Q3 2024 Kennametal Inc Earnings Call

Participants

Michael Pici; Vice President - Investor Relations; Kennametal Inc

Christopher Rossi; President, Chief Executive Officer, Director; Kennametal Inc

Patrick Watson; Chief Financial Officer, Vice President - Finance; Kennametal Inc

Sanjay Chowbey; President - Metal Cutting; Kennametal Inc

Angel Castillo; Analyst; Morgan Stanley

Julian Mitchell; Analyst; Barclays Bank PLC

Tami Zakaria; Analyst; JPMorgan Chase & Co.

Christian Zyla; Analyst; KeyBanc Capital Markets Inc.

Michael Feniger; Analyst; BofA Securities

Presentation

Operator

Good morning. I would like to welcome everyone to Kennametal's third quarter fiscal 2024 earnings conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Mr. Michael Pici, Vice President of Investor Relations.
Please go ahead.

Michael Pici

Thank you, operator, and welcome, everyone, and thank you for joining us to review Kennametal's Third Quarter Fiscal 2024 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 am Michael Pizzi, Vice President of Investor Relations. Joining me on the call today are Christopher Rossi, President and Chief Executive Officer; Pat Watson, Vice President and Chief Financial Officer; Sanjay Chowbey, Vice President and President of metal cutting and Franklin Cardenas, Vice President and President of Infrastructure. After Kris impact prepared remarks, we will open the line for questions.
At this time, I'd like to direct your attention to our forward-looking disclosure statements. 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 eight K on our website.
And with that, I'll turn the call over to you, Chris.

Christopher Rossi

Thanks, Mike. Good morning and thank you for joining us. I'll start the call today with a review of the quarter and some end market commentary as well as an example of the industry-leading innovation we are bringing to market. Then Pat will cover the quarterly financial results as well as the fiscal year '24 outlook.
Finally, I'll make some summary comments and then open the call for questions.
Beginning on Slide 3. For the quarter, sales decreased 4% year over year with organic decline of 2% unfavorable business days of 1% and unfavorable currency exchange and 1% price was offset by volume declines and product mix. At the segment level, organic growth was flat at 0% in metal cutting and declined 5% in infrastructure. On a constant currency basis, the Media posted 0% growth. Asia Pacific sales declined 1% in the Americas declined 5%.
Moving to our end markets, aerospace and defense grew 10%. Transportation was flat at 0%. General engineering declined 2%, earthworks declined 5% and energy declined 14%. These results are in line with what we expected and noted on our previous earnings call. Let me take a moment to provide some color on end markets year over year.
In aerospace and defense, sales increased 10% year over year. Metal Cutting grew 9% and infrastructure grew 13% both segments benefited from continued execution of our growth initiatives and market strength in aerospace, transportation was flat at 0% this quarter due to continued strength in EMEA, which was driven by EV and hybrid project wins offset by a decline in the Americas due to prior year project wins that did not repeat.
General engineering declined 2% versus prior year due to lower industrial production in EMEA and the Americas that affected both segments. Earthworks declined 5% during the quarter, primarily due to lower mining activity in China, energy declined 14% primarily in oil and gas as a result of 20% decline year over year in US land-based rig counts and wind energy project delays in Asia.
Turning now to profitability. In the quarter. Adjusted EBITDA declined 150 basis points, primarily due to lower sales and production volumes, higher wages and general inflation, unfavorable foreign exchange and the continued effect of unfavorable timing of pricing compared to raw material costs in the infrastructure segment. These were partially offset by higher price realization in the Metal Coatings segment and restructuring savings of approximately $6 million Metal Coatings.
Adjusted operating margins decreased 230 basis points year over year, driven by lower sales and production volumes, higher wages and general inflation and a property sale gain in the prior year. These items were partially offset by higher price realization and restructuring savings of approximately $5 million. Infrastructure segment's adjusted operating margins decreased 100 basis points year over year, primarily due to lower sales volumes, higher wages and general inflation and the unfavorable timing of pricing compared to raw material costs.
These factors were partially offset by restructuring savings of approximately $1 million. Adjusted EPS decreased to $0.30 compared to $0.39 in the prior year quarter. Free operating cash flow year to date was $84 million up from $60 million in the prior year. The increase in free operating cash flow was driven primarily by working capital changes, including improved inventory levels, partially offset by higher capital expenditures and lower net income.
And finally, we continued the share repurchase program this quarter with $15 million of shares bought back, bringing the total amount repurchased to $178 million. Our share repurchase program reflects the confidence we have in our ability to execute our strategy for long-term value creation despite quarterly macro economic headwinds.
Regarding the full year outlook as we discussed in detail last quarter, our outlook for the full year is largely informed by forecasts of specific market drivers, and those remain generally unchanged for the balance of the year. Pat will provide more details on the outlook in his section.
Now on Slide 4, I'd like to highlight an example of our innovation advantage continues to deliver enhanced product offerings to our customers.
This slide shows our new universal turning grade with Ken gold technology from our metal cutting portfolio. This new turning grade offers longer to life faster cutting speeds and enhanced reliability across a broad range of aerospace, defense, transportation, medical equipment and general engineering applications. Notably, this new turning gray is the fifth product launch for turning applications that leverage our state of the art, Ken gold coding and certain manufacturing capabilities that were enabled by modernization. And they are a great example of how we're no longer forced to play defense due to antiquated manufacturing capabilities. But instead we are now playing offense with new products to drive growth that outpaces the market.
Now let me turn the call over to Pat, who will review the third quarter financial performance and the outlook.

