Good morning. I'm Michael Pici, Vice President of Investor Relations, and I'd like to welcome those people participating in the room and online via the webcast to Kennametal's 2023 Investor Day. Before I begin, let me go over a few housekeeping items. In the event of an emergency, please use the exit at the rear of the facility and follow the signs to exit the building. Second, during today's presentation, we will be making several forward-looking statements, and we caution you that these statements are projections, and actual results may differ materially. We are under no obligation to update the forward-looking statements that are fully detailed in Kennametal's SEC filings for any actual events. Additionally, during our discussion, we will reference non-GAAP financial measures. The reconciliations to the nearest GAAP measure may be found in the appendix of the presentation.
A note regarding today's presentation: at the conclusion of the event, the presentation will be available for download on the investor relations page of our website at kennametal.com. Let me just give you a brief overview of today's agenda. Chris Rossi, our CEO, will kick the day off with an overview of our corporate strategy. Sanjay Chowbey, the President of Metal Cutting business, will then give you an overview of the growth initiatives Metal Cutting. following Sanjay will be Franklin Cardenas, President of Infrastructure, who will then provide you an overview of the growth initiatives for the Infrastructure segment. We will then take a brief break for those that didn't have a chance to browse our Innovation showcase for those participating in the room. Following the break, Dr. Carlonda Reilly, our CTO, will provide you an overview of our technological advantages and innovation capabilities.
Pat Watson, our CFO, will round out our prepared remarks this morning with an overview of our financial strategy and our targets. Following the presentation from Pat, we will conduct a Q&A session. Let me give you a brief overview of how the Q&A is going to work this morning. For participants in the room, you've been provided a QR code. Please scan the QR code and enter your question into the queue. For participants online, they may access the queue by entering their questions into the chat feature. You may enter your questions at any time during today's presentation. With that, I'll kick it off with a brief overview video.
Good morning, everyone. I'm Chris Rossi, the CEO of Kennametal. Welcome to our 2023 Investor Day. You know, as I watched that video, it reminded me of one of the things that attracted me to come to work for this company. You see, prior to working for Kennametal, I was a customer, and my company made equipment for the oil and gas industry. And Kennametal was always that supplier you could count on to work with your industrial engineering department to figure out how to machine difficult, parts, and also to improve the productivity in general of your manufacturing operations. And they would also be the supplier that our product engineers would work for to improve the survivability of our equipment when it was operating in a harsh working environment.
So I experienced, just like in the video, how Kennametal supports customers in the production of products that people use every day. In the case of my former company, it was energy. And it's ultimately this level of customer support that Kennametal provides that enables us to increase our share of wallet with existing customers and to earn the business of new customers in order for us to grow our business. And that's what today's Investor Day is all about. How will Kennametal grow at above market rates while expanding margins? And the team we have here today is really excited for the opportunity to tell you how we're gonna do just that. But before I get to that point, let me start with a little background information for those that are less familiar with Kennametal.
The company is 85 years old this year, and since its inception, we've amassed this huge amount of application technology expertise and materials science expertise, and we developed a great brand recognition. We're really known for solving difficult cutting challenges as well as wear-resistant problems. We do this across a diverse set of end markets and customers, and we have the manufacturing capability and reach to provide our products and solutions all around the world. We do all this through two business Metal Cutting, which, as the name suggests, we provide tooling for people to machine parts across the diverse end markets that are shown. Likewise, Infrastructure provides earth cutting tools and wear-resistant solutions that have applicability across a wide range of industries.
So across the two segments, Kennametal really does support the production of products that people use every day, like automobiles, airplanes, roads, and energy. And the common denominator across all these products and solutions is the applied application technology that we have and the material science that's shared across the two segments. So for 85 years, we've been building that technology and that great brand recognition, and more recently, we invested in increasing our manufacturing capability, really to bring it up to par with our brand and our technical expertise. And we did that through a program called Simplification and Modernization. Put simply, Simplification and Modernization was a strategic growth enabler. It not only allowed us to streamline our organization to improve our sales efficiency, but it really allowed us to step up our level of customer service and enable new product innovation.
Now, admittedly, we have more work to do here because our margins are still not what they need to be, but we know that that will come as our markets fully recover from the pandemic and as we execute our growth, capacity optimization, and Operational Excellence initiatives that we're going to share with you today. And we think of those initiatives in three strategic Innovation Advantage, Commercial Excellence, and Operational Excellence. Now, a lot of companies have very similar strategic pillars, but throughout the day today, the team's going to show you the uniqueness that Kennametal has built into these strategic pillars to drive above-market growth and expand margins. So for us, these are much more than just catchphrases. They really guide the leadership team and the employees every day in terms of executing our strategy to achieve our objectives.
