Kennametal Inc. (KMT) Earnings Call Transcript & Summary

Okay. Good morning, everyone. Welcome back for Day 2 of UBS Global Industrials and Transportation Conference. I'm Steve Fisher, UBS Machinery and E&C Analyst. We're very pleased to have the management of Kennametal with us. We have Damon Audia, Chief Financial Officer; and Kelly Boyer, Vice President of Investor Relations. If anyone has any questions, please submit them through the app or the website, and they will come directly to me. We are not directly going through a slide deck here, but there is a great slide deck on the company's Investor Relations website that you can reference. Before we get started, as a research analyst, I'm required to provide certain disclosures relating to the nature of my own relationship and that of UBS with any company on which I express a view on this call today. These disclosures are available at www.ubs.com/disclosures. Alternatively, please reach out to me, and I can provide them to you after the call.

Damon and Kelly, welcome. Thanks for being here.

Thanks, Steve.

And just to kick things off, you guys reported a few weeks ago, your fiscal third quarter. Can you just give us your thoughts on the fourth quarter, has demand stabilized anywhere? I know you said that April was going to be -- or was down 35%. Just wondering if you have any more confidence in that being representative of the quarter or not?

Yes. So Steve, we're not going to update anything beyond what we said from the earnings call related to April and for the fourth quarter. But maybe just for the group, I'll remind them as to what we said in April. And to your point, we did say April was down around 35% year-over-year. And if I look at that from a regional perspective, Americas was down more than the 35%. And again, I think if you remember, they were -- that region was really the last region to go into the industrial downturn that we've been dealing with now for well over a year. And so from a year-over-year perspective, the comp was more difficult for the Americas. And it was also the last country or the last region to really start to experience the effects of COVID-19. So they were down more than 35%. EMEA and Asia Pacific were slightly better. What I would tell you is they were driven again probably by easier comps. China was the first to go into COVID, the COVID-19, and they were stabilizing as the quarter ended there on lower levels in demand. And I think what we did say on our call is that our Industrial business saw year-over-year growth in China in April, which was a positive. So that was by region. If I look at it by end markets, what we said, again, is transportation and energy were below that 35% average; aerospace and general engineering were at or slightly above. And so for us, you've got different end markets with different results.

Sure. That's helpful. And then as we get to your Q4 report, which, I guess, typically is in early August. Do you think you'll be in a position there at that time to provide guidance for your fiscal '21?

Well, it's a good question. I would tell you, right now, visibility still remains very limited. And I think, like Chris said on the call in April here, early May, we're not necessarily sure that the worst is behind us. And you know our business well, Steven. One of the difficulties in predicting our business here right now is that we're about 80% of our business is consumable. And if you think about that, what it means, I'll give you a simple example. Let's say that one of our customers uses approximately 100 inserts per shift when they're running full. And so if they're running 3 shifts a day, they're using 300 inserts a day. And generally, given the short order of our order pattern with them, they probably keep a couple of days in inventory. So let's say they keep 3 days of inventory in the system, so that would mean they have 900 inserts in their inventory. Well, as these customers start to either come up -- ramp up their production after being idle or they're running at low levels of utilization, if they're using only, let's say, 100 inserts per day instead of a 300, they're naturally going to decrease their inventory levels from that 900 down to 300. And for us, that's the big question mark for us is, how much inventory is caught up at the end users' sort of inventory? And how much do they have to work through based on what their rate of production is or what it will be over the next several quarters, and ultimately, how does that facilitate itself into our order pattern? And right now, that's a big challenge for us where we don't have a lot of inventory -- or sorry, a lot of visibility into that. And so for us, it's a challenge that we'll see what we know as we get at the end of our fiscal fourth quarter. We'll try to give as much as we can on updates related to our expectations at that point in time. But at this point, I don't really know what we'll be able to say.

