Kennametal Inc. - Analyst/Investor Day

| About: Kennametal Inc. (KMT)

Kennametal Inc. (NYSE:KMT)

September 28, 2011 8:30 am ET


John R. Tucker - Chief Technical Officer, Vice President and President of Business Groups

Quynh McGuire - Director of Investor Relations

Frank P. Simpkins - Chief Financial Officer and Vice President

John H. Jacko - Chief Marketing Officer and Vice President

Carlos M. Cardoso - Chairman, Chief Executive Officer and President


Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

Clifford Ransom - Ransom Research

Michael Corelli - Barry Vogel & Associates

Henry Kirn - UBS Investment Bank, Research Division

Eli S. Lustgarten - Longbow Research LLC

Holden Lewis - BB&T Capital Markets, Research Division

Ann P. Duignan - JP Morgan Chase & Co, Research Division

David Rainey - Akre Capital Management

Unknown Analyst -

Quynh McGuire

So thank you for joining us, and welcome to everyone here. I'm Quynh McGuire. For those who don't know me, I'm the Director of Investor Relations. If there's a follow-up after this meeting, please give me a call. I'd be happy to go over any details that need clarification. And as part of Lean and be a Green Belt, I have my contact information on the last page of the presentation book.

And I'd like to introduce our speakers. Carlos Cardoso, who is our Chairman of the Board, President and Chief Executive Officer. John Jacko is our Vice President and Chief Marketing Officer. John Tucker is our Vice President and President of the Business Group; and Frank Simpkins, who is our Vice President and Chief Financial Officer.

In the audience, we also have additional members of our Executive Management Council. And I'm going to ask each of them to stand up as I say their name. We have Judy Bacchus, she's our Vice President and Chief Human Resources Officer; Kevin Nowe, who is our Vice President and Secretary and General Counsel; Phil Weihl, Vice President of Integrated Supply Chain and Logistics. Additional members from Kennametal are here as well, and please stand up. Marty Bailey, she's our Vice President of Finance and our Corporate Controller; Brian Kelly, Vice President, Corporate Tax and Assistant Treasurer; Larry Lanza, Vice President and Treasurer; Mark Olyarnik, Assistant Treasurer and Director of Treasury Services; Ben Stas, Vice President of Finance Business Groups. We also have Cathy Nomen, [ph] Barbara Heiser, [ph] and Deb Maulen [ph] who are assisting with today's event.

So now, I'd like to direct your attention to our Safe Harbor statement. Today's discussion contains statements that may constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of assumptions, risks and uncertainties that could cause actual results, performance or achievements of the company to differ materially from those expressed in or implied by such forward-looking statements. The company undertakes no obligation to update information that's presented today.

And before turning the meeting over to Carlos Cardoso, our Chairman, President and CEO, I'm going to show you a brief video. And the goal is to help you better understand our investment story.

[Video Presentation]

Carlos M. Cardoso

Good morning, and welcome. We are very happy that you joined us today for our Analyst Day event. I'll start the presentation; and John Jacko, our VP and Chief Marketing Officer, will talk about our positioning for growth; and John Tucker, our VP and President of Business Groups, will talk about executing our strategies; and Frank Simpkins, our VP and CFO, will share the results. And I'll come back and summarize for you.

So what I wanted to start with is to build a bridge from last year's presentation to this year's. So let me highlight some of our company-specific growth initiatives that we talked to you about last year and where we are today. So we are working and we'll show you this throughout the presentation as an enterprise structure. In other words, we have a market-facing customer-focused organization. We've moved from a product-focused to a market-focused organization, and we've seen a lot of opportunities. And both John Jacko and John Tucker will show you some examples how that is working and the benefits that we're experiencing so far. We launched completely the WIDIA brand channel strategy. Again, you'll know if you go far enough, 2003 we had about 60 brands. We are now down to 2 brands. So great improvement, and again, I'll talk to you later about some of the benefits and what we experienced there as well.

We accelerated the reduction of many factory footprints. We always talked about our footprint needed to be addressed, and we have done that. We have reduced the legacy sites by 50%-plus. We did permanent cost reductions to break through prior peak of 12% EBIT margin. As always, we continue our lean initiatives. We centralized our processes, and we implemented SAP, standard SAP globally. And we actually turned the switch on last January 3. And we talked about delivering 15% EBIT by 15% return on invested capital by FY'13, and we'll give you a status on where we are today relative to that.

So where are we today? Today, we are -- hopefully, we'll show you through the presentation, we are a different, well positioned to take advantage of growth opportunities that we'll identify throughout this process. We are prepared for additional growth, as well, going forward. We experienced 28% organic sales growth in FY '11. The WIDIA brand launched successful, as I said, 37% year-over-year growth in FY '11, 37%. So this is the fastest growing brand in our portfolio. So again, the strategy is paying. Completed restructuring programs, permanent cost, $170 million, we will talk about that. Frank will show you a detailed analysis of that. And we expect to reach our target of 15 x 15 by this year.

So with that, this is a good summary of what we said we're going to do. And I can feel comfortable sitting in front of you today that we have met or exceeded all the objectives that we set forward a year ago in this same meeting.

So let me talk a little bit, give you a Kennametal overview. You know, again, our mission is to deliver productivity to customers and provide innovation, custom and standard wear-resistant solutions. So our whole organization now has moved into a solutions-based company. And throughout this presentation today, I hope that you get a comfortable feeling that we have totally repositioned this company for growth.

Our products, we serve diverse mix end markets with products for energy, road rehabilitation, mining, machine tooling and et cetera. As we go through this presentation, you see that we serve a very diverse end market portfolio.

Our customers, we serve companies that are in aerospace, surface and underground mining, transportation, OEMs, oil and gas drilling, manufacturing machining centers. Basically, everything today is manufactured around the world in any industry. Kennametal is part of that process.

Our depreciation, we developed proprietary processes for powder other that and material science that provide customers with application expertise. So at the end of the day in simple words, we see what the customer problem is. And through metal powder, we solve that problem. Whether it's a cutting tool or whether it's a daring, deep 120,000 feet below the sea level, we help our customers solve that problem.

This has been a journey, and I think as I look around this room, there's many people in this room that were with us at the same meeting in 2003 when we launched this journey. It has been a journey. We developed strategies in 2003. This isn't something that just before the recession, we turned the light on and we went for it. This is something that we've been on ongoing since 2003. The downturn simply provided opportunity to accelerate certain actions that we have put in place. We were one of the first companies to react to the downturn, and we couldn't have done that if we do not have a strategy ready to implement. So it will begin with building the foundation, the Kennametal Value Business System or KVBS. We improved the balance sheet. We managed the portfolio of business. We looked at the business that we have, what business were core, what business were non-core, which business could grow, which business could not grow. And we made acquisitions and divestures based on them. Continue driving Lean, Lean has been a journey. And Lean is now part of our fabric. And you'll hear later on we have over 1,000 Green Belts in this company. So there's 1,000 people in our organization that know how to deal and solve problems in a systematic way.

We accelerated measures to reduce structural costs, manufacturing footprint and headcount. We took $170 million of permanent, permanent costs out of our structure. And again, you'll see throughout this presentation the benefits of that. And hopefully, by now, we don't have any doubt that, that is really permanent cost because it is really now for more than 12 months showing in the bottom line.

However, we continue to focus on growth initiatives, brand channel strategy, SAP upgrade, enterprise structures, standard process and so forth, so that we can drive growth. And the bottom line, if you look at the bottom of that chart, in 2003, we were barely a $1.6 billion company with 6.3% EBIT margin and 5.5% return on invested capital. And you know at this point is, we needed 14,000 employees to deliver that. If you go back to 2011, $2.4 billion, 14% EBIT margin, almost 15% return on invested capital with less than 12,000 people to deliver that. So you can see, just in these figures that the permanent cost is there. Otherwise, we could not deliver it. And we continue to have leverage. As we talk about 2012, we're going to see even more leverage as a result of all these things that we've been done. And again, I continue to emphasize, this has been a journey, a very strategic journey, and we've been implementing very well against that journey.

Again, I talked about the fact that the recession provided opportunities. Our leadership team, as we face the recession, really look at 2 things. One is we look at the best Kennametal and some a lot of other companies. And we could do -- we had an option to do what we have always done and most companies do: cut cost, focus on the core business, avoid change in strategic direction and respond to lower demand levels. I mean, that's what most companies did. We said we're going to take this opportunity, and we're going to take the road less traveled. We focused on customers, provided innovation to address customer needs. We launched a whole new portfolio of WIDIA that we developed during the recession. Never stopped innovating during that process, make acquisitions or build alliances, invest on making the business more efficient, realign the organization to better serve customers. And at the end of the day, we chose that path less traveled. And today, we feel that the benefits associated with that decision are very good and were the right decision.

So let me talk about some of the examples of our new enterprise customer-facing structure. And this is a picture to lead you to an idea to how does this works. So the enterprise structure is highly focused on the customer. So each served end market is a separate business unit. We no longer have product lines and product business units. Two reporting segments, industrial control -- industrial consists of aerospace and defense, transportation and general engineering. Infrastructure consists of energy and earthworks. Sales functions are organized by geographic regions and end markets. Again, we take a global strategy, and then we deploy it locally through the sales force, so that we can meet customer demands at that level. And we have shared services that drive functional excellence. Again, we want our business people, we want are sales people to be focused on one thing and one thing only, and that's the customer and profitable growth. We want the shared services to be behind them and helping them and giving them all the tools that they need to best serve those customers and to allow us to grow profitable. And we can compare today those shared service against the best in the world and see a benchmark and see what else do we need to do, what else can we do to become more efficient.

So that is sort of a picture of how we are working today. And by the way, this has been -- we've been on this for a year, and we'll hear later from John Tucker sort of how things are working out.

So the other area is that its important how this company is much different is the portfolio management. I want to call your attention that we continually, as I said earlier, evaluated the business to ensure relevance in the marketplace and assess opportunities to expand profitably. What we show here is in the past 2004, we divested about $600 million in sales of non-core more commoditized general lower EBIT margin. And when I talk lower EBIT margin, very low EBIT margin. We took that cash, and we acquired about $300 million of sales of companies that have technology, they were less cyclical, higher margin, close to 20% margins and quite honestly that has pricing power. So if you took this base model at any one point, just the mix difference in this company would increase our EBIT margin by 300 basis points basically by not doing anything. Just the structure of the company, the difference is about 300 basis points.

And by the way, a lot of our cyclicality that we experienced and a lot of our detrimental margins that we had was because $600 million of our business, which is a big proportion whether you say at $2 billion or at $2.4 billion again, again, add no pricing power and was very cyclical. So this is a fundamental change in this company that we all need to keep in the back of our minds.

Driving our strategies. Our strategies are consistent with our journey. So these strategies that are in front of you are very similar to the strategies that we presented in 2003. And the reason they're still very relevant is because we still have many innings to play in our strategy. We still find value in the strategies that we had in place. So we're going to continue to focus on the customer, market leader, in customer satisfaction, mission readiness, manage, develop and retain talents, technology, market leader in innovation. As you know, our goal is to have 40% of our sales to come from new products. We've been doing that for 8 years. We'll continue to do that. And as I said, the one thing that we didn't slow down during the recession was technology, was investing in new products and is paying off today because we're gaining market share as a result of that.

Excellence, quality and service to customers, and growth and profit, balanced mix portfolio, markets and geographies grow at twice the market rate. In other words, we have demonstrated that we can take the IPI and grow 2 to 3x IPI consistently. And I believe that we are well positioned to do that. And we have demonstrated over the years that we have done that and can do that.

So let me switch gears a little bit and talk about 5 points of how we are different today. And I'll talk about each one of these points in detail. So industry leader globally, we are an industry leader globally. Balanced geographic presence with strong focus on emerging markets. Consumables business with annuity revenue streams. Reputation for being innovative in the marketplace with new product introductions. We introduced about 10,000 new SKUs, new products every year, plus or minus. And we've been doing that consistently. So no doubt, we are an innovative company. And we are a compelling financial -- we have a compelling financial profile, less cyclical due to more streamlined cost structures and geographic balance.

So let me move on to the first point here. Global industry leadership. Kennametal brand is generally #1 or #2 in most markets, serving diversed mix of end markets. I was speaking with someone in the last 30 days, I'm a member of the National Association of Manufacturers, a member of MAGPI, [ph] I went to -- 2 weeks ago, I went to the Interactive Manufacturing Experience in Las Vegas, where a lot of the large machine tool builders presented, and I just came back last week from EMU, which is the largest machine tool shelf in the world. So I think that I met with probably 200 to 300 CEOs in the last 30 days in the industry. I have not met one, I have not had one CEO say, things are falling apart, not even one. So all I can tell you is manufacturing is strong, and we continue to see growth.

Now there is a decelerated growth. I mean, we grew 28% last year, and we guided this year at the 12%. So it is decelerating from 28% to 10% to 12%. But boy, I'm really happy at double-digit growth. So that's -- and the reason that is happening to us, the reason we can grow 2 to 3x is because the markets that we play. You look at energy, it's not just the energy, but you look at customized process. It's one of the areas that we play. That's a very strong area right now. And power generation, that's a strong area that we play, that's very strong. So it's not just energy, it's all the elements underneath the energy market segment, all the areas that we cover. You take an example of earthworks, underground mining, still very strong. Recycling is a very strong business. We play heavily into that. Transportation. Automotive, especially in developing economies, is still very strong. It's still growing. Rail and high-speed train is still growing, again, especially in developing economies. We play in all of those energies, not just here in transportation, but in areas that are very good high-growth areas. This is why we continue to see double-digit growth. Aerospace and defense. Aerospace is coming, and you're going to see a lot of growth. And general engineering, which has been a leader for growth for us, and continues to be at this point.

