the Middle East. The other assumptions in our outlook are noted on the slide While it is earlier than normal, I would like to take a moment to provide a bit of a framework to help you think about FY27. First off, our current assumption is that tungsten prices will remain elevated for some period of time going forward. That implies there will be significant carryover pricing given the 35% price expectation for the fourth quarter. This carryover pricing will diminish as FY27 progresses since we would fully lap it in the fourth quarter. Keep in mind that this assumption holds price at the fourth quarter level. Also, we would Expect price raw timing benefits in a flat tungsten environment will continue through the first half of FY27, with the bulk of the benefit occurring in the first quarter. Outside of tungsten, we would expect normal cost inflation going into FY27. However, we would see performance based compensation reset to target, providing a $20 million tailwind. We will also see additional savings from restructuring continuous improvement of $10 million. We will provide the rest of the details including market expectations for FY27 on our call in August. Back to you, Sanjay.

Sanjay Chalbe (President and Chief Executive Officer)

Thank you, Pat. Turning to Slide 12, let me take a few minutes to summarize. We have delivered three strong quarters so far in fiscal 26, driven by price and modest improvements in various end markets, project wins on the commercial side, and productivity and cost improvement actions going forward. We will remain focused on the strategic growth initiatives and lean transformation we have underway, while also exploring ways to strengthen our portfolio over time. Additionally, we will continue to actively manage our tungsten supply chain. And in summary, we remain confident in our plan for long term value creation for shareholders. With that operator, please open the line for questions.

OPERATOR

Thank you. We will now begin the question and answer session. If you would like to ask a question during this time, please press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star then the number two. We will now pause momentarily to assemble our roster. And today's first question comes from Steve Volkman with Jefferies. Please proceed.

Steve Volkman (Equity Analyst at Jefferies)

Morning, Steve. Hi, good morning, guys. Thanks for taking the question. Can we just start with what do you think, Pat?

Pat Watson (Vice President and Chief Financial Officer)

What was the incremental margin on the volume in the quarter? Yes, I think the volume incremental margin was pretty normal for us, Steve. I think there's a couple things obviously in the quarter that are kind of masking that because we've got some big numbers being thrown around there. Obviously you got the $39 million worth of price raw timing benefit coming through. In the prior year we had that $8 million advanced manufacturing tax credit. And then I'd say the third component there that that's just unusual for us is variable compensation. So last year, you know, we would have been on the low side of accruing for variable compensation. This year, given performance were a bit on the high side, you know, in the quarter, that's like an $18 million number there in and of itself. And then of course you have some benefits coming through for restructuring, but when you pull all that back, volumes, volume leverage is pretty normal for the business.

Steve Volkman (Equity Analyst at Jefferies)

Okay. And then it sounds like You've adjusted price. You obviously have a big forecast for the fiscal fourth quarter. Are we like where we need to be today in terms of price or will there be more price that sort of flows through in the fourth quarter and maybe even later into the summer?

Sanjay Chalbe (President and Chief Executive Officer)

Yeah. Steve, this is Sanjay. As you know, this is a very dynamic situation that we are managing and we'll continue to monitor how that moves. As you know, even the last call you talked about how it was moving on a daily basis, hourly basis. So that's why we will just tell you that we are looking at different market variables. And definitely our goal here is to fully offset the cost implication of tungsten.

Pat Watson (Vice President and Chief Financial Officer)

I would just add to that, Steve. We did put price in here in the market, various dates by region, but effectively in the April, May timeframe. April, May. Okay.

OPERATOR

All right, thank you guys. And the next question comes from Steven Fisher with ubs. Please proceed.

Steven Fisher (Equity Analyst at UBS)

Mary? Steve, thanks. Thanks. Good morning and congrats on managing all the complexities here. Just to follow up on that last question, just curious about the differences between metal cutting and infrastructure. I know with infrastructure it does tend to be fairly quick to capture that pricing. I'm just curious to confidence that you can really fully pass on the price increases within the metal cutting, you know, and what the frequency of timing you can put that through. Essentially, you know, are the customers that are going to these distributors are they're really seeing a 35% increase on the shelf there from these products. Just curious if there's any real differences there in dynamics between metal cutting and infrastructure.

