Kennametal Inc. (KMT) Earnings Call Transcript & Summary

Good morning. I'm Michael Pici, Vice President of Investor Relations, and I'd like to welcome those people participating in the room and online via the webcast to Kennametal's 2023 Investor Day. Before I begin, let me go over a few housekeeping items. In the event of emergency, please use the exit at the rear of the facility and follow the science to exit the building. Second, during today's presentation, we will be making several forward-looking statements. And we caution you that these statements are projections and actual results may differ materially. We are under no obligation to update the forward-looking statements that are fully detailed in Kennametal's SEC filings for any actual events. Additionally, during our discussion, we will reference non-GAAP financial measures. The reconciliations to the nearest GAAP measure may be found in the appendix of the presentation. A note regarding today's presentation. At the conclusion of the event, the presentation will be available for download on the Investor Relations page of our website at kennametal.com. Let me just give you a brief overview of today's agenda. Chris Rossi, our CEO, will kick the day off with an overview of our corporate strategy. Sanjay Chowbey, the President of our metal cutting business, will then give you an overview of the growth initiatives for metal cutting. Following Sanjay will be Franklin Cardenas, President of Infrastructure, who will then provide you an overview of the growth initiatives for the Infrastructure segment. We will then take a brief break for those that didn't have a chance to browse our innovation showcase for those participating in the room. Following the break, Dr. Carlonda Reilly, our CTO, will provide you an overview of our technological advantages and innovation capabilities. Pat Watson, our CFO, will round out our prepared remarks this morning with an overview of our financial strategy and our targets. Following the presentation from Pat, we will conduct a Q&A session. Let me give you a brief overview of how the Q&A is going to work this morning. For the participants in the room, you've been provided a QR code. Please scan the QR code and enter your question into the queue. For participants online, they may access the queue by entering their questions into the chat feature. You may enter your questions at any time during today's presentation. With that, I'll kick it off with a brief overview of video. [Presentation]

Good morning, everyone. I'm Chris Rossi, the CEO of Kennametal. Welcome to our 2023 Investor Day. As I watch that video, it reminded me of one of the things that attracted me to come to work for this company. See prior to working for Kennametal, I was a customer and my company made equipment for the oil and gas industry. And Kennametal was always that supplier you could count on to work with your industrial engineering department to figure out how to machine difficult parts and also to improve the productivity in general of your manufacturing operations. And they would also be the supplier that our product engineers would work for to improve the survivability of our equipment when it was operating in a harsh working environment. So I experienced, just like in the video, how Kennametal supports customers and the production of products that people use every day. In the case of my former company, it was energy. And it's ultimately this level of customer support that Kennametal provides that enables us to increase our share of wallet with existing customers and to earn the business of new customers in order for us to grow our business. And that's what today's Investor Day is all about. How will Kennametal grow at above market rates while expanding margins. And the team we have here today is really excited for the opportunity to tell you how we're going to do just that. But before I get to that point, let me start with a little background information for those that are less familiar with Kennametal. The company is 85 years old this year. And since its inception, we've amassed this huge amount of application technology expertise and material science expertise. And we developed a great brand recognition. We're really known for solving difficult cutting challenges as well as wear resistant problems. And we do this across a diverse set of end markets and customers and we have the manufacturing capability and reach to provide our products and solutions all around the world. And we do all this through 2 business segments. Metal cutting, which as the name suggests, we provide tooling for people to machine parts across the diverse end markets that are shown. Likewise, infrastructure provides earth-cutting tools and wear-resistant solutions that have applicability across a wide range of industries. So across the 2 segments, Kennametal really does support the production of products that people use every day like automobiles, airplanes, roads and energy. And the common denominator across all these products and solutions is the applied application technology that we have and the material science that's shared across the 2 segments. So for 85 years, we've been building that technology and that great brand recognition. And more recently, we invested in increasing our manufacturing capability really to bring it up to par with our brand and our technical expertise. And we did that through a program called simplification and modernization. Put simply, simplification and modernization was a strategic growth enabler. It not only allowed us to streamline our organization to improve our sales efficiency, but it really allowed us to step up our level of customer service and enable new product innovation. Now admittedly, we have more work to do here because our margins are still not what they need to be but we know that, that will come as our markets fully recover from the pandemic. And as we execute our growth, capacity optimization and operational excellence initiatives that we're going to share with you today. And we think of those initiatives in 3 strategic pillars: innovation advantage, commercial excellence and operational excellence. Now a lot of companies have very similar strategic pillars. But throughout the day today, the team is going to show you the uniqueness that Kennametal has built into these strategic pillars to drive above-market growth and expand margins. So for us, these are much more than just catch phrases. They really guide the leadership team and the employees every day in terms of executing our strategy to achieve our objectives. And in many ways, these pillars were enabled by simplification and modernization. Let me show you an example of what I mean. Now many of you have had the opportunity to visit our Orwell Ohio inserts facility which has been newly modernized. And some of you had the opportunity to visit before modernization. And for those that did, you'll remember that pre modernization, the facility had antiquated equipment and was highly manual. It was unable to consistently hold tolerances within specification. So sometimes that led to a poor quality experience by our customers in the field. Post modernization, however, it's highly automated, requires less incremental labor to drive higher volumes. Quality consistency is no longer a problem, and we're able to produce products like Ten Gold. This new insert incorporates our latest coating technology for superior performance. And frankly, it could not be manufactured on the old equipment. And we're not done improving Orwell yet. We still have more opportunity to optimize the processes by deploying more smart factory technology as well as data analytics. So the bottom line is pre modernization Orwell and facilities like it put us at a competitive disadvantage. Post modernization, Orwell is now an enabler to our sources of competitive advantage, which are really built on 3 things: deep customer insight, application expertise and material science. And we take all of this to develop and produce high value-added products for our customers that our customers need. So Orwell and its ability to produce products like Ten Gold is really a good example of how simplification and modernization is helping us to accelerate growth. As I said, pre modernization, we were at a competitive disadvantage and essentially playing defense just to protect share. Post modernization, we're now on offense to take share by executing our strategic pillars. And in doing so, we're really positioning the company to be able to capitalize on the global megatrends that are benefiting our end markets. We're targeting new customer acquisition by expanding into underserved areas of those same end markets. And of course, we're driving higher levels of customer service to enable us to earn a larger share of wallet with existing customers and to win new customers. Now in addition to growth, we're also very much focused on margin expansion. Now we know that margins will naturally expand as we grow and drive more volume. But we're also interested in accelerating that margin expansion by teeing up another $100 million of cost savings. And Pat's is going to talk more about that in his presentation. For now, I'd like to stay on the growth side of the equation, talk a little bit more about our markets and the megatrends that are affecting them. The first thing I would point out is that a full post-COVID recovery is actually still ahead of us. For example, compared to fiscal year '19, airplane build rates are still 30% lower. And while automotive has made a nice improvement since the pandemic, they're still about 5% off. U.S. land rig counts are down about 25%. And in some key regions, the U.S., for example, and especially Germany, industrial production levels have not really recovered fully to the peaks that we saw in fiscal year '19. So we see these as tailwinds that will help us as we go forward based on a full recovery in these areas and regions. Also the growing global middle class, that's going to certainly lead to higher spending and consumption, which will benefit all of our end markets. It will also lead to an increase in demand for energy, both renewables and traditional sources. Geopolitical instability, that's really creating an environment where security and reshoring are prioritized. And if you think about it, as our customers build new factories, to derisk their supply chain. That's an opportunity for our metal cutting business to help them tool those factories up. It also creates more construction of the facility itself and the roads, which should benefit our infrastructure business. Similarly, government infrastructure spending in general is driving higher levels of construction. And I think the last point I would make is that customers are becoming more dependent on Kennametal for technical expertise as their internal expertise retires. And that's created an interesting dynamic where customers are reaching out to us to make a connection to augment their technical expertise. And once that connection is made, it's a very sticky bond because they need us to help them in the day-to-day operations of their business. So we see these megatrends as a tailwind, and it's a tailwind that we can help leverage by expanding into underserved areas of our existing end markets. Our TAM is quite strong at $22 billion, and it includes the end markets on the right that are attractive end markets and highly diversified. However, on the left side of the chart, you can also see that we have a significant opportunity to open up new revenue streams by expanding into underserved areas of these same end markets which will add new customers, and we'll also expand our business with existing customers. And this morning, the team is going to be sharing with you specific examples of these opportunities. But for now, let me just give you sort of a high-level summary of what this opportunity set looks like. The expanded focus areas are in blue, and you can see how they align with our current end markets. So for example, in aerospace, we can leverage our strong position in engines and landing gear to help make other components on the aircraft like the airframe. Similarly, in general engineering, we can take our aerospace expertise and help medical device manufacturers with the machining of their components, which use many of the same hard-to-machine materials as an aerospace. And we also have a very large portfolio of earth cutting solutions and wear-resistant solutions that we can apply to industries that we've never focused on before. And Sanjay, Franklin and Carolina will be sharing with you some of these opportunities. But there's clearly, based on the blue area, plenty of opportunity for us to accelerate growth. And we're confident we can do just that because over the last several years, we've really focused on honing our commercial excellence process and tools to allow us to take share in the areas that we're focused on. And I think an example of that process is the work that we've done to gain share in aerospace. Now we made the decision to expand into aerospace prior to the pandemic. And while we began to win business almost immediately, it really took us a few years and the addition of Franklin and Sanjay to the team before I really felt like we had a systematic set of processes and tools to drive share gain. And you can see that process at work in this metal cutting example. Since fiscal year '21, our growth rate in aerospace has been 44% while the OEM build range has been at 34%, and we think that's a good proxy for overall market activity. So 44% versus 34%, we grew faster than the market activity. And an integral part of this targeted commercial excellence process focused on share gain is to leverage our innovation advantage. And that advantage was recently recognized by Lockheed Martin when they took our new Harvey end mills and it put them into their enterprise-wide machining guide. And the best part about this example is, well, this is a metal cutting example, as Franklin will talk about, the same process is applicable in infrastructure. So bottom line is we know how to drive share gain for above-market growth and I'm confident we're going to do just that as we continue to execute those strategic pillars, innovation advantage, commercial excellence and operational excellence. And in doing so, we're going to continue to earn a larger share of wallet of our existing customers. We'll capitalize on those global mega trends I talked about. And we're going to expand in underserved areas of the current end markets to generate new revenue streams and acquire new customers. Now in addition, we're also going to look at bolt-on acquisitions to accelerate growth, and Pat will talk a little bit more about that in his section. And so in summary, our progress on simplification modernization has enabled us to switch from playing defense to protect share to now playing offense to take share by executing these strategic pillars. And we're well positioned now to achieve our growth and profitability targets, which the team is very excited to share with you today. We're looking to grow organically at a 4% to 6% rate and in doing so, we see a path to 20% to 23% adjusted EBITDA margins and to grow EPS at a 20% to 25% rate, all while generating strong free cash flow and returns. And Pat is going to go into the buildup of these numbers in his financial section. But suffice to say, the key drivers are the 4% to 6% growth rate and $100 million of additional cost savings. Now in addition to these financial metrics, we know that our customers and our investors and our employees care about how we run our company and whether we run it in a sustainable way. So I wanted to just take a few minutes to talk about our approach on ESG. I'm really proud of the work that our employees have been doing in this area for many years, and I would encourage you all to go and look online at our fourth annual ESG report, which was just published recently. It really summarizes some of the great things our employees are working on the highlights over the last 12 months including the work that we've done on increasing the amount of recycled material that we can use in our products, which we know is very important to many of our customers and investors. Okay. so, so far this morning, I've only given you a brief outline of how we're going to achieve these targets. It's now time to introduce the rest of the team to fill in some of the details. And this is the team that's driving our growth and profitability initiatives. I'm going to let each of them introduce themselves as they come to the stage. But let me just say at this point that this is a highly experienced team and they bring to Kennametal, I think, a bolder and more entrepreneurial mindset than we've ever had in the past. In addition, they're helping me to reshape the culture of Kennametal to a culture of accountability, where all the employees are fully engaged in achieving our strategy and delivering on the targets that we just talked about. And this, frankly, is a change from the past in Kennametal, and I think it's one of the critical success factors for us going forward. I'm very proud to lead this team, and they are certainly one of the reasons why Kennametal is a compelling investment which I summarize here. We know that investors care about these areas, above-market growth, margin expansion, balanced capital allocation, strong free operating cash flow and the wherewithal to sustain the competitive advantages that are allowing us to achieve these results. And as a leadership team, we are absolutely committed to delivering these targets for our shareholders. So now let's dig a little bit deeper into this above-market growth area. We'll hear from the 2 segment presidents. We'll start with metal cutting and an introductory video, and then we'll invite Sanjay to the stage. [Presentation]