So if you look at the pie chart, you can see that the majority of our business grow faster than the IPI. And the energy per se grows near the IPI, but the fact that we are in all of these niche markets underneath the energy allows us to grow at a rate higher than the IPI. The other area that we talked about is our geographic balance and presence. We have significantly expanded our global presence, and this chart shows since 2006. If you go back to 2003, our rest of the world percentage of our sales was 10%. It was 26% in 2011, will be higher in 2012. That's the highest growth area and obviously not 26%. It becomes significant for our total growth.

China manufacturing outlook shows that the government can assist as managed, you cannot make expansion between 8% and 10% branch growth. And you know, I've been bothered for the last 3 to 4 years, because when I come to Wall Street, I find that when the Chinese government is supporting their economy, the GDP going up, everybody gets overexcited. When they slow it down, everybody gets over pessimistic. So I did a chart, finally, and it's in the bottom-right quadrant. The Chinese government has successfully, successfully and intentionally managed their GDP between 8% to 10%. And one of the reasons they can do that is because they have $1 trillion in surplus. So that chart, even though in the worse of recession, the worst-case scenario is that they were below 8% for 3 quarters, and the lowest one was 6%. But you can see, the lower line that I drew by hand is 8%, the top line is 10%. So my advice is that we shouldn't get excited when it goes over 10%, overly excited. We shouldn't get over pessimistic when it goes below 8% or gets close to 8% because they're going to continue to do that. And if we went back further, that chart would be consistent. So we're excited to be in China, we have experienced continuous growth in China, and we are very optimistic about China. And even if they grow at 8% GDP, I'll be extremely happy and satisfied with their growth.

Let me talk about the other area that makes us different. And this is the fact that 80% of our revenues are consumable business. This product lasts to anywhere from 1 hour to 24 hours and has to be replaced with another product. So we may never make another mining machine. But as long as we're mining, our products are being sold. We may not make another machine tool, but as long as our machine tool is cutting chips, we are selling our products. And this is a great business model, has been a business great model and continues to be a great business model, and we continue to be excited about the fact that 80% of our business are consumables.

And I need to continue to come to this chart, the other depreciation. We are an innovative company. For 8-plus years, we deliver 40% of our sales from new products. And you can see, there was a little blip during the recession. And by the way, that blip was 39% instead of 40%. Okay, but we've been consistently at 40% and above for 8-plus years. Now you have to realize that those products -- our products don't have price pressure. In other words, the purchasing agent cannot compare that product to the previous product on price. However, that price delivers -- that product delivers at least 20% productivity. So we can go to the customer and say, hey, we can offer you something that is going to reduce your cost by quite a bit. It's going to cost you a little more, but the benefit is here. It is a great business model. It has helped us gain market share and quite honestly, has helped us improve our margins without having to increase prices that much. And we'll talk about pricing a little later as well.

And the last one that I wanted to talk about is this compelling financial profile. Again, we have strong operating leverage, lower cost structure, you're going to see that in specific at Frank's presentation, consistent cash flow, strong balance sheet, process efficiencies driving non-value-added work. Again, I keep on bringing you back to the chart that I showed you, $1.6 billion with 14,000 employees, $2.4 billion with 12,000 employees. I mean, this is not a dream, this is reality. So we have made our processes a lot more efficient, and they deliver more value with less cost, significant lower breakeven point, and Frank will go into some details on that, and substantial margins and earnings growth. And you know, as I said, we don't need a lot of growth to continue to expand our margins and EPS.

So let me switch gears here. So looking ahead, what's happening? And we have -- basically, we have a very consistent strong correlation to IPI, not as closely related to PMI. So PMI is a leading indicator where IPI, we basically have, as you can see, a 90-plus percent correlation. And we have consistently grown 2 to 3x IPI. As a matter of fact, in 2011, we grew almost 5x IPI. We had the WIDIA brand. We had a lot of the Kennametal control initiatives were driving that extra correlation to IPI. And again, if you look at the charts, the IPI forecast, and this is of August, so I mean, we're not too far, this is a very recent forecast, it's 4.6%. Again, it's very simple, 4.6%. If you put 2x to 3x, here we are at our guidance that we gave you, 10% to 12% growth, so continues to be consistent. And by the way, our first 2 months, which you guys have data for, we are at or better than our expectations. So again, once again, it's consistent with the IPI.

And you know, one of the challenge still that we have is we buy machines. Okay. Our lead times that we're getting from our suppliers of machines are still 6 to 12 months for standard machines. As a matter of fact, at EMU, I have to go talk with a CEO of a company that we're trying to buy a machine from, and they quote us 12 months, and we couldn't live with 12 months, we need it sooner. So I had to talk to their CEO about what is it that they can do to give us that machine standard, a standard machine. I want to make sure everybody understands, standard machines, that we could get in less last 12 months. And I went to see him, he said, "Carlos, I'm booked. I have no more room in the next 12 months."

So is very consistent, the 4.6% is consistent. Now that number is a lower number with 5-point something for 2011. And I'm talking about Kennametal fiscal years, not calendar years. We normalize this. So it is decelerating, no doubt. It is true that it is decelerating. But by the way, our guidance reflected that, and we are operating in that. And we believe that we'll continue even. As we look into our 2013, we continue to see positive IPI.

So you know, one of the questions that I always get asked, so I figure I answer before I get asked is, where are you going to grow, and what are the challenges? What are you worried about? So we looked at -- we have 2 challenges that we've been managing. One is the raw materials inflation. I mean, we've talked about this all the time. The reality is our tungsten has gone up, and you'll see later on from John Jacko and John Tucker, we have managed that very effectively through pricing and good pricing in the marketplace. And God knows what's going to happen with the raw materials. We believe that, that's going to be -- again, it's going to be flat. But we can't be saying that the economic environment is decelerating the growth and think that the raw materials are going to continue to go up. It doesn't work. I mean, if we're going to think about, hey, things are decelerating, there's good reason to believe that raw materials are going to be flat or decelerating as well. And the other one is the supply chain. I just talked to you, I mean, we missed our capital plan last year because lead times of equipment. We couldn't get the equipment fast enough that we needed. And that can continues to be a challenge. And again, it doesn't make sense, does it, because, you know, we're talking about the world falling apart, yet we can't get machines fast enough to accommodate our needs. And some of my colleagues have the same challenge, the same problems. So those are really the 2 challenges that we need to manage, and I think we'll show you today that we're managing those appropriately.

And then when you look at -- we have 5 drivers for growth. And 5 of the 6 are really are under our control. The first one that is not under our control is the global economic expansion. I mean, and again, I go back to the IPI, and 4.6% is positive, and we believe we'll stay that way. But then there's 5 things that are really under our control. And that's what leads to the 2x and 3x IPI. The first one is expansion in Asia Pacific, our presence. We invested heavily in 2007 and 2008. We have 4 facilities in China alone, and we have 1,000 people in China today, okay? So we're not playing in China, we are in China. And we're taking advantage of that growth. And we are in Brazil, we have a plant in Brazil. I mean, we have over 1,000 people in India. So we have real presence. We did that during the good times. During 2006, '07 and '08, if you look at our capital expenditures are much above depreciation. And we said all along that our strategy was deterred, and we're going to take that cash, and we're going to invest it in developing economies, so that we now can benefit from that, and we are.

WIDIA strategy, 37% growth last year. When the company grew at 28%, WIDIA grew at 37%. We continue to grow at a higher pace with WIDIA than the other -- the rest of our business. It's simple, WIDIA is going into spaces that we weren't before. We are filling in the whitespace. We weren't there before. And we're now competing with people that had that space, and we're getting that market. And the price selling? I'll wait until John Jacko and John Tucker talk about that. John Tucker is going to focus on enterprise selling. New product introduction again and pricing. Well, John Jacko is going to talk about what is our pricing strategy, and John Tucker is going to talk about how do we implement it and how have we very successfully implemented the price increases.

So those are the major drivers of growth in our -- that are in our control, and we'll continue to deliver on those.

So let's talk about -- we talked about organic growth so far. So let's talk about inorganic growth. Another question that I often get is sort of what do you guys look for? So first of all, I want to suggest that we have a very disciplined approach. But one of the things that we look at is technology, so everything revolves at technology. So we divested $600 million worth of business that were low margin, cyclical and I would argue that had low technology. We acquired $300 million worth these sales, new businesses that were driven by technology. If you look at all those businesses, the core of it is technology. That's why they're less cyclical, that's why they have higher margins and so forth. So we start with the technology. What technology can they acquire that's adjacent to our technology where we can bring value into the technology and then, the next area is the geographic. Now can we leverage that technology outside of U.S., outside of Western Europe? Or can we even buy that technology outside? So that's the second area.

And the third area is platforms. And you know, again, you have to go in that direction. So we're not going to acquire a platform that does not have the right technology. So you have to have -- the technology is the center of the way we look at business. Because when we find ourselves with a really good product development processes and 40% of our sales. And we can't, under the normal conditions of the organization, we can't really do a lot better than that. So we need to go out and acquire technology that is in good business where we can bring. So we continue to expand our core technology as a company, so that we can deliver more value, more solutions to our customers.

So long-term financial strategy. So you heard about the business strategy and not only organic growth but the way we look at potential M&A. So this is what we expect every year: 6% to 10% top line CAGR, 15%, 20% earnings per share growth, $300 million to $400 million in free operating cash flow, debt to cap at 30% to 40%, and PWC of sales at 20% to 25%. So those are the financials. I mean, we feel that once we are at 15%-plus in the high teens, we feel that we are going to be in the first quartile a financial performer, and now we're going to look to expand to continue to grow the business and focus on those metrics.

So let me just close my portion here before I introduce Frank with a reminder again why Kennametal is a different company. Ongoing portfolio Management, further balancing served geographic region and generate revenues in equal thirds from North America, Western Europe and the rest of the world. Maintain cost savings from restructure, in other words, keep the fixed costs at that level, continue driving enterprise structure and focus on customers, and grow WIDIA brand and the indirect channel sales. So the bottom line is that we need to stay with the strategy, and we need to continue to implement the strategy. There's a lot of room left for us to continue to grow and drive the results with the strategy that we have.

So with that, I'll turn it over to John Jacko, Vice President and Chief Marketing Officer. John?

John H. Jacko

Good morning. Thank you, Carlos. He often confuses Frank and I, so I don't know why he said that. So I'd like to thank everyone for having this opportunity to discuss some of our growth initiatives. I know most of you like to read from back to front in this time and read the financials first. But I do think we have some interesting things going on inside that are going to really help build the company as we go. And hopefully, you'll see our presentation build upon one another. I'm going to talk a little bit about strategy, and then John is going to show the execution. And then obviously, Frank's going to -- the part you're waiting for, on how we measure the results.

One of our key themes is around the enterprise and driving a different thinking -- oh, I'm sorry, is around driving different thinking and how we deliver productivity solutions. So let's begin, and let's talk a little bit about the organization because I think the organization provides us with a bit of a competitive advantage. And as Carlos mentioned during the recession, we could have taken an easy way out and just chased the little bit of growth that was out there, but we actually took a very disruptive approach and said, you know what, let's accelerate the journey we've been on. Let's blow up the organization and look at it at a different way and drive ourselves closer to the customer. And it's very interesting, I read with one of our, I would call it, our #1 competitor, also talking about their one company approach that they're going toward. It sounds like a page out of a book that I've read.

Now I think we might have a leg up because this is one of the things that Kennametal has learned is this is a cultural journey. This isn't something that you decide one day that you're going to open products to the customers. So I think we have a leg up and that we started over a year ago.

So just to talk about how it works. We have the end market leaders, these are the aerospace and defense, general engineering, earthworks. Strategic leaders in our company, they make sure that we look out, have the right product and solutions in place for where our customers are today and where our customers are going in the future. Their goal is to be as close to customers as possible. We'd like them to know their customer better than the customer knows themselves at the end of the day, so that we have the stuff that's ready.

They translate those needs into opportunities. So we see the opportunities in pipeline from these teams. And they also sit on our product prioritization council. So our engineering investment is driven through the leadership of these segments and where we invested dollar in the product cycle.

I do want to mention, there is a small team in marketing that is looking to see, is there a new segment we should be getting into at the same time? So while we're very focused on our segments, we're also thinking, okay, where else is the possible growth. We have what I like to call a unified sales force, and I used the word unified versus one because well, they're really unified in terms of process, career paths and specialties. Make no bones about it, our customers want product depth as well as breadth. And we're very focused to make sure we don't lose that because we deliver productivity at the end of the day, and that has to be where we begin with our customer as well as we try to bring the power of the whole portfolio, the whole enterprise to our customers. This unification process though has really allowed us, as we moved into a new SAP environment, to be able to have standard processes as we look across our sales force, how we measure pipelines and how we do our work.

Probably one of the biggest leverage points that I see is this global integration of the company functions. We now have the ability, through SAP, for me to see the complete spend around the world across the business units and to be able to implement standard processes around the world. So before where I may have to negotiate a lot more with different business units, we can centralize, we can outsource to low-cost countries as a shared service. And this, I believe, there's a lot of runway ahead as we've just gotten started on that initiative.