Patrick Watson

Thank you, Chris, and good morning, everyone. I will begin on Slide 5 with a review of the Q3 operating results. The quarter's results show that we continued to execute our initiatives in the face of soft market conditions. Sales were down 4% year over year with an organic decline 2% fewer workdays of 1% and unfavorable currency exchange of 1%.
Sales performance this quarter was in line with the expectations we previously provided. Operating expense as a percentage of sales was flat year-over-year at 21.1%. Adjusted EBITDA and operating margins were 14.2% and 8.1% respectively, versus 15.7% and 9.8% in the prior year quarter.
During the quarter, we realized approximately $6 million of savings from the previously announced restructuring program. We remain on pace to achieve run-rate savings of $35 million annually by the end of FY24. The adjusted effective tax rate increased year over year to 26.5%, primarily driven by unfavorable geographical mix, partially offset by favorable return to provision adjustment.
Adjusted earnings per share were $0.30 in the quarter versus EPS of $0.39 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on Slide 6. Year over year, effective operations this quarter was negative $0.07. This reflects lower sales and production volumes and higher wage and general inflation in both businesses and unfavorable price in raw material timing and infrastructure. These items were partially offset by higher prices in metal cutting and restructuring savings in both businesses. You can also see the effects of the tax rate, foreign exchange and lower share count on EPS.
Slides 7 and 8 detail the performance of our segments this quarter reported metal cutting sales were down 2% compared to the prior year quarter with flat organic sales and an unfavorable foreign currency effect of 1% and unfavorable Workdays of 1% by region. On a constant currency basis, sales in EMEA were flat with the Americas and Asia Pacific each down 1%. Amir year over year. Performance reflects growth driven by transportation and aerospace and defense, offset by general engineering in the Americas, we continued to execute our growth initiatives in aerospace and defense and in general engineering growth in these end markets were more than offset by lower sales in transportation and energy in Asia Pacific, sales growth in India was more than offset by market conditions in China and a few other smaller markets.
Looking at sales by end market, Aerospace and Defense grew 9% year over year as our strategic initiatives continue to drive results in this end market, general engineering declined 2% year over year with modest growth in the Americas and Asia Pacific, offset by lower sales in Amea. Energy declined 8% this quarter with the majority of effect in the Americas coming from continued slow conditions in oil and gas and in Asia Pacific from wind power project delays. And lastly, sales and transportation were flat with EV and hybrid project wins and overall strength in Amea offset by project sales in the prior year that did not repeat in the Americas.
Metal Cutting adjusted operating margin of 10.8%, decreased 230 basis points year over year as lower sales and production volumes, higher wages and general inflation and a gain on a property sale of approximately $1 million in the prior year period that did not repeat were partially offset by higher price and restructuring savings of approximately $5 million. We will continue to align variable costs to production levels over the next several months.
Turning to Slide 8 for infrastructure. Reported infrastructure sales were down 7% year over year due to negative organic sales of 5% and unfavorable foreign exchange and fewer business days of one percentage. Regionally, on a constant currency basis, the US sales increased by 1%. Asia Pacific declined 2% and America sales declined 9%.