In many ways, these pillars were enabled by Simplification and Modernization . Let me show you an example of what I mean. Now, many of you have had the opportunity to visit our Orwell, Ohio, insert facility, which has been newly modernized, and some of you had the opportunity to visit before modernization. For those that did, you'll remember that pre-modernization, the facility had antiquated equipment and was highly manual. It was unable to consistently hold tolerances within specifications, so sometimes that led to a poor quality experience by our customers in the field. Post-modernization, however, is highly automated, requires less incremental labor to drive higher volumes, quality consistency is no longer a problem, and we're able to produce products like KENGold. This, a new insert, incorporates our latest coating technology for superior performance, and frankly, it could not be manufactured on the old equipment.
We're not done improving Orwell yet. We still have more opportunity to optimize the processes by deploying more smart factory technology as well as data analytics. The bottom line is, pre-modernization, Orwell, and facilities like it, put us at a competitive disadvantage. Post-modernization, Orwell is now an enabler to our sources of competitive advantage, which are really built on three things: deep customer insight, application expertise, and material science. We take all this to develop and produce high-value-added products for our customers that our customers need. Orwell and its ability to produce products like KENGold is really a good example of how simplification and modernization is helping us to accelerate growth. As I said, pre-modernization, we were at a competitive disadvantage and essentially playing defense just to protect share. Post-modernization, we're now on offense to take share by executing our strategic pillars.
In doing so, we're really positioning the company to be able to capitalize on the global megatrends that are benefiting our end markets. We're targeting new customer acquisition by expanding into underserved areas of those same end markets. And of course, we're driving higher levels of customer service to enable us to earn a larger share of wallet with existing customers and to win new customers. Now, in addition to growth, we're also very much focused on margin expansion. Now, we know that margins will naturally expand as we grow and drive more volume, but we're also interested in accelerating that margin expansion by teeing up another $100 million of cost savings. And Pat's going to talk more about that in his presentation.
For now, I'd like to stay on the growth side of the equation, talk a little bit more about our, our markets and the megatrends that are affecting them. The first thing I would point out is that a full post-COVID recovery is actually still ahead of us. For example, compared to fiscal year 2019, airplane build rates are still 30% lower, and while automotive has made a nice improvement since the pandemic, they're still about 5% off. U.S. land rig counts are down about 25, and in some key regions, the U.S., for example, and especially Germany, industrial production levels have not really recovered fully to the peaks that we saw in fiscal year 2019. So we see these as tailwinds that will help us as we go forward based on a full recovery in these areas and regions.
Also, the growing global middle class, that's going to certainly lead to higher spending and consumption, which will benefit all of our end markets. It will also lead to an increase in demand for energy, both renewables and traditional sources. Geopolitical instability, you know, that's really creating an environment where security and reshoring are prioritized. And if you think about it, as our customers build new factories to de-risk their supply chain, that's an opportunity for Metal Cutting business to help them tool those factories up. It also creates more construction of the facility itself and the roads, which would benefit our Infrastructure business. Similarly, government Infrastructure spending, in general, is driving higher levels of construction. And I think the last point I would make is that customers are becoming more dependent on Kennametal for technical expertise as their internal expertise retires.
That's creating an interesting dynamic where customers are reaching out to us to make a connection, to augment their technical expertise. Once that connection is made, it's a very sticky bond because they need us to help them in the day-to-day operations of their business. We see these megatrends as a tailwind, and it's a tailwind that we can help leverage by expanding into underserved areas of our existing end markets. Our TAM is quite strong at $22 billion, and it includes the end markets on the right that are attractive end markets and highly diversified.
However, on the left side of the chart, you can also see that we have a significant opportunity to open up new revenue streams by expanding into underserved areas of these same end markets, which will add new customers and will also expand our business with existing customers. And this morning, the team's gonna be sharing with you specific examples of these opportunities, but for now, let me just give you sort of a high-level summary of what this opportunity set looks like. The expanded focus areas are in blue, and you can see how they align with our current end markets. So for example, in aerospace, we can leverage our strong position in engines and landing gear to help make other components on the aircraft, like the airframe.
Similarly, in general engineering, we can take our aerospace expertise and help medical device manufacturers with the machining of their components, which use many of the same hard-to-machine materials as in aerospace. We also have a very large portfolio of earth cutting solutions and wear-resistant solutions that we can apply to industries that we've never focused on before. Sanjay, Franklin, and Carlonda will be sharing with you some of these opportunities. There's clearly, based on the blue area, plenty of opportunity for us to accelerate growth, and we're confident we can do just that, because over the last several years, we've really focused on honing our Commercial Excellence process and tools to allow us to take share in the areas that we're focused on. I think an example of that process is the work that we've done to gain share in aerospace.