Sanjay Chalbe (President and Chief Executive Officer)

Yeah, sure, Steve. I think first of all, like in past we have talked about the metal cutting is a list price business. And also when you look at the material flow, you know, there is more lag in that, you know, but infrastructure sees that first. And based on the different product, you know, we also have like different content of how much tungsten is used. So that will reflect, you know, when you look at the growth numbers, sales growth numbers, you know, by different end markets within the different, you know, like segments, you know, you will see in some cases very, very high number. Many cases, you know, those are driven by the higher content of tungsten. So we have, you know, in infrastructure many customers who are on the index price basis, but many others are not. And we do move relatively quicker on infrastructure pricing in metal cutting, you know, there's a three to six month lag generally and then based on, you know, the list price change, you know, we implement that.

Steven Fisher (Equity Analyst at UBS)

Okay. And then maybe just a little more color on what you're seeing in energy and how you see that evolving for the next few months. Just curious what you are hearing from your customers there and is that something you're preparing for? Kind of a bit more of a ramp up?

Sanjay Chalbe (President and Chief Executive Officer)

Yeah. On the energy. I'll divide the question into two pieces here. First is the AI power generation related energy demands which we see more so in the metal cutting side. Definitely. As you know there's a lot of industrial activities driven around the world but a lot in the US also and we are very well positioned with our innovative solutions, application support and custom solutions for our customers and we are doing a pretty good job in winning share there. And I do believe that that will continue. And as you have seen in even this quarter report, we talk about that quite a bit when it comes to the other side of energy, which is more or less, let's say in oil and gas it will definitely touch a little bit metal cutting but lot more in the infrastructure side as we talked about it, that there is a little bit of optimistic view, but it's cautiously optimistic view. The rig count projection right now has gone from 527 to 532. But if you look at the market there are two camps. There are people who are saying that there will be a lot more investment coming up here and there are people who are saying that this is temporary and things like that. But our overall conclusion based on what we see, the trough is behind us and we should see some steady improvement going forward.

Steven Fisher (Equity Analyst at UBS)

Thank you very much.

OPERATOR

And our next question is from Julian Mitchell with Barclays. Please proceed.

Julian Mitchell (Equity Analyst at Barclays)

Hi, good morning. Hey just maybe a first question just to try and clarify the tungsten related sort of tailwind to EPS. I think you said $2.45 for fiscal 26 in aggregate in the fourth quarter. Is it around $1.75? Is that roughly the right math? Just wanted to check that.

Pat Watson (Vice President and Chief Financial Officer)

Yeah, I think if you kind of back into that Julie. And we had about an eps terms about $0.16 I think in Q2, $0.39 here in. And so you just force the rest out of Q4.

Julian Mitchell (Equity Analyst at Barclays)

That's great. Thank you Pat. And then maybe Pat, help us understand those moving parts around the sort of cash flow year ending leverage, you know when you might look to resume the share repurchase program, you know, help us understand what that free cash flow in the the fourth fiscal quarter is looking like and you know how quickly does it sort of reverse following that based on where tungsten is today.

Pat Watson (Vice President and Chief Financial Officer)

Yep. So I would think, you know, think about it this way and we Talk about this from a, you know, how does the cost structure lag from an income statement perspective that obviously the balance sheet is following that too. So as tungsten has ramped, we're going to continue to see inventory build on a valuation basis here in the fourth quarter. That's really what's driving that negative free operating cash flow for the full year. And so as that kind of builds up, we would anticipate you get about a quarter or two out again from a change in tungsten. We would kind of get flatlined. The business would then move back to its normal pattern in terms of its cash generation ability. Obviously, as I said kind of in the scripted remarks here, the magnitude of what we're dealing with here is just significantly larger than what we've seen in the past. Right. Think about that from a share repurchase perspective. Look, you know, we've been very committed to returning cash to shareholders through the dividend program as well as through our repurchase program. You know, our desires have been at a minimum to offset dilution from equity compensation programs. We just fundamentally think that's good housekeeping. You know, in the current environment, you know, what would we want to see to really resume that? We really want to see some stabilization in, of terms, clarity about where tungsten is headed. Our obvious thesis here at the moment is that tungsten should be relatively stable. That being said, it's a very dynamic marketplace today.

Julian Mitchell (Equity Analyst at Barclays)

That's great. Thank you.

OPERATOR

The next question is from Steve Barger with Keybanc Capital Markets. Please proceed.

Steve Barger (Equity Analyst at KeyBanc Capital Markets)

Mark, Steve. And Steve, you may be muted on your side. Yep. Sorry. Thanks. Hey, Pat, you talked about good activity in aerospace and defense and some share gains in infrastructure and earthworks. But at the same time, I think you said some competitors are turning away orders presumably on price, cost. So can you talk about what you think is happening with pre buy and just, you know, people scrambling to get product due to inflation and then, you know, how does that map to the longer term durability of share gains?