Looking at sales by end market. On a constant currency basis, aerospace and defense sales increased 13%, driven by market growth and executing on our growth initiatives. General engineering declined 2% due to lower industrial activity year over year and or inventory sales in the prior year, partially offset by ceramics growth in EMEA and Asia-Pacific for earthworks declined 5% due to lower underground mining in China and the lower sales of snowplow blades in the Americas from a milder winter. And lastly, energy declined 16%, mainly in Americas due to lower US land rig counts and drilling activity.
Adjusted operating margin declined year over year to 3.8%, primarily due to a few factors. First, lower sales volume, primarily in the energy and earthwork end markets, higher wages and general inflation and unfavorable price raw material timing. These headwinds were partially offset by restructuring savings of approximately $1 million.
As we discussed last quarter, provided the tungsten prices remain relatively steady as they have Q3 was the last quarter we expected to experience unfavorable price raw material effects. Accordingly, we continue to expect infrastructure's fourth quarter margins to be approximately at the same level as last year's fourth quarter.
Now turning to Slide 9 to review our free operating cash flow and balance sheet. Our year to date free operating cash flow increased to $84 million from $60 million in the prior year. Increase in free operating cash flow was driven primarily by working capital changes, including improved inventory levels, partially offset by higher capital expenditures and lower net income compared to the prior year period. 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 $658 million, down from $712 million at the end of the third quarter of fiscal '23. On a percentage of sales basis, primary working capital decreased to 32.7% year to date, net capital expenditures increased to $79 million compared to $66 million in the prior year.
In total, we returned $31 million to shareholders through our share repurchase and dividend programs under our $200 million share repurchase program that ends in June. We bought $15 million of shares in Q3 for a total of $178 million or 6.5 million shares, representing approximately 8% of outstanding shares. Since the inception of the program, we had no activity under the new $200 million three-year share repurchase program authorized by our Board in February. And as we have every quarter since becoming a public company over 50 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 improvements. Indeed, to maintain a healthy balance sheet and debt maturity profile. At quarter end, we had combined cash and revolver availability of approximately $785 million and were well within our financial covenant. Full balance sheet can be found on slide 15 in the appendix.
Turning to slide 10, regarding our full year outlook. Since we are now in the fourth quarter, we are narrowing our sales and EPS outlook, we now expect FY24 sales to be between $2.03 billion and $2.05 billion, with volume ranging from negative 4% to negative 3% net price realization of approximately 2% with our inflationary pricing actions, partially offset by lower prices for customers with index pricing due to higher material content and a neutral effect from foreign exchange, however, reflected in the annual outlook is an anticipated fourth quarter foreign exchange headwind of approximately 1% year over year. Our adjusted EPS outlook is now $1.40 to $1.55.
The last notable change to our outlook is an increase in our free operating cash flow to be greater than 125% of adjusted net income up from greater than 100%. The other elements of our outlook shown on this slide are unchanged from the prior quarter. And with that, I'll turn it back over to Chris.