Well, that's one cool video. I really like the tagline, helping our customers build better, but let me tell you how I really found that this is a cool video. Over the summer, my kids have just come back from college internships. They heard this music playing in my office, in the [indiscernible], they watch the video. They're like, wow, we didn't realize that you guys were touching all aspects of our lives. They're helping build electric cars, airplanes, medical device, wind turbines, they were pretty impressed. I felt really good because it's good to be appreciated by kids once in a while. Good morning again. My name is Sanjay Chowbey. I joined Kennametal about 2 years ago. But my introduction to Kennametal has started more than 30 years ago. I still remember the day I was in the machining lab at engineering college. And between me and my colleagues, we were just talking about some new products that Kennametal had just introduced. So I've made full circle from that day to today and I'm really excited to lead metal cutting segment of Kennametal, the best team in the cutting tool industry. Now on my journey to here, I have built various different experience. I'll share with you a little bit. To start with, I got my chance to work in the factory and become a plant manager and also strengthen my experience in lean and [indiscernible] production system. Then I also took frontline roles in sales and marketing. I strengthened my growth tool experience. My first 13 years, I was with the transportation industry with a Tier 1 company. I had the opportunity also to lead a Japanese joint venture, where I strengthened my experience in lean and again, [indiscernible] production system. Following 11 years, I led 3 business units in a successive responsibility at Danaher where I was able to deliver above-market growth, margin expansion and also superior return on invested capital. Along the way, I also picked up my MBA at Northwestern's Kellogg School of Management. Now I bring this wide and deep experience to the role at Kennametal. What I'm going to share with you over the next 15, 20 minutes is what's changing in our playing field, what is our game plan and the progress we have made in the last 2 years, but more importantly, what lies ahead of us. So let me start with a quick introduction of the metal cutting business. As you know, with about $1.3 billion business, sales last year, we are serving a wide variety of applications, as you saw in the video. Transportation, aerospace defense and energy make up about 45% of revenue. The remaining 55% is coming from general engineering, where all the other industries sit there and also our small customers who are served through our channel partners. Now as you can see that this does cover a wide variety of applications. And I can attest to that. To learn the business over the last 2 years, I have gone to more than 125 customers. My main goal was to learn the business, even though I've been a customer of Kennametal for a long time, but I wanted to contribute to our team's knowledge in terms of deciding our strategic priorities and also our growth initiatives. I can share one example with you here. I was with one application engineer and the sales team to a very small family-owned business. This customer was making parts for aerospace and defense applications. While on the floor, I saw our application engineer and the technician on the machine, they started to talk about one of the part this customer was making. This part was using -- this machine was using Kennametal's product. It was a standard product off the shelf from catalog. After talking for a few minutes and looking at the part geometry and the machining movement and all that, our application engineer infact suggested to use a different setup -- different set of Kennametal tools, it's still standard, tools and find a better way to do that machining. A couple of weeks later, customer reported that they saw a 15% improvement in productivity. So this kind of insight that we can still use our own Kennametal standard product, but to still get better solution. That comes down to the value of application expertise and our knowledge of material science and machining. This type of core competencies are very important for me also to realize as we look at what to work on and making sure that market opportunities are tied to our core competencies, okay? So now with that, let me go to how we are going about winning in the market. You heard from Chris earlier, these 3 strategic pillars are the core foundation of everything we do. I'm going to speak to first in a western advantage. You heard about [ indiscernible] investments. that has enabled a lot of new products, including [Ken Gold] and KCS10B and few others that you will hear from Carlonda on that. Next year, commercial excellence, Again, this is very important because we have to get out of our comfort zone, not just work with the same customers we have. One evidence here, 1/3 of the growth we had in EV and also in Aerospace last year came from new customers. Now I will talk more about innovation advantage, and commercial excellence in more detail as I go through initiatives. But I'd like to take a few seconds here, talk a little bit more about the operational excellence. This is an overarching theme that really affects all parts of our business. starting from world-class customer service to environmental health and safety initiatives, operating margin expansion and also return on invested capital. As you see one item listed here. Over the last 2 years, we have improved our inventory turn at metal cutting by 15%, okay? That's very important. So now let's look at how some of these things are helping us outperform the market. As the chart can show you that we have started to build a clear edge over the last couple of years. The left side of the chart is a line chart that shows you our performance in the yellow line, Kennametal and compares with 2 leading global companies. You know that there's very limited information out there in public domain for our peers. Nonetheless, I will tell you that these 2 are world-class leading [Kennametal] peers, well run and well respected. But we have been outperforming them since early 2022. Now on the right side of the chart, what you see is from U.S., Germany, France and Italy, industry associations, which report member reported numbers. Between the 2 charts, what you see here is that either we are holding our own or we're outperforming the market. Now you will ask, how are we doing that? Of course, there is -- these type of questions always have a lot of details. But I'm going to give you 2 main themes here. We have taken time to understand our market and decide what to work on. And how we have gone about that process. As you heard from Chris and I will also speak to market themes. So we look at what's changing in the market as one of the contributors to that. Second contributor is, what is our core competencies. There may be changes in market, but that may not suit our strength. So we look at that. And the third piece is a good business model where we can really come up with a good return for our investors. So overlap of those 3 things, that's how we decide what to work on. And Part B is relentless execution. That's how we are doing it. So I'm going to walk you through some of this process before I specifically talk about the growth initiatives. So on this page, you saw earlier Chris talk about the themes. A lot of these topics can take half an hour to 1 hour individually. So I'm not going to speak to everything, but I want to confirm with you that what you see on the right side, the metal cutting approach is to make sure that we're strengthening our historical focus areas Along with that, we are also growing in the expanded term. Now one of the themes that I will speak to a little bit here, evolving workforce. We have heard from many customers, as you also heard from Chris earlier, that as the technicians and the machinists are retiring, they're having a hard time replacing them. We know that from our own experience. So our goal is to look at that need of the customers and make sure that we are strengthening our offerings, whether it's the online tools, inside sales support, technical support on the phone or in-person support. That's how we're using the market themes and our core competencies to match that. Now looking at our growth rate here. On the left side, what you see, our markets are growing. Led by Aerospace at high single digit and then followed by transportation, energy and also general engineering, in low single digit. Net-net, when you do the math and look at our revenue mix, you'll see the market is going to contribute in a very low single-digit range. And Pat is going to speak to that a little bit more at the enterprise level. But what sits in the middle of the page is more important. That's how we are planning to grow above market and deliver 5% to 7% CAGR until fiscal '27. Now let's look at, again, coming back to themes and our core competencies. As you can look at the themes, I'm not going to repeat everything. You've seen it before, but I want to emphasize again what our core competencies that help us maximize this. First, our broad portfolio of proven products and innovative solutions. Second, our materials science expertise. Third, our sales and engineering -- application engineering expertise. Number four, manufacturing excellence, global presence in that and also our distribution warehouse network. And number five, our digital capabilities. So we're going to take all of that and look at the market themes and come up with what we are going to focus on in terms of growth initiatives. So let me sum up our overall 4 growth initiatives that we're working on right now. Of course, there's other ideas in the pipeline, but we know it's very important to take the critical few and make good progress. This chart basically shows you what growth initiatives we are working on and where it sits within the industry that we currently serve. Of course, you heard from Chris earlier that expanding into airframes and assembly beyond our comfort zone of agents and also going beyond the big players in aerospace to small tier suppliers, that's what you see in the number one. Hybrid and battery electric vehicle sits under transportation, medical and then small job shops sits under general engineering. So let me start with the first initiative of aerospace and defense. Now it's no secret. We all know that the last few years due to pent-up demand and also because of the geopolitical drivers. Aerospace has been and defense has been a relatively higher growth market and is expected to be that way even next 5 years or so. We are here to capitalize on that through our innovation advantage and also our commercial excellence. You heard about the solid carbide end billing product getting on Lockheed Martins, which was -- we also had a press release on that. That's a testament to our proven solutions. Now if you look at the comment from Clint Williams or Pratt & Whitney on this page, Clint is the Director of Operational Excellence. As his job is to look -- wake up every day and look for better ways to do things. His comment here that as the aerospace has more demand, how are we helping them improve capacity without a lot of CapEx investment on their side. We can help them with finding better way to machine things to improve tooling life, that, that way, they don't have to make as many changeovers. That's what we are doing. So we are partnering with them, and you'll see many examples like that. in our innovation room also when we get to that. Okay. Now I'm going to share with you a few other aspects of commercial excellence here on this page. As you see on the left side, commercial excellence has 2 pieces. On the left, you see how we get bigger share of wallet with existing customer. That's that example with 1 OEM where we have grown our business in the last 3 years with new programs. On the right side of this page, you see that we have also, at the same time, increased our customer count by 10% in aerospace and defense over the last 1 to 2 years. This is very important. And as I said earlier, we are doing that by getting outside of our comfort zone, not just the engine going to Aerostructures and assembly and also not just the big players, but also work with tier suppliers which we know are very, very important part of the overall supply chain and value stream. Now I want to draw your attention to HDI, the testimonial here. HDI is a Canada-based landing gear and actuation system supplier, a global supplier. We have had several workshops with them. This comment here kind of reflects that. In fact, I witnessed one such workshop, where our team and their experts set together to find solutions to complex problems and also design for manufacturability. That's how we're helping them. Now I travel a lot in my job. And in fact, every time I fly and come home safely. I really feel good that we're part of the solution. So now let's move from flying to driving. Now this is a busy slide. I'm going to walk you through the details slowly, but let me start with 2 main conclusion of this page. Number one, despite shift in mix in the transportation, overall transportation market is going to grow slightly or stay flat. Secondly, regardless of mix shift, we are very well positioned through our innovative solutions and commercial excellence to gain market share and deliver a solid above-market growth in transportation. Now let me walk you through the details here on this page. The left column on the table that shows you relative tooling usage by the family of the product. As you see, hybrid electric vehicle uses about 110% of the tooling used at the internal combustion engine, whereas battery electric vehicles use about 55%. That's number one. Number two variable here is what's happening to the unit volume. As you can see here, the unit volume is going from $86 million to $93 million by fiscal '27. The third variable here is the shift in the mix. Today, roughly 30% of the mix is battery and hybrid electric vehicles. That's going to go from 30% to 60% by '27. So by the time you look at all 3 variables, net-net, you get to 0.1% tooling demand CAGR. Now 0.1%, that's roughly flat. But we have been talking to many of our customers and the industry experts. In general, the belief is that transition to fully battery electric vehicle might be slower than the models that we have here. And in fact, hybrid might be even higher. So what that will mean with hybrid using 110% of the tooling that is very likely the market itself might be slightly higher than 0.1% CAGR. Now what you see on the right side of the page is what we are doing. We have comprehensive solutions for all sorts of electric vehicle and also hybrid electrical while we maintain our strength in the ICE engine vehicles. Now that sets up innovative solutions. And if you have not had a chance to look at outside, please take some time on that. We are helping our customers improve their operation, but also, at the same time, our solutions are allowing us to get price premium. So between the growth of market, our innovative solution, our commercial excellence, we're pretty confident that in transportation we'll deliver a pretty good growth rate despite all the shifting mix. Now let me go to a little bit more detail on that, how we are doing that. If you have seen outside also the press release, the product, Rick [ Reaver ] or KENionic, Carlonda will talk a little bit more about that. But I can tell you, I personally witnessed one such operation. I was at the factory of a European supplier, which is a global OEM. They were using a competitive product and then I saw comparison of how they were doing that versus our product, and it was very impressive. Our product Rick [reaver], improved productivity, improved surface finish, customer was very happy, and we were able to win that business. Now moving to the commercial excellence side. We've also expanded our base outside of our comfort zone. We have won several tier supply business, including many in China and also including global OEM based in China. In Europe, we took our EV solutions literally on the road. That's what you see the truck here. That's the EV truck road show that we took that helped us educate our customers and our channel partners. We generate a lot of leads and also a lot of project wins through that. We are doing something very similar in the U.S. later this year. And I invite you to learn more about that when you get the chance to go back to the innovation room and soon learn more about the starts and also the product that we'll be displaying on those. Now let me move to our next initiative, which also requires precision. Medical. Medical industry is an attractive industry, but it is way underserved by us. We're going to change that. We are changing that as we speak. How are we going to do that? First, we do have solutions in our portfolio today, and we have material science expertise. We have application knowledge that we have not capitalized to the extent that we should be. But like I said, we are changing that. I'm going to give you one example here. I was at a customer that makes hip joints, knee replacement. They were using a competitive product. And after looking at some of the problems they're having, our team members suggested to use KCS10B inserts. And after a couple of weeks of trial, customer was very happy. They saw a 15% improvement in productivity and overall surface finish and quality. In other words, we do have solutions like that, that we can use to grow in medical. In parallel, we are also pursuing inorganic growth actions to bolster our product coverage and also application knowledge and customer account on medical. That's how we're going to go and expand our medical business. Now I'm going to move to the last initiative here with the small job shops with 6 under general engineering. With about $3.1 billion TAM, this is a very important segment for us. We do quite well, but we have a headroom to grow here. We're going to be using 3 approaches to grow in this business or in this segment. First, our digital capabilities. We are coming up with new solutions and have launched many of those already. To help our customers find the right product for their need, do the product machining simulation. Also, we're offering them other options to get to us, either inside sales team or phone support or through our channel partners. As you see, this is a statement from Kenny of Max tool, they're pretty happy with the one-stop shop that we offer, product and also technical support. That is a very important part to serve our small customers. And finally, different tiers of support as the customer needed completely do-it-yourself online tools or the phone support or in-person support. Now in the U.S., these small job shops make up about 50% of general engineering. And again, the way I define it is less than 100 people. We know that these are small customers are very important part of any country's economy. Our goal here is to make sure that we are supporting them. In general, they have not gotten as much support from our channel partners or us. So we're going to do more and do it more efficiently, to reach to them and give them support here. Now I will give you one such example that just recently, I was in a business review of our initiative here, and this example came up in that, that we had just launched a new product and after watching that video online, the customer sent us a message. It came to our inside sales team. The customer asked a couple of questions. We just responded to that. But after a few days, there was no response. So our sales team did not just do this transactional conversation to say, okay, you asked me this, I gave you this. They followed up to find how is the customer doing? Have they made a decision and after talking to the customer for some time, on the phone, it was decided that, that new product that we launched was not the right solution. One of our other product was a better solution for the customer. So this is very important in the ecosystem that we'll have online tools will support our channel partners. But within our goal is to help our customers find the right solution. I also will share with you that this is not just about the small customers. This applies to big customers. I was at a very large customer at one time, and I was walking in their applications and engineering area. End customers, we were just talking about some help they needed, and I was talking to the salesperson saying, look, connect with account manager or connect with engineer. Then one of the other engineers said, "No, I just got the solution. I talked to the Kennametal application support". And I'm understanding that I'm like, I didn't hear you talk. Then she just gave me a look, then I realized, Chat is a new talk. So that's also very important for us. as part of the overall initiative we have for DCX we're helping our customers. So now let me summarize our initiatives. These are the 4 initiatives that we have talked about and the core competencies. I'm going to look at how this translates to our growth rate overall. What you see on the left side is very important also to start with. $1.270 billion revenue that we had last year was achieved through 9% organic growth despite mixed market conditions around the world. What you see in the middle, that's how we're growing the business, and we're going to deliver 5% to 7% growth over next 4 years. Now let me speak to my closing comments now. This slide obviously lists many of the things that you've heard from me and Chris, our product, our application support. But I'm going to leave you with 3 important messages, not just from this slide, but overall, my -- all my slides and presentation. Number one, we have built processes and organizational capabilities to really understand market dynamics and figure out what we should be working on. Second, we have -- as part of that itself, relentless execution. So process to do what we work on and also how to execute. Number two, we have made real progress. This is not just process. We have solid results that I spoke to earlier. We have made progress in all aspects of business. Customer service, operating margin expansion, above-market growth. But my third message is we're going to be using operational excellence and commercial excellence tools to make sure that we are doing with much better customer service for customers, continue to improve that. and also improve operating margin expansion and return on invested capital. In summary, with the strategic clarity with superior execution and a strong and engaged team I'm very confident that we'll deliver above-market growth and value for our [indiscernible] stakeholders. With that, I'm going to welcome my colleague, Franklin with a video first. [Presentation]