Sanjay Chalbe (President and Chief Executive Officer)

Yeah, Steve, this is Sanjay. I'll take that. First, first of all, you know, we did see some pre buy, but it was mostly in the infrastructure, earthworks, you know, construction business. Beyond that, there was not much material impact on previse in the rest of the business. We did see opportunities also in the earthworks business within infrastructure and also in aerospace and defense in metal cutting, where we did see some evidence where we were able to capture where competitors were not able to either provide proper lead time or even just meet the demand. So that's how we saw that. Does that answer your question?

Steve Barger (Equity Analyst at KeyBanc Capital Markets)

I think, just so I'm clear, why do you think the competitors are not able to meet demand right now?

Sanjay Chalbe (President and Chief Executive Officer)

Yeah, well, we have seen some competitors are definitely having problem in getting raw material. And even if they're getting raw material, they're also pretty booked and they're putting longer lead times. So in some cases we are able to provide a better lead time and that's how we got it.

Pat Watson (Vice President and Chief Financial Officer)

I would say that the opportunity obviously there, Steve, is that there is short term disruption in the marketplace that gives us an opportunity to quote and win business that maybe we wouldn't normally have seen the same opportunities on the opportunity for us. And the challenge to our sales organization, quite frankly, is to convert that to permanent long term share capture.

Sanjay Chalbe (President and Chief Executive Officer)

Yeah, one more thing, Steve. I will add to that. I think for investors who may be listening to us first time, I do want to mention that this situation that we have with tungsten is not driven by higher demand. It is driven by supply constraints. As in past, you have seen some of the times tungsten went up. At the same time oil and gas and some of the other industry which consumes a lot of tungsten went up. This time it is because of supply constraint and also export controls. So just simply in a big portion of market there is less supply right now.

Steve Barger (Equity Analyst at KeyBanc Capital Markets)

Yeah, understood. That actually is a good segue to my next question. If I heard you right, you're slowing facility closures and last quarter you expected restructuring savings of 125 million. Now that's 110 million. Are those two things related and if so, why? Maybe I missed it. Why are you slowing facility closure?

Sanjay Chalbe (President and Chief Executive Officer)

Yeah, very good question. As we said in the prepared remarks and I will clarify that a little bit more. Obviously we are seeing right now more growth opportunities which is driven by all three factors. Market improving, then also share gain through our routine strategic growth initiatives that we have talked about in past and on top of that, a window of opportunity from the tungsten situation. So we look at how we can create the best value for all our stakeholders. And we feel right now that allocating more resources on growth opportunities and driving our routine business leverage will create more shareholder value for now and that's how we are making the shift. However, we are not stopping the work on footprint optimization. We'll continue to work on it. Timeline will shift a little bit. We'll come back and give you more information on that at appropriate time.

Steve Barger (Equity Analyst at KeyBanc Capital Markets)

Got it. Thank you.

OPERATOR

Our next question is from Tammy Zachariah with JP Morgan. Please proceed.

Tammy Zachariah (Equity Analyst at JP Morgan)

Hey Good morning. Thank you so much. First question is on terrace. I think IPA got struck down. Do you expect to file any refunds and if so, what kind of refund, what amount of refund would you expect to collect?

Sanjay Chalbe (President and Chief Executive Officer)

Yeah. Tammy, Morning. First of all, as you know this is also one of the very dynamic situation. We still have tariffs in place and so we are not taking any hasty action on this yet. I think we'll continue to monitor and based on that we'll make decisions. So nothing more to share at this point in today's call.

Tammy Zachariah (Equity Analyst at JP Morgan)

Understood? That's fair. And my second question is for the fourth quarter. Just wanted to clarify, do you expect volume growth to be in that 2 to 3% full year range or it could come in above that?

Pat Watson (Vice President and Chief Financial Officer)

Yes, it's the full year range. I would say it's depending on where you're at in that range, Tammy. It's going to be low at the high end, maybe up into the mid single digits. You obviously you factor in 35% price we talked about from a script perspective. Don't forget we had a divestiture in the prior year and you got a little bit of FX in there as well. So that kind of is the math there. In terms you think about the top line, I would emphasize, you know, as we just think about, you know, the profitability, you know, that obviously we're going to see sequentially profitability step up pretty significantly here based on that price raw and you know, given the circumstances that we're in today, again is unusual, we're going to have some of that price raw realization in metal cutting too. So when you think about again the margin performance of the business as a whole in the two segments, pretty big ramp up for both of them.

