Kennametal Inc. is a supplier of tooling, engineered components and advanced materials consumed in production processes. End users of the Company’s products include metalworking manufacturers and suppliers in the aerospace, automotive, machine tool, light machinery and heavy machinery industries, as well as manufacturers and suppliers in the highway construction, coal mining, quarrying and oil and gas exploration. Its end users’ products include items ranging from airframes to coal, medical implants to oil wells and turbochargers to motorcycle parts. The Company specializes in developing and manufacturing metalworking tools and wear-resistant parts using a specialized type of powder metallurgy. Its metalworking tools are made of cemented tungsten carbides, ceramics, cermets, high-speed steel and other hard materials. The Company operated two global business units consisting of Metalworking Solutions & Services Group (MSSG) and Advanced Materials Solutions Group (AMSG).
WSR: Good day from Wall Street. This is Juan Costello, Senior Analyst with the Wall Street Reporter. Joining us today is Carlos Cardoso, President, Chairman and CEO of Kennametal Incorporated. The company trades on the New York Stock Exchange, the ticker symbol is KMT. Kennametal is a global provider of Metalworking Solutions using tungsten carbide inserts. Thanks for joining us today Carlos.
Carlos Cardoso: Good morning Juan. It’s my pleasure to be here.
WSR: Start up by talking about the deal with Top-Eastern Drills Co.
Carlos Cardoso: Yes, we just announced the sale of what we call the high-speed steel business to this company in China. And obviously in the last few years, we have been looking at the company’s portfolio and trying to align our portfolio with our core competencies. So we are primarily a tungsten carbide company and this divestiture, the Top-Eastern will allow us to better focus on our core products and allow a good company, in our view, to serve in many cases our customers with that divested product in a very good way.
WSR: So, they purchased three of your plants and facilities?
Carlos Cardoso: Four plants — four facilities and obviously, the brands associated with those four facilities. So that will give them a good position in the US to be able to support our customers in the US as well.
WSR: Talk about also the award from the Advanced Manufacturing Award that was given to two of your investors, what that signifies for the company. I think it was the eight-year in a row that the company was honored with such an award.
Carlos Cardoso: This is the product development investors’ award that was given to our company. One of our long-term strategic goals is to have 40% of our sales come from new products. And we have, for the last five years, been consistent at 40% or above. So this company was founded based on a technology, which was the invention of tungsten carbide–application of tungsten carbide. So we continue in the area of innovation and we believe that we can continue to bring higher value to our customers day-in and day-out as a result of our technology investment and developments. We also average 40 to 50 patents per year. So, we are quite an innovative company when it comes to developing new products every year. And as a result of that, we have been recognized pretty much around the globe, but giving a number of awards relative to our product development, processes and achievements.
WSR: Can you talk to us a little bit about some of your key products and some of the main applications in the market?
Carlos Cardoso: You should look at Kennametal as a two-business concept. Again our core competency is to take tungsten carbide powder to a customer solution and we do that two ways. We do that to a metal working business, so if we can think of anything that is manufactured around the world, manufacturers use our tools to shape and cut metal and so forth, all the products that they make. So if you are making an engine for an automobile, if you are making an engine for an airplane, if you are making a light switch for your house, they use our tooling through drilling, turning, milling, and so forth. And one of our biggest moves is actually into energy where we are a major player in the wind mill market, where we help manufacturers machine pretty high, pretty complex materials so that we can generate energy at a very, very cost efficient way. So that’s sort of one methodology, one business. The other business basically takes the tungsten carbide and applies it to things that are non-metal working related. For example, road milling, when people are rehabilitating a road and they are milling the old top out, so they can apply new coats. They use our tooling to do that. And in some cases, when you are drilling for gas at 30,000 feet below the water, they use again our tungsten carbide tooling to make that happen all the way to if you can think of a diaper, the tooling that is used to shape the diaper or a band-aid, it is produced with tungsten carbide tooling. So again, I look at our company as a very pervasive, we are basically everywhere, in 66 different countries and 13,000 employees around the world. A company that was really started as a small business in 1938 in a small town outside Pittsburgh called Latrobe, Pennsylvania. Pretty impressive that this is an innovative company, American breed company has been a major player around the world with our products, either Number one or Number two in every market that we play.
WSR: So talk about some of the market trends Carlos and how well positioned the company is to capitalize on some of the trends in market.