Now, we made the decision to expand into aerospace prior to the pandemic, and while we began to win business almost immediately, it really took us a few years and the addition of Franklin and Sanjay to the team before I really felt like we had a systematic set of processes and tools to drive share gain. You can see that process at work in Metal Cutting example. Since fiscal year 2021, our growth rate in aerospace has been 44%, while the OEM build rates has been at 34%, and we think that's a good proxy for overall market activity. Forty-four percent versus thirty-four percent, we grew faster than the market activity. An integral part of this targeted Commercial Excellence process, focused on share gain, is to leverage our innovation advantage.
And that advantage was recently recognized by Lockheed Martin when they took our new HARVI end mills , and it put them into their enterprise-wide machining guide. The best part about this example is, while this is Metal Cutting example, as Franklin will talk about, the same process is applicable in Infrastructure. So bottom line is we know how to drive share gain for above-market growth, and I'm confident we're going to do just that as we continue to execute those strategic innovation advantage, commercial excellence, and Operational Excellence. And in doing so, we're going to continue to earn a larger share of wallet of our existing customers. We'll capitalize on those global megatrends I talked about, and we're going to expand into underserved areas of the current end markets to generate new revenue streams and acquire new customers.
Now, in addition, we're also going to look at bolt-on acquisitions to accelerate growth, and Pat will talk a little bit more about that in his section. So, in summary, our progress on simplification modernization has enabled us to switch from playing defense to protect share, to now playing offense to take share by executing these strategic pillars. We're well-positioned now to achieve our growth and profitability targets, which the team is very excited to share with you today. We're looking to grow organically at a 4%-6% rate, and in doing so, we see a path to 20%-23% Adjusted EBITDA margins and to grow EPS at a 20%-25% rate, all while generating strong free cash flow and returns.
Pat's going to go into the buildup of these numbers in his financial section, but suffice to say, the key drivers are the 4%-6% growth rate and the $100 million of additional cost savings. Now, in addition to these financial metrics, we know that our customers and our investors, and our employees care about how we run our company and whether we run it in a sustainable way. So I wanted to just take a few minutes to talk about our approach on ESG. I'm really proud of the work that our employees have been doing in this area for many years, and I would encourage you all to go and look online at our fourth annual ESG report, which was just published recently.
It really summarizes some of the great things our employees are working on and the highlights over the last 12 months, including the work that we've done on increasing the amount of recycled material that we can use in our products, which we know is very important to many of our customers and investors. Okay, so, so far this morning, I've only given you a brief outline of how we're gonna achieve these targets. It's now time to introduce the rest of the team to fill in some of the details. This is the team that's driving our growth and profitability initiatives.
I'm gonna let each of them introduce themselves as they come to the stage, but let me just say at this point, that this is a highly experienced team, and they bring to Kennametal, I think, a bolder and more entrepreneurial mindset than we've ever had in the past. In addition, they're helping me to reshape the culture of Kennametal to a culture of accountability, where all the employees are fully engaged in achieving our strategy and delivering on the targets that we just talked about. This, frankly, is a change from the past in Kennametal, and I think it's one of the critical success factors for us going forward. I'm very proud to lead this team, and they are certainly one of the reasons why Kennametal is a compelling investment, which I summarize here.
We know that investors care about these areas: above-market growth, margin expansion, balanced capital allocation, strong free operating cash flow, and the wherewithal to sustain the competitive advantages that are allowing us to achieve these results. As a leadership team, we are absolutely committed to delivering these targets for our shareholders. Now let's dig a little, dig a little bit deeper into this above-market growth area. We'll hear from the two segment presidents. We'll start Metal Cutting in an introductory video, and then we'll invite Sanjay to the stage. Tee up the video.
Well, that's one cool video. You know, I really like the tagline, "Helping our customers build better." But let me tell you how I really found that this is a cool video. Over the summer, my kids had just come back from college internships. They heard this music playing in my office. They popped in, they watched the video. They're like, "Wow, we didn't realize that you guys were touching all aspects of our lives. You're helping build electric cars, airplanes, medical device, wind turbines." They were pretty impressed. I felt really good because it's good to be appreciated by kids once in a while. Good morning again. My name is Sanjay Chowbey. I joined Kennametal about two years ago, but my introduction to Kennametal, it started more than 30 years ago.