Tammy Zachariah (Equity Analyst at JP Morgan)

Understood, Helpful, thank you.

OPERATOR

And the next question comes from Angel Castillo with Morgan Stanley. Please proceed.

Angel Castillo (Equity Analyst at Morgan Stanley)

Hi, good morning. Thanks for taking my question. Just maybe first wanted to start out on the market share gains. That's been a meaningful driver I guess of the organic growth that you've been seeing. Just curious if you could unpack that a little bit more. I guess I'm trying to understand if it's possible to I guess separate how much of the share gains you think was maybe driven by kind of value proposition or project wins that are tend to be a little bit stickier versus where it's maybe related to kind of competitor supply constraints and in particular I guess to the latter bucket curious if you kind of expect that as over time as kind of supply perhaps normalizes if you would expect to kind of give that back or if there's any kind of stickiness to some of those shifts that we might be seeing on the kind of supply driven angle. And also if you could comment on the promotional campaigns you talked about as well, that would be helpful.

Sanjay Chalbe (President and Chief Executive Officer)

Yeah, sure Angel. First of all, again it is a combination of all three factors, market improving and we think that that should continue then second will be in our strategic growth initiatives and we have talked about in past, those will include for example what we have done in aerospace and defense and energy and general engineering, Earthworks and so on so forth. How we have gone about winning bigger share of wallet with existing customers, but also going out and winning business at different tiers of the supply chain or our customer value chain. And those I will tell you that are very sustainable because we are winning those using our core competencies from product and innovation and our commercial excellence and our operational capabilities. Now the third piece of the volume that we have also talked about, the window of opportunity we have from Tungsten Dynamics, we also think that those are sustainable at least in the near term, that we see that in the long term we'll see how that plays out. But we are being very strategic about which opportunities that we go and capitalize. We are selective on what opportunities we think are going to be longer term sustainable for us. So all in all, of course it's a mix of three things and I won't be able to quantify, break down or don't want to disclose it in public domain on that. But I can tell you that as we have talked about in past, that driving growth above market has been one of our strategic imperative and it will continue to be in last two years, three years actually I will go a little bit beyond that. We have shown our ability to outperform or at least hold our own in our metal cutting business where we have public peer data and this is going to continue to be one of the focus. So in short, I will just say that it is going to be a meaningful piece of our overall volume story.

Angel Castillo (Equity Analyst at Morgan Stanley)

Very helpful, thank you. And then if you could bear with me, I guess a three part question here just on tungsten, hoping to better understand, I guess a couple of things. One, any more color you can add in terms of the sourcing that you're doing and how that differs versus competitors that allows you, in a market that you described is very competitive in terms of sourcing to make sure that you're able to have the right amount of supply. So just any color you can add on that and then maybe a little bit more Longer term or medium to longer term. On the tungsten side, I think your preliminary fiscal year 27 outlook talked about that as being kind of stable at current levels. Just anything you can add in terms of the supply demand that you're seeing progressing from here in terms of, I think there might be some capacity that's coming online in 2027. So just to the extent that, I guess any implications from that or the recently kind of lower prices of tungsten in China as to what, you know, where that commodity heads in 2027 and then just kind of lastly, you know, implications of that to the price and the market share gains that you talked about on the supply basis.

Sanjay Chalbe (President and Chief Executive Officer)

Yes, certainly. So I'll try to take each one of those in terms, you know, when I think about the advantages we have, I want to go beyond, quite frankly, just the sourcing aspect. Look, from a sourcing perspective, you know, as we've talked about in the past, we do not use significant amounts of Chinese material outside of our Chinese operation. You know, outside of China, you know, we've got a diversified supply base and partners we've been with for a long period of time and getting material from Bolivia, other East Asian sources, and as well as a nice slug of recycled material. But a lot of the strength that we have as a company vis a vis some of the competition that's out there is also the integrated nature of our supply chain. So we have the ability basically to take in tungsten materials at various stages and turn them ultimately into a final product. You think about that from our ability to take raw materials which is virgin or in and process that there is only a handful of companies in the industry that can do that as well. And so that provides us, I think, a durable strategic advantage here in this set of circumstances. You know, as you think about where it is from from an overall pricing perspective, yes, our assumption at the moment is the tungsten prices are stable. You know, I think the, you know, the, the last couple of quarters that we've gone through in terms of, you know, the magnitude of this price change, I don't think that many market participants would have envisioned us going from a couple hundred dollars a ton to over $3,000 a ton, excuse me, as we have over the last 12 months, you know, certainly there has been some softening in China the last week or so in terms of the prices. Unclear at the moment in time whether or not that's indicative of a larger trend that would be more durable. We'll obviously continue to monitor and watch that. And then your last Question in terms of what supplies coming online? Yep, there's a variety of new mine projects that are out there that will come online. We would anticipate in the fullness of time that would help moderate the tungsten prices here a little bit on a global basis. I think the other reality of the situation here is in particular we've got the export controls in China that are in place, number one. And then number two, we've got lower Chinese mine production over the last two years as it relates to, based on some information from the public domain, lower quality ore potentially out there, as well as I would emphasize, lower mining permits provided by the Chinese government. So, you know, the market has been in a period of shortage. Additional supply obviously would help alleviate some of that, you know, and as that market continues to unfold, obviously that will inform our pricing decisions and you know, how we set, I'll say, our inventory objectives here in terms of holding inventory as well.