Christopher Rossi

Thanks for turning to Slide 11. Let me take a few minutes to summarize. Although macro conditions remain a headwind in the short term, the global megatrends that should drive market growth over the long term remain intact. We have successfully navigated similar macro headwinds before and we'll stay focused on what we can control to improve margins and drive share gain throughout the economic cycle. As you know, I announced my decision to retire effective May 31. I've been fortunate to lead a strong team of employees dedicated to improving the company and continuously improving our ability to serve customers through simplification and modernization.
We've streamlined the organization and improve sales effectiveness, improve customer service, make our factories more efficient and enabled the development of new products. We successfully navigated the challenges of COVID and embarked on a cultural transformation to drive accountability across the enterprise for gaining share and improving profitability. I'm exceptionally proud of the work our teams have done to make Kennametal stronger over the last seven years.
Finally, I'm especially proud to turn leadership of the Company over to my chosen successor Sanjay shall be. I'm confident the company will continue to improve under his very capable leadership.
Sanjay, is there anything you'd like to add?

Sanjay Chowbey

I would Chris, first on behalf of all of us at Kennametal.
Let me just say thank you for everything you have done for the Company over the last seven years. I also want to personally thank you for your support and coaching, especially during this transition period.
Now a quick update from my side. Over the last couple of months, I have continued to run metal cutting along with taking time to learn more about the infrastructure business and the enterprise as a whole.
Looking ahead, we'll work on the following top three priorities while living our values of safety, respect, integrity and accountability.
First above market growth through innovation advantage, best in class customer service and commercial excellence. Second, margin expansion through operational excellence and applying lean principles. And third, executing a balanced capital allocation strategy.
In closing, I'm really excited to step into the CEO role on June first, and I'm looking forward to connecting with all of you in August to cover our full year results and fiscal '25 outlook.

Christopher Rossi

Thank Sanjay. And with that, operator, please open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Steve Volkmann, Jefferies.
Morning, Steve, there perhaps you're muted, Mr. Volker,
We'll move on to our next question from Ms. Angel Castillo, Morgan Stanley.

Angel Castillo

Thanks for taking my question. And Chris, it's been a pleasure working with you and wish you all the best. And Sanjay looking forward to working with you going forward.
So maybe just to dive into a little bit more of kind of the outlook and what you're seeing on the surface and the fundamentals are the quarter kind of shook out as you expected, but it looks like the mix of it in terms of end markets might have been a little bit different on. Can you just walk through the major end markets and maybe some of the pivots or changes that you've seen in terms of the underlying trends in the third quarter? And then maybe you kind of bolster that with some of the underlying trends that you're seeing thus far in the fourth quarter across those end markets?