I still remember the day I was in the machining lab at engineering college, and between me and my colleagues, you know, we were just talking about some new products that Kennametal had just introduced. So I've made full circle from that day to today, and I'm really excited to Metal Cutting segment of Kennametal, the best team in the cutting tool industry. Now, on my journey to here, I have built various different experience. I'll share with you a little bit. To start with, I got my chance to work in the factory. I became a plant manager and also it strengthened my experience in Lean and Toyota Production System. Then I also took frontline roles in sales and marketing. I strengthened my growth tool experience. My first 13 years, I was with the transportation industry, with a Tier One company.
I had the opportunity also to lead a Japanese joint venture, where I strengthened my experience in Lean and again, Toyota Production System. Following 11 years, I led three business units in successive responsibility at Danaher, where I was able to deliver above-market growth, margin expansion, and also superior return on invested capital. Along the way, I also picked up my MBA at Northwestern's Kellogg School of Management. Now, I bring this wide and deep experience to the role at Kennametal. What I'm gonna share with you over the next 15-20 minutes is what's changing in our playing field, what is our game plan, and the progress we have made in last two years, but more importantly, what lies ahead of us. So let me start with a quick introduction of Metal Cutting business.
As you know, with about $1.3 billion dollar business sales last year, we are serving a wide variety of applications, as you saw in the video. Transportation, aerospace, defense, and energy make up about 45% of revenue. The remaining 55% is coming from general engineering, where all the other industries sit there, and also our small customers who are served through our channel partners. Now, as you can see, that this does cover a wide variety of applications, and I can attest to that. To learn the business, over the last two years, I've been to more than 125 customers. My main main goal was to learn the business, even though I've been a customer of Kennametal for a long time. But I wanted to contribute to our team's knowledge in terms of deciding our strategic priorities and also our growth initiatives.
I can share one example with you here. I was with one application engineer and the sales team to a very small family-owned business. This customer was making parts for aerospace and defense application. While on the floor, I saw our application engineer and the technician on the machine. They started to talk about one of the part this customer was making. This machine was using Kennametal's product. It was a standard product off the shelf from catalog. After talking for a few minutes and looking at the part geometry, and the machining movement, and all that, our application engineer, in fact, suggested to use a different setup, different set of Kennametal tools, it's still standard tools, and find a better way to do that machining. A couple of weeks later, the customer reported that they saw a 15% improvement in productivity.
So this kind of insight, that we can still use our own Kennametal's standard product, but still get better solution, that comes down to the value of application expertise and our knowledge of materials science, and machining. These type of core competencies are very important for me also to realize, as we look at what to work on and making sure that market opportunities are tied to our core competencies. Okay? So now with that, let me go to how we are going about winning in the market. You heard from Chris earlier, that these three strategic pillars are the core foundation of everything we do. I'm going to speak to, innovation advantage. you heard about modernization investments. That has enabled a lot of new products, including KENGold and KCS10B, and a few others, but you will hear from Carlonda on that.
Next here, Commercial Excellence. Again, this is very important because we have to get out of our comfort zone, not just work with the same customers we have. One evidence here, one-third of the growth we had in EV, and also in aerospace last year, came from new customers. Now, I will talk more innovation advantage and Commercial Excellence in more detail as I go through initiatives. But I'd like to take a few seconds here, talk a little bit more about the Operational Excellence. This is an overarching theme that really affects all parts of our business, starting from world-class customer service to environmental, health, and safety initiatives, operating margin expansion, and also return on invested capital. As you see one item listed here, over the last 2 years, we have improved our inventory turn Metal Cutting by 15%. Okay? That's very important.
So now let's look at how some of these things are helping us outperform the market. As the chart can clearly show you that we have started to build a clear edge over the last couple of years. The left side of the chart is a line chart that shows you our performance, the yellow line, Kennametal, and compares with two leading global company. You know that there's very limited information out there in public domain for our co you know, our peers. Nonetheless, I will tell you that these two are world-class, leading co you know, peers, well-run and well-respected, but we have been outperforming them since early 2022. Now, on the right side of the chart, what you see is from U.S., Germany, France, and Italy, industry associations, which report member-reported numbers.
Between the two charts, what you see here is that either we are holding our own or we're outperforming the market. Now, you will ask, "How are we doing that?" Of course, there is, these type of questions always have a lot of details. But I'll give you two main themes here. We have taken time to understand our market and decide what to work on. And how we have gone about that process, as you heard from Chris, and I will also speak to market themes. So we look at what's changing in the market as one of the, you know, contributor to that. Second contributor is: what is our core competencies? There may be changes in market, but they're not, that may not suit our strength.