Okay. That's very fair. And maybe we'll dig into that customer visibility and interaction in a little bit here. But maybe moving along just as we again think about maybe the near-term Q4 and then even into '21 as you think of what the range of possible outcomes could be. You've talked about being able to kind of stay within your historical range of decremental margins. How do you guys think about what that decremental range is as we look at our model? Obviously, when you have periods of low changes in sales, that the decremental numbers can be all over the place or vice versa. So just curious, how do you think about what that historical range of decrementals is?

Yes. I mean I think the simplest way to think about it is, on average, our company, we lever or delever them, the decremental margins are around 40% plus some form of fixed cost absorption. And again, I think that would be at a high level average. I think that the challenge in why every downturn is different is we have 2 very discrete businesses, and we have our metal cutting businesses of Industrial and WIDIA, which I would tell you are above that average in 40%. So the average -- the standard profit there is north of 40%. And so if that -- if an industrial downturn is being led out of transportation, general engineering, you're going to see the decrementals there coming from that market be higher than 40%. If you look at where -- if it comes from something more energy-centric or infrastructure, again, that business is below the average of 40%. And so again, its decrementals are going to be below standard margin plus some fixed cost. But if you look at where we were historically, it's 40% plus some level of fixed costs that you just can't eliminate in a short period of time or even a medium-term period of time.

Got it. That makes sense. And then as far as some of the actual cost protocols related to the current situation, have you removed furloughs anywhere or eased on any of these temporary cost reductions? And if not, what would you have to see to do that?

Yes. So the quick answer is no. We haven't slowed them. In fact, we've actually increased them. And again, as we -- at the start of the call, we've been in the industrial downturn now for -- the third quarter was our fourth quarter of negative organic growth. And credit to our CEO and really leaning into cost. We started to do furloughs in our fiscal third quarter given the market weaknesses that we were seeing. And then as COVID-19 really started to escalate in the back half of the quarter and here into our -- into the fourth quarter, we have escalated or only increased those temporary cost actions that we were taking. For us, I guess, I would say that these costs -- these cost actions will continue. And they may increase if the downturn is going to be extended. I think the question for us is the timing of the recovery, Steven, whether some of these temporary actions need to be shifted from temporary to more permanent, but also when we talk about that, we also still need to maintain the ability to pivot and be able to capitalize on these markets once demand starts to recover. And I would say that's where we spend a lot of our term right now, reevaluating our overall cost basis given the current environment, trying to understand what we may be able to redo or reevaluate on a more permanent or at least semi-permanent basis versus the temporary actions we're doing right now.

I guess we'll get into this a little bit later. But I mean as we start to see just economy generally opening up, I mean, to what extent does that give you any optimism or are we still just really -- that limited visibility you talked about before about the customer inventory?

Yes. Well, again, I think depending on how you look at the situation, I think right now, it's a big question mark as to what is the trajectory here. And if I read some of the macro things, like we talked about like General Motors talking about increasing its production. I think they've said that their goal is to try to get to full capacity or high levels of utilization within 4 weeks. Those are all positive signs for us that to the extent that they're actually able to do that, dealing with the COVID-19 safety protocols, those are great things. I'm hopeful that the market demand warrants that. I think some of the concerns that I look at is, when you read some of the other press about what happened in Europe where Volkswagen, I believe, announced they were opening their large facility, Wolfsburg facility, had a lower level of utilization. And then you read a couple of weeks later that they had to slow production down due to more market demand-related issues. And so for me, it's that question mark is to, as companies are eager to get back to work, ramp up production, what will end consumer demand warrant for an extent for the longer period of time? So are we looking at somewhat a short-term recovery, and then it tails back down due to lack of demand? Or do we start the momentum as these states open here in the U.S., as countries start to open their borders in Europe? Do we start to build back up and start to recover? I don't know which direction we're going to head right now.

Okay. And as far as planning for that and taking actions, you're sort of just in a kind of day-to-day, week-to-week, wait and see what it makes sense to do, again, like you said, keep it temporary or make it more permanent? Is that the way to think about it?