Thank you, Sanjay, and good morning, everyone. The video is a quick snapshot of what I will be covering today and really provides a good look at our products in action. My name is Franklin Cardenas, and I've had the privilege to lead the infrastructure segment at Kennametal for the past 3 years. Prior to joining Kennametal, I spent almost 25 years at Donaldson Company in a variety of leadership roles. Most recently, living in the Asia Pacific region based in Shanghai, China. What attracted me to Kennametal and still energizes me is the relentless focus on profitable growth and the bold transformation that Chris is leading. See, I consider myself a builder. I am a firm believer of bringing together talent and disciplined processes to drive positive change, and that is exactly what I've been doing at Kennametal for the past few years. My goal is that by the end of this presentation, you will have a good understanding of what we do in the infrastructure segment and how we create value. As Chris mentioned earlier, our focus is to deliver wear resistant and earth cutting solutions to a variety of industries, which we organized under our 4 end markets. Mining, for example, is a sub market of earthworks. And energy is a -- sorry, on oil and gas is a sub market of energy and so on. There are 3 things that I would like to highlight. First, if you think about it, everything works out over time. Everything works out over time. And I personally feel it when I'm jogging next to my 20-year-old son and I struggle to keep up. Now addressing this type of wear is our scope for today's presentation. Second, the common denominator across our products is our material systems. And we have 2 primary material systems, tungsten, which is heavy and ceramics, which is light. And third, something that we are really good at is that matching our customer needs with our material science expertise, delivering customized solutions for more than 10,000 customers around the world. You will hear more about these things throughout my presentation. But now let me tell you how our strategic pillars are helping us enable our strategy. As you heard from Chris and Sanjay today, we have a strong foundation on our strategic pillars. Innovation is something our customers have come to expect from Kennametal. And Carlonda will talk later about how we align business strategy and technology innovation. If you think about it, we've been in business for more than 80 years, and still more than 30% of our revenues comes from new products and customized solutions. This track record of innovation is why our customers are willing to pay more for the peace of mind that our products bring. Let me repeat that. Our customers are willing to pay more for the peace of mind that our products bring. And we are expanding our customer reach to gain share. This is really what commercial excellence is all about. Last year alone, we generated an additional 45,000 customer touch points and improve their opportunity conversion rates. And we know our customers have choices. So maintaining a competitive position is what operational excellence is all about. Keeping safe and environmentally friendly operations. When taken together with the strategic pillars of innovation, commercial excellence and operational excellence help us win in our end markets. So let's talk about our end markets. Our total addressable market is about $8 billion and supported by positive megatrends, we are well positioned to gain share and grow faster than the market. We are currently focused on improving the effectiveness of our salespeople to go in share of wallet. And we are expanding our addressable market by focusing in underserved regions. One of the examples where we are winning on underserved regions is our global mining expansion. We are building a sales team in Latin America that is already gaining share by selling our portfolio of proven solutions. And we are doing the same in other regions of the world. Essentially, we're taking products that we sell in our core markets to win in other regions. Now let's discuss the growth of our end markets. Our growth strategy includes capitalizing on the market growth and gaining share, targeting a 3% to 5% growth rate for infrastructure. We operate in markets that are large and have a healthy growth potential. And when we think about our focus on our strategic pillars, bringing new products to the market, improving the way we engage our customers and running our plants more efficiently we are well positioned to win to gain share. Let me share an example of how our focus on our strategic pillars helped us solve a customer problem. The customer is a large oilfield service company, and the problem is that sand was contaminating completed oil wells. Standard solutions were failing due to accelerated wear. So we quickly assembled a team to work closely with the customer on a solution. At Kennametal, we have different tools to solve this type of well problems. Our solution combined our capabilities in additive manufacturing with our tungsten carbide material expertise, something that no one else can do today. The additive manufacturing tool that we delivered is simply not possible to be made by traditional manufacturing methods, given its complex geometry. So through close collaboration, we solved our customers problem. And this is a customer that we've had for decades. And this customer knows that the next time and the next time, and the next time they have a wear problem, we're going to be right here to help them just as we've had for all these years. Now let's cover our mega trends support growth in our end markets. As you heard from my colleagues, megatrends are working in our favor. And let me tell you why they are tailwind for infrastructure. Let's take earthworks, for example. As governments continue to invest in infrastructure to stimulate their economies, it's a great opportunity for us. because our tools are using various aspects of construction. And with the increase in demand of energy to power the world, it is going to support growth in oil and gas, giving us the opportunity to continue to grow with existing and new customers and applications and our focus in underserved markets supported by our global footprint will benefit from the growth of the middle class, especially in emerging markets as consumer spending increases. So in summary, our markets will benefit from positive market trends. And here is a look at our end markets and our areas of focus, and I will expand on each of these in the subsequent slides. The rationale behind this areas of focus is this, they are margin accretive. They build on our strengths and in some cases, they help us reduce the cyclicality of the business. What I will focus on our organic growth efforts, all of these have an inorganic component to them, and Pat will cover later in his presentation, our disciplined M&A process. So let's start with our defense initially. I invite you to explore our defense exhibit in the innovation room where you will see our full portfolio of amortizing penetrators and fragmentation devices, as well as the armor protection systems that we're launching to the market. In essence, we're bringing the success we've had in Europe to the U.S. market. As the largest U.S.-owned producer of tungsten that is vertically integrated. This is a great opportunity for us. We are currently working with our customers and defense agencies to position ourselves as a strategic partner and we are already making progress, with approval from 3 of the largest ammunition OEMs and a significant increase in order entry. Carlonda, we touch later in her presentation on how we are even developing new solutions, and we're in the early stages of development of new solutions for armor protection systems. Now let's talk about how we are expanding our ceramics business beyond our traditional applications. [indiscernible]. Please raise your hand. Thank you. Well, the shiny symbol [indiscernible] on the [indiscernible] of the wrapper was likely made with 1 of our operator boats, which we will be able to see in the innovation room. The way I think about the ceramics business is this. It is highly profitable. It doesn't cycle with the rest of our business given its high exposure to food packaging and it allows us to expand in a different material system. The boats are used to metalize the inside of your potato chip bags to keep the food fresh. And they are also used to metalize the holograms in some of your currency. We are constantly focused on diversifying into new applications and expanding into components for semiconductor processing, electronics and mortal metal, are current areas of focus. And we're already making progress with almost 30% growth over the past 2 years. These are very specialized markets that give us the opportunity to gain share in highly profitable and fast-growing markets. Let me give you an example of a molten metal application. We were recently approached by a manufacturer of solid rocket motors, and they were interested in a crucible to produce solid rocket fuel. For all the engineers in the room, this means high temperature and high corrosion resistance. Our team worked together with the customer to find a solution, and we delivered the largest crucible yet made with boron nitride solving our customers' problem. Carlonda is going to expand later on this material system and how we are expanding even beyond what we're doing today, so that we can access even more applications. But now let's talk about how we are winning and expanding in mining. We've been a valued partner of the mining industry for decades. And our sweet spot has been met coal. What has made us successful is that we offer differentiated solutions that either extend equipment life, improve productivity or reduce equipment downtime. A lot of our mining products including our [indiscernible] coatings are also great applications for surface mining and mineral processing. So we are diversifying our focus beyond our coal business into new applications and on their self regions. Earlier I shared the example of how we're already growing in our global mining initiatives. And how we're being successful in Latin America, capturing share with existing products. And we're doing the same in other regions of the world. So we are heavily focused on expanding our market coverage to continue to gain share. Now we are really focused on working with our OEM partners so that we can gain share as they produce new vehicles and also through the replacement parts through their dealer networks. Now let me transition to oil and gas. As with mining, we've been supporting oilfield service companies for a long time and we have deep established relationships with our customers, and we have earned a high market share. The opportunity for us is to build on this strong market position to protect our core business and win in new high-value applications and other self regions. One of the vehicles that we use is establishing joint development agreements in which we come together and work with our customers to solve anywhere challenge that they may face. And the case story on the slide is a good example in which we work together with the customer and we deliver an additive manufacturing solution to separate oil and water, improving well productivity. Carlonda is going to expand on this innovation later in her presentation. I have shared several examples in which we tailor our solutions to meet our customer needs. And this is why our commercial excellence process and our customer-first focus are so critical. Our small customers, for example, they benefit from our standard product line and they need support on tool selection based on their road milling conditions. Our distributors, they typically support large end users or a territory, and they are interested in a strong brand that can command high margins and provides excellent customer support. And our mining and oil and gas customers are typically large end users and they are interested in a strong, reliable partner that understands their business and can provide support when they need it and where they need it. At Kennametal, we know that we have to earn our customers' business every day as the only path to high-quality earnings. And this path is going to take us to a growth rate of 3% to 5% through 2027. As we discussed earlier, we are laser focused on capitalizing on market growth and gaining share. And we will continue to deliver differentiated solutions to our customers and price for the value that we provide and to our commercial excellence process, our innovation and our customers' first focus, I am confident we will deliver growth that outpaces the market. I know I covered a lot of content. So let me summarize. First, we are the experts in water resistant and [indiscernible] coating solutions and our ability to solve our customers' problems is second to none. Second, we are well positioned in large and growing end markets and we are winning through our strong customer relationships and our portfolio of proven solutions. Third, we are relentlessly focused in driving growth that outpaces the market both organic growth opportunities and inorganic opportunities. And finally, through growth and continuous improvement, we are well positioned to deliver value to our shareholders, improving margins and working capital. I always say to my team, we are Kennametal. We have the expertise, the products, the solutions and the passion to outperform our competitors. We are Kennametal. Thank you. And I will now turn it back to Mike Pici, before we go to the break.