So we look at that, and the third piece is a good business model, where we can really come up with good return for our investors. Overlap of those three things, that's how we decide what to work on. Part B is relentless execution. That's how we are doing it. I'm gonna walk you through some of this process before I specifically talk about the growth initiatives. On this page, you saw earlier, Chris talk about the themes. A lot of these topics can take half an hour to one hour individually. I'm not gonna speak to everything, but I want to confirm with you that what you see on the right side, Metal Cutting's approach, is to make sure that we're strengthening our historical focus areas. Along with that, we are also growing in the expanded TAM .
Now, one of the themes that I will speak to a little bit here: evolving workforce. We have heard from many customers, as you also heard from Chris earlier, that as the technicians and the machinists are retiring, they're having a hard time replacing them. We know that from our own experience. So our goal is to look at that need of the customers and make sure that we are strengthening our offerings, whether it's the online tools, inside sales support, technical support on the phone, or in-person support. That's how we're using the market themes , our core competencies, to match that. Now, looking at our growth rate here, on the left side, what you see, our markets are growing, led by aerospace at high single digit, and then followed by transportation, energy, and also general engineering in low single digit.
Net-net, when you do the math and look at our revenue mix, you'll see the market is gonna contribute in a very low single-digit range, and Pat is going to speak to that a little bit more at the enterprise level. But what sits in the middle of the page is more important. That's how we are planning to grow above market and deliver 5%-7% CAGR till fiscal 2027. Now, let's look at, again, coming back to themes and our core competencies. As you can look at the themes , I'm not going to repeat everything. You've seen it before, but I want to emphasize again, what are core competencies that help us maximize this? First, our broad portfolio of proven products and innovative solutions. Second, our materials science expertise. Third, our sales and engineering, application engineering expertise.
Number 4, manufacturing excellence, global presence in that, and also our distribution warehouse network. Number 5, our digital capabilities. We're gonna take all of that and look at the market themes and come up with what we are gonna focus on in terms of growth initiatives. Let me sum up our overall 4 growth initiatives that we're working on right now. Of course, there's other ideas in the pipeline, but we know it's very important to take the critical few and make good progress. This chart basically shows you what growth initiatives we're working on and where it sits within the industry that we currently serve. Of course, you heard from Chris earlier that expanding into airframes and assembly beyond our comfort zone of engines, and also going beyond the big players in aerospace to small tier suppliers, that's what you see in the number 1.
Hybrid and battery electric vehicle sits under transportation, medical, and then small job shops sits under general, general engineering. So let me start with the first initiative of aerospace and defense. Now, it's no secret, we all know that the last few years, due to pent-up demand and also because of the geopolitical drivers, aerospace has been, and defense has been relatively higher growth market, and it's expected to be that way even next 5 years or so. We are here to capitalize on that through innovation advantage and also our Commercial Excellence. You heard about the solid carbide end milling product getting on Lockheed Martin. We also had a press release on that. That's a testament to our proven solutions.
Now, if you look at the comment from Clint Williams of Pratt & Whitney on this page, Clint is Director of Operational Excellence, as his job is to look, wake up every day and look for better ways to do things. His comment here, that as the aerospace has more demand, how are we helping them improve capacity without a lot of CapEx investment on their side? We can help them with finding better way to machine things, to improve tooling life, that way, they don't have to make as many changeovers. That's what we are doing. So we are partnering with them, and you'll see many examples like that in our Innovation Room also, when we get to that. Okay? Now, I'm gonna share with you a few other aspects of Commercial Excellence here on this page.
As you see on the left side, Commercial Excellence has two pieces. On the left, you see how we get bigger share of wallet with existing customer. That's that example with one OEM, where we have grown our business in last 3 years with new programs. On the right side of this page, you see that we have also, at the same time, increased our customer count by 10% in aerospace and defense over last 1-2 years. This is very important, and as I said earlier, we are doing that by getting outside of our comfort zone, not just the engine, going to aerostructures and assembly, and also not just the big players, but also work with tier suppliers, which we know are very, very important part of the overall supply chain and value stream.
Now, I want to draw your attention to HDI, the testimonial here. HDI is a Canada-based landing gear and actuation system supplier, global supplier. We have had several workshops with them. This comment here kind of reflects that. In fact, I witnessed one such workshop where our team and their experts sat together to find solution to complex problems and also design for manufacturability. That's how we're helping them. Now, I travel a lot in my job, and in fact, every time I fly and come home safely, I really feel good that, you know, we're part of the solution. So now let's move from flying to driving. Now, this is a busy slide. I'm gonna walk you through the details slowly, but let me start with two main conclusion of this page.