Angel Castillo (Equity Analyst at Morgan Stanley)

Very helpful. Thank you so much.

OPERATOR

And the next question is a follow up from Steve Barger with KeyBanc Capital Markets. Please proceed.

Steve Barger (Equity Analyst at KeyBanc Capital Markets)

Hey, thank you, Pat. Just to level set expectations for the models, you said price raw timing benefit from tungsten flows through into the first half mostly in 1Q is the right way to think about FY27 kind of reverse order from this year high point by far in one Q trailing back down to your quarterly average of like $0.40 towards the end of FY27.

Pat Watson (Vice President and Chief Financial Officer)

Yeah. Here a couple ways that I think about that, Steve. First off, just let me give you some like the basic walk and I'll start from the midpoint. Right. Midpoint of the outlook this year is 388. You know, we said we got $2.45 a price raw in there. You know, probably have about two dimes worth of variable compensation that would reset. So let's think of like a, you know, a clean FY26 removing those items about $1.63 in EPS terms. Right. And then kind of moving forward next year, you're going to add 10 cents in for the additional restructuring that we talked about. That gets you down to like about $1.73 before you get to what I'll call is additional price raw, which again should exist in that first half. Right. And then whatever the volume assumption is that you guys make at this point in time, obviously we'll give some clarity about that in August. The second thing I would say about that in terms of now taking that cadence and thinking about the year. Yeah, I think the right way to think about this Again, this is assuming a relatively stable tungsten environment would be first half. We're going to see the benefits of price raw back half of that year. We'll get back to what I would call it is a normal level of profitability. Right. Absent the price raw tailwinds.

Steve Barger (Equity Analyst at KeyBanc Capital Markets)

Super helpful, thank you.

OPERATOR

The next question is a follow up from Julian Mitchell with Barclays. Please proceed much.

Julian Mitchell (Equity Analyst at Barclays)

This will be a quick one. Maybe just flesh out a bit more the cadence of kind of volume demand. You had that very interesting chart on cumulative volumes going back several years that was interesting. And you've clearly seen a pickup as you said a couple of times. There's some pre buy I suppose in that. So maybe give us any color you can on sort of how base volumes are performing if you can really get to that level of detail from your channel partners and so forth. And have you seen an improvement in base demand in the last couple of months or it's difficult to disentangle that from pre buy movement.

Pat Watson (Vice President and Chief Financial Officer)

I'll take that first and then Sanjay, he'll hit most of it. But just to clarify that chart to make sure we're all talking about the same way. Right. That chart is based on a 12 trailing months basis, Julian. So based on that you can think about as an annualized chart. It's going to kind of flatten out any sort of short term pre buying issues.

Julian Mitchell (Equity Analyst at Barclays)

Right. Because again we're talking about an annual type number. And with that I'll turn it over to Sanjay here.

Sanjay Chalbe (President and Chief Executive Officer)

Yeah, Julian, with regards to rest of the drivers at this point, Q4, we are confident in what we are saying that we do see impact from improving market condition which is again moderate. And then on top of that in our share gain opportunities that we have, those will definitely play out. I think with respect to fiscal 27. We'll come back and talk about that in August. But the initial signs are seems like things are definitely stabilizing.

Julian Mitchell (Equity Analyst at Barclays)

Great, thank you.

OPERATOR

And this concludes today's question and answer session. At this time I would like to turn the conference back over to Sanjay Chalbe for any closing remarks.

Sanjay Chalbe (President and Chief Executive Officer)

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.

OPERATOR

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