Yes. Again, one of the great things about Kennametal, I would tell you, is the level of data that we have in our systems and the granularity of information. One of the things that we're doing differently now versus maybe prior economic downturns is we are literally scheduling our factories on a weekly basis at this point. And a little -- and a part of that goes to the change in the environment of what we're dealing with. And I'll use Germany for an example, which you know is generally has a more structured process to it. Under this COVID-19 environment, the German government has afforded corporations like us the ability to really flex the workforce in what they would call short-time work or short work weeks where you can move them to the equivalent of a furlough with relatively short notice periods. And that hasn't happened during prior downturns. But having that flexibility and having the data that we have in the system, we are looking at order patterns on a rolling 5-day basis now and adjusting production for the forthcoming week, trying to keep labor costs low, trying to keep inventory levels in check, and it's giving us a lot more flexibility to be nimble to sort of manage real-time based on what these market demand signals are telling us. So if and when we see demand pick up, we can run more shifts or have more workers in. And if we see a trend a different way, we can idle the factory for an extended period of time, for an extra day or reduce the number of workers per shift. So we're not sitting there, building extra inventory or carrying extra cost. And we're trying to be much more nimble and real-time with how we're running, coupled with what we talked about with some of these temporary cost actions that we're doing at the corporate level for professional workers.

Great. We did get a question in here. And maybe just to make sure we -- it sort of jumps ahead a bit, but I just want to make sure we do address the questions that investors have here. And the question is related to the video unit. And really, are you thinking about any strategic actions related to that? And is the -- the question says, is the company planning on a sale of its WIDIA unit in order to free up cash and focus on its other core businesses?

Yes. So what I would tell you is that the WIDIA brand, the WIDIA unit is very much a brand that we need to leverage throughout our -- with our customers. And WIDIA product is actually manufactured in the same factories that Kennametal-branded product is. So this is not a stand-alone business that could be carved off and sold off because if I was to extract all the WIDIA product out of the factories, almost every industrial factory would have lower levels of utilization. It wouldn't be like I could sell factory a or sell factory b to exit WIDIA. So it's not as simple as a carve-off in sale. What I would also tell you is, as Ron Port has come in as the Head of the Chief Commercial Officer for our 2 metal cutting businesses, we are seeing opportunities. And you heard Chris talk about this on the last earnings call about commercial excellence where we are seeing and we're seeing a lot of opportunities to really grow more, leveraging our multiple brands that we have differently than maybe what we have in the past where Industrial or the Kennametal brand and the WIDIA brands can be much more complementary with the same customers, where we can own a larger share of their wallets than maybe how we've approached this in the past where they've sort of worked very much independently, different channels, different approaches. As we look at the metal cutting organization more holistically now, we're seeing more opportunities to leverage the WIDIA brand, our Hanita brand and other brands, probably better now than what we did in the past. And for me, I would tell you, rather than selling it, we see an opportunity to really pursue and grow it more so than maybe what we even did 2 years ago or 3 years ago.

Terrific. Maybe getting into some of the demand factors. You talked earlier in the call about some of the different regions and end markets. Just maybe bigger picture here. As we think about a recovery, are there any of the end markets and regions that you think are likely to come back more quickly and which ones will like take a little longer?

Yes. You're asking me to look into a crystal ball here, predicting the future. And it's a hard question. I think for us, as we talked about earlier, our visibility is still very limited. So it's hard to say. And again, you think about where transportation and energy were at the end -- in the month of April versus where aerospace and general engineering were. They were down somewhere about now more than 35%. I think I'll go back to my earlier comments. We're hearing that in transportation, manufacturers are starting to come back, but at lower levels of utilization. So the optimist in me says, hey, if they're able to do what they say they're going to do and customer demand is there to warrant increased levels of production, there they've shown a history, at least, if you think about what happened with 9/11, they've demonstrated the ability to create a catalyst to get customers into the dealerships to buy vehicles. Maybe they move faster than if you think about aerospace, which is definitely very challenged right now. There's a lot of studies out there saying that it's going to be a prolonged downturn as end users like you and I are reluctant to get on planes. And energy, obviously, everyone knows where the excess capacity or excess supply is, and the U.S. rig counts are definitely going to be challenged. And I would say that, that one probably has a longer road to recovery. The bright spot for us, and we talked about this although it's not a major end market, our earthworks group in infrastructure has seen some positive results, especially as it relates to U.S. road construction. So that seems like it's been good.