So let's talk about our geographic growth plans. So as you can see, on the bottom-right here, we've more than doubled the business in the rest of the world over the last 5 years, and we have plans to reach over 1 billion by 2016. And this is on our way to a 1/3, 1/3, 1/3 strategy that Carlos has talked about since I've been here and I'm sure before that. So we have plans focused specifically in China, India, and we're finishing up our Brazil plan as we speak. We talked about the China strategy last year. And I'm pleased to note that not only are we exceeding our growth targets, but we're continuing on in the investment profile in China, and I'll give you a couple of examples. We recently completed significant investment in our Shanghai facility, not only expanding office space from putting a demo center, which showcases our aero, metalworking technologies. And they have some new aircraft, new engines that will be going in, so this is very strategic. We've invested in our Zhuzhou facility to enhance our in-country wear solutions. And we use -- internally, we used in China, for China. So this is for China, in country wear-solutions. And we're about, on October 14, to have our opening ceremony that also brings our Conforma Clad wear solutions into China as well. We have regrinding centers that have been set up in Guangzhou and Chengdu. And we have a customer touch program that has 9 different cities that we go to, a traveling roadshow that we found has been a very good investment of our marketing dollars to let the customers know what we do, how we can help them and to reach out.

In India, we have very aggressive growth targets in India as well. We've made significant investments in our Bangalore facility with more in fiscal year '12 plan, and we also have service investment in some of the outskirt regions of India. India is a place where we have a very strong -- we're very much the market leader in India, and we intend to continue on that path.

And then we talked about Brazil. Brazil's strategy is in the midst of being completed. We see a very good wear-solutions growth in Brazil. And I'm sure, next time, we'll be talking about what our strategic plan is there.

The bottom line I'd like to leave you with is, we have a very disciplined process of planning investment on how we'd be efficient with our investment dollars. And we constantly ask ourselves, if we only had $1 to spend, where do we spend it, and make sure that we're not trying to spend, or try put money in too many different places versus being focused in these specific regions.

So let's move to products and innovations. So many companies out there, they measure their R&D as their spend per sales dollar. We focus a little bit differently on a percent of new product sales. So it's not just a function of how much of our total revenues we spend in R&D. Carlos has talked about our goal is 40% of our sales coming from new products, and this results in about 10,000 SKUs every year being launched into the field. And as Carlos mentioned, they must have at least a 20% performance improvement either over the products they're replacing that are ours, we're big fans of cannibalization, or our competitors' products that we're out there matching against.

We talked a little bit on our strategy to lessen these -- for how we select these projects to being very market-backed approach from the customer to our market segments. And we also are looking for as much innovation as possible. Now last year, we talked a little bit about our award-winning Carnegie -- we won the Carnegie Science Award for our Beyond Blast tool, and that continues to be a very strong seller as well as it's a very strong innovative solution that it is one of the first to the industry in there. And it's the very first product that take the very novel design that really delivers and increase in customer productivity without their need of any special capital or equipment, so it's revolutionary.

Something very similar in road construction. We have a new Road Razor ECO product that increases the milling speed of road milling by 15%, or they can translate that into a fuel consumption likewise. We have a new Kennametal 4x design that is, I'm proud to say, the strongest and most rigid quick-change clamping system in the market today. And we recently had a couple of trade shows where the machine tool builders are coming to us, and we demonstrate that we can be the industry leader in this area. We have the innovation in advances books. What these are is Kennametal innovations, WIDIA advances. These are catalogs that come out once per year that has our latest and greatest products in there, and we have a very effective training program, not only for our sales force but our channel partners to make sure they can demonstrate the value of our new products as we launch them to the field. So very robust pipeline of new products that turns into sales, and I'm very happy with our new SAP system. To tell you, they're both innovations and advances have exceeded their revenue goals at the current time.

So the next slide, there's 2 important tenets on this slide. The first is a customer outside-in approach, and the other side is about driving business efficiency. So in the past, we would say that a customer wants a hole, not a drill. And we've moved that thinking to the customer wants to the machine a complete component, not just by a tool. And this has been a very much outside-in-driven process from our customers, and it has moved us away from a tools to a complete solution set. John's going to talk a lot more about that as he follows me, but this allows us to really deliver the productivity for whether it's a camshaft or a cylinder head and be able to provide all the tools that the customer needs to be able to machine that.

Now the strategic part of this is this brings us much further up into the design process. So now, we can become a partner in the design process versus just being 1 of 3 vendors being selected to provide a tool. This also translates us into a potential service offering, and I'm going to talk about services in a second. But we will sell a camshaft kit of tools for the customer to be able to make that camshaft. At the same time, we'll guarantee him the cost per part, which allows us to develop a longer-term annuity stream.

On the other side of the slide here, we continue to be focused on SKU reduction. And this enables optimization of our product portfolio. A streamline portfolio benefits both Kennametal and our channel partners by driving business efficiency. And Carlos mentioned it previously, it was only 5 or 6 years ago that we were 30 different brands with overlapping SKUs, and I would say a very inefficient and unsustainable business model. I could not have kept up with all the collateral that would have been needed for us to support 30 brands just as an example even within marketing. I believe now, we have a very efficient 2-gram portfolio model. Our goal is 100,000 SKUs, and this creates the right efficiency for both -- it translates into our websites, our e-commerce catalogs, our hard copy catalogs and trying to be very efficient.

Now I do want to mention, we saw a little bit of an uptick as we have now separated Kennametal and WIDIA, which caused us to have to put in some additional SKUs because there were some holes in the portfolio that we wanted to make sure we had 2 comprehensive portfolios that we're bringing into market. So there was a little uptick there.

I do want to make a quick comment on private label program. We're moving away from this space to concentrate on building and strengthening our current brand names. So some of these programs are not as lucrative as we had originally thought. And we're going to take our resources and continue to focus on the Kennametal and WIDIA names.

So we have a number of service offerings. And I would tell you that we've just scratched the surface, and there's a lot more runway here. Our enterprise service offerings foster our partnership with the customer where we become a reliable resource. And this is a growing part of our business, and we can see that with the retirement of some of the manufacturing talent that's out there, this will be an area where we can actually provide significant value to our customers. We also learned during the last economic downturn that this business did not fall as fast and even recovered quicker than some of the rest of our business. So these kind of solutions are obviously something our customers strongly value, and there's a lot more pieces of that pie that we're going to put together here.

Now I just want to talk about these 4 just briefly. Supply chain services, this is where we have these unmanned automated draw-based systems for dispensing and replenishing metal cutting tools at point-of-use. And this allows customers, an easy way to manage their tooling and is very attractive to our customers. We have reconditioning services, and this is where we take our solid carbide tools and are able to recondition the tip versus having to sell a new tool that allows our customer to be able to save money in this service. And this is an area that we have seen -- when I was recently in India, the need for reconditioning centers and the ability to create that stickiness with the customer is a very strong market opportunity out there that we're going to capitalize on.

We have cost per part programs. This is a fix fee to Kennametal for each part produced. This places the customer revise, sell transactional business with the customer to create a longer lasting relationship. And these are likewise programs that are growing. Some of our people are in these facilities, and obviously, also creates the opportunity for additional business.

And lastly is our advanced tool management software. This is the proprietary software package that provides tool management, inventory control, purchasing and audit trail and reporting capability. And we use this in our cost-per-part programs as a way to monitor usage. And we seen significant expansion of this software to be able to link right into the whole machine tool business, including the machining center. So a lot of runway there.

So we expect these programs to grow, as the customers and supplant their retiring workforces with more of this cost-per-part-type programs. Now the way our business model works is we incubate these programs in marketing. And then as they get to a certain scale and size, we put them into the business. A good example is the way that we've done WIDIA. So we took WIDIA, the strategy, held her off of this side of the business, got it to a certain size, and then you'll hear Mr. Tucker talk about it in a second, and how -- now that it's ready, we're accelerating growth by having it as part of the business.

That's a good lead-in to talk about WIDIA. So you've heard about our 2 brand strategy. And I think, if you haven't heard, while we see both the direct and indirect channels continuing to grow, we think we we're going to see -- we know we're going to see the indirect channel growing even faster than the direct channel. And this is customer-driven, local support, they're consolidating their vendors, economies of scale, some one-stop shopping. So our response to this trend has been the WIDIA brand. I mean it's a brand that we own. We consolidated the flagship, and now we are taking a very comprehensive portfolio, exclusively through the indirect channel and supporting our customers with very strong application engineers that can show the productivity we delivered.

WIDIA recently won an Industrial Supply Association Award for commitment to serving our end users through our partners and delivering exceptional documented cost savings and productivity improvement to an end user. So this is a great sign to some of our competitors who have been kind of sitting there saying, "What is this thing called WIDIA?" and see that our customers are truly valuing the portfolio as well as the application engineering support.

The Kennametal brand is dedicated to OEMs and Tier 1 customers looking for highly customized solutions where direct, and to some degree, selected and indirect channels are preferred by our customers. So I would not want anyone to walk away thinking, "Well, does that mean Kennametal --" Kennametal is our flagship brand. It's got excellent growth, it has the #1 or #2 positions in many countries, but the WIDIA brand is a very -- a niche portfolio that is working extremely well in the indirect markets there.

We've also cleaned up the North American distribution channel. I do want to mention that as well. And John's going to get into some details on that and the execution of the strategy.

So we have our new channel partner reward program. The whole goal here is to decrease the channel conflict and reward growth. Our channel partners came to us 3 or 4 years ago and basically said, "You guys aren't very good at channel management." And we listened, and we got some outside help, and we've come together and developed this new channel partner reward program. And you can see on the chart here, we are often at odds with them, competing for the same sales, which is really not good use of our sales teams.

Now some level of channel conflict is inevitable. Our partners told us we could do much better. So we've launched our channel partner reward program with delineated clear rules for territorial coverage and account ownership, so that competing channels avoid fighting over the same set of customers.

After significant voice of the customer and tweaking of the program, it was introduced in July of 2011. The channel partner program focused primarily on growth for both Kennametal and our channel partners. It has a consistent set of terms and guidelines, standardized contracts, standardized payment terms, electronic order entry to promote self-serve behavior, and it is a consistent platform for us to reward channel partners with upfront discounts and back-end rebate based on incremental growth.

So I was talking to one of the few people outside here, this is not a program where we reward growth from taking business from one of your channel partner covenants that already sells Kennametal or WIDIA. This has to be real growth that we managed through our point-of-sale data. So very excited that this is a level-playing field program, whether you're a large national or whether you're a small bar, it is a functional discount program based on what you provide in your local territory.

So the initial rollout of the program included our Kennametal North American distributors. Approximately 50 of them are on the new program. In January, we're going to expand it to approximately 200 distributors from our WIDIA portfolio, as well as another 100 integrators that are out in the business.

Implementation in Europe will occur mid-calendar year 2012, and expansion into Asia-Pacific and Latin America will shortly follow. And we're going to use a trial test in China and Taiwan that's going to coincide with our European rollout to see how the program works in the other areas of the world.

Lastly, I just want to talk about pricing. So pricing has become a very strategic lever in our organization, and some of it is driven by raw material price increases, but also as we move into a price performance type of system. So you can see on the 3 corners: raw material cost changes, price performance and the competitive landscape at which or what drives this model. Our strategic pricing group has a mission of pricing, new products, as well as set prices on our current products for both standard and in engineered products, and that's all driven around the value we provide to the customer.

So we approach pricing as an integrated process to deliver the solutions needed in the marketplace at price points that are often leading in the marketplace. So often, Kennametal is a price leader in the marketplace. But we do that by assessing our customers and market needs from a segment and market-back perspective. We focus on solutions, and this value feeds the price points for our new products. So each new product coming out, we have a price-performance curve with our competitor products, with our products and productivity delivered to help us set the correct value pricing for that product.

We also market price. So we don't do cost-plus pricing. We assess the shipped cost in our product development process and challenge our manufacturing to be able to hit the shipped cost targets that we need, so that we have the right marketplace for our customers.

We use price realization analysis to assess the impact of our pricing decisions, and that includes concessions and rebates, and we also measured the competitive price levels, how often our competitors are also pushing discounts out there. So I believe we have a rigorous system, and John's going to talk to you about how the prices of raw material have increased and then how we've been able to respond during the last year.

So I hope this gives you a pretty good idea of some of our growth platforms. There's a lot of runway ahead in most of our -- most of the programs that we have here, and we are executing on our plans as we outlined in the past.

With that, I'm pleased to introduce John Tucker, who's going to give you some insight on the execution of these plans. Thank you.

John R. Tucker

Thanks, John. You threw me a curveball there, when you called me Mr. Tucker. That's been about as sincere as John has been in the last couple of days. So I don't know how to respond.

Good morning, everyone. Today, I'm pleased to present the actions we have taken that have delivered the best performance in our company's history. I'll demonstrate how we attained these results through alignment of segment strategies and initiatives focused on growth, while implementing disciplined global processes, maintaining our commitment to permanent cost savings, both now and in the future, while we're focused on a value creation for our customers, and just how that focus transforms into exceptional results for our shareholders.

Last year, you'll recall, we spoke about the need to shift our culture, to focus on the opportunities that matter most to customers. You can see where we started and where we believe we needed to be as an organization. While we've made exceptional progress, we still have room for further improvement. Today, I'm happy to tell you, we are a different culture. Why? Because we are an integrated business focused on end market strategies that create value and drive investment decisions in the enterprise.

We've implemented our strategy around the WIDIA brand portfolio, and we're gaining traction in the marketplace. We have functional clarity that has provided opportunities for lean savings and global standardization, and our initiatives around managing global key accounts has been strengthened over the past year.