Christopher Rossi

Yes, sure. Let me start with a metal cutting. First um, we we had expected general engineering to be flat with industrial activity remains soft in the Americas and EMEA.
And then Asia Pacific sequentially, the IPI.s, they were they were going to they were going to slightly improve. And that's that's basically what we saw bill rates on aerospace, they deteriorated slightly, I think because of the quality issues that one of the major OEMs had in energy was pretty much flat. The rig count was up was flat. And then as we said on our prepared remarks, it was down year over year. But if I look at Q3 to Q4 sequentially, I'd still say general engineering, again, relatively flat Americas in Amea And Asia Pacific would be improving. So that's driven primarily by by India. And then also China, there's a normal seasonality that we would see there that would drive some improvement.
Aerospace. That segment continues to improve and be strong, but it is dependent on the production issues stabilizing for for one of the major OEMs, but generally that the long-term trends for that are still very positive.
Energy, we expect, again to be flat the rig count in Q4 is expected to go up a couple of rigs, but essentially Angel is pretty much flat. And then Powergen remained stable in Amea And Asia Pacific for transportation. We think that Americas is going to continue to improve again sequentially due to strike recovery and also seasonality. Amir will probably be flat and Asia Pacific will improve also due to seasonality buying gold into infrastructure. I would say that the quarter played out about what we said.
My comments that I made for metal cutting and general engineering will be the same for infrastructure. And energy, as I said, was flat with the rig counts being stable and then our customer sentiment in terms of outlook for energy in North America anyway, as they seem to have been done with their completed their inventory adjustments and we think things will pretty much be flat for for the fourth quarter and mining that activity was lower than we expected and was driven primarily by lower coal demand in the US, largely due to the milder winter and on a slower China recovery. And then in construction that followed the normal seasonal pattern. Pat mentioned the snow blades that were down slightly due to the mild winter.
If I look at infrastructure going forward, again, general engineering, same comments apply to as we have with Metal Coatings, basically flat with some continued strength in India driving growth in Asia Pacific. Energy, as I said, will probably be flat Q3 to Q4. Mining is expected to sort of stabilize at the current levels on in general, there are softer market conditions in China and China. And in terms of the thermal coal, you'll the milder winter, obviously created an excess supply of coal. So that will probably will also probably continue to be a bit of a headwind. And then construction, we expect that to follow the normal seasonal pattern except in China, again, due to the lower economic activity, looks like construction is slowing down a little bit.
And I'm going to ask you, I think, Angel, thanks

Angel Castillo

I appreciate now that that's very thorough and helpful, thank you. And maybe switching over to the stronger free operating cash flow that you talked about. Can you just maybe give us a bit of a sense of what you're kind of expecting there in terms of maybe some of the absolute value and then the use of that cash in terms of the buyback, what kind of cadence should we anticipate in terms of potential for buybacks in the following quarters? And do you kind of expect that to pick up from current levels given where the stock prices or how are you kind of seeing that?

Patrick Watson

Yes, Joe, a couple of thoughts just overall on free operating cash flow development, as you know, our strongest quarters from a cash flow perspective, our Q3 and Q4, we would expect that to be the case here as well, an FY24, no, from a capital structuring perspective in the way we have thought about our share repurchase program. It has been always at a minimum to offset the dilution that comes from management compensation programs as well as to opportunistically buy back shares when we've got the cash and when it's appropriate, given other potential calls on cash like no bolt-on M&A and the like, as well as we think about our cash position, I'll say going throughout the year as we close out Q4, always on our mind is the fact that as we enter into the new fiscal year and normally our worst cash flow quarter is Q1, right?
And so those are always thoughts that are on our mind in terms of how we size in at the share repurchase program. Obviously, as well, we are going to be concluding here our first repurchase repurchase program of $200 million that will terminate here at the end of the fiscal year and our Board's already authorized the second tranche of that repurchase program starting in February, an additional three year $200 million repurchase program that we all get started on the future here as well. So we remain committed to returning cash to shareholders. We're working on that balanced capital allocation strategy.

Angel Castillo

Very helpful. Thank you.

Operator

(Operator Instructions) Julian Mitchell, Barclays.

Julian Mitchell

Hi, good morning, and I wish you all the best, Chris, and thanks for the all the help down the years and maybe and just to start off with the question perhaps on that price sort of raws dynamic. I understand it was a headwind in the third quarter year on year should be a tailwind. I think right now in the fourth quarter into early next year. So I just wondered perhaps, Pat, if you could sort of flesh that out a little bit, what kind of tailwind, particularly the infrastructure segment should get in Q4 from from tungsten and any sort of way of sizing the effect into the first half of next year?