Terrific. And maybe some of the -- just going back to the discussion about inventory levels. You guys talked on the conference call about some destocking. I guess you really have kind of 2 channels here. You've got your direct and manufacturers, then you've got the distribution channel. Do you have any particular expectations for either side of when the bulk of destocking would be done? I guess it probably all comes back to how much visibility you have on demand and their levels, but just any thoughts around kind of the timing of completed destocking?

Yes. Well, again, we were in an industrial downturn prior to COVID-19, so we had already seen a fair amount of destocking taking place really through the first half of our fiscal year. We saw a little and what we thought was it would sort of tail off into our third quarter. However, as COVID-19 headwinds really started to accelerate in the back half of our third quarter, what we saw is some of that destocking activity did continue, and we would expect it to extend here into the fourth quarter. Maybe not to the same order of magnitude that we saw in the first half of our fiscal year, but I think it all goes back to that comment we talked about earlier. It really depends on customers' existing inventories and to what degree they're ramping up their production and the overall macro environment over the next several quarters. That will be -- the question is, when do they start to reorder on a more -- on a regular or consistent basis? And that's a very hard question for me to answer today.

Fair enough. Maybe shifting gears a little bit to the topics around pricing and competition. Can you just remind us of how you set pricing? Obviously, you've got a lot of different products and segments, but how do you set pricing? And to what extent should we expect any price pressure in various parts of the business as we go through this choppy time?

Yes. Sure. No, it's a good question. And I think for those -- for the investors who are familiar with us, again, as part of our early stages of our simplification and modernization efforts, we talked about an approach of value-based pricing with our customers where we really try to go through and change the mindset of cost -- of shifting from a cost-plus mindsets into a value-based pricing because we know we bring a lot of value to customers through our engineered solutions, to the technical support that we bring to them and the price that we charge them has to reflect that. We did a lot of that heavy lifting over the last couple of years. So generally speaking, because we are now sort of what I'll call value-based with them, we've really been able to maintain price, and we haven't seen a lot of pressure, generally speaking, across our portfolio because of the process that we've taken in the last couple of years here. I would tell you that I think most of the pricing pressure we are seeing is being seen more in the energy end markets. And in that case, what I would tell you is we're taking it on a case-by-case basis. Again, we know the value we bring to these customers. However, if we can figure out that we can give them some sort of a concession in a way that allows us to get a larger share of wallet or some other sort of benefits so that our overall EBIT may be better with that customer, absolute amount of EBIT is better even if it's a slightly lower margin, this may be a win-win for us, especially in lower volume environments where we're dealing with under-absorption in our factories. And so for us, we're sort of looking at each of these selectively, making sure we know what we bring to the customer and what that value is for him or her. And as their asks come in, we'll evaluate what's the trade-off that we're willing to make, sort of helping them win, but at the same time, hopefully helping us win as well.

Terrific. You guys have made great strides on improvements with the simplification and modernization efforts. As we think about the bigger picture of the competitive landscape out there, your competitors are certainly not standing still. So where do you see the industry making investment that you guys will ultimately need to match or that you're perhaps concurrently trying to match as you also go through the simplification and modernization?