As a result of our first year's focus on customer essentials in fiscal year '11, our execution delivered an all-time record performance. We achieved this accomplishment by standardizing our global processes, reducing over 6,000 customizations to just 600. And just to give you a little perspective more on what it has meant to us in terms of streamlining the organization, we took 27 global process owners across the globe and unified them with one focus on the enterprise. We took 397 customizations down to 30. We've taken 29 manufacturing process variations to just 7. We are 90% standard SAP, with only 10% aligned with the processes that truly differentiate our relationship with customers.

And while this may be a little bit surprising, we took over 27 independent global price lists and took them to one price list per brand for the enterprise, and we did this while simultaneously implementing and updating to SAP 6.0 globally. We've managed a significant and unprecedented raw material increases throughout the year, offset by appropriate price increases to maintain our margins and deliver performance. That performance delivering balanced double-digit sales growth and nearly 15% operating income in both segments of the business, thus significantly improving our EBIT performance and return on invested capital over any prior year.

As you can see, our value-creation execution drove operational efficiency and record financial performance over prior years. We accomplished these results through a market-facing strategy and building a customer-centric mindset, globalizing standard processes across all of our business functions and leveraging our SAP platform, focusing on permanent cost take-out and maintaining our commitment to retaining those permanent cost savings, both now and in the future. As a result, we achieved our goals ahead of expectations.

Next, before I flip to the next slide, we'll take a look at our aligned strategies and initiatives to execute our segment results with these segment strategies focused on partner markets, with the right technologies and the growth regions globally, creating indispensable value through a relentless focus on products, solutions and productivity, utilizing our effective and efficient sales teams and channel strategies.

Earlier, Carlos mentioned our company's strategic objectives around customers, technology, our commitment to excellence, profitable growth and of course talent. Here, you see the industrial group's alignment with those strategies, focused on market-facing, customer-focused products and solutions, as we deployed integrated customer action teams throughout the globe. Technology advanced as we expand our superhard product development initiatives, and emerging market optimization, addressing demand shift with specific growth initiatives and resources applied in each of those areas of focus.

Profitable growth driven by solutions strategies with engineered products, featuring our Beyond grade of inserts and our Beyond Blast product portfolio, and implementing WIDIA into the global business model, while optimizing and aligning our sales team's training and tools to better provide effectiveness through our sales force effectiveness initiative. These initiatives resulted in 31% sales growth in this segment, 233% operating income growth with the 890 basis points expansion in operating margins.

Let's talk about infrastructure group, with a focus on share gain and geographic expansion. While our strategies here are similar to the industrial segment, you'll notice some specific differences as we play to our foundational strength. It didn't turn. There it is.

Let me start over, so we can start at the top of the page here, because I don't want you to miss this. This is a really good story. Let's talk about the infrastructure group with a focus on and a share -- on share gain and geographic expansion. While our strategies here are similar to the Industrial segment, you'll notice some specific differences, as we played to the foundational strengths in Earthworks' tooling solutions and energies, powders, claddings and coating solutions.

While we are a market facing peer [ph] organization here as well, the opportunity is offering an enterprise-selling approach to leverage and pull through additional metalworking solutions across the markets. Our technology strategies are focused on superhard development for Earthworks, with abrasion- and corrosive-resistant coatings for the energy markets, while we continue our efforts for growing energy markets in recycling and the renewable energy industries. And our global market expansion strategies are focused on new opportunities in Asia-Pacific markets using our global tools and training around sales force effectiveness. As we execute these strategies, we delivered 22% sales growth, 38% operating income expansion and 160 basis points expansion in operating margins.

We achieved results by serving our customers more effectively and efficiently through the direct and indirect channels. On this slide, you'll see how we address our 5 end-market customers with both Kennametal direct and Kennametal indirect, as well as our WIDIA indirect sales channel. Additionally, we offer a complete portfolio of solutions around standard products, engineered product solutions, services, as John had mentioned, bundled packages, while we support machine builders to limit the spindle to drive the annuity stream for our metalworking tools.

Earlier, John mentioned WIDIA, and he presented the growth opportunities we have with the WIDIA brand to address the fast-growing indirect channel. Both Carlos and John mentioned, and I'm proud to mention as well, that WIDIA is currently our fastest-growing brand with 37% growth year-over-year. We have implemented an aggressive strategy targeted to establish natural trading area goals for each growth region. We've implemented specific training programs to leverage the power of the WIDIA portfolio, while strengthening the channel network globally by signing Fastenal as our North American national partner, building the Asia and Eastern European channel infrastructure, terminating 280 nonproductive distributors, while executing our channel partner rewards program that John just mentioned, as we target WIDIA to be $0.5 billion of sales by 2016.

As we executed our strategies throughout the year, we experienced and overcame the largest raw material cost increase in history, with tungsten APT market prices reaching $460 per metric ton. The maturity of the increase, as you can see on the upper slide, coming in the second half of the year. With our finger on the pulse of this challenge, we maintained the material costs -- we addressed the raw material cost increase in the marketplace with 5 targeted price increases throughout the year. And today, I'm pleased with the price realization we are achieving versus our target to deliver results, while maintaining our competitiveness in the marketplace.

So let's talk a little bit about segments and geographies. Executing our strategies drove strong growth in both segments across all regions. From a segment perspective, 64% of sales were generated in our Industrial segment, and 36% in our Infrastructure segment. Our 28% organic growth rate was realized in the relationship with 32% growth in Industrial, 21% growth in the Infrastructure segment. And our $518 million of organic sales growth split was 71% in the Industrial segment and 29% in Infrastructure.

From a geographic point of view, 46% of our growth of $2.4 billion of sales were generated in North America, 28% in Europe, and 26% in the rest of the world. Organic growth rates expanded to 33% in the rest of the world, 27% in Western Europe and 25% in the Americas. The high-growth rate in the rest of the world is reflective of our commitment and focus on resources, both human as well as capital, to achieve our third strategy and take advantage of favorable market conditions in the growth markets around the world. Lastly, you see the regional split of the $518 million of organic sales growth, being 42% in North America, 30% from the rest of the world, and 28% in Western Europe.

None of this could have been accomplished without exceptional products. Key to our growth accomplishment was our ability to deliver value to our customers from our new products' pipeline. We delivered over 12,000 new products to our 5 targeted end markets to fuel our growth, enhance our customers' productivity and profitability, driving our goal with 40% of sales generated from new products.

The pipeline releases were well-balanced with our new Road Razor ECO tool, with its unique body design to deliver road rehabilitation industries the most economical and ecological performance. Our development of new corrosive-resistant tungsten carbide grades for specialty and defense products were tinged with both land- and sea-based components and coatings for oil and gas explorations, as well as numerous metalworking solutions for those customers supporting our energy-producing gas turbine customers like General Electric, Siemens and Alstom, to just name a few. And we brought to market our new Tri-Blaze Dura-Plus product, the next generation of abrasion- and impact-resistant alloy steels for surface mining applications.

Additionally, as John had mentioned, our 2012 Kennametal innovations catalogs featured our latest turning, holemaking, milling and tooling systems to enhance our customers' performance and productivity. And our new 2012 WIDIA Advances catalog, identified new product introductions which further strengthened the WIDIA portfolio offering, and it's really gaining traction in the marketplace. More importantly, we released these new products, as we systematically eliminated private label products to drive and concentrate on delivering our branded solutions, building brand equity around the Kennametal and WIDIA brands.

As we think about products and we talked about a market-facing, customer-centric organization as we move forward in this past year, our new product price -- product pipeline continued to be robust. But thinking differently means continuously aligning with customer expectations to deliver component system solutions as well, which is all about delivering solutions on an enterprise scale and allowing them to deliver the tools necessary to finish machine products with precision results that enhance our customers' both performance and profitability. Here you see just 3 bundled product solution offerings to address one automotive customer's solutions expectations around an integrated block system solution, a braking system and crankshaft systems that enhanced both throughput, productivity and drove their cost significantly downward.

But what I'd like to really share with you is a specific example of just one of many solutions we delivered over the past year. This is one that I'd like to share that really delivered demonstrable solution results by collaborating with the machine builder, as well as Boeing. We were able to tailor a total tooling solution package for Boeing 737 titanium landing gear beam. This beam, as you might imagine, required a significant amount of machining on both sides of the part, specifically, 52 hours on each side for a total of 104 hours. As a result of our tool design and tooling system solutions, we were able to realize a process reduction of 88 hours or 85%. That, for me, is different thinking.

As we talked about the importance of leveraging the enterprise around the globe, I think this is a perfect example of how we took the solution I just shared with you and the importance of leveraging that enterprise performance through global standardization. Here's an example of the Boeing solution I just presented taken globally to deliver the exact same results in Russia. As you can imagine, driving global standard solutions such as this lets us be more responsive to our customers. It lets us standardize on both the solutions and the manufacturing of our tools for those solutions. It leverages our engineering resources to do more with less, and it strengthens or annuity stream and becomes our foundation to enhance our competitive position in the marketplace on a global basis.

Here's another solution I'd like to share with you. It's got a slightly different twist to it. This is an example of the power and potential of enterprise-selling solutions. This is an energy customer's proprietary workpiece, where we were able to offer a solution upstream to our normal coating and abrasion solution cell with a metalworking solution. This solved the complex and perplexing problem with the solution that removed over 284 pounds of material, while reducing their machine process time by 60%, demonstrating expanded capabilities with existing infrastructure customers in an area where we hadn't supported them before, thus, fueling additional growth for the enterprise and really demonstrating to the organization the capability and ability to grow internally with existing customers and drive future growth for the enterprise as we move forward.

Now I've got a video that's going to come up shortly. But thinking differently to me means thinking out of the box in a fashion that best serves our customers. Carlos mentioned earlier, and you may be aware of the recent imX exhibition that took place in Las Vegas. imX stands for Interactive Manufacturing Experience. We were 1 of 8 selected manufacturing partners to sponsor an event like no other in the industry. This was an invitation-only event to provide key industry leaders and decision makers an opportunity to meet with, both face-to-face, our industry experts and introduce them to the latest technologies and processes necessary to meet our rapidly changing global competitive landscape.

I'd like to share with you just one of the learning tools we unveiled at this event that demonstrates our capability and the change in thinking, and reflects truly different thinking from a Kennametal perspective.

So what you see is about a 60-inch panel. It's sort of like an iPad on steroids, and it's pointing out in what -- this is one of our demonstration tools, a power gen station where there's over 17,000 blades in a power-gen turbine. And what we can demonstrate is the effective way the machine, one of those blades that many of our customers face, as a problematic solution every day. And as you see him moving in different types of solution, you saw on the upper left, it changed the operating perspective to drive efficiency. Here, you see an orbital milling solution where we can demonstrate the ability to make the slots in the shaft connection to that turbine blade. And by selecting different types of solutions, we can optimize the performance of the customer's ability to effectively manufacture efficiently that tool.

Here, you see ceramic technology being demonstrated. And as he increases the operating speed from low speed to high speed, and the turning speeds increase, you see a thermometer up on the upper right that demonstrates the temperature at the cutting tip that generates performance and the advantages ceramics have over other products to better machine that product and demonstrate the capability at an exhibition, where, in the past, we could demonstrate and hold up a tool, but you couldn't see the impact, as you can here, to the benefit that those tooling solutions bring to a customer, thus, demonstrating the expressed capability that we have with our product solutions and system solutions to improve and enhance your performance as an important customer of Kennametal.

Now it's -- not only is this important from a demonstrable perspective with our customers to deliver enhanced performance and let them see the benefit that normally is driven in terms of productivity, but it gets us away from that discussion around what's your best price, because now we can drive a price to performance ratio that lets you see by buying a tool, such as that ceramic tool that you saw in the demonstration, the value that you can achieve with a slightly higher tool price by driving productivity that was demonstrated by 2 of the 3 demonstrated examples I used around the Boeing solution, as well as the energy customers' solution earlier.

So for me, this is really an exceptional tool. It demonstrates that we are different today than we were in the past, and it's a great tool for training our sales team and letting them use it to demonstrate performance with the customer.

So let me talk a little bit about tools and effectiveness. I mentioned throughout my presentation sales force effectiveness. And the learning tool that you saw is just one of the elements we're using to build growth opportunities with improved tools that fuel growth for the company. We're improving our sales force effectiveness around 3 key initiatives, one around global teams with clear go-to-market strategies that are aligned around roles and responsibilities, driven by key account management and providing clear clarity around channels and alignment, so that we really better serve customers. We're using standard processes throughout the organization around sales and operational planning to better align with our colleagues in ISCL. We're using Lean methodology, and we've driven a change to our compensation models that further motivate our salesmen to drive growth and reward them for that growth, as they improve and grow the products that we serve with our customers.

We also have standard sales processes in place, all linked with John's marketing initiatives. So that we're outlined across the organization to best serve customers. Our tools and reports are clearly important to us, using voice of the customer to address areas for improvement and focus, while we used performance metrics, so we can clearly understand elements like our win-loss performance, our margin and share attainment, and more importantly, share of wallet with each of our key customers. All of this is being done to strengthen our team to relentlessly drive and deliver value to our customers.

I certainly could go on and talk because this is more throughout the morning, but I notice I'm running short on time. But what I would like to tell you, this has been one of the most exciting years in the history of Kennametal. We successfully demonstrated our ability to execute first-year strategies in a new market-facing structure. We've converted our customer-centric culture. We have a robust pipeline of innovative products and solutions. We've made $170 million of cost reductions permanent. And we've compared to our previous record year of 2008, we've delivered $39 million more EBIT on $187 million less of sales.