Thank you, Franklin. We're going to take a 15-minute break to allow the participants in the room to browse the innovation showcase and take a look around some -- experience some of the products we have to offer here, and we'll be back shortly. [Break]

Okay. We got about 2 minutes and we're going to get started. So if everybody can make their way back in and take your seats. And just as a follow-up, if you do have any questions you'd like to ask, please either scan the QR code for those participating in the room. And for those via the webcast, may use the chat feature. We'll be starting in about 2 minutes. [Break]

Okay. Welcome back. I hope you all had a chance to grab some refreshments and browse the innovation showcase, if you did have a chance to do so. It's my pleasure now to welcome to the stage Dr. Carlonda Reilly, our CTO, who will provide you an overview of our innovation and technological advantages after a brief video. [Presentation]

Well, good morning, everybody, and thank you, Mike. And as Mike said, welcome back from the break, and I certainly hope you all got a chance to take a peek at each of the stations of our innovation room this morning. My name is Carlonda Reilly. And I, just 2 days ago, celebrated my fifth year anniversary with Kennametal. I came to this company after spending 23 years at DuPont, where I had progressive management experience in operations, business, marketing and, of course, technology. Over the course of my career, I have worked on every aspect of innovation and new product commercialization. And I've cultivated a passion for customer intimacy and translating customer insights into products that are still successful in the market today. And that's what attracted me to Kennametal. I saw the same passion at all levels with excellent scientists and engineers. So I'm very excited to talk to you today about our technology leadership, how it powers our innovation advantage, which contributes to our long-term growth. Kennametal has an expansive toolbox within innovation, where material science and product engineering are at the heart of our capabilities and are key enablers to our growth. Now I'd like to tell you a story that illustrates this. My team and I recently hosted one of our aerospace customers at our global R&D center in Latrobe, Pennsylvania. And this customer was not only impressed with our facilities, our products and our engineers, but they've been even more impressed by the fact that we have delivered and demonstrated a 30% cycle time reduction to their new part manufacturing process with our tooling solution, more than anyone else to date. So with engagement like this, it's no wonder that we have grown with this customer year-over-year, and it truly demonstrates the enabling power of our world-class technology. We are confident that we are market-leading innovators at Kennametal. And we are providing solutions that are creating increasing value for our customers and transforming how every day life is built. So how do we do that? There are key elements that we use in our approach to innovation that help to drive differentiation and competitive advantage. First of all, I'll talk about our customer-led innovation, what that means to us and how it's foundational to the impact that we're having in the market and how it fuels the other 3 elements, as in development of a market-leading product portfolio and our approach to extending our technology and leveraging our technology across our enterprise for value and extending our technology reach. The innovation strategy flows out of the enterprise and business strategies as Chris, Sanjay and Franklin talked about earlier. And our strategy defines where and how we win for Kennametal and the customer and the capabilities that we employ to deliver it. We share our strategy with our teams so that we are all aligned and striving toward our aspiration and to drive business results. And we have a targeted approach to innovation investment and have shifted our focus on new product development to more effectively contribute to that growth. The areas of the circles represent how our investment focus was distributed before simplification modernization as I've shown in the gray. And after, as shown in the yellow. We are focusing our opportunities more so in that upper right-hand quadrant, that is higher-value next-generation type of products and new technology development. Key innovation, smart factory, process simplifications that we've made during simplification modernization have resulted in a more focused portfolio of higher value differentiated products, a portfolio aligned with our business strategy and market drivers and increase speed and impact of our innovation into the market. We have engineers in the field, along with our sales and marketing, and they [ alert ] work really closely with our customers to really understand their technical challenges. And you add to that our material science, design, process and application engineering expertise, along with our innovative thinking, and you have a formula of solutions to our customers. So I have 2 examples that I show here. First is our tool with KENionic technology. You saw that prominently displayed out in the innovation room. It was just recognized just 2 weeks ago, as a 2023 R&D 100 Innovation Award winner. It is a unique design inspired by Bionix to give the optimal combination of strength, power and metal lightweighting to the tool, and it also produced 50%, that's 5-0 percent more productivity to our transportation customer. And we're finding that this technology approach is really giving us a great tool to enable OEMs to not only look at and convert to new applications in ICE, but also EV component manufacturing. And when one of our oil and gas customers could not efficiently use conventional methods to make complex control devices and systems. We employed our leading additive manufacturing capabilities to provide a solution with wear and corrosion resistance, like no one else has been able to, to date. So I've been interviewed many times to share my experience on innovation within industry. And in my experience, I've been asked many times how to successfully manage innovation. And in my experience, it requires a robust end-to-end framework in place, accountable project leaders, engage senior leadership for fast decision-making, and effective cross-functional teams for success. And we have that, all of that at Kennametal. We take ideas from a variety of different sources. And by the time that we scout them and move them into development, those projects have a validated business case and customer buy-in. This approach allows us to focus on fewer but higher impact projects in the R&D development phase. Hence, we're able to move products from development to launch faster. So ultimately, customer-led innovation ensures that we're bringing to market higher value products with established demand and bigger impact. So let's look at 2 examples that you saw out in the innovation room of delivering greater value and faster speed to market. Our FIX8 tooling system, for example, provides industry-leading technology for a wide range of turning applications and has produced higher efficiency for the customer. And we took our first line of KOR end mills from concept to commercialization 4x faster than the average cycle. Now just last week, I visited one of our large U.S. customers, and I saw our KOR end mill in action across nearly 20 machines. And I heard the engineer say that our KOR end mill has changed the landscape of this type of operation because of its high metal removal rates versus traditional offerings in its class. Both of these innovations are creating wins for Kennametal and our customers. And I cannot stop here. I'm also excited to talk to you about a sampling of these leading and award-winning innovations across both of our segments and growth markets. So as Chris mentioned earlier, on enhancing our competitive advantages, we do leverage our technology across the enterprise for value. One example of that is some of our mining innovations, which have come from exploiting key design principles that we typically use on the metal cutting side. And as we strengthen our position in energy and electric vehicles, our additive manufacturing capabilities are allowing us to deliver solutions in the most efficient way while producing highest performance. Such as our RIQ Reamer or some of our other reaming capabilities as well as our design -- complex design nozzles, if you will, with tungsten carbide. Now I have one other product that I'd like to focus on here, and I have to hold it up, and I know some of you won't get to see it in the back closely, and it's out in the innovation room. And that is our award-winning HARVI I TE, solid carbide end mill. It is a recent winner of an Edison Award for innovation. Now there are a handful of manufacturers that actually manufacture or supply equipment that can make a solid carbide end mill like our HARVI I TE. And I spoke to one of them when we first launched this product. And let me tell you, this manufacturer was -- is experienced and very highly technical. And he took one look at this solid carbide end mill and said, "Wow, I have never seen a complex design like this in a end mill. You could not have used our equipment to make this end mill." I didn't answer him at the time, but the fact of the matter is we did use his equipment to make this end mill. The bottom line our engineers are so innovative that they can create those innovations on equipment that even the makers of the equipment don't know is possible. And in the HARVI I TE's case, this complex design has translated into unprecedented flexibility and performance with our customers. And it's one of the reasons why it is a preferred product in the Lockheed Martin machining guy. HARVI I TE and all of the innovations that you've seen here today are excellent examples of our innovation advantage at work in the market. And there's even more to come. We have a rich technology road map for the future. Franklin, Sanjay and I and all of our teams work together closely to define the differentiated products to launch when the customers want and need them. We have a complete toolbox of materials and process options that ensure that we can bring the right level of technology to our new products and maintain a steady stream of innovations to the market. Now while a new product might have a specific value to proposition that's really targeted toward one or the other businesses. The work that we do on advanced materials and advanced process technologies apply to both. And they're also enablers to both near and long-term growth opportunities. So our ceramics technology is one great example of that, that I'll go through now. As Franklin mentioned earlier, we are applying our current ceramics materials from within his segment, namely boron nitride to adjacent application spaces for growth in the near term. Thermal conductive materials for electronics is one example of that. In fact, we have ceramic material solutions and processing capabilities across both of our segments. And altogether, it accounts for about $90 million of sales for the company with high margins for the company. So as we leverage -- as we leverage our capabilities across our segments, we see opportunity to address some of these new growth applications for us and their growth that could come longer term. So we're not only utilizing our ceramics technology expertise to help us grow now. But we are thinking about what's next and scouting the potential to expand our ceramics technology to a wider range of applications whose future growth is driven by global mega trends. Leveraging materials in process, development across our businesses enables us to address and capture the anticipated growth in these applications and attractive end markets. We've proven, we can win in ceramics with our current capabilities, technology and solutions. And as we are in the early stages of expanding our ceramic applications, we are bringing our winning innovation approach to these opportunities, with an eye to fuel growth beyond our current planning cycle. So Kennametal is leading in the area of metal alloy additive manufacturing. This is a comment we have heard from a wide range of customers and industry partners. We are unlocking ways to solve and deliver solutions to our customers across both segments in ways that we could never have a dreamed of with traditional methods. We have end-to-end capabilities. For example, our proprietary powder grades, which represents pre-print capabilities as well as our post-print capabilities, which is the finishing of our components and tooling. Now you saw out in the innovation room our KENionic technology and KenTIP FS. Both of these innovations have been enabled to a certain extent by additive manufacturing. But I have one other here that you've seen in the innovation room as well that I'd like to highlight for you, and that is this flow control device. Now our customer will take 4 to 5 manufacturing steps to make this device, cut off the top, cut off the bottom, grind out the flow channel in the top and the bottom and then join the 2 pieces together. And typically, they can only do this in steel or stainless steel. However, Kennametal can produce this entire device in just 1 step using additive, and not with all the functionality internally. And not only in steel, but we can do it also in tungsten carbide with corrosion resistance and superior wear resistance, which the customer highly values. We are the only ones to produce a solution like this to customers today. It's one of the reasons why a leader like GE Additive selected Kennametal to be its beta test partner for its fast printing technology. So together, we are producing a powerhouse of solutions to the market. And I have one other part here. And if I can go forward, and I need to be careful, there are a lot of sharp edges here. I'm going to hold up this. It's actually a part and I'm going to ask you to imagine that you are an engineer in a small job shop and you need to make this small aerospace part and you need to do it efficiently, but you don't have a lot of resources in your internal department to do it. For some of these customers, we essentially are their engineering department. So with our DCX platform that Sanjay talked about earlier, we were able to effectively collaborate with this customer and he or she can actually access our unique skills and capabilities for the solution. We receive a model of the part and then we utilize our product innovations to produce a proposal of a highly efficient tooling package solution. That customer can place the order of that solution at the click of a button. It is delivered along with everything that customer needs to know in order to make his or her part, along with the application knowledge to back it up. Extending our technology reach in this way is truly an example of transforming how everyday life is built. So I started my presentation today with a video where I told you that innovation is the lifeblood of Kennametal. It was true 85 years ago when we were first founded and is even more true today. Even if you only got to spend a few moments out there in our innovation room. You saw just how innovative our products are and experience, the broad reach our applications and solutions are having across markets and various applications. As I stand here today, I can tell you with confidence that we are market-leading innovators. We imagine, create, manufacture products and solutions that others simply cannot. And by doing that, we deliver extraordinary value for our customers, which in turn delivers value for our shareholders. My team and I are focused on this all day and every day. And I'm so proud that I got a chance to share all of this with you here today. So with that, like to thank you for your time, and I'd like to welcome to the stage now, our CFO, Pat Watson.