Number one, despite shift in mix in the transportation, overall transportation market is gonna grow slightly or stay flat. Secondly, regardless of mix shift, we're very well-positioned through our innovative solutions and Commercial Excellence to gain market share and deliver a solid or above-market growth in transportation. Now let me walk you through the details here on this page. The left column on the table, that shows you relative tooling usage by the family of the product. As you see, hybrid electric vehicle uses about 110% of the tooling used at the internal combustion engine, whereas battery electric vehicles use about 55%. So that's number one. Number two variable here is what's happening to the unit volume. As you can see here, the unit volume is going from 86 million to 93 million by fiscal 2027.
The third variable here is the shift in the mix. Today, roughly 30% of the mix is battery and hybrid electric vehicles. That's gonna go from 30% - 60% by 2027. So by the time you look at all three variables, net-net, you get to 0.1% tooling demand CAGR. Now, 0.1%, that's roughly flat. But we have been talking to many of our customers and the industry experts. In general, the belief is that transition to fully battery electric vehicle might be slower than the models that we have here, and in fact, hybrid might be even higher. So what that will mean, with hybrid using 110% of the tooling, that it's very likely the market itself might be slightly higher than 0.1% CAGR.
Now, what you see on the right side of the page is what we are doing. We have comprehensive solutions for all sorts of electric vehicle and also hybrid electric, while we'll maintain our strength in the ICE engine vehicles. Now, that sets up innovative solutions, and if you have not had a chance to look at outside, please, you know, take some time on that. We are helping our customers improve their operation, but also, at the same time, our solutions are allowing us to get price premium. So between the growth of market, our innovative solution, our Commercial Excellence, we're pretty confident that in transportation, we'll deliver a pretty good growth rate despite all the shifting mix. Now, let me go to a little bit more detail on that, how we are doing that.
If you have seen outside, also the press release, the product, RIQ Reamer or KENionic, Carlonda will talk a little bit more about that. But I can tell you, I personally witnessed one such operation. I was at the factory of a European supplier, which is a global OEM. They were using a competitive product, and then I saw comparison of how they were doing that versus our product, and it was very impressive. Our product, RIQ Reamer, improved productivity, improved surface finish. Customer was very happy, and we were able to win that business. Now, moving to the Commercial Excellence side, we've also expanded our base outside of our comfort zone. We have won several tier supplier business, including many in China and also including global OEM based in China. In Europe, we took our EV solutions literally on the road. That's what you see the truck here.
That's the EV truck roadshow that we took. That helped us educate our customers and our channel partners. We generated a lot of leads and also a lot of project wins through that. We're doing something very similar in U.S. later this year, and I invite you to learn more about that when you get the chance to go back to the Innovation Room and see, learn more about the stops and also the product that we'll be displaying on those. Now, let me move to a next initiative, which also requires precision: medical. Medical industry is attractive industry, but it is way underserved by us. We are gonna change that. We are changing that as we speak. How are we gonna do that?
First, we do have solutions in our portfolio today, and we have materials science expertise. We have application knowledge that we have not capitalized to the extent that we should be. But like I said, we are changing that. I'm gonna give you one example here. I was at a customer that makes hip joints, knee replacement. They were using a competitive product, and after looking at some of the problems they were having, our team members suggested to use KCS10B inserts, and after a couple of weeks of trial, customer was very happy. They saw 15% improvement in productivity and overall surface finish and quality. In other words, we do have solutions like that that we can use to grow in medical. In parallel, we are also pursuing inorganic growth actions to bolster our product coverage and also application knowledge and customer account on medical.
That's how we're gonna go and expand our medical business. Now, I'm gonna move to the last initiative here with the small job shops, which sits under general engineering. With about $3.1 billion TAM, this is a very important segment for us. We, we do quite well, but we have headroom to grow here. We're gonna be using three approaches to grow in this business or in this segment. First, our digital capabilities. We are coming up with new solutions and have launched many of those already to help our customers find the right product for their need, do the product, you know, machining simulation. Also, we're offering them other options to get to us, either inside sales team or phone support or through our channel partners. As you see, this is a statement from Kenny of MaxTool .
They're pretty happy with the one-stop shop that we offer, product and also technical support... That is very important part to serve our small customers. And finally, different tiers of support as the customer need it. Completely do-it-yourself online tools, or the phone support, or in-person support. Now, in U.S., these small job shops make up about 50% of general engineering. And again, the way I define it is less than 100 people. We know that these small customers are very important part of any country's economy. Our goal here is to make sure that we are supporting them. In general, they have not gotten as much support from our channel partners or us, so we're gonna do more and do it more efficiently to reach to them and give them support here.