With additional opportunities for improvement, we have a long runway to go, and we're excited about where the future is in front of us. But one thing is clear. We've demonstrated that successfully executing strategies means winning the customer and winning financials, as Frank will share with you.

So with that, I'd like to turn the presentation over to Frank. Frank?

Frank P. Simpkins

And thank you, John, and good morning, everybody. I'll just try to connect the dots on a couple of things that Carlos, John and John touched on. So I'm going to cover our recent financial performance. It's an update on the key initiatives, to try to connect the dots a little bit, and also highlight why we think Kennametal is a different company. And as Carlos mentioned earlier, we're within our goal, reaching 15 x 15 milestone with additional upside going forward. And by the way, this is one year earlier than we had anticipated.

So here's an update from last year, very similar to Carlos and John and John showed, but this is an update on our progress toward our commitment we made last year at the Analyst Day. I mean this chart should look familiar to us. This is what I finished with last year.

So last year, I started it by mentioning on the slide that our goal is to expand our EBIT margin to at least 15%, no later than 2013. And I also stated that was on a consolidated basis, including corporate and the business unit, not just the business segments on a standalone basis. And I'm pleased to say that we're on track to see this commitment one year earlier than anticipated.

On the EBIT margin expansion strategy slide, this is the one on the top. We highlighted 4 areas of focus: market growth, strategic initiative, lean and productivity, and restructuring. So now I'm going to walk through, kind of give you a little bit of an update on each one of these items. The other factor I mentioned last year, I said that we probably could get to 15 x 15 one year earlier if the market was a little bit stronger from an organic perspective, and I'm pleased to report it was, and I think we maximized our profitability last year.

But turning to the individual categories. First, on market growth. I think Carlos and John touched on this as well. We outpaced the market with organic growth of 28%. John showed $518 million of growth compared to last year, and that was actually 5x the global IPI. So I think we came out of this recession very strong, and that's much faster than our goal, as Carlos pointed out, of 2x to 3x global IPI.

On the strategic initiatives, the key focus here, as John Jacko touched on, was really the center on our WIDIA and indirect strategy, the international expansion and continued focus on new products. I would say that we did well here. As you heard earlier, our WIDIA sales grew 37%, our rest of world grew 33%, and our new products are 40% of sales. So 3 check marks, in my opinion, across the board there.

Lean and productivity, we continue to take Lean further in the company. This is part of our DNA or our fabric, as Carlos touched on. And we've been able to more than offset inflation in the prior fiscal year. And to put that in perspective on a sales per employee, if Carlos had those numbers up from 2003, our sales per employee in 2003 was $131,000. Last year, we finished at $212,000, a 62% increase in productivity across the organization.

So Lean continues to be a key component of our Kennametal value business system. And as Carlos touched on, we have approximately 1,000 Green Belts. I think or the individuals who have been to our plants or our corporate headquarters, I think you've seen it. I'm also pleased, every member of management in the room here is either Green Belt-certified or has gone through the process, because every single year, you have to recertify. I should say, every other year, to continue that drive-on offering. So a pretty good focus across the organization.

And then lastly, on restructuring, I think this has been a pretty successful story. These are initiatives I think we executed extremely well, and our savings came in favorable to our original estimate that we gave you last year. Last year, we said we would come in at $160 million of benefits at a cost of $165 million. I'm going to show you this later, but we did better on both fronts.

On our return on invested capital, the chart on the bottom there, particularly on asset turns, we continue to focus on the balance sheet. We further reduced our primary working capital, which I'll touch on in a second. We took out the facilities that we talked about related to our restructuring initiatives. We invested wisely in CapEx, and we're very efficient on our tax plannings. So we look at all the constituents to continue to drive returns across the organization.

So the takeaway on the chart is somewhat [ph], we feel confident about achieving our next milestone of at least 15% EBIT, 15% return on invested capital one year earlier than we had committed.

So let me now give you a quick snapshot of last year, our key performance indicators as compared to the prior year. This is kind of a little bit more of a dive-down. John touched on a couple of these points earlier. But as you can see, we realized excellent top line organic growth of 28%. We also achieved strong earnings leverage of 36% on an EBIT basis, and I'll hit on that a little bit further. But more importantly, we set new annual records for earnings per share, EBIT and return on invested capital. And we did this, we talked about -- Carlos showed the road less traveled. So when you put that into perspective, we accomplished this by aligning our enterprise structure, launching the WIDIA brand strategy, updating our ERP system to one common global system and overcoming a significant run-up in raw material cost and still put these numbers up.

We also completed the restructuring program, which we began during the recession a few years ago. In fact, we're on pace to realize $170 million in annual ongoing benefits, and I'll show you the chart later by the costs and benefits components.

But I think, more impressively, is we've actually experienced our gross margin expansion of 350 basis points to last year finishing up 37% despite this significant input cost, as John showed you with the run-up on tungsten and how we were proactive with the pricing.

Also, our SG&A or operating expenses also decreased 300 basis points. We got that down to 22.3% of sales, which also contributed to our 14.1% record EBIT and earnings per share of $2.98. And equally important, I think it sticks out in this chart for a lot of people who were balance sheet fans is the return on invested capital of 14.8% for the year.

We continue to watch the balance sheet as well. Our cash from operations is plus 10% of sales at $231 million, and we reduced our debt to cap to 15.9%. We also strengthened our balance sheet, improved our financial flexibility, which allows us to reinvest back in the business and better weather any market uncertainty that we're going to face in the future. So the takeaway here is, I think our team executed well on many fronts.

I wanted to give you a little historical perspective on a couple of trends. So here's a brief summary of our P&L for the last 4 years. Fiscal 2008, as shown here, that was our prior peak performance year, so we're going anchor off of that number. Note that we achieved all-time records for EBIT and EPS in fiscal 2011, and sales that were below the prior levels on fiscal '08. And I think John Tucker pointed this out as well, so from a consolidated basis, our sales were lower by 7% or approximately $200 million compared to the prior. You can see the performance metrics on the right-hand side.

We had strong top line growth as a result of excellent organic growth, key strategic initiatives around our brands and channels, our products, the geographic expansion as well as price realization. As Carlos noted earlier, 26% of our sales is now coming from the rest of world growth markets that we have specifically focused on, and I think this better reflects a better balance of geographic sales. Our EBIT also rebounded from a recession low of 4.7% to a record 14.1% last year. And compared to our prior peak in fiscal 2008, EBIT margins expanded 250 basis points on $187 million less sales. This was driven by the expanded gross margin that I talked about, controlled costs across the organization, a very robust restructuring program that eliminated cost across the company.

And lastly, our earnings per share reached an all-time record of $2.98 due to our operational and financial strategies and cost programs. We eclipsed our past peak of $2.76 of much lower sales, while successfully addressing higher raw material costs and having a higher share count outstanding compared to the prior peak.

Our financial profile has continually changed over the years, but we remain true to our capital structure of principles to maintain a strong balance sheet. We continue to make improvements in our primary working capital, which we define as accounts receivable, inventory and accounts payable as a percent of sales. Further opportunities are still apparent in these areas, but we have made good progress with our days sales outstanding and our day payables metrics. And as John and John talked about, and with the new ERP system, we think we can even make further progress with our inventory turns. With the reduction of the SKUs and a better visibility of the system, we think we can do a much better job as we go forward. So the takeaway on the inventory side is, we still think we have lots of opportunity.

Our debt to capital has been reduced well over the past few years. In fact, our debt is now 1/4 the level from June of 2009, and this is due to our solid operating cash flow and performance, and is reflective of our commitment to maintain our conservative financial principles and the decision to issue approximately $120 million in equity in July of 2009.

On non-invested capital, through a combination of the strong operating performance, including our focus on restructuring as well as the balance sheet, we achieved an all-time record in 2011. This also takes into consideration excellent tax planning with a focus on achieving an optimal pack, as well as capital structure.

And lastly, not shown here, but I would comment that our U.S. pension funding remains greater than 100% funded, and this frees up our balance sheet for operational and strategic growth.

Despite the economic downturn, Kennametal has consistently generated strong operating cash flow. As you can see on the chart, we actually averaged over $200 million annually or approximately 10% of sales, and this provides substantial operating liquidity and capital for growth in our business. We take pride in this performance, especially during challenging environments, and we also see additional opportunities and an accelerated additional initiatives to further improve our working capital and to accelerate cash flow and increase our shareholder returns.

We remain true to our capital structure principles and have deployed the substantial cash generated in a strategic manner, driven by return metrics. It's a very disciplined process. And as far as CapEx goes, we apply our cash generation to areas deemed to provide the greatest returns for both shareholders. And the areas of focus where we continue to look at from a CapEx perspective are manufacturing capacity, production capabilities, and as we talked about earlier, our global expansion. We reduced our CapEx levels to below maintenance levels during the crisis, but we're now back in line with our depreciation. We should be around that level for the next few years. But I'll point out that the investments we made in fiscal 2008 and 2009 also enables to aggressively restructure the business during the downturn.

Here we go. Now I'll give you a quick update on a restructuring program that we initiated a few years ago. I'm pleased to announce we completed the program at the end of the June quarter with a positive outcome. The restructuring program is now complete. When we were here last year, we said we expected the cost associated with the programs to be $165 million, the projected savings to be $160 million in annualized benefits. I'm pleased to note that the cost came in at about $152 million, which is $13 million less than forecasted, and the benefits are now projected to reach $170 million as you heard on an annualized basis, with $165 million being realized last year. The program covered the closure of 15 manufacturing facilities. In addition, we also divested non-core, commoditized businesses, which also eliminated 7 facilities from our footprint over the past few years. This brought the total number of facility closures to 22. John showed 15. We also divested 7, as Carlos showed in this portfolio management.

As a result, the key focus of the program was to lower our fixed cost permanently, and that's the keyword. We had a plan in place since 2003 for us to reduce our footprint by 50%, and we did accomplish that fact. And was always, we still have a contingency plan in place, should be the need arise to take up further cost in both manufacturing as well as nonmanufacturing areas. And we also retained capacity through very lean practices, making CapEx investments to enhance productivity as well as capacity. We feel we're well-balanced on a global basis.

Getting away from the restructuring, also, we look at our operating costs. And another driver that we continue to focus on as a team is to focus on operating expenses or SG&A. And we always measure it, very similarly, guys [ph], as a percent of sales. So prior to the recession, we were consistently reducing our costs, and we're around a path drive towards a long-term goal of having SG&A as a percent of sales to be 20% or less. We were moving the needle as a result of our cost discipline focus and efficiency of our channel brand strategy that we talked about over the years.

While the recession created some headwinds, we're now back to making progress towards our goal, achieving SG&A of 22.3% last year. With the introduction of the new enterprise approach and the new ERP system, taking into consideration as well restructuring, we will continue to drive cost out and self fund growth initiatives as a result.

With the enhanced visibility of the SAP system to our cost structure, we're going to continue to leverage technology to also consolidate, outsource or eliminate non-value add activities across all disciplines in the company, and we're also going to continue to drive Lean into many of the back office functions to get an added benefit. So we plan to self fund our market-facing functions, or I should say, sales and marketing functions, by continuing to reduce our back office or administrative functions. The bottom line is we want to reduce our G&A, but focus it back to sales and marketing. So we can leverage the business much better and grow the top line quicker than the market.

I like to show this chart because I think this chart puts in perspective the past few years. We accomplished a lot, as we highlighted today, while executing our strategies and managing through a very challenging economic environment in the past few years. But I think this really hits home how the transformation has taken hold. You can really see the benefits of a restructuring and the strategic execution, beginning really in fiscal 2010.

During this timeframe, we've had 5 consecutive quarters of EBIT records and 2 quarters of record return on invested capital for the company, and we continue to focus on further expanding our margins and improving returns as we go forward. You can see that we have been at double-digit EBIT beginning with the March 2010 quarter and have remained at that level. Even more impressive is the margin performance during the second half of our past fiscal year 2011. You'll notice that we averaged about 16% in the second half of last year in the March and June quarter. And in the June quarter standalone, it was an all-time high that also eclipsed our largest global competitor. It's the first time we've ever done that. So hopefully, this puts into perspective the recent performance.

Now I'd like to shift a little bit and now put it into further, better visibility, how it relates to the historical Kennametal and the performance that we're doing this year.

As you can see on this chart, if you go back in time to 1987, you can see a similar EBIT pattern of peak to trough results. Kennametal typically followed similar patterns going in and out of recessions. But as noted on the chart, you see from a historical Kennametal perspective, we have on average the peak EBIT percent of sales of approximately 12% and a trough of around 5%. This was true in the '80s, '90s, as well as into the 2000s. However, the past fiscal year, this also reflects our guidance that we provided for fiscal '12. I think it tells a very different story. We're at an inflection point of higher profitability and returns due to the initiatives we have implemented over the past few years.

Carlos, John Tucker, John Jacko and I all touched on the key drivers: The enterprise approach, the WIDIA and indirect channels, the footprint change, the restructuring. There's a lot of hard work that went over into these initiatives. And I think you're beginning to see a new Kennametal emerge that is better positioned to outperform the market and deliver excellent results.

You may have heard us refer to this trend in the past, but I think when you have a visual view, I think it helps crystallize the point, you can actually put in a better context.