Thanks, Carlonda, we started out planning for this event about 6 months ago. And when we sat down, we crafted an agenda of the day's events and the comms team went through it and they said, first, we're going to have a really great video and Chris is going to take the stage. By the way, what they call this video, sizzle. So we're going to have a sizzle and then Chris. And then we'll have some more sizzle and Sanjay, and you get it and it goes all the way through. And we get to me. And I said, what do I get? And they're like, you don't get any sizzle. You don't need any sizzle. And they're right. I didn't because Carlonda brought the sizzle. What a fantastic amount of innovation that our technology team brings to bear every day for our customers. So good morning, everyone. I'm Pat Watson. I'm the CFO of Kennametal. I've been in this role for just about a year now, I've been with Kennametal though for 19 years in total. So I'm new to the executive leadership team, but I'm certainly not new to Kennametal. I came to Kennametal right out of MBA school, I joined a company that had fantastic technology, great application know-how. Some things don't change. Being around 19 years on the executive team that sometimes makes me the historian in the group. I've had a great pleasure over the number of years as serving as the company's Corporate Controller and a finance leader for both metal cutting and our EMEA business. You heard from the team today, about the strategic pillars we have in place and how they're really foundational to our long-term success and our ability to generate above-market growth and margin expansion. Over the last few years, we made a lot of progress on simplification modernization. We took $200 million of cost out of the business. We closed 6 facilities. Today, our facilities are safer. They are more efficient, and they are better equipped than ever before to provide consistent, innovative products to our customers. This is the foundation. You heard the team talk about building on. We're building with innovation, the ability to bring products to market faster that we can now make in our modernized facilities. You heard about commercial excellence, our ability to take market share through targeted growth initiatives and improve product consistency and more innovative products. You heard about the share gains that we had in aerospace and really critically, the share gains we've had in Aerospace, we believe we can replicate across the other opportunities you've heard us talk about today. And now with operational excellence, we're going to continue the good work that we started with simplification modernization. Together, these strategies, they will help us grow faster than the market and expand margins. Before I introduce our long-term financial targets, I want to take a moment and just reaffirm our outlook for FY '24 with sales of $2.1 billion to $2.2 billion and EPS of $1.75 to $2.15. These targets are, of course, embedded in our long-term outlook. So let's take a look at our long-term revenue target. Using 2023 as our starting point. We believe we have line of sight into compound annual sales growth of 4% to 6%. We believe that this sales growth rate is achievable and reasonable given the conditions and mega trends that are in our end markets. Together, the mega trends in our end markets, the pricing for the value of our products and innovation bring, we believe that will account for about 2/3 of that sales growth. In the past, our sales performance was highly dependent on end market conditions. And the reality is today, we remain exposed to cyclical end markets. However, under Franklin, Sanjay's leadership, we've been building the capability to take market share. With the addition of these 2 gentlemen to the management team, we have 2 leaders focused on building and executing the necessary commercial and management processes to drive market share gains. Sanjay, Sanjay shared some of the proof points with you that we have on metal cutting. Now let's recap some of the opportunities we have to grow faster than the market. First, EV, we've staked out a winning position in the emerging EV marketplace using innovation and our application know-how like with a KENionic tool. Now if you haven't taken a look at that tool when you're here in person, I invite you after our presentation. Go look at the tool, talk to the product specialists. They will tell you about the value that, that type of innovation brings to our customers. Sanjay spoke to you about medical. The medical market is a natural extension of the things we're already good at in metal cutting, similar material systems, customers who value precision in a market that's backed up by solid megatrends and is noncyclical. You heard from Chris and Sanjay on how we have taken share in Aerospace and how we're going to continue to do so. Franklin. Franklin spoke to you about the opportunities we have in ceramic wear parts, and Carlonda spoke about the opportunities we have across a broader portfolio of ceramic applications. Ultimately, with revenue potential that's above and beyond the financial targets we're talking about here today. Franklin also spoke to you about what we're going to be doing in defense. Bringing capabilities we have in Europe to the U.S. Department of Defense market. One of the things that's different and one of the things that gives me a lot of confidence in our ability to achieve these results is our cultural transformation. Starting in 2019, under the direction of the executive leadership team, we began a cultural transformation of this company focused on improving accountability and entrepreneurship. We call this cultural transformation the Kennametal way, where every day, we challenge ourselves to put the customer first, to be bold and make decisions of speed and to own it by driving the execution of our strategies. This culture of accountability, it doesn't just help drive market share. It also creates a culture that values continuous improvement across the entire organization. And we have a clear path to expand margin by executing targeted initiatives across the business. Let me provide you a few recent examples. In Infrastructure's Mistelgau, Germany facility, in one of their manufacturing processes, we used value stream mapping to reduce cycle time by -- [indiscernible] cycle time 2x, while also decreasing inventory requirements. At our Solon, Ohio facility, we went from having 171 steel blanks to 5. And in doing so, we reduced the cycle time of the manufacturing process. Enterprise-wide, we've deployed better S&OP planning tools, which are allowing us to reduce lead times, lower inventory, both enhancing our customer service and improving our cash flow. Beyond these initiatives, to improve operational performance, we have our capacity optimization 2.0 program, which will enable us to lower structural costs. Building on modernization. Over the next 4 years, we plan to achieve $100 million of cost takeout. The restructuring program we announced in June, that's a down payment on that $100 million. We will reduce costs in this business by optimizing our inventory levels, improving customer service, while we lower costs through continuous improvement projects and lowering the cost of tungsten by improving our ability to recycle and improving yields in our tungsten processes together, saving about 1% of cost of sales per year. We're going to continue to invest in our factories, deploying automation where it makes sense in smart factory and further reducing structural costs by closing 3 to 5 plants. Together, our sales growth and our cost reduction initiatives will increase cycle peak adjusted EBITDA margins to 20% to 23%. This is EBITDA margin, which placed us in the top quartile of industrial companies. And importantly, above our record EBITDA margin, which we achieved in FY '19 on about 15% more volume and before 190 basis points of dilution -- dilutive effects in margin from unfavorable foreign exchange, lower pension income and higher inflation. The improvements in sales, pricing, mix and our operational excellence initiatives will partially be offset by inflation, of course. Although our profitability model assumes that inflation continues to moderate and returns to pre-pandemic levels. Improving profitability will also drive cash flow. In FY '23, we demonstrated the ability of this business to generate strong free operating cash flow, generating the best free operating cash flow we've had since 2015 at $169 million or 130% of adjusted net income. Going forward, we're going to continue to emphasize generating cash flow in excess of 100% of adjusted net income. To support this, execution of our inventory optimization program will enable us to drive primary working capital as a percent of sales below 30% by 2027. We expect to generate ample cash to support reinvesting in the business and returning cash to shareholders. And with a balanced capital allocation program designed to maximize shareholder value, we're going to continue to fund organic growth and the reinvestment that's required in the business. Our disciplined approach to capital deployment will result in higher ROIC. Over the course of the period to '27, we anticipate generating $1.4 billion to $1.6 billion of cash from operations, and that is net of approximately $100 million, the fund restructuring initiatives. From these funds, we'll deploy about $400 million to $480 million back into the business in the form of capital investment to support organic growth, cost-out programs and replace aged equipment. That will leave us about $1 billion to $1.2 billion to return to shareholders through our consistent dividend program, through our share repurchase program as well as to pursue M&A. Now we haven't done M&A in a number of years, but it has been an area of increasing focus for us the last few. Starting a few years ago and leveraging the experience of new leaders like Sanjay, we began rebuilding our corporate development capabilities in both, businesses and their respective pipelines. When we're looking at acquisitions, we're going to be looking at acquisitions that improve access to markets, give us products into the portfolio that we find useful and would add something to us. We'll be looking at things that are right in the core and near adjacencies. Importantly, these targets will be margin accretive, have attractive organizational cultures and offer us the potential to realize significant synergies. The management team is committed to delivering strong results for all stakeholders. And we believe we have a clear path forward to delivering 4% to 6% annual growth, compounded from 1% to 2% market, 1% to 2% share gain and pricing of approximately 2% per year as we expect inflation to continue to moderate. With this growth target and $100 million of cost savings initiatives, we can achieve cycle peak adjusted EBITDA margins of 20% to 23%, above our prior record EBITDA of 19.6%, we achieved in FY '19 and top quartile performance for an industrial business. This implies operating leverage over the course of the cycle of about 40%. We're also going to grow adjusted EPS at a compounded annual growth rate of 20% to 25% and improve our capital efficiency, delivering free operating cash flow in excess of 100% of net income and improving ROIC to 12% to 14%, a substantial improvement over where we ended FY '23. Kennametal is a company founded on a material science breakthrough. Today, our material science expertise and know-how, coupled with deep customer insights and our ability to serve customers with innovative products, this innovation advantage, it forms and customer intimacy, it forms the core of our enduring competitive advantages in the market. Over the past few years, a lot has changed. We've dramatically increased our ability to compete. With modernization, our operations are safer. They are more efficient, and they are better equipped than ever before to deliver innovative, consistent products to our customers. We've built the ability to grow faster than the market, tapping into favorable megatrends and [ targeting ] markets and applications, we know how to serve. We've changed our culture, improving accountability and entrepreneurship. And we're going to continue the modernization journey with operational excellence. We've got the right strategies. We've got the ability to execute them. We will set out and achieve the targets we've given here today. And in doing so, we're going to grow faster than the market. We're going to expand the profitability of this business, and we're going to return cash to shareholders, offering the opportunity for significant value creation. And with that, I'd like the team to come on stage, so we can answer your questions.