Yes. No, I think you hit on the key right. The one -- the sort of the minimum ante for us to really compete effectively is we got to continue to do the simplification/modernization. But I think going forward, you're always going to see us as well as the premium companies in our industry make investments in product innovation, right? Driving increased productivity, helping the customers solve their biggest challenges. Product innovation is the lifeblood of this company as it is for many of our competitors. So I think that -- and you see us introducing new products even during this environment, some of our award-winning products coming out with the HARVI I TE, the RIQ Reamer, which is tailored for the EV market, the electric vehicle market for those customers. So those are going to continue to be there. We'll continue to do that investment for new product innovation. I think as well, given this environment, I think one of the things that is becoming further visible is improving that customer experience. So as salespeople aren't readily as available to travel to customers, be in the factory with them, how do you improve that overall customer experience to make it easier, less friction for them to get what they need from you servicing their needs. So I think those will be the 2 buckets. I think within the manufacturing operations, even though we are doing a lot of heavy lifting through simplification/modernization, as we look at some of our more modernized factories now like Rogers, for example, we think that there may be further areas of improvement as we leverage more of the smart factory type information to really become more digital, more automated through certain processes. That will further help improve our productivity and hopefully lower our cost.

Terrific. Maybe shifting gears again to a little bit about the manufacturing operations and post-coronavirus here. Can you talk about how you're actually managing production? Have you pulled back shifts? Have you added more shifts to manage social distancing? What was different about manufacturing, and how do you deal with that from a cost perspective?

Yes. So I guess what I would tell you is that the effects of COVID-19 have not really required us to increase this number of shifts we're running, I would say, but we're rather -- we're probably running -- we're running the operations more efficiently, and we've become more nimble. As I go back to my earlier comment about looking at that data on a rolling 5 days and of being able to adjust our workforce on a much more frequent basis, as we think about things like Germany, so we're being much more nimble. Obviously, we've instituted a lot of the safety protocols very early on. We basically had 4 plants in China where we rolled out those protocols with COVID-19. And then we've been able to sort of take that information and roll that around our plants worldwide. So whether that's things like masks, social distancing, how we manage our shift changes to limit employee interaction. All -- those are all the things that we've been able to do, and we've been able to do quite well. I think, as you know, we were deemed or we are deemed an essential business, and so we have been running all of our factories around the world with the exception of China, Bangalore, India and Bolivia, which were each shut down as part of government-wide mandated shutdowns, and they were shut down for a brief period of time, but all are up and running now. And so again, we've been working through this and being able to perfect our protocols. And I think if I think about what we're focused on today, I would tell you, you could ask any of my leadership peers, we're all focused on 3 priorities. It's the safety of our associates, it's serving our customers and then it's positioning Kennametal to win when these markets snap back. So making sure we're not doing things that are going to compromise our ability to win when the markets come back.

So it doesn't sound like these are creating any particular inefficiencies that you have to take any specific extra steps to offset, is that right?

Well, I would say it hasn't had any major effects. Obviously, there's some incremental costs that we're dealing with, with masks, with sanitizers, with productivity, a little bit of productivity from shift changes. Nothing that is significant. We have dealt with no different than what you would expect as we go through simplification/modernization, with reducing travel, with suppliers unable to get to our factories, but generally speaking, there's nothing here that makes us feel that we're coming off -- there's nothing that's going to prohibit our abilities to meet the numbers of the margins that we've talked about when the volumes return. So I feel we feel like we're okay.

Got it. And in terms of the supply chain, obviously, you have factories in various places. How much of the supply for those factories comes from outside that particular region of manufacturing? And how do you envision supply chain changing over time?

Yes. So I mean we're -- obviously, we're a global company with 40 factories around the world. And I would tell you, to the extent that we can, we try to do as much in-region, for-region to support our factories and our supplies from those factories. It's not perfect. What I said, we really haven't experienced through this COVID-19 situation around the world, we really haven't experienced much disruption in our supply chain. You think about our largest source of purchases, it's raw material. Most of our powders come from in-house. So whether that's from our recycling operations that we have or the recycle we do with our customers or whether that's from our supply chain that we get out of Bolivia, most of our powder, we have some form of control over. I would tell you, obviously, as demand has come down, we've adjusted our supply accordingly. But for the most part, we haven't really had any disruptions that have impacted our operations related to lack of supplies for any of our products.