As a result of the hard work that I touched on by our global team across all disciplines and implementing our initiatives, we feel that we're in a much better financial position than we've ever been. As we have highlighted for you, we believe that we have a much more flexible structure to address whatever market conditions we have to face. We have permanently reduced our cost structure, rationalized brands and channels and have further balanced our business. And I think this chart, what we're trying to show you here, this is evidenced by what's shown on the chart, if you go back and you compare our prior peak earnings per share of $2.76 that we achieved in fiscal 2008, when you compare it to our current fiscal 2012 outlook, you'll notice that we'll deliver significantly higher earnings per share on sales at about the same level. And we feel there is additional upside as we approach the $3 billion threshold in sales, and our EBIT margins can achieve the mid- to high-teens range going forward. And our $3 billion in sales is based on organic growth and does not include any acquisitions. And we feel the $3 billion over the next few years is well within our sights.

But we understand we can't control the macro environment. So we have, shown on the right-hand side, a hypothetical scenario reflecting what we expect to happen if we had an unfavorable market, and sales fell equivalent to the prior trough. As I noted, if our sales were to return to the past levels using fiscal 2009 as the trough, the sales at about $2 billion, we still believe we can achieve EBIT of between 10% to 12% and deliver earnings per share of approximately $2 a share. When you compare this to our fiscal 2009 results, you see a vast structural difference and higher performance. And as well with our new structure in place, we also feel if the sales will go down, our decrementals would be basically be half of what they were during the last cycle. So the last time, a lot of people in the room said that 40%, we think our decrementals would be down to about 20%. So significantly changes a lot of the cost we took out of the business.

So the bottom line here is we significantly lowered the breakeven of our business, and we're better positioned now than we have ever been in the history of the company. And I think John, Carlos and John also mentioned that as well.

Now I'll shift a little bit towards the balance sheet and kind of priority use of cash. As I noted earlier, we believe we consistently generate strong operating cash flow, and this provides substantial operating liquidity and capital for growth of the business. We are highly disciplined in our capital allocation process to ensure that we invest in the highest potential initiatives, and I think we have them listed here for you. But over the years, we have applied a rigorous and disciplined investment process in order to become a breakaway company as Carlos showed at the beginning. Kennametal has reinvested approximately $1 billion in the business, if you go back to fiscal 2003, through a combination of CapEx and inorganic and M&A activity.

The capital expenditures of nearly $0.75 billion were invested in a number of strategic areas, including productivity enhancements, new product capacity, streamlining our manufacturing footprint, and as we all touched on, growth in emerging markets. We also have actively managed our business portfolio over this time horizon. We divested over $600 million of assets and invested nearly $740 million of acquisitions with higher profitability and returns since 2003. And additionally, over the same period, we've also returned over $0.5 billion to our shareholders in the form of dividends and share repurchases.

Kennametal has repurchased almost 400 million of shares since 2006, and we have issued equity of approximately 120 million in July 2009 during the severe global recession. And we also reinvested $152 million, as I said earlier, in restructuring of the business to deliver higher returns, improve the profitability and increase our global competitiveness. So we feel this disciplined and balanced investment approach is a key contributor to our long-term returns.

Challenge with the clicker -- apologize for that. I know we have some bankers in the room, so I just want to make a point that Kennametal remains committed to maintaining solid investment grade things with Moody's, S&P and Fitch to enable us to ensure consistent competitive access to desired funding sources.

Kennametal's current capital structure reflects a strong equity foundation and high liquidity levels in the form of cash and available credit facilities. At the end of June last year, Kennametal had a total debt outstanding of $313 million and a reported debt to capital of just under 16% as I showed earlier. Our leverage, in terms of debt to EBITDA, was just 0.7, as measured by our bank covenants. So we're in very good shape there. Our net debt has steadily decreased in spite of the significant investments we've made, and that's due to our consistent strong cash flow.

At the end of June, we were below our target long-term leverage level and remained well positioned to further fund growth initiatives whether it's CapEx or M&A, as well as opportunistic share repurchases. We also extended our debt maturity profile through the refinancing of our 5-year, $500-million bank credit agreement in June of last year, and intend to issue new tenure notes to effectively replace our $300 million, 7.2% senior unsecured notes that mature in June of 2012. We are prepared to go to market and intend to do so well in advance of the June 2012 maturity. And we expect to realize a lower coupon and generate interest savings versus the current issue, which had a 7.2% coupon.

So with the new issue and the replacement of the existing bonds, we will complete an important liquidity objectives of maintaining both debt capacity and extending our maturity profile. We'll also maintain our diversified funding profile and avoid over-reliance on a single funding source for accessing both the bank and public debt markets.

Very similar to what John talked about earlier, just kind of an outside-in view of how we have performed over the last 3 years compared with our peer group. You could see we're 1 of 20 of our peers. And I'm showing too, here, but we typically measure ourself on 6 primary metrics. We look at sales growth, EPS growth, return on invested capital, EBIT margin, operating cash as a percent of sales and debt to EBITDA. And then we basically take those and we compositely rank them on all 6 metrics. But just to show you here, highlighted are 2 of the 6 items, and you could see the progress we've made towards our 15 x 15 initiative, as well as how 15 x 15 correlate with top tier financial performance. You could see that on the left-hand side, as well as on the return on invested capital, we feel we're moving the envelope in the right area.

So as a result of continued growth and solid improvements in our profitability, Kennametal, when you take all these 6 characteristics into consideration, we're actually in the first quartile. This is what we review with our board, and this is how compensation metrics of the management team are aligned. So this further validates not just kind of how we're looking at the business, we're also trying to look at that outside-in perspective to measure how we're doing with both the top-tier industrial companies.

Now I'll just touch on our outlook in a couple more slides here. Shown on this page is our outlook for fiscal 2012 that we provided at the beginning of our fiscal year. Bottom line is there's no change to our outlook. We're only a couple of months into this new fiscal year, as a reminder. But the underlying assumptions of our outlook are a continuation of our long-term strategies that we touched on, and it's based on also as well as looking at global IPI that Carlos touched on earlier.

As Carlos said, we anticipate organic growth of 10% to 12% based on global IPI of about 5%. And this is consistent with our long-term goals of 2x to 3x global IPI. And I will put that in perspective, we also suspect sales growth to be a little bit higher in the first half of our fiscal year than in the second half.

Carlos also touched about -- we published our monthly order rates on the 10th business day of the following month through looking at both July and August. As Carlos said, we either met or exceeded our expectations 2 months into the new fiscal year.

So I'd say, overall, we expect to deliver our 15 x 15 milestone 1 year earlier than we had anticipated, and deliver strong leverage as a result of our initiatives. And similar to fiscal '11, we feel that fiscal '12 is going to be another record year for the company.

We also get a lot of questions on seasonality patterns. So I wanted to remind everybody here, here's a historical snapshot of our earnings by the first half compared to the second half. And we feel it's important to show how our business performs based on our fiscal year time frame, and our composition footprint of our international businesses. As many of you know, we are, at June 30 year-end, and we typically start off the fiscal year in a slower period, given the shutdowns that we experienced in Europe with the vacation period. And then we also experienced that as well in the second quarter, the December quarter, because of the holiday period in both November and December. So we end up with a less quality workdays. And then compounding that, we always typically start projects in the first half, where we incur the cost and we get the benefits in the second half of the fiscal year. So that's why we get a little bit of a different split between our first half and our second half. And if you throw out fiscal '09 and '10, given that kind of the way that recession put in there, we expect to follow suit consistent with this pattern going forward.

So to wrap up and summarize the financial overview, I think you heard us today, we think Kennametal is a transformed company. We are delivering unprecedented financial performance on many fronts. Our new enterprise structure is focused on customers and served end markets, and this provides top line growth from cross-selling opportunities that John talked about. During the last downturn, we accelerated our plans to reduce our costs, aggressively implemented restructuring program and getting very favorable savings as you saw on the chart, and both John Tucker pointed out as well. As a result, we feel well positioned for future growth not just this year. We're going to get 15 x 15, 1 year earlier than we talked about. And we also strengthened the balance sheet, the operating flexibility of the company, and I think as Carlos pointed out very early, we think we are becoming a breakaway company. And I think we have a lot more runway ahead of us in the future.

So thank you for your time, and I'll turn it back to Carlos for some closing remarks.

Carlos M. Cardoso

Thank you, Frank. I'll be brief, so we can jump right into the Q&A. But I think it's important for me to talk about, one more time, about what our financial metrics and objectives going forward, again: 6% to 10% top line CAGR; 15% to 20% earnings per share; $300 million to $400 million free operating cash; debt to cap between 30% and 40%; and the PWC of sales of 20% to 25%.

Again, I hope that during the presentation today, that you realize that this has been a journey, and this is not an overnight fad that 2011 was an all-time record, and we expect 2012 to be an all-time -- we believe that we have a number of initiatives, and we have differentiated ourselves in the marketplace, and we can continue to deliver performance at the top level.

So again, we talked about 5x IPI in 2011, and we talked about 2x to 3x going forward. I'll remind you that we talked about 6 drivers, which one of them is the economy. Five of them are the traditional Kennametal initiatives that we have delivered in the last few years to outpace the marketplace. And there is no difference going forward, we are a global industry leader. We have a diversified mix of certain markets, powerful brands, and the geography position that we have gained in the last few years will continue to help us drive top line performance.

The consumable business model, again, as long as activity is taking place in the marketplace, we are selling and continue to drive sales. And a record innovation. I mean, we really have established ourselves to -- by having a DNA that is an innovative company. We developed 11,000 new products -- introduced 11,000 new products in the marketplace every year. We've done that for 8-plus years. And that's a record that, in the first few years, people doubted, "How long can you do it? How long can you sustain it." We have proven for 8 years. We strongly believe that we continue to drive at that pace. And I think that at the end of the day I hope that we were able to demonstrate that this is a compelling financial position that we're in.

So with that, I apologize, I think the room is very cold, but I see John going back and forth. My remote control on the temperature didn't work.

So I'll turn it over to Q&A. And the rule is easy. I answer all the easy questions. These guys answer the tough questions. Okay go ahead.

Right here. Right in -- do you, guys, have a mic? Can we have a mic positioned in the front and one in the back? It's easier, I think.

Question-and-Answer Session

Henry Kirn - UBS Investment Bank, Research Division

It's Henry Kim from UBS. How comfortable are you with the leverage under the 40% debt-to-cap target? And over what time frame would you look to get toward the target? And maybe dovetailing with that, does the current environment change how you prioritize organic opportunity versus M&A versus buyback versus [indiscernible]?

Carlos M. Cardoso

Okay, I'll let Frank address the first part of the question, and I'll add to it.

Frank P. Simpkins

Henry, as far as our target debt-to-cap, I mean, that's our goal as I showed in our priority use of cash. We like to look at reinvesting back in the business in organic share repurchases and dividends, as you guys know. Acquisitions are tough at this time. We have a very disciplined process. I think Carlos talked about that. We have an active pipeline, but some of those things, we're not just going to just go out and buy company for the sake of buying something. If there is a better opportunity, I either put it back in the business or buy our own stock because the valuation is cheaper. We do that. So we evaluate each one of those. And if the right acquisition will come along, we feel comfortable that we can go to 30%, 40% and get back down relatively quick, and maintain our investment grade rating. So it's -- in some respects, it's a timing issue.

Carlos M. Cardoso

Yes, I mean, I think that it's pretty obvious that we did a lot of work of divesting that business. So the last thing we're going to do is go out and buy a new business. I mean, I certainly -- I mean, it wasn't easy work for me, I can tell you that. And so we're going to stay disciplined on that front. But we also need to have -- I mean, we also need to have cash at hand in case an acquisition comes. Again, in 2006, I was pressured a lot that our balance sheet was too strong and go do something, go do something. Those people that were advising me during that time, I don't know where they were in 2009, 2010, okay? So all I can tell you is that I'm not going to -- we're going to stay disciplined. We're going to stay -- obviously, we can make mistakes, but it's going to be hard for us to make a mistake. We're just going to stay vigilant and we're going to take the opportunities when they come, and we need to have the balance. And that's the balance that Frank talked about, and we are committed to that balance.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Ann Duignan, JPMorgan. Just a couple of follow-up questions. In the guidance that you've given us today, is there any share repurchases baked into that guidance or would that be additional to the 15% to 20% earnings per share growth?

Carlos M. Cardoso

Yes, we have some -- when we put the plan together, we basically addressed solution, okay? So that's the plan. As the year turns out, and based on the priority use of cash, we make adjustments, so minimal, we will address the dilution, if our shares have been relatively cheap, so we've been buying. I mean, that's the bottom line is that we are going to be opportunistic and do the right thing. But we bought...

John H. Jacko

Yes, to put that in perspective, and as you know, last October we got a new share repurchase authorization with the board for 8 million shares. Last year, we bought 1.5 million. And again, as Carlos said, we put a certain amount in for dilution every year. But then we go back and look at opportunities, if there's not an acquisition, the CapEx already in there, we may accelerate more towards share repurchases than other areas given where -- the priority is at the highest returns. And at the end of the first quarter, we'll obviously update you on where we stand.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Okay. And then just a quick follow-up on the acquisition front. Can you talk a little bit about what you mean by new platforms? I mean, what might those be or what areas might you be looking at?

Carlos M. Cardoso

I'll give you an example. Tricon was a new platform in a way, okay? So when we acquired Tricon, it was a platform that brought us into surface mining. We're very strong in underground mining, and that -- it's still a materials company, still within our technology niche, although that's a new technology in addition to what we had but created a new platform for us. Things like that, that will be a new platform. We are going to stay close to our core. I mean, this is what we know. This is what we bring value. We're not going to be a holding company. I mean, that's what you guys do, the buy side, they're holding companies. We stay -- stick to our niche, which is technology, materials technology. And when we buy something, we need to bring some value to, otherwise, it doesn't make any sense to buy it. Cliff?