[Operator Instructions] So our first question. You've laid out a promising strategy. You've made some fair points regarding modernization. What's different this time compared to the last Investor Day? And what gives you the confidence in delivering this plan?

Yes. That's a good question, Mike. I think there are several things that are certainly different about the company, one of which is the simplification of modernization. As I said, we were effectively, prior to that program, playing defense and just trying to hold on the share. And as you've heard today, the enablement of innovation through that modernization process, we're now very much on offense to take share. I think the other significant change is -- Carlonda talked about it. Prior to simplification/modernization, we were doing incremental R&D on existing platforms. Now we have an approach that's customer-led. These are product platforms that are high value added, and they're transformative type of products that you've seen in the innovation room. So that alone, in the last few years, I've seen more new product launches than I had in my prior 3 or 4 years. And in this business, it takes a while for those new products to get traction. So in my mind, that opportunity for growth on these new product platforms is still very much ahead of us. And then the other thing that I think is significant, and Pat touched on it, and I did in my opening comments, is we've been working on transforming the Kennametal culture to a culture of accountability. And that really means delivering always on our customer commitments. And then when we make commitments to our other stakeholders like we've done today, we are absolutely focused and fully engaged in delivering those commitments to our stakeholders. So I think those are three very significant differences from prior, Mike.

Great. Thank you. Just a follow-up on simplification and modernization. It's a question here regarding our facilities, and we expect to target to close 3 to 5 of them as part of the $100 million reduction, does that get the footprint where you want it? Or is that the right number of plants based on your revenue?

Yes. We're teeing this up as, I would say, capacity optimization 2.0. So the first phase of modernization was the 6 plants that Pat said we reduced. In this version here, we've got another 3 to 5 opportunities. But the way manufacturing works and this mentality around continuous improvement, we'll continue to always look to optimize that footprint. But that's the sort of the next phase of the journey, I would say, Mike.

Great. We've got a question here for Sanjay. And this one is regarding lean. And the question is: How do you view where the metal cutting team is in relation to its progression for lean? And how much more opportunities do you see down the line for that?

I think we are definitely seeing a lot more opportunities going forward, but we have built a good foundation, and we have implemented many of the lean tools. But I think on a high level, I definitely would say that we have a lot of opportunities. And what Pat spoke about the operational excellence numbers, we have built those in our model. So it's within our reach to deliver that. We've been doing lean for many years, but I think we can take it on next level.

Great. So given the mega trends, especially for infrastructure spending and the technology innovations that your infrastructure growth CAGR seems to be relatively modest, are there growth headwinds that offset some of these opportunities?

Yes. I don't think they're -- I wouldn't call them growth headwinds. I mean we gave the our outlook, largely based on also the consultance of third parties in terms of what the markets are going to do. And then we layer on our share gain initiatives on top of that. So there's no headwinds that are working against us, I would say, Mike.

Great. So we have a question for Franklin. What is the path to improving margins in the Infrastructure segment?

Well, that's a good question. So I think many of us, I know I do, have in our minds our fiscal year '23. And let me just provide a little bit of context. In fiscal '23, we made the decision to adjust inventories for two reasons. One, because our supply chain improved. And second, because our customers also started to manage inventories as supply chains improved. And that created an absorption impact in our financials. Now excluding that, our margins in infrastructure are typically linked or affected by two cycles. Our end market cycle, some of our end market cycle, as you know, like Oil and Gas, and our material cycle. Our material cycle is primarily tungsten. So we're exposed to those two cycles, but the most important thing is what we're doing about it. What we're doing about it, as I mentioned in my presentation, is diversifying into markets that are margin accretive. And in some cases, that cycle at a different rate than our curing business. And the second thing we're doing is running our plants more efficiently to make sure we improve margin. Pat shared, we're incorporating recycling to make sure that we also not only meet our ESG target but also improve that cost of our products. And we are reducing our production cycle, so that we can take material out of the system, and therefore, in total, also reduce our exposure to the raw material cycles. We live by the combination of these two elements, again the growth in higher-margin applications, reduction of costs and reduction of inventory, we make progress towards improving the margins of the segment.

Great. We have an interesting question here. It's two part, and there are kind of two unrelated parts, but it's one question for somebody I want to make sure I get it addressed. So first one relates to the understanding the basis for the 2% price increase and/or the inflation assumptions around that. And how is price tracked over the last 10 years? And then the second part is more related to additive. And it's -- you have a lot of exciting new products there? And what type of headwind are you assuming for the growth from additive?

You want to take the...

Yes. So from a pricing perspective, we'll talk about what our pricing outlook here is about 2%, that pricing outlook is really based on where our inflation expectations are at. And we basically what you can find in the treasury yield curve as of a couple of weeks ago. And so that's pretty tied into market expectations right now. I think if we looked at pricing over a longer period of time, outside of a couple of moments and seasons when there's been significant raw material price headwinds, which obviously would inflate the price realization, I think that historical rate over a longer period of time would be pretty close.

I think you want me to take the additive and headwinds. I think the way you look at additive is the way we look at it is a unique tool to be able to address solutions that are required both, in metal cutting and in infrastructure, in providing unique ways of solving problems. And so if you combine that with our material science expertise, our application expertise and our design expertise, we can produce a solution that's required using additive. If we don't need to use additive, we'll use other solutions. And that's what's the power of having our additive capability is, is that we are able to draw from our complete toolbox of options to solve problems in the most efficient way with the highest performance.

Mike, if I can just add, I think with respect to the market headwinds, this is the right time to really differentiate our performance through solutions like that. I think so that's really the way we go about that.

So we have a question here that's kind of looking to address the strategic pillars, and says: When comparing the impact from innovation versus commercial excellence versus operational excellence, how concurrent are the benefits and the impact? And is there any one of these that you would expect to achieve sooner rather than later?

I think as I mentioned on innovation that we've been working on that in a few years, we've made the shift from the sort of incrementalism to these product platforms. And so I think that revenue stream that is going to be advantaged by that, that's still to come. That's still largely ahead of us. Commercial excellence. As I said, it took us a few years to get to a point where I felt like we had a systematic process and set of tools that we could actually go in to a targeted area and drive share gain in a systemic way and also measure ourselves on it. And so I think we're pretty far down the road, but I think the benefits of that are still largely ahead of us. Operational excellence. That really created an environment where we could do these new product innovations and launch that. But clearly, we got another $100 million of potential cost savings. So there's still more opportunity there to continuously improve.

Great. Thank you. We have a question here for you, Pat. Maybe you referenced the new operating leverage number in the mid-40s. What gives you the confidence of achieving that?

Yes. I think if we look back at some time outside of periods of time where we've had a significant amount of inflation or raw material costs going in or out of the business, we've been able to achieve operating leverage in that mid-40s range. And I think one of the things that's different for us here as we kind of go forward, with our inventory optimization program, we will be looking to burn off inventory and set production over the long term here at slightly less than what would be our sales rate.

Great. So given the fact that 2/3 of your growth target is coming from outgrowth initiatives, does this require more bolt-on M&A or SG&A to help support the outgrowth initiative?

Yes. The 2/3, as Pat said, is the market and the pricing and 1/3 is our growth initiatives. But those growth initiatives were inorganic growth -- or excuse me, organic growth initiatives. So anything inorganic would be to accelerate that and achieve levels higher than that.

Okay. So now we have a question again for you, Carlonda, and this one is focused around ceramics. And the question is, can you provide any additional commentary regarding the renewed focus on ceramics?

Yes. So as you heard Franklin talk about in his business, the opportunity in ceramics. And we have capability, technology, also processing capabilities, a wider range that we bring to bear for both of our businesses. And so what we see is an opportunity for application development of current materials to expand our application spaces primarily on the infrastructure side. And we see those as nearer-term opportunities. But as you look at our ceramics technology and our processing capabilities, there's also opportunity for materials development and process development, a little longer cycle. And we see these opportunities really align with the mega -- the global mega trends. So that growth is a little bit further out. And so we have some time, and we're looking at where we can apply our technology to best fit that in the future. And so we see both, near- and long-term growth opportunities, with our ceramic capabilities.