Great. Now in terms of restructuring, you said about half the benefits of simplification and modernization are left to achieve. How much of that is still in dollar terms ahead as we think about 2021 and '22?

Yes. So if we think about the savings related to simplification and modernization, I think through the end of the third quarter, we've saved about $87 million since inception. Our longer-term target in net was $180 million to $220 million. So we have about, call it, $90 million or so to get to the low end. I think it's important to remind investors, though, that, that $180 million to $220 million was predicated on sales of $2.5 billion to $2.6 billion, and that there is a little bit of a volume component embedded in that savings. Again, you've heard the example at Rogers where we've gone from 16 operators for 16 presses where we now have one operator for running for high-efficiency presses. However, if the volumes aren't there, right, that operator, he or she can't run 4 presses. She may be running 2 or 3 presses. And so that's sort of that volume component that we're dealing with. But if we think about where we are on the journey, $87 million to date, what we said is for full year '20, we would save modestly more than the $40 million we saved the last year. So put that in the low 40s in FY '20. And then in FY '21, what we did say is, given a reasonable volume assumption, we didn't give a specific, but we would expect these savings to be modestly higher than what we'll save in FY '21. And so when you start to do the math, you start to get into the $87 million cumulative coupled with our fourth quarter, that plus what we'll do next year, you start to get into an aggregate or a total savings of around $120 million to $130-plus million versus that $180 million to $220 million. And that's where the delta then becomes more about that volume starting to kick in.

Sorry, that $120 million was by the end of fiscal '21?

So by the end of '21, yes, we should be in that -- given if the volumes are reasonable in FY '21, from a cumulative nature, we should have saved in the range of $120 million to maybe $130 million or so in the overall simplification/modernization. So I think just to do it on an annualized basis, I think in FY '17 and '18 and FY '19 combined, we had done, I think, around $50 million. In FY '20, we will do a little bit north of $40 million. So I'm going to call it $45 million. That would put me at $95 million. And then we're going to do a little bit more in FY '21, so that, let's say, another $45 million just for simple math. That would put you at the $130 million cumulative basis on that path to $180 million to $220 million.

Got it. Sorry, Kelly, go ahead, was there anything?

Yes. I just think -- so the $95 million plus the $45 million, you get to.

Got it. Okay. Wanted to just ask you about some of the other structural actions that you have planned. What are you looking for to be more aggressive there? Like, why wouldn't you just take those actions now as long as you're in the process of doing this?

Yes. Well, I mean we're -- as part of our simplification and modernization journey, what we've talked about is closing 5 to 7 plants. We've been now -- we've already executed 5. We've talked about the additional -- the incremental or the downsizing, significant downsizing of the Essen operation, and we've alluded to another plant. Beyond that, as part of the FY '21 restructuring, what I would tell you, Steve, is we're not -- when we talk about closing a plant, we're not foregoing the revenue, right? We are taking that product under most conditions, and we are shifting it to one of our other factories for better utilization and to run it through a more modernized factory. And so those sort of footprint reductions take time. It's not something that you can just simply close the plant. There's technical people with products being moved. They have in it the level of technical specifications we produce our plants at -- or produce our products at does take some time to make sure that the new equipment can do it the right way. So what I would tell you, we're not changing the journey. We're looking for ways to accelerate cost actions where we can; however, if we do see ourselves in an extremely low demand environment that are going to persist for a long point -- for a long period of time, we will need to consider taking additional actions. And that goes into -- to my comment earlier about the temporary cost actions, when do those have to shift to become more permanent or at least semi-permanent to reduce costs versus how we've managed costs in the recent couple quarters here.

Got it. Now one positive element of things going forward is that you're winding down the real capital spending headwind that you have to cash flow. So I guess one question that I have here is -- and you've got a covenant of net debt-to-EBITDA of 3.5x. You are kind of managing your debt with some anticipated improved cash flow. Do you anticipate staying under that 3.5x, given that, at least in the fourth quarter, you have, I think, some -- the challenging lower profits expected?