Clifford Ransom - Ransom Research

Cliff Ransom. A question for Frank. This is really very remarkable progress that you've made over the last couple of years. But I was a bit concerned that somewhere he's preoccupied with Lean, with metrics and goal. When I look at a typical manufacturing company, and maybe this is going to be part of your answer, I'm asking what am I missing? It seems to me that world-class is something like 10% working capital to sales, and your goal is twice that. And when you get SG&A, even with the reallocation of S to G&A, that number's probably mid-teens, not 20%. So what is it that I'm missing about the structure and nature of your business and your competition that are going to allow you to get to those goals?

Frank P. Simpkins

I'll talk and then Carlos can add a couple of things. First, on the model. Cliff, the SG&A, I think world-class great industrial companies have high teens. I mean, you may not -- I mean, different now. But when you have a direct field sales model, they typically command a higher cost. So we have a higher SG&A cost inherent with our indirect -- or our direct field sales. So as you know, we've been trying to basically balance our direct and indirect, with distribution to get a better parity in the organization, but the direct field sales individuals, when they are working with a customer, they get much higher margins. Because they're on the shop floor, there's added opportunities, they drop the productivity, so we gain more share with the direct field sales organization, and John or Carlos can talk about it later. As far as the working capital, I don't think we're -- we said that we're done at 20% to 25%. That's kind of the next milestone. I think when we look at parity, and I know Anne [ph] always gives me encouragement, with the days payables outstanding, I think we've done a pretty good job of slowly bringing up our days payables. I think we've done a good job of our days -- DSOs, kind of in the 50s and bringing up the payables, to try and get parity there. But I think for us, the holy grail is going to start to be the inventory turns. And I think nobody here is willing to be -- even if we get the 4 or 5 in the next few years, because everyone turn of inventory is another $100 million of free operating -- huge opportunities there. We know we have a lot of work. We restructured the organization. John Jacko talked about reducing the SKUs, which I think we'll start seeing the benefits because it came down through the recession. And I think with the capital investment we put in place, I think there's going to be an added opportunity. And then, with the whole IP structure, the visibility of SAP -- to have a better visibility in looking at the whole, I'll call it, enterprise costs whether it's in manufacturing. I think there's going to be huge opportunity there. And then at the end of the day, we're also changing compensation metrics and in some respects, to focus on on-time delivery and other areas. So if you want to get desired result, we've done a lot, I think. So through a combination of SKU, the systems and the compensation, we think we're going to start driving the inventory turns.

Carlos M. Cardoso

I'll add to that. If you look at our business as 40% being direct, and 60% indirect, somewhere in that side. The direct side is the innovation is the price leader in all. So when we look at it, we look at EBIT margin versus SG&A percentage. Because, you can have a better SG&A percentage and have less pricing power on the other hand, right? Because you have less glue with the customer. So it's all about the balance. I mean, the metrics drive the business, but the metrics, that needs to be set up to drive value, okay? And to us, to me personally, is EBIT. And a portion of our business has higher margin, gross margin but has higher cost of sales. But the other part of the business has slightly lower margin, but has lower cost of sales. And I think that's the beauty about this company is this is a 2-piston engine versus a 1-piston engine. In other words, that's a benefit for us. We're looking at that mix constantly and how do we drive shareholder value. And that has been very, very beneficial for us. Eli?

Eli S. Lustgarten - Longbow Research LLC

I got 2 quick questions. One, can we talk about the inventory levels across the company at this point but compared to where they were in 2008? And more importantly, where are you with your current level of activity? And can you do this sort of regionally between North America, Europe and China?

Carlos M. Cardoso

Are you talking about IPO? Inventory turns or...

Eli S. Lustgarten - Longbow Research LLC

Kennametal inventory at the customer level. Just where inventories at customers'...

Carlos M. Cardoso

I mean -- again, first of all, we ship 80% of the orders that we get in 1 month, just to give you an idea. So very -- 80,000 customers, we serve 5,000 customers a day, 4,000 to 5000 customers, so very high speed. I can tell you that if you take MSC aside, most of our distributors have probably 30 to 45 days inventory. I would say that our customers in the developing economies, they have about 30 days to maybe 45 days inventory. In Asia-Pacific, typically they get to 3 months. So that's -- the Asian like to have more inventory than the Western world. And I tell people that every time we have a recession, if you go back and study, companies become more efficient. In other words, they learn how to operate at higher levels with less inventory. And that's true for this recession as well. So we find ourselves, in a way, there are customers that have very little inventory.

Eli S. Lustgarten - Longbow Research LLC

And you talked a lot about, I think in use of CMI as the more of a leading index. But the preliminary CMI in Europe is 48.4%, which basically says there's no growth going on in Europe, I guess, I think your point, and even China, 49.4%. Can you talk about, you said there was no change yet, but are you preparing and taking any step or looking at what's going on in Europe, not so much of the -- not the sovereign states up but the actual GDP numbers, our competitor 0, manufacturing looks like it's slowing, and whether you're seeing any changes or preparing any changes that's still a big part of your business?

Carlos M. Cardoso

Yes, I mean, I think that I just -- as I've said I just came from Europe from the show. And when you look at the total number, I mean there's a number of countries involved in that number. And this is the one time that we are, I think, in the right place. Our largest market is Germany. Okay, the second is the U.K. And as our numbers show, we continue to grow. Germany is, if you look at the GDP and the IPI in Germany, still positive. And they still, one of those machine tool builders I was talking about is a German company, okay? They have 12 months lead times and so forth. So it is slowing down. I don't think it's going to go into a negative where we play in our markets. Basically, the beauty of this company where we are today is that, if we slowdown more than what we are planning, we slow down the factory. We really don't have to go out after a lot of costs. As Frank said, $2 billion would be a 30% reduction in the top line forecast of 2011. First of all, I don't think that's can happen this year. Second of all, I would say, okay, there isn't -- we are in a very good position. So if you buy 30%, we can still deliver $2 EPS plus. And I don't believe that the world is going to get there, but we wanted to show it to you because I'm reading the same papers that you guys are reading. And I knew that you are going to ask that question. And I know that at the end, when you leave, your minds are not going to be changed. And we're going to continue to do our thing, okay? We're going to continue to deliver. We're going to -- continue to surprise you, like we have, because, I mean, this is an industry -- industrial recovery. I mean, like I said, I can't talk to 200-plus companies and no one -- not even one person sees what we read in the paper. So the financial markets are disconnected from the -- we're going to continue to have financial issues. Europe is going to continue to have financial challenges and all that stuff. But we don't see it. I mean, so -- let me be more specific to you, at 10:00 this morning, we haven't seen it. How's that? Okay. There is one in the back. Okay.

Unknown Analyst -

Just to outfast you, I wonder if you can give us more details on what you can do on the cost-cutting side? You said there's another layer of cost cuts that you need to pull it out, and just sort of what other leverage you can pull?

Carlos M. Cardoso

I mean, the biggest leverage is to slow down the factories. I mean, it's the direct labor, okay? We -- so if the market came down 30%, up to the 30%, we really don't need to do anything else other than the direct labor. I mean, we still can deliver $2. So we are not going to do panic, and we're not going to start slowing down R&D and all that stuff and laying off people when just because we read in the papers. I mean, we're just not going to do it. We were very, very pragmatic during the recession. We kept -- if you remember, we kept 400 people, and we offset those costs through salary reductions and furloughs and all those stuff. Because we said, when this thing comes back, it's going to come back strong. And if we don't have those 400 people okay, we're going to lose market share. So we found a way to keep those people. And guess what? We are getting market share as a result of that because we did it. So we're not -- we've learned through this thing. I've lost a lot of hair in the process. We're going to stay steady. We're going to watch things closely. And the good news is that we don't have to do a lot. I mean, we just have to stay focused. So maybe somebody in the back and then we'll switch the microphone.

Holden Lewis - BB&T Capital Markets, Research Division

Holden Lewis of BB&T. Just trying to get a little bit of perspective on the rifts from raw materials. In your materials, you talked about that productivity and Lean allowed you to offset or more than offset inflation in the past year. And you also had, I mean, a 4 or 5 price increases. And if I put those together, I get to come away assuming that price, in fact, wasn't to play defense against raw materials, but was to play offense with the margins. I'm just wondering if you can tell me if that's true or it's the wrong way of looking at it. And if it's true, would you see the same dynamics going forward where you can use Lean and productivity to offset any tungsten increases, any prices you put forward -- put in, and going forward to continue to boost the margin?

Carlos M. Cardoso

So our philosophy, those are 2 different things. Our Lean is for inflation. In other words, as salaries go up and healthcare and all that stuff, we try to offset those with Lean. So these are ongoing. Raw materials, we're going to -- we offset that with price. Those are 2, I mean, very 2 specific strategies of the company. We don't use Lean to offset raw material price increase. We pass raw material to the customers. We've been very successful doing that. Again, we said here a year ago, 90% of the group didn't believe that we could do that. Well, we've done it. And not only that we did the raw material offset, we did raw-material-plus-margin offset. So we have a positive margin that offsets the raw material price increase. We've done it. That shows you the power of being a technology company. That shows you the power of there is, we have to probably have an SG&A at that level because that drives -- the intimacy drives value into the customer and that means that we can get price. Our product has value and that balance that we drive. So those are our 2 strategies. They don't come together. It's the way we deal with the business. Okay. There's somebody back there who has the mic coming up.

Unknown Analyst -

Carlos, just a question, I guess, on -- if you look at your historic EBIT margin range, it's about a 5% to 12% sort of peak-to-trough like you showed. I guess based on what you're saying today, it looks as if the future range is more like 10%, 11% of the trough up towards maybe 17%, 18% at the peak. So your midpoint has moved up quite a lot. I guess, is there a risk that the high incrementals that get you to a higher peak margin also mean that on the way down, that's where your trough margin doesn't really change much. Because I guess if you look at Sandvik, your main competitor, they have a higher peak margin than you guys, but their trough margin is actually not very different. So how can you make sure that generating very high incrementals does not lead to very high decrementals on the way down, because looking at the Sandvik's example shows that, that happens.

Carlos M. Cardoso

Yes, I mean, I don't know that the financials and the intricacies of Sandvik, but I mean, again, the bottom line, we said -- we set out in 2009 to say, we're going to look at this thing as if we'll never recover forever it, okay? And we want to have a double-digit EBIT margin business at $2 billion, okay? And we have achieved that. So the bottom line is that as long as we have the breakeven point doesn't change for the business, which is something that we pay very close attention to. And we've been very, very effective at doing that. I think we're in good shape. I mean, I think -- again, I don't think that the business is going to go to the extreme of $2 billion. I mean it's just that...

Frank P. Simpkins

I would add to that. We took $200 million across out of the business, we divested low commoditized businesses that were hurdles in the past. When you put those 2 factors in, I don't know what it's going to be, but it's not going to be as bad as it was. I know that for a fact.

Carlos M. Cardoso

Again, if you take the worst case scenario, 6-point-whatever, in 2003, the block recession, and I said that you have -- we have a 300 basis points just in the mix change. I mean, we're a double-digit without doing anything. I mean, it doesn't account even for the $170 million of fixed costs. So the mix alone gives you 300 basis points, and then you take $170 million, which are -- those close -- those plants are closed. We're not going to reopen those plants again. Okay, you take that, I mean, how can you go below that number?

Unknown Analyst -

And just a quick follow-up. On your cost base, your CapEx is growing, I guess, high teens in percentage terms this year. Your headcount last year grew about 600. What kind of headcount additions are you expecting this year in your guidance?

Carlos M. Cardoso

In our -- I think we are pretty much at the headcount level that we need to be in accordance to our guidance. I mean, the bottom line, the growth comes -- have come primarily from direct force, okay? So obviously, as production goes up, you have to have -- add the direct labor. Where our indirect is pretty much -- and by the way, again, I want to remind everybody, we don't bring those indirect people back because we're doing things differently. We had 20 order entry systems, now we have an SAP with 1 order entry system. So we're not going to go back and rehire the people. We don't have a system for them to work on. We can't rehire them. So that's why those costs are permanent costs that we just don't have. We had -- I mean, in 2002, we had 300 IT/engineering systems. We probably have about 20 today. But one is the master, so those people don't have a place to come. I mean, even if somebody wakes up and says, "Hey, I want to hire people back," I mean, there's no place for them to go. The process doesn't work anymore. Okay, somebody in the back. I mean, they've been -- go ahead.

Unknown Analyst -

I know the disclosure from Berkshire is a little spotty. But do you have a sense of how your organic growth compare to Iscar's last year or any kind of anecdotal or qualitative comments you have about how they are performing?

Carlos M. Cardoso

No. I mean, they're -- they don't announce. They don't disclose their numbers. I mean, it's nice to be in that situation because they can say anything they want.

Frank P. Simpkins

Yes. The only thing I would add there is that I think there's probably a little bit of a shift there with the Japan -- the unfortunate situation in Japan for the Tagitech [ph] plant. They're probably down a little bit more, and I think we're taking advantage of that in some regions. So I'll just give you that -- anecdotal for you.

Carlos M. Cardoso

And I'll add that the WIDIA brand goes head-to-head with Iscar. So if we're growing at 37%, then that business better come from some place. That is head-to-head Iscar, SECO, Mitsubishi and so forth. So we -- our numbers are -- we're growing at 37% in their space. Okay, one back there.

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

Andy Casey, Wells Fargo Securities. A couple of questions. The first is could you help us size the WIDIA brand today against that $500 million goal?