Christopher Rossi

So as we think about the growth of the general dynamics here in that infrastructure segment, we do see price lead raw material costs a little bit. That's what drives part of this dynamic for us as we move from in Q1 into Q2, we did see a sequential headwind of about [$13 million] at the enterprise level. That was predominantly in the infrastructure segment as we move from Q2 to Q3. That headwind was basically, I'll say, equal in size. And then as we get into Q4, we'll see that headwind abate.
Right. And so at this point in time, in Q4, I'll say we're simply pricing on the same level. The cost is flowing through the P&L again in general, as we think about how that structurally works for us, we and we have visibility also into the cost structure going forward from a tungsten perspective about two quarters. And as we've seen tungsten prices here over, I'd say the last 45 days or so our recent low up again from about 45 days ago, sitting around [312, 313] per MTU. Most recently last week were about [332, 333] so we have seen a little bit of an uptick in the cost of tungsten. As that I'll say, continues at that level. We'll see that we can book it as time moves on, we'll get more and more stability into the cost structure into the I'll say at this point in time, the second quarter, more or less of of FY25. And so that's kind of where we're at right now.

Julian Mitchell

Thanks very much. And then just my second question, you've talked about demand a little bit already, and I just wanted to follow up on that. So I think China is an area where clearly your you took down the outlook a little bit. I just wondered, sort of beyond China, have you seen any change in demand patents, particularly in areas like general engineering in the last couple of months or your business selling into kind of, say, off-highway machinery OEMs?
Yes, it seems like listening to other companies in the last two or three weeks, there has been some softness in orders or sales in those types of markets. Just wondered if you'd seen a similar pattern or else outside China, things have actually been very steady for you.

Patrick Watson

Yes, I think in general, general engineering, for example, if you look at if you look at the Eurozone. And I think that PMI has been below [50] now Juliana for like 21-months and it's up for the last several months. It's just kind of been bouncing just below the [50] mark and between I think [45 50]. So it hasn't really changed much. And the same thing with the with the US as we seem to be in this mode where it's it's in contraction territory, but it's kind of it's kind of stabilizing at about the same level of Now recently, if you look at April IPIS. for industrial production, which is a good, good metric for general engineering, and it ticked up a little bit in April, but we've seen that happen before. So I don't I don't know that we can call it a trend, but we still see at least through the fourth quarter. I think things are sort of stable at these. It may be softer levels is how it how I characterize it.

Julian Mitchell

That's helpful.
Thanks very much.

Operator

(Operator Instructions) Tami Zakaria, JPMorgan

Tami Zakaria

Hi, good morning. Thank you. So much. And Chris, thanks for all the help and wish you the best of luck, and welcome aboard to Sanjay.
So my first question is around modeling. Can you remind us is the fourth quarter, similar from a warranty perspective, year over year, we have a different compare.

Christopher Rossi

You know, from a Workday perspective, it is fractionally higher.
I don't think it's even a full day for Workday.

Tami Zakaria

Got it. Okay.

Christopher Rossi

Up there is just, you know, embedded in that obviously, we've had I'll say, for the most part, an Easter holiday shift where Easter was more of a third quarter phenomena for us this year in the Americas and Europe and last in the prior year would have been a fourth quarter phenomenon.

Tami Zakaria

Got it. That's very helpful. And my second question is around aerospace and defense. I think one of the major OEMs, I just had a new an investigation opened on a different aircraft model. How this is more from a medium to long-term perspective. How are you thinking about build rates over the next few years? Do you expect aerospace and defense to grow nicely over the next few years? And also, can you comment on the mix between commercial aero versus defense within your portfolio?

Sanjay Chowbey

Yes. I would say on the commercial versus defense, it's mostly mostly commercial, but there is a portion that is certainly defense related and we are low our view for for aerospace and the commercial air production long term is that the demand is demand is solid. If you look at the major OEMs, yes, there's there's quality issues which we think got, of course, we are certainly on inhibiting demand in the short term, and we've kind of reflected that in our Q4 forecast. But even if you look at the other major OEMs, there are still they're still constrained by supply chain. And we know that that supply chain because we're also active in that those both suppliers are actively working on improving increasing production.
So I think it's just a matter of time where the supply chain will no longer be a constraint, especially when you were talking about in the mid in the midterm timing. But the demand is very solid. There's definitely a need for more aircraft. And so we feel we feel very good about that. But we are there are some constraints right now that are holding things back. And I still think I don't believe production build rates are still what they were prior to the of the pandemic.