Great. Thank you. Your presentation this morning really resonated. Another question for you. You launched 24 new products in 2023. How does that look in '24 and '25? Any context would be helpful.

Okay. Yes. So we have a full pipeline of new product launches in play. We have a plan in place. And sometimes we might be a little lower, sometimes we might be a little higher or whatever in terms of our averages. But what we look at is the number of products that we really need to get out to the market to help fuel our growth. And so we have targets to do that, and we typically are pretty successful at achieving that with our process that we have in place.

Great. So the macro data in Europe and China, which are big markets for Kennametal, has been soft in recent months. Do you have any context or commentary on how you see that market -- those markets evolving as the year progresses?

Yes. It's -- I would say we would -- if we looked back to our last earnings call that we had in early August, as far as China is concerned, baked into our forecast for fiscal year '24, was an assumption that things are things are recovering slowly. And we said that one of the things that might take us to the high end of our guidance is if that recovery accelerates. So we still see that way. And Germany, I think we see that through the first half of our fiscal year, so for the rest of this calendar year, we'll probably stay at [ above ] the lower levels that we saw, and then we see maybe an improvement in the second half, Mike, is what we had commented on in our last earnings call.

Okay. Great. We have a question here regarding the $100 million savings, and it really is more along the lines of: Can you provide any context or color on where those cost savings may come from?

Yes. I mean there's some -- there was a breakdown that Pat tried to provide. It's got $100 million, $20 million of which was this restructuring of the couple of hundred salary personnel that we've sort of rebalanced our workforce to make sure that we're prioritizing those resources in the growth areas. You've got the 1% of sales, Pat, would equal about what?

About $45 million, yes.

$45 million. So the rest would be the amount that's associated with the restructuring of the plants.

Okay. Great. We have a question here. It looks like it's based on modeling, not our modeling, but external modeling. And it says it appears the Street has really mismodeled the EPS growth trajectory here versus your new guidance today. Can you provide any context on why that might be?

I guess the best context I give is we've not really given a long-term outlook in a number of years. And this is at this point in time where we think where we're at. We're excited about what potential we have, both from a cost takeout perspective and revenue generation on market share capture. And we're really committed to hitting the targets we put out here today.

Okay. Great. This is a strategy-related question. You've listed a large number of customers and products, but many industrial companies have been focusing more on fewer larger customers, 80-20 on product and customers. Do you have too many customers and products?

Yes, I think -- I don't think we have too many customers. And in fact, what we have is a solution set of products that it seems like it's quite large. But if you remember, we went through a simplification phase, and we reduced a number of SKUs and sort of got ourselves down to a portfolio of products that we think is manageable and that we can continuously improve and innovate on. But we've got the solution set of products that just happen to be applicable to many industries and different kinds of businesses. And I think the way we've organized ourselves to go at and target these customers in an organized fashion. Sanjay mentioned that part of that commercial excellence process is to know what to work on. And I can tell you, when he first came into the company, we were down the path of aerospace, but it took his team a while to figure out, hey, what is this, what's the next thing around [ tackle? ] Is it going to be the small customers and general engineering? Is it going to be medical? And so we take the time and have a disciplined process around staying focused on those. So I can see how you could -- it could seem like we've got too many things going on, but because of that disciplined process, I think we can focus in and achieve the targets that we've talked about here today.

Okay. Great. We have a question here for you, Sanjay. What are you -- what's your target in terms of organic growth in transportation over the next few years? And how will you go about achieving that?

Thank you, Mike. So as I mentioned earlier, the market, we expected at 0.1%, so roughly, let's say 0% to 1%. But through our innovative products, price premium and also share gain initiatives, we are expecting somewhere with low to mid-single-digit organic growth in transportation.

Okay. So Chris, we have a question for you. Can you provide any comments or additional color on the current market conditions by end market?

Yes. It's similar to what we've already said in our last earnings call. And generally, what that was, was that we were expecting to -- we left the fourth quarter seeing some softness in a number of our end markets and regions. And we kind of expected that to continue through the first half of our fiscal year. And then we start to see an improvement in the second half. So that really hasn't changed, Mike.

Okay. So there's a cost question or an SG&A question. It's been in the low 20 range since FY '18, and that was a target of simplification and modernization. Is there more room for SG&A leverage? Or should we assume that it is well optimized [indiscernible] is to come from gross margin expansion?

Yes. The -- there's going to be -- inside the deck will be a modeling sheet. And one of the issues that's addressed in there is that we do expect that the OpEx can go below 20%. That's one of our assumptions going forward.

Yes. There for other modeling related questions in the appendix, you'll find a set of assumptions that drive the financials that you see at a higher level throughout the presentation. Okay. So Pat, you referenced the new operating leverage in the mid-40s. Why did that question come back? Never mind, ignore that. How confident are you on the acceleration of growth in the second half of '24?

This is a new question.

Sorry, new question.

Yes. I think the way to think about that is no one knows for sure what's going to happen. But we put our best estimate out there that's part of our guidance. And of course, we give a range to sort of factor in the possibility that it might not be as good as we think might regrow or recovers fast. So that's part of what drives the range. But the thing that we are absolutely certain about and could focus on are the things that we can control, right? So embedded in any forecast are these, what we call growth initiatives. And what amount of growth are we going to achieve above the market, and that we can control. So we feel quite good about that and also the actions to improve can take costs out of the business. So while the market is something we can't control, we are very much focused on the things that we can and we try to reflect that all in the range that we've given for fiscal year '24.

Great. We have a question for you, Franklin. Why does vertical integration in defense give you a competitive advantage?

Thank you, Mike. Well, a couple of things. As we discussed in the megatrends, the geopolitical instability is driving different decisions by many ministers of defense to have more control of their materials. In the case of the U.S., for example, the U.S. has determined that tungsten is a critical mineral, which means there is a need to establish a more robust supply chain. And the Department of Defense has clearly said they want to buy American. So in Kennametal, being the largest U.S.-owned producer of tungsten, that is very [indiscernible]. This is a great opportunity for us, because what the U.S. wants is exactly what we're doing. So that's where we see the main opportunity.

Great. We have an inventory optimization question. And there was a lot of color on optimizing inventories. How comfortable is Kennametal with its inventory position today and how about in the distribution and customer channel?

I only heard -- I didn't hear all of that, Mike. Can you give again?

Sure. So we'll take it in two parts. I need to come back up. So the first part of the question was: Inventory reductions at our levels, now are we comfortable with our levels and then how do we see that level maybe at the distributor and the channel impact?

We have an opportunity from an operational excellence standpoint to drive our inventories down. So right now, they're at the right level given what our processes are capable of. And we think that they're going to put us in a position that as there's a potential recovery in the second half of the year, we'll be -- we'll have the benefit from that. But longer term, we think we can drive the current inventory levels below and still provide the same level of customer service. So that's our objective is to drive those inventories below the 30%. And then in terms of the channels, what's basically been happening in the channels is customers have been very careful about the inventory they add. And so if you happen to be supporting, for example, an aerospace business, they're probably holding more inventory because that -- the market conditions are a little more certain, and things are expected to continue to grow. Otherwise, people are still being cautious about how much inventory they're allowing into the channel. We've certainly seen that in Kennametal side, and Franklin is experiencing it very much so on the Oil and Gas companies, where they have significantly reduced their inventory, because they were holding a lot of extra inventory due to the supply chain issues. And as those issues were alleviated, they no longer need the inventory, and we, of course, had to make some significant adjustments that he talked about at the start of the questions.

Great. So we have a question here regarding the Capacity 2.0. And in the past, you stated there was no need for a simplification or Capacity 2.0 type of exercise. What has changed?

Yes, I don't recall ever saying that. So my philosophy is that you have a set of operations, you look at the footprint, you look at your options to drive more cost and more margin expansion. And then also, you have to balance that you're also trying to, at the end of the day, serve as the customer. If we can't sell this stuff, it doesn't matter what the footprint looks like. So we have to keep in mind that we have a certain amount of customer service. Now these plant closures and those type of programs are very disruptive, and they require a lot of management attention and resources. So it's natural to do this in phases. So what we heard with simplification modernization was phase -- was sort of a Phase 1. Capacity optimization 2.0 is the next sort of logical set of steps. But as we said in the previous question, it doesn't mean that that's over at that point. You have to then assess where you are at the end of that process.

Great. So this is a question around the innovation road map. And it goes: Does the innovation road map cover future materials outside of tungsten and stellite powders? And can you share at what material or composite materials you're looking at?

So if you notice, our roadmap has really a pyramid, if you will, of areas that we look at; advanced materials, advanced process technology and then new product roadmaps. And new product roadmaps are -- tend to be those products that we're thinking to launch within this current cycle. But there, within the other areas of advanced materials and advanced process technologies, those go beyond that. And those really look at not only the near-term technologies that we need for product launches but longer term. And I think we talked a little bit about ceramics as one example of that.

Great. So does the mega trend of onshoring or near-shoring provide competitive advantage over the overseas players, especially when the company is adopting customer-driven innovation? Is it better to have production closer to home?

I think the question is -- first of all, as I said in my opening comments, the reshoring, if you will, or the production of new facilities by our customers derisk their supply chain. They have to tool up these new facilities. And it's true that many of these facilities are moving to the U.S. or to -- frankly, outside of China as an example. And we have a better opportunity to win business because of our strong position really anywhere in the world, Mike, it doesn't really matter. But in China, we also have a good position. So whether the factories were originally in China and moving to the U.S., we should be able to have a leg up in terms of getting more business, because we're positioned in the U.S. very well. But frankly, we have the coverage to, regardless of where these facilities are located, to take advantage from that.

Great. So we have a secular tooling demand question. And the percentage around headwinds like the ICE to EV transition. Are there categories of secular tooling demand expansion other than hybrid cars? Other than hybrid vehicles, are there other secular trends that you see as an opportunity for further expansion within tooling?

Okay. I'm not sure the intent of the question. If the question is intending towards like hydrogen fuel or some of the other fuel, there will be several components.

I think they're looking for more -- okay, so you have a trend that's shifting from ICE to EV. Is there are other trends out there that provide an opportunity other than hybrid to take advantage of tooling capabilities outside of maybe what we're currently doing?

Okay. Yes, I don't know if I have anything new to add to what I already talked about it. So I'll just recap that we are launching -- have launched several solutions, really help our customer in the hybrid and electric vehicle. At the same time, we are also improving our technology for internal combustion engine, which is not going to go away anytime soon. So our overall strategy here is to make sure that we will deliver above-market growth in transportation. And we're staying very close to our customers. As things evolve, we'll continue to come up with new solutions.

Okay. We've had several questions on EBITDA margin, as you would imagine. So I'm going to kind of summarize them all together here, really kind of focusing on what's the main difference between the 20% to 23% margin targets now versus the prior targets?