Carlos Cardoso: Obviously, we are in the midst of one of the toughest recessions in a long time, most people are relating to being the toughest recession since the World War II. And during this period, obviously we have taken a lot of cost out of the business, out of areas that we quite honestly could afford to take the cost out, but we have continued to invest in new products at the same rate that we had before but we continued to invest in new markets, apparently new markets like energy, windmills and alternative materials for the aerospace like composites and high-grade titanium. So, when the business turns, I think that we have a much lower cost position coming out of this recession than we had going into the recession, and it is always very challenging to take cost out during good times as most people in business understand. Also we have been able to take some of the fat out of the business, and we have again managed our portfolio during the last few years, so we have a more focused, more profitable portfolio. And I think that we are well positioned relative to the markets that are going to be long-term growth markets like energy. And we continue to invest on developing economies where the economies and the markets are going to come back first, and they are going to have a higher sustainable growth rate than developed economies.
WSR: In terms of what differentiates Kennametal, what differentiates or makes the company unique from other players in your sector?
Carlos Cardoso: At the end of day, our technology is a differentiator and our people, the quality of the people that we have. I continue to believe that Western PA and some of the places that we have chosen to be around the world have the best people in one way or the other. From a culture perspective, in Western PA, in Germany from a technical perspective and so on. And the last competitive advantage is the fact that we are very global, in 66 different countries and we operate it as a single entity, so that we can deliver all the solutions that Kennametal has to offer through one person, through one channel directed to one customer.
WSR: Can you walk us through your background and experience Carlos as well as that of the key management team at Kennametal?
Carlos Cardoso: I would characterize the management team as a diverse team from the point of view that we have people that have been here in the top management team, that have been here for 20 plus years. So we have been with the company for a long time and have a lot of history, have a lot of knowledge of the company. And we have people that have been here a year in the management that bring a different perspective and different level of experiences. And we also have people that are very global, 50% of top leadership team is non-US born folks. So, when I look at our ability to lead this company through many different industries, which we do, many different countries, 60 different countries and through a balance of staying to our roots, to being looking in the forward looking ten years from now, I think the mix of management that we have provides a really good mix. And we have people in our management team that, again have been in cutting tools, in the carbide industry for a long time and we have people that have come from the aerospace, automotive, energies. So we have a really good well-balanced leadership in high management folks. Myself, I am non-US born, obviously an American citizen for many years, proud to be one, but was raised outside the United States and came here at a young age to go to college. And I have worked and lived in three different continents and I have had worked in many different industries from consumer to most of my career in manufacturing, worked at my own machine shop, when I was at a very young age of 23, owned my own business and I have also worked for one of the top companies in the world, Honey Law, one of largest companies in world. So I have really a breadth of experience from owning my own company and running a small business with 10 people, to being part of 100,000 people company and being part of their management team. So, I believe that again my background, my experience matches sort of the long-term strategic views of the company, being global, high-tech. I have been in the aerospace industry for a great number of years in my career, and allows me to continue to look and position this company in better markets and with better products.
WSR: In terms of milestones, what specific milestones and objectives has management team set for the company over the next year?
Carlos Cardoso: Obviously, the next year is a tough question to answer because right now in the midst of the recession, we are managing the company for cash and so our view is to keep a strong balance sheet and that’s one of our objective, the other objective is to make sure that we keep this company healthy through this process. From a longer-term perspective, our goal is to get this company to be 15% EBIT margin business and 15% return on investment capital business. Just prior to the recession, we met our last milestone of achieving 12% by 12% in those areas, and obviously we are down from that now during the midst of the recession, but our goal is to get the business to be a 15% by 15% business.
WSR: And talk to us about the company’s growth. Will you continue to grow organically, look for M&A activities or be a combination of both?
Carlos Cardoso: It will be a combination of both. I mean we have had for the last five years had a good balance of organic growth as well as acquisitions and quite else we made a few divestitures as well. So, we are going to continue to focus on the growth in developing economies and growth in new markets and new products across the board, as well as once we get out of this recession then start looking into potential acquisitions.
WSR: Do you think that investors understand the general direction of the company?
Carlos Cardoso: I think that the investors understand the general direction of the company. I think that we are obviously a company that is generally traded, so we have investors that understand our company pretty well. I don’t feel that we have enough prospective investors or investors that fully understand the potential of the company and that’s what we need to do. We need to continue to get out and tell the story and demonstrate performance.
WSR: What are some of the key reasons why Kennametal (KMT) represents a good long-term investment opportunity to potential investors?
Carlos Cardoso: I think first is the fact that we are a technology company, so our products brings value to the customers, and I think that we have a better opportunity for growth. The other element is that 80% of our business is consumables, things that get worn out between a hour and 24 hours and specially coming out of the recession, typically the areas that go first is the consumable business, so we should be a good leading indicator of the turnaround of the economy and third is that we have done a good amount of restructuring during this difficult times to position us to have tremendous upside leverage as we come out of the recession.
WSR: Thank you.
Carlos Cardoso: Thank you.