Tami Zakaria

Got it. Thank you so much.

Operator

(Operator Instructions) Steve Barger, KeyBanc.

Christian Zyla

This is [Christian Zyla] for Steve Barger. Thank you for taking the questions.
And we just like to echo previous comments. It's been a pleasure working with you, Chris, and we look forward to working with you, Sanjay. And first question, I know you guys continue to focus on your commercial excellence and product innovations. Can you just give us some idea of how the new product contributions relate to growth and then production upcycle. How much do you think you would outgrow the market given your efforts on these fronts?

Christopher Rossi

Yes, I think it's a really good question because as I talked about in my opening remarks, prior to modernization, I think it was fair to say that we were on we were lagging off in terms of our ability to release new products and position ourselves to take share. And that's now changed with modernization. I the example I gave in my prepared remarks, were the fifth product innovation that's been released on since modernization. That's just done this and this coating area, that's not all products, of course. But I think if we look back prior to modernization, it may have been it may have been seven or eight years before we had released anything along those lines because we simply lack the manufacturing capability to to make this new these new products with this new coating technology.
So for me, it's very it's very significant that we are we finished this modernization of sort of 2022. We're leveraging the success of these examples. And so most of that growth is still ahead of us. If you look at the adoption rate and how people are looking at these new products, they feel they feel very good about it. But clearly, that's a change from where we were before modernization, where we were we were not releasing new products as quickly.
So it is our innovation advantage is very key to driving share gain. It is one of the major levers we have along with, of course, customer service levels, and that's also improved through modernization because typically before we are we were challenged in terms of consistency and quality before modernization and also our I think our on-time performance and our ability to respond within the proper lead times was also constrained. So we feel very good about it is a major driver. And we haven't we haven't differentiated, Christian in terms of how much of how much of the driver of it of share gain. That is other other than I would say it's a big, big piece of it. And then I would comment on our Investor Day that we plan on getting a 1% to 2% growth from the markets based on long-term megatrends, we used about 2% of growth from price, and that's pretty consistent with what we've done historically. And then the share gain, again driven off as one of the big levers on innovation, that's also 1% to 2% over the long term.

Christian Zyla

Great. Very helpful. Thanks for that color. If I could just follow up on that, which markets do your innovation wins allow you to take share and or I guess, do they enable upside to the range that your margins seem like they've been in for the past few years?

Christopher Rossi

Yes, I think they are feeling that maybe the example that I gave in my prepared remarks, if you noticed that had a broad range of applications. So it's we do customize some tools that are specific, for example, example may be more on titanium machining that happens in aerospace more than anywhere else. But for the most part, a lot of these prospects, while they may be, are designed with a specific application, for example, in aerospace in mind, they have broad application across many industries. So that's a good thing about our products as they have broad application.
There was another part to your question, Christian, but I forgot what it was.
Can you repeat it?

Christian Zyla

Just on the if the product innovation wins enable upside to the range that your margins seem like they've been in over the past two years.

Christopher Rossi

Thank you for sure, yes, I think that on the innovations apply to them to sort of higher end of challenging applications and those applications we price for value anyway. So as long as we've now been focused on that element of commercial excellence. I don't know that they're going to drive necessarily improved margins that process, but they are an enabler to winning new business and having the opportunity to make the higher margins on those type of products anyway. And then they also apply to us in our Fit for more fit for purpose type applications and those help to improve our competitiveness. I'm not sure that there's necessarily a specific specific group that it's going to necessarily drive more margin improvement specifically because they're using over such a broad application of across our end markets.

Christian Zyla

Thanks, again.

Operator

(Operator Instructions) Michael Feniger, Bank of America.