Now, I'll give you one such example. I recently was in a business review of our initiative here, and this example came up in that, that we had just launched a new product, and after watching the video online, the customer sent us a message. It came to our inside sales team. The customer asked a couple questions. We just responded to that, but after a few days, there was no response. So our sales team did not just do this transactional conversation to say, "Okay, you asked me this, I gave you this." They followed up to find, how is the customer doing? Have they made a decision? And after talking to customer for some time on the phone, it was decided that that new product that we launched was not the right solution.
One of our other product was a better solution for the customer. So this is very important in the ecosystem, that we'll have online tools, we'll support our channel partners, but at the end, our goal is to help our customer find the right solution. I also will share with you that this is not just about the small customers. This applies to big customers. I was at a very large customer at one time, and I was walking in their applications and engineering area. And customers, we were just talking about some help they needed, and I was talking to the salesperson saying, "Look, connect with account manager, connect with engineer." Then one of the other engineers said, "No, I just got the solution. I talked to the Kennametal's application support." And I'm standing there, I'm like: "I didn't hear you talk." Then she just gave me a look.
Then I realized chat is the new talk. So that's also very important for us as part of the overall initiative here for DCX, we're helping our customers. So now let me summarize our initiatives. These are the four initiatives that we have talked about and the core competencies. I'm gonna look at how this translates to our growth rate overall. What you see on the left side is very important also to start with. $1.27 billion revenue that we had last year was achieved through 9% organic growth, despite mixed market conditions around the world. What you see in the middle, that's how we are growing the business, and we're gonna deliver 5%-7% growth over next four years. Now, let me speak to my closing comments now.
This slide obviously lists many of the things that you heard from me and Chris, our product, our application support, but I'm gonna leave you with three important messages, not just from this slide, but overall, my, all my slides and presentation. Number one, we have built processes and organizational capabilities to really understand market dynamics and figure out what we should be working on. Second, we have, as part of that itself, you know, relentless execution. So process to do what we work on and also how to execute. Number two, we have made real progress. This is not just process. We have solid results that I spoke to earlier. We have made progress in all aspects of business: customer service, operating margin expansion, above-market growth.
But my third message is, we're gonna be using Operational Excellence and Commercial Excellence tools to make sure that we are doing the much better customer service for customers, continue to improve that, and also improve operating margin expansion and return on investor capital. In summary, with the strategic clarity, with superior execution, and a strong and engaged team, I'm very confident that we'll deliver above-market growth and value for all our stakeholders. With that, I'm gonna welcome my colleague, Franklin, with a video first.
Thank you, Sanjay, and good morning, everyone. The video is a quick snapshot of what I will be covering today and really provides a good look at our products in action. My name is Franklin Cardenas, and I've had the privilege to lead the Infrastructure segment at Kennametal for the past three years.
... Prior to joining Kennametal, I spent almost 25 years at Donaldson Company in a variety of leadership roles. Most recently, leading the Asia Pacific region based in Shanghai, China. What attracted me to Kennametal, and still energizes me, is the relentless focus on profitable growth and the bold transformation that Chris is leading. See, I consider myself a builder, and I'm a firm believer of bringing together talent and disciplined processes to drive positive change, and that is exactly what I've been doing at Kennametal for the past few years. My goal is that by the end of this presentation, you will have a good understanding of what we do in the Infrastructure segment and how we create value. As Chris mentioned earlier, our focus is to deliver wear-resistant and earth-cutting solutions to a variety of industries, which we organize under our four end markets.
Mining, for example, is a sub-market of earthworks, and energy is a sub-market... oil and gas is a sub-market of energy, and so on. There are three things that I would like to highlight. First, if you think about it, everything wears out over time. Everything wears out over time, and I personally feel it when I'm jogging next to my 20-year-old son, and I struggle to keep up. Now, addressing this type of wear is out of scope for today's presentation. Second, the common denominator across our products is our material systems, and we have two primary material systems: tungsten, which is heavy, and ceramics, which is light. And third, something that we are really good at is at matching our customer needs with our material science expertise, delivering customized solutions to more than 10,000 customers around the world.
You'll hear more about these things throughout my presentation, but now let me tell you how our strategic pillars are helping us enable our strategy. As you heard from Chris and Sanjay today, we have a strong foundation on our strategic pillars. innovation is something our customers have come to expect from Kennametal, and Carlonda will talk later about how we align business strategy and technology innovation. If you think about it, we've been in business for more than 80 years, and still, more than 30% of our revenues comes from new products and customized solutions. This track record of innovation is why our customers are willing to pay more for the peace of mind that our products bring. Let me repeat that. Our customers are willing to pay more for the peace of mind that our products bring. And we are expanding our customer reach to gain share.