Yes. So I think when we think about the targets we're putting together now, a couple of things about those targets. Number one, we look at the -- what's funded from that from a growth perspective. Obviously, we're going to get some leverage off of what's coming on from a mega trend perspective. We're going to have our share capture initiatives as well and the demonstrated ability we have really to take market share. I think our confidence in hitting the sales number and driving the volume here is really important in terms of our ability to generate the EBITDA. Likewise, I think historically, we've demonstrated the ability to take costs out of the business as well. And so with our optimization programs and operational excellence going after $100 million, that's a sizable chunk in terms of what the overall margin expansion has been. And what I'm also just going to point out is when we peaked the last time before we hit COVID and some of this inflation, we were just under 20% at that point in time as well. And so coming in at 19.6%, at the bottom end of our range is the 20% to 23%. And we have a lot of confidence in our ability to get into that range.

Great. So there's a question here around labor, and it's focused on the importance of it to execute our strategic plan and that we have a highly skilled workforce. But we referenced customers relying on our engineering expertise due to retirements at the customer level. How are you ensuring that Kennametal has deep and well-trained sales team and any challenges related to that?

Yes. We have several programs inside the company where we cultivate new engineers and people that are early in their careers to come into the company, and that's a very proactive process. It's very much focused on the technical skills to be able to sell this product as well as to be able to someday work in the technology organization. So this is an ongoing process. It's very active, and we've been very successful in bringing in new talent to make sure that we got a good pipeline to backfill any potential retirements. The other thing that we take advantage of is that a lot of our retirees, they want to retire, but they also want to keep consulting or stay engaged. And so we have programs by which they can become mentors and train some of the newer engineers and stay in connection to them. So we feel pretty good about our ability to maintain that pipeline.

Great. No Q&A would be complete without the potential upside, downside to your model question.

Yes. So look, if we think about what's the upside and downside, as Chris talked about, the end market growth numbers that we put together as best as can tied us some external indicators. Obviously, that's a variable for us, right, in terms of what's actually going to happen over the next couple of years from an end market perspective. But very critically, we believe they're tied to fundamental mega trends that are going on in our end markets. So regardless of what happens in the short term from a cyclical perspective, that potential is there, right, over the long term. We feel very much the things like market share gains. Our operational excellence, that those things are very much inside of our control.

There's a question regarding the medical market. Looking at the medical market as a large growth opportunity, what investments will need to be made to expand into that market? And are you looking to acquire a player in that segment to gain share?

Go ahead, Sanjay.

Yes. So definitely, we have built in our model, the technical expertise, application support, product development. We have roadmaps. So some of those things are already in the model. We do expect to make those investments. Along with that, inorganic investments, as I talked, we'll definitely pursue that. Of course, we have a pipeline, but it has to also fit what you heard from Chris and Pat that it has to be overall good for all our stakeholders. We're not going to make anything just blindly, just because we want to grow. So we have both paths to take, organic and also inorganic.

[Operator Instructions] We have a few more here. So how much is ceramics part of your costs today? And where do you see that going? How will it affect your supply chain process and your margins?

As part of our cost today? Yes. Well, I think maybe to put it in perspective, we said it was about a $90 million business. So the material cost portion of that is still relatively small compared to everything else we buy. But I'm not sure it's going to really necessarily change our supply chain. We have a -- we -- part of simplification modernization was actually to top-grade that supply chain organization, so that we could really drive continuous improvement and take cost out of whatever the material we were sourcing. And so ceramics is something that we have experience buying. And so the fact that we're going to grow in that area, I think we've already got the sort of supply chain structure there and talent to do a good job with that.

Okay. Great. We have a DCX-related question. With DCX, can you discuss the possible channel conflict and your -- with your existing distributor network and what kind of impact has it had at the enterprise level?

Yes. Thank you. So DCX, as I spoke earlier, has multiple different aspects to it. The first one, where we're really making it easier for all our customers and channel partners to access wide product information and tooling packages and things like that. So that's not going to create any channel conflict, because it's good for everybody. When you go to the second piece of DCX, which is demand generation, there also, we are working to reach out to more customers. And as we get the questions and demand generation leads, we are working with our channel partners together to fulfill that. So that also doesn't create any conflict with our channel. Now the third option of DCX is e-commerce. In the case of e-commerce, if there are customers who only will buy online, they get all the options. They can buy through our channel partners, e-commerce side. But our main focus is what I spoke to in the #1 and #2 bucket. And I think what we will do overall is to make the pie bigger for our channel partners and us, both and take care of our customer needs. That's the main focus of DCX.

Great. There was a question from the audience around the competitor chart for metal cutting, and that there was one major competitor not showing. I just want to ground everybody in the context for that slide. What we were doing there was trying to compare ourselves to companies that have publicly available data. We understand there's other players in the space that we don't have access to their data. So that comparison is strictly driven by companies that you can go out and benchmark and measure yourself. We have a question for additive, again, for you, Carlonda. Some people view it as a threat to subtractive manufacturing. You've talked about some products here and created some applications for that. What is your overall view on that?

Yes. We don't see additive manufacturing replacing many of the applications that we serve from a tooling perspective or even an infrastructure component perspective. You utilize additive manufacturing for flexibility and design. You utilize additive manufacturing for perhaps a reduction of lead time or for prototyping. And so if you take a look at the type of applications that we have, particularly in metal cutting, perhaps it does require some unique -- those applications themselves don't require additive manufacturing, but perhaps they require unique solutions to do the tooling to get to that part that you're trying to get to. And that's where we have strengthen in that design, also in the materials development. So we see it as a valuable tool our toolbox to pull from if we need to give a solution for either a unique component design or a unique tool design for whatever part or component that we are servicing for our customers.

Great. So we have a portfolio SKU-type question. Can you describe how you keep track of 70,000 SKUs in order to determine which areas you can launch new products. What does your internal database look like as it just seems like a large task?

Yes. I'll let you add to this, Sanjay, if you want. But when I came into the company, the big part of the simplification program was to reduce the number of SKUs. And if you think about what Carlonda said, prior to simplification modernization, the R&D process was actually generating incremental product improvements. That I always use the example, if it's -- if you're making solo cups, you had a red solo cup, and then you'd make one that's blue, which is a whole another SKU, but no one's going to pay any more money for the two solo cups, right? And so we had a lot of that was perpetuated over a number of years. So the first phase of sort of simplification was to clean all that out, reduced powder formulations. Pat just used a modern example of -- a recent example of [ insulation, ] where we had all these steel blanks that we now reduced it down to five. So we've done a lot of that work to simplify the product. And the number sounds a little overwhelming. We think of 70,000 SKUs. It seems like that's a big number. But you got to recognize that we're not -- a lot of these tools have applicability across a wide range of applications and industries and customers. We're not focused on 80,000 SKUs. We're focused on this type of customer, this type of customer, this type of customer, and we provide the product portfolio that we think we need to go to market and be successful. Anything you'd like to add to that, Sanjay?

Yes. I just would like to add that we do have a process for product life cycle management, where we're looking at what needs to come out. But importantly, we also have a process what comes in. So the new product process led by business is based on customer needs. We're not launching something just for the sake of coming up with a new product. So managing both ends of that will continue to help us continue on the journey that Chris talked about.

So we have a question about the cadence for the 4% to 6% growth. And how should we think about that cadence over the next 4 years, given this year's guidance is below that at the midpoint? Does growth accelerate as we exit -- enter into 2027?

Yes. So obviously, when we think about FY '24 here, and Chris talked a little bit about our outlook already. We expect this first half of the year to be a little soft as end market conditions were soft in the fourth quarter and then for end market conditions to pick up. I think mathematically, we looked at the 4% to 6% that obviously implies that we'll get a little bit more growth after we get out of FY '24. And again, I go back to, as we think about the buildup of that 4% to 6%, we've got a 2% pricing assumption that's in there and then 1% to 2% for market and 1% to 2% from share gain as well. That market of 1% to 2% really tied into what's going on from a mega trend perspective, in our end markets. So while there may be some to-ing and fro-ing a cyclical business, we're really confident about what the end markets have for us over the long term.

Great. We have a two-parter here, somewhat unrelated. But both of the topics we discussed this morning. So it's about DCX and additive. And they usually take years to come to fruition. Can you share how long you've been on this path as being able to highlight them today? And when do you think they will be a mature part of your company and your business?

You're asking me or you want to -- Yes. So it's been a couple of years, and we always focus our opportunity on -- the opportunities that we have in place. And so we work, as you saw on a variety of different advanced technologies and for the future and additive has been one of those over the last couple of years. And certainly now, we have a really good foundation of capability, not only in design but also in materials as well as the actual manufacturing piece as well.

Great Sanjay, you want to add?

On the DCX, we have been on this for a few years. But like I said earlier, as we launch new product, new features and all of those things have to be updated in the online world. So it will be an ongoing process. Along with that, we are building new tools, new simulation packages and all that, so that will be ongoing. So just like when you look at the physical assets, same way is for the web tools will require ongoing improvements. That will be part of our package. In parallel, we'll continue to look at evolving needs of our customers and make sure we launch new products in the DCX's space.

I think also, if I might add, Sanjay, when Carlonda talked about the collaboration space as a vehicle to reach some of these small customers. Imagine you are an engineer sitting there. You're the industrial engineering department, right? And that collaboration space is still in the early stages. So this -- our ability to connect with these smaller customers through that, I think that benefit is still very much ahead of us.

Great. Well, that concludes the Q&A portion of today's event. Thank you for your questions today. After Chris' closing remarks, there's going to be a brief survey that pops up on your screen. We ask for you to provide us your feedback. We'd really appreciate it. For participants in the room, there's also a paper copy that you can complete as well.

Okay. Thanks, everyone, for the great questions and attending today. I just want to take a minute to close out, but I want the full team up here. So Judy, our Chief Administrative Officer and Michelle Keating, our General Counsel, please come up on stage. So in closing today, let me just say on behalf of the whole team that we've never been more excited about the opportunity ahead of us with Kennametal. And collectively, we're all committed 100% to achieving the targets that we've talked about today. As you heard from the team, a lot has changed with Kennametal. Pat talked about the culture change and driving to a culture of accountability, where we're really very much focused on delivering on our customer commitments and then also delivering on our commitments to our shareholders via making the targets that we just talked about today. Carlonda shared the shift from this incremental product innovation to now a process where we're launching new platforms, customer-led that are high value-added products. And the benefits and the revenue generation capability of that change in R&D focus, I think, is still very much ahead of us. Sanjay and Franklin discussed the fundamentals of their growth strategy and the important role that commercial excellence and the share gain process and tools that we developed to focus on driving and taking share. These two business leaders, they came into the company, and they are not of a mind that is okay, where we're just going to continue to focus on the same customers. And that's going to put us in a position where all we're going to do is ride the cycle up and down. They're absolutely driving their teams and measuring their teams on the key to success and the way to win is to gain share, and that's what these guys are focused on. And our ability to take share, as I talked about, has been significantly enhanced with the modernization investment. Before, as I said, we were essentially playing defense and just trying not to lose share. We're now in a position for all the reasons we discussed today, that we're now taking the field as the offensive team to gain share. And all these changes, in my mind, equal a compelling investment decision that we share with you. The entire team is confident that we're going to be able to drive above-market growth. We're going to expand the margins of this business, and we're going to do that in the process, we're going to be generating a significant amount of free operating cash flow and great returns for our shareholders. So on behalf of all of Kennametal and this leadership team, thank you very much for attending, and we hope to see you soon, on another call, perhaps. Thank you very much.