Michael Feniger

Hey, gentlemen, thanks for taking my question. I'm just curious, I appreciate obviously, the guide for the fourth quarter seasonally, when you're heading to your next fiscal year, I think sales are typically down a certain range quarter over quarter. On just based on the current environment today, should we expect that normal seasonality heading into next year pushing better the normal seasonality? Or are there still kind of headwinds that would make us feel like that normal seasonality might have a little bit more pressure than we look at in prior years?

Christopher Rossi

Yes. Obviously, I'll I'll start off by saying, Mike, that we're in the planning process right now for FY25.
Right. But just a couple of things to think about.
I'll say no, to answer your question from a sales perspective, going into Q1 as well as just some cost structure items to think about relative to '25 as well. First off, we would see and our expectations on normal seasonality going from Q4 to Q1 would be down about 8% to 10%. And so that would be our normal expectations beyond that.
As we just think about the framework, I'll say for FY25. It is a couple of things I just touch on. Number one is, and we talked about this a little bit earlier on the call would be raw material costs where tungsten sits today. It is slightly upfront from the lows, again, as we continue to have stability in that tungsten price. And that would be a favorable thing as we think about the price raw phenomena going into the first half of FY25?
Yes. So the second thing in terms of just the the overall cost structure of things, we've been working on is obviously we've got our existing restructuring program that's out there that we intend to hit a run rate here of $35 million on an annual basis at the end of the year, you'll see some some, I'll call it, rollover benefit as we move from '24 to '25 as we achieve that full rate throughout FY25 but again, we're right in the in the planning process. Now management team is digging into all the money, all the market and cost phenomena, and we'll report back to you with a holistic outlook on FY25 and about 90 days.

Michael Feniger

Great. And just on metal cutting the flow during the quarter, the [230] bps of margin margin degradation. I believe there was a one-time gain on the prior year. Just wanted to flesh it out. Was the decremental margin on your your I think it was flat organic growth. There was that in line with kind of what you guys were thinking? Just trying to understand what you guys saw in that quarter. How would you kind of think about it in terms of your sensitivity to volumes?

Christopher Rossi

Yes, I think the first thing, certainly there was about $1 million gain in the prior year in the metal cutting business that was related to a property sale that did not repeat, right? So you got to factor that in.
I think the other thing, as we think about margins and decrementals in terms of the quarter, right.
Two things. Number one is, you know, yes, your comments in terms of the total sales changes factor, but don't forget in there there's there's positive price embedded in the quarter as well.
And as you think about the price realization in the quarter, that would imply volumes obviously being negative?
Well, I'd say that the other piece of that volume being negative in terms of what's happening in Q3, in particular, from a decremental perspective is going into Q3. We saw a slowdown in markets in December timeframe, and that's just simply cause us to react to what that demand is in the quarter and, you know, reset production and adjust the cost structure of those things that simply don't happen instantaneously. They happen over time as we put the actions in place to constrain the cost relative to where volume demand is from an end-market perspective and production as well.

Michael Feniger

Great. And I'll just if I could have one more skews more in there, just the stable the commentary in general engineering, the stable at softer levels. I'm just curious, do you are you guys is your inventory levels with your customers, your customer inventory levels, are they reflective of that stable or softer levels? Do they have a little bit more progress to go on? Any any color on that would be helpful.
Thanks.

Christopher Rossi

Yes, I would say that the the customers have in terms of destocking, they were already very cautious about how much inventory they are holding anyway. And I think they still maintain that. So I would say that their current stocking levels reflect them that forecast that I provided an outlook on the on the conditions. So no more no significant destocking that we're looking at to be ahead of us. And then I think they're also cautious on the restocking, and they'll probably need to see some up some demand signals before they get into that mode.

Operator

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

Christopher Rossi

Thanks, operator, and thanks, everyone, for joining the call today. As always, I appreciate your interest and support and please don't hesitate to reach out to Mike if you have any questions. Have a great day. Thanks.

Operator

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