Yes. Well, the covenant, I'm sure as you're aware, it's a rolling 4-quarter average. And there are -- it's like in any bank agreement, there are exclusions, there are add-backs to that. So we did -- we withdrew our guidance, and we really -- we're not going to disclose any sort of forward-looking covenant calculations. What I would tell you, and I tell the investors, we do have a strong liquidity position. We have great banking relationships. And I said we don't expect any issues with our covenants as we look forward here.

Okay. Now one of the things that Chris had hinted at was opportunities to take cost out of the sales expense. Can you talk about your go-to-market strategy at this point, I guess, how much is distribution, how much is direct? Where can you improve things to address that sales expense?

Yes. No, it's a good question. And you heard Chris, as you said, allude to this on the third quarter call is no different than our simplification and modernization spend. I think we firmly believe that the amount we spend on our sales force has to generate the right required return on investment. And you asked the question about WIDIA earlier. We have multiple strong brands beyond just Kennametal and WIDIA, but we have Hanita and other brands. And we believe as we learn more about our markets and we have the ability to leverage these brands with our customers in a way that we haven't necessarily focused on before. And as I alluded to again in a prior comment, that's one of the areas where Ron Port, as our new Chief Commercial Officer for metal cutting, will focus on, right? It's -- again, I use a simple example here. I keep -- I use GM because of my auto experiences. But when GM is cutting -- or if they're cutting the engine block for the Corvette, they need very high precision, high-technology tools for that, right? They want the equivalent of white-glove treatment, given the criticality of quality there. But for other parts of their operation where they may be roughing aluminum or roughing steel, they may not need that level of quality and precision. And today, the way that we're organized is we may not be servicing those other aspects of that need for General Motors because of the products that Kennametal brand services. And so as we look at that opportunity, we want to make sure that we look across our portfolio, our brands, the different quality or performance attributes of the products we're selling to make sure that we're gaining as much share of wallet with these customers as we can. And I think as Chris would tell you, we're probably in the early stages of identifying those opportunities and better leveraging what we're calling commercial excellence. And for us, we think those are the incremental opportunities. I think to your -- the latter part of your question on channel strategy, we've sort of evolved over time. We used to be a bit more of a direct selling in the early parts of our simplification and modernization strategy. We did transition more to and improved our relationships with our distributors. And we do think that they, distributors, play a very important role in accessing many of the customers in more efficient ways than what we can. I would say, we review how we interact with each of these customers to make sure that we think it's optimal. I think through the simplification/modernization process, most of that heavy lifting was done early in, call it, the fiscal year '17, fiscal year '18. We're probably right now around 50-50 direct versus indirect, and we feel comfortable at that level.

Great. And then we're just at time, but there is one question that came in. I want to make sure we address it. And it's, of the 20% of the business that's not consumables, what are the products, verticals that you address? And what's the production lead times there, if you don't mind, just spending a minute on that?

Yes. Well, it's going to be -- some of them are going to be -- like we do make industrial machines, for example, out of India. We do make certain cutting -- we'll make machines. There are certain products that have like the tool holders that -- and there's a smaller different groups of products in there. The lead times, I would say, generally speaking, are going to be longer than the short lead times that we have in our standard products, but it's probably going to be a whole host of small things here and there. But the biggest one would be the industrial machine, the cutting, the industrial machines that we make out of India.

Okay. And do those go across verticals? And anything on the lead times there?

Yes. They would go to an array of end markets. They would be under the Industrial, I would likely guess, a general engineering bucket. And the lead times are going to be fairly long. Again, you're talking about building certain machines. So those are not -- those will have a little bit of a longer order pattern.

Got it. Well, great. We are out of time here. But -- and if anyone didn't get their questions addressed, feel free to let me know. And thank you very much to Damon and Kelly. Really appreciate your being here today. Thank you.

No worries. Thanks for setting us up. Appreciate it.

Bye.

Bye-bye.