Carlos M. Cardoso

Okay, it's about half of that today.

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

Okay. And then back to the earlier question a couple ago. In terms of your 30% to 40% incremental margin that's included in -- or at least implied in the 15% to 20% CAGR on the bottom line, the 20% decremental. Can you help us understand kind of what the levers are to pull the 20% versus the 30% to 40%?

Carlos M. Cardoso

Frank, do you want to take a crack at that?

Frank P. Simpkins

Well, the 20%, Andy, as you know, as I said earlier with the cost side of the business, I mean, you, guys can work around your models. With the permanent cost take out of the $170 million and the kind of the portfolio management, those costs are completely out of it. Now one thing as we go forward, we talked about the WIDIA product, we talked about new products that have typically higher margins going into place, and I think pricing is a little bit stronger as we were a little bit behind as our raw materials ran up. We still had fairly strong margins. We would have had even better margins over that -- our incremental would have been much higher had the raw material costs not creep. And so we're watching tungsten, that continues to come back down some of the normal basis, we think we can maintain that relationship offset it.

Carlos M. Cardoso

We call that and new normal for tungsten though.

Unknown Analyst -


Frank P. Simpkins

There's a component as well there.

Carlos M. Cardoso

Yes, there is about 3 or 4 drivers. I mean, it's not one thing. It's a number of things there in that area. Okay. Can we have a mic up here and that person can -- somebody? Okay. Go ahead.

Unknown Analyst -

Yes. We won't let John off the hook here. John, you mentioned that you still have a small portion of the portfolio, that private label. Can you give us an idea as to what that was last, maybe, 5 years ago? And how you'd whittled that down until now, and whether you expect that to completely go away at some point?

John R. Tucker

Yes, let me put it in context. We have and addressed about 8 private label customers, and we took the initiative this past year. And as we worked them off, so that we don't totally leave them hanging, if you will, so that they can make choices of where they want to go with other product solutions. We intend to be totally out of the Private Label business by the end of this fiscal year, okay? And one of the advantages there that I could've gone on a little bit about as you might have imagine is that those private label customers, and this speaks to the visibility of the new organizational approach where we have much better visibility of our cost and pricing structures both in the indirect and direct channels, it led us to take a look -- and we've addressed those as what we call low-flying birds. In other words, the margins really weren't where we wanted to be with those private label customers, so that's why we decided to exit it. And what that also did is let us use that capacity, what is being used for the private label products to be used for the Kennametal and WIDIA brands where we get higher margins. So it was a double impact of exiting from lower margin activities around those 8 key global, private label customers and moving that capacity towards a higher margin Kennametal and WIDIA products. And we're pretty excited about it.

Carlos M. Cardoso

I'll give you another perspective in addition to what John said. The majority of the private label sales came from the old Greenfield business. So as we sold that business, the majority of private label went with that business. And if you follow, on trying the high-speed steel, that's why they have low margins and all that stuff. The number that we have left is minimal. I mean, it's not a -- yes?

Unknown Analyst -

I was hoping you could elaborate a little bit on the services opportunity, how big do you think that could be and the margins in that. And then I have 2 other questions after that.

Carlos M. Cardoso

Okay, I'll let John Jacko to maybe address that.

John H. Jacko

Sure, I don't think we want to give the margins on it. I would tell you, it's not dilutive to our business. And it's a very good business. The size, it's about $100 million right now is what I would put the services at. I really do believe we've only scratched the surface on it. I mean, there is a number of opportunities that we're looking at. And I guess the only one I would share right now is this whole concept of rapid response centers being put out, especially in emerging markets. There's going to be a real opportunity for us to not only recondition our customers parts but also get us into some areas that we haven't been in that we can replace some of our competitors as well.

Unknown Analyst -

Okay, well, if you look at your 6% to 8% growth numbers, how much of it do you think is going to services or is it not going to make an advance anytime soon?

Carlos M. Cardoso

No. I would say that this service strategy is a 5-year strategy. So if you look at 2012, we wouldn't be able to see that in that number, but we'll continue to be in the next, I would say 3 years continues to be a small incremental growth for us.

John H. Jacko

One of the things about pulling it out of the business and putting it aside, is for us to get our arms around exactly what you're talking about, right? This has been integrated in the business and not necessarily fed the way that we would feed it as we pull it apart. So I think what -- we'll have certainly better answers next year into the detail.

Unknown Analyst -

And just following up one more point on that topic. Are there other opportunities to buy companies that actually focus on that, that would allow you to jumpstart that opportunity or just wholly organic?

John H. Jacko

What I've spoken about is totally organic, but we also have an inorganic strategy as well.

Unknown Analyst -

Okay. The other 2 questions really the -- could you talk about your utilization rates and your plans? And also, could you talk about the delta between emerging markets margin and margins in, say, Europe and the United States.

Carlos M. Cardoso

Yes, I'll address the easy one, which is the margins. We make the same margins regardless where we operate, okay? So I know that's counterintuitive, but we make good money as good money in China as we make anywhere else in the world, so -- or India or wherever. So our margins -- and again, it's part of the strategy that we are in the country for the country. So we can compete very effectively in China because we are in China, making product in China and competing in China. And relative to our utilization, I mean, obviously, it varies from product-to-product and plant-to-plant. But generally speaking, we probably are around 80%. I mean, that's an educated guess at this point. Yes.

Unknown Analyst -

Carlos, Doug Thomas [ph]. Just -- you talked -- you touched upon this just for a second, but could you and maybe Frank, talk about the board's commitment to alignment and incentive compensation, stock ownership, those things that I always preach about and think that they, over the long run -- those are very important factors in terms of driving shareholder growth. But can you talk about what the commitment is on your part and particularly the board to align your interests with shareholders?

Carlos M. Cardoso

Yes. I mean, first of all, personally, I truly believe in that. I want -- I meet with a lot of the investors, you guys know that, I go around the world a lot. One of the things I want to feel good about is when I look at investors and things are bad, this is hurting him and me and the pocketbook at the same time, I can say welcome aboard. We're on the same boat. It's a lot easier conversation than if my pocket is full and theirs is empty, okay? That's a tough -- very tough conversation. Maybe I don't want to go see him in that case. But the board is very, very committed to that. And I want to tell you, if you look at -- in our 10-K that we just issued, we went to the extreme. We're actually showing in a graph, the performance of the company in the last 5 years and how much I was compensated based on that. And we're both right in the center, we have 2 lines. We're both right in the middle in the lower left quadrant. It means the company in the last 5 years didn't perform as well as -- because of the recession, and I didn't get compensated as well either. And hopefully that will change, but we'll stay within those lines. And I tell you, the SEC, we actually found this on their website, the SEC actually called out Kennametal by name just last week of saying that we have done one of the best jobs of showing how our comp ties to the company performance. And they have encourage other companies to look at our proxy to use that to meet the Frank Dodd Bill requirements. So I'm sure we can share that with you. We actually just got it yesterday or a day before yesterday.

Unknown Analyst -

And then just quickly on the share repurchase, would you alter -- you seem to indicate that you would alter some plans that there's some flexibility built in so that you could repurchase more shares in a given year if you thought that -- if you measured the opportunities versus the weakness in the share price and so forth. What do you -- what is that -- what's the most, for example, I don't know if you can talk about the number of shares, but what is the largest capacity of the company really to buy back shares? And what do you say about the dividend too? First time in a long time, I'm getting questions about the dividend -- cash dividend.

Carlos M. Cardoso

So our balance sheet tells you that we have such ability to buy more shares? So I mean, the answer is yes. I mean, we have that flexibility. We look at it. We're doing -- I, obviously, cannot go into the details of the number of shares. But we have 8 million authorization that is in place and I suspect that the board will not have no issue to add more authorization if we need it. So -- and the dividend, we look at dividends once a year, okay? And our next time to look at it is in the next board meeting that we have. And we want to be in the 50th percentile of our peer group. So we are working those analysis as we speak, and we'll come back. I haven't seen the numbers, so I won't be able to tell you. But if we are below the 50th percentile, I mean, then we're going to get to the 50th percentile. That's kind of the how we run the business. So you can tell that we have very, very specific guidelines that we follow, and we really don't deviate a lot from those guidelines. Okay, there's somebody back there, I can see the...

Unknown Analyst -

Christian [ph] from [indiscernible] I have 2 questions. First of all, Japan is your third largest market. Could you elaborate a little bit on your expectations for sales growth in Japan in this fiscal year? And then second of all, in terms of your pricing policy, pricing will be based as you told us. Can you elaborate a little bit in terms of -- if tungsten prices were to come down, I assume you would expect to retain savings there. Is that -- can you just confirm that?

Carlos M. Cardoso

So I'll address that. The last one, yes. I mean, that -- this is why it takes us a little longer to get pricing is because we don't directly correlate our price increases to the tungsten, the cost of the tungsten. So as the tungsten comes down, obviously, if the tungsten came down by 100%, whatever. I mean, we'd have to look at that. But we have never given price back based on the tungsten coming down, and we have experienced some downturn. The Japanese market is very, very small for us. I mean, we're in Japan and because we have to be there for the machine tool builders. And the reason we are in Japan is because of the exports, as they export machines from Japan. We want them to be tooled with our stuff. So it's not a big market, it doesn't really affect us one way or the other. Any more questions? One here? Okay.

Michael Corelli - Barry Vogel & Associates

Just had a question. Michael Corelli, Barry Vogel & Associates. I had a question about your capital structure. Obviously, you have $205 million in cash, enough significant free operating cash flow this year. Talking about looking in acquisitions could possibly accelerate the share repurchase. I would imagine, as far as acquisitions are concerned, the target growth is probably narrowed, but the pruning that you've done and the increase in EBIT margins to a smaller target group of companies that you could actually acquire, which might make it a little more difficult, is there a consideration of as far as issuing new debts to replace the old debt, if you're building cash, you can find acquisition that you complete that might decide to issue less debt versus the $300 million that you have coming due rather than just issuing the same amount of debt and maybe having too much cash on the balance sheet?

Carlos M. Cardoso

Yes. I mean, I think that our pipeline of acquisitions, if anything, is stronger at this time. And to be honest with you, some of the concerns that we have is not -- if they all -- if the whole pipeline or if 25% of the pipeline came lose at one time, could we really handle that? So that's a concern that we have right now. We discussed that. In other words, if 2 or 3 of those companies that we have in the pipeline all came to us and said, "Okay, we're ready to do a deal today." Could we really do a deal we'll all 3 of them or do we have to select? So that's giving an indication that we do have a strong pipeline. But as Frank said, it's really difficult to predict and see what the timing is. Relative to the balance sheet, I mean, maybe you can pipe in a...

Frank P. Simpkins

I think we looked at all those items. I think to Carlos' point, our priority uses of cash, maybe accelerate some share repurchases, but we look at cash regeneration and every quarter we go through with the Treasury and tax department, do we need to do as much in that stuff that we debate internally? What we know, we think we have the right path. And we -- and our attention is to go forward with the debt refinancing at this time.

Carlos M. Cardoso

Yes, I think I have a hard time, to be honest with you to go back and say, "We're going to reduce our debt right now." So, to one end, I mean, you guys are telling me, "This guy is going to fall apart." So if that comes true, I need the cash, right? So I don't have to issue equity. If things work the way I think they're going to work, is we're going to grow like hell, we're going to need -- we need to support that growth. So I sit here and say, "Why would I do that? Why would I let that cash burn a hole in my pocket?" I mean, either way -- I mean, I have to be -- it's one or the other. You guys are all right and things are going to fall apart, so I'm going to need that cash. Or I'm wrong or I'm right, and I'm going to need that cash anyway because I need to support the growth that I think is ahead. So why would I change my strategy relative to the point of capital, I'm not sure. Yes.

Unknown Analyst -

If we look strictly at the slide, the 40% of your full year guidance in the first half of the year would equate to $1.40 to $1.52, and the consensus is $1.56, so is there anything in the -- that's happening in your business that would cost you to be sort of at the bottom end or the top end of your guidance? And I know it sounds like everything is great.

Carlos M. Cardoso

Well, I mean, we had a hard time getting away from quarterly guidance, so we're going to stay away from quarterly guidance. How's that? I mean, I think that you have a lot of information. I think you have -- I think the street is relative to the outlook is close. I mean, so I'm not going to add any more to that. I mean, it's right there.

David Rainey - Akre Capital Management

All right. David Rainey from FBR. I'm on the buy side. Just curious, how much of the cash at year end was overseas and not available for share buybacks? And I ask that because it sounded like from the earlier answer, if you were going to increase your leverage and take it out of your debt to capital, I guess, the 30% to 40%, that would be more in line with an acquisition strategy. So I'm just assuming that you're not going to draw down the line to buying share. So how much of the cash is effectively restricted?

John H. Jacko

That cash is overseas.

Carlos M. Cardoso

So a good percentage of the cash is overseas. So we do bring it back at the end of the quarter, and then we play with the allowance that we have.

David Rainey - Akre Capital Management

So, the number 80% or so overseas?

Frank P. Simpkins

A good portion of it.

Carlos M. Cardoso

Yes, you're close. So that's another reason for my answer about the cash. I mean, it's just -- yes, obviously, if we did that acquisition in Europe, that would help, right, and so forth. One more question and then we'll -- anybody has one more question or that this is it?

Very good. I mean, the management team is going to be around. So if you guys wanted to talk to the management team, and that's the reason why we have them to come in so you guys have exposure.

So thank you again for making the time to spend with us, and I look forward to seeing you around. Thank you.

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