This is really what Commercial Excellence is all about. Last year alone, we generated an additional 45,000 customer touchpoints and improved our opportunity conversion rates. And we know our customers have choices, so maintaining a competitive position is what Operational Excellence is all about. Keeping safe and environmentally friendly operations. When taken together, the strategic pillars of innovation, Commercial Excellence, and Operational Excellence help us win in our end markets. So let's talk about our end markets. Our total addressable market is about $8 billion, and supported by positive megatrends, we are well positioned to gain share and grow faster than the market. We are currently focused on improving the effectiveness of our salespeople to win share of wallet, and we are expanding our addressable market by focusing in underserved regions. One of the example where we are winning in underserved regions is our global mining expansion.
We are building a sales team in Latin America that is already gaining share by selling our portfolio of proven solutions, and we are doing the same in other regions of the world. Essentially, we're taking products that we sell in our core markets to win in other regions. Now, let's discuss the growth of our end markets. Our growth strategy includes capitalizing on the market growth and gaining share, targeting a 3%-5% growth rate for Infrastructure. We operate in markets that are large and have a healthy growth potential. When we think about our focus on our strategic pillars, bringing new products to the market, improving the way we engage our customers, and running our plants more efficiently, we are well positioned to win and gain share.
Let me share an example of how our focus on our strategic pillars helped us solve a customer problem. The customer is a large oil field service company, and the problem is that sand was contaminating completed oil wells. Standard solutions were failing due to accelerated wear, so we quickly assembled a team to work closely with the customer on a solution. At Kennametal, we have different tools to solve these type of wear problems.... Our solution combined our capabilities in additive manufacturing with our tungsten carbide material expertise, something that no one else can do today. The additive manufacturing tool that we deliver is simply not possible to be made by traditional manufacturing methods, given its complex geometry. So through close collaboration, we solved our customer's problem, and this is a customer that we've had for decades.
This customer knows that the next time, and the next time, and the next time they have a wear problem, we're gonna be right here to help them, just as we've had for all these years. Now, let's cover how megatrends support growth in our end markets. Have you heard from my colleagues? Megatrends are working in our favor, and let me tell you why they are tailwind for Infrastructure. Let's take earthworks, for example. As governments continue to invest in Infrastructure to stimulate their economies, it's a great opportunity for us because our tools are used in various aspects of construction. With increase in demand of energy to power the world, it's gonna support growth of oil and gas, giving us the opportunity to continue to grow with existing and new customers and applications.
Our focus in underserved markets, supported by our global footprint, will benefit from the growth of the middle class, especially in emerging markets, as consumer spending increases. In summary, our markets will benefit from positive market trends. Here is a look at our end markets and our areas of focus, and I will expand on each of these in the subsequent slides. The rationale behind these areas of focus is this: They are margin accretive, they build on our strengths, and in some cases, they help us reduce the cyclicality of the business. What I will focus on our organic growth efforts, all of these have an inorganic component to them, and Pat will cover later in his presentations our disciplined M&A process. Let's start with our defense initiative.
I invite you to explore our defense exhibit in the innovation room, where you will see our full portfolio of armor-piercing penetrators and fragmentation devices, as well as the armor protection systems that we're launching to the market. In essence, we're bringing the success we've had in Europe to the U.S. market. As the largest U.S.-owned producer of tungsten that is vertically integrated, this is a great opportunity for us. We are currently working with our customers and defense agencies to position ourselves as a strategic partner, and we are already making progress. With approval, approvals from three of the largest ammunition OEMs and a significant increase in order entry. Carlonda will touch later in her presentation on how we are even developing new solutions, and we're in the early stages of development of new solutions for armor protection systems.
Now, let's talk about how we are expanding our ceramics business beyond our traditional applications. Did anybody had a granola bar this morning? Please raise your hand. Thank you. Well, the shiny silver coating on the inside of the wrapper was likely made with one of our evaporator boats, which you will be able to see in the innovation room. The way I think about the ceramics business is this: It is highly profitable, it doesn't cycle with the rest of our business, given its high exposure to food packaging, and it allows us to expand in a different material system. The boats are used to metallize the inside of your potato chip bags to keep the food fresh, and they are also used to metallize the holograms in some of your currency.
We are constantly focused on diversifying into new applications and expanding into components for semiconductor processing, electronics, and molten metal are current areas of focus. We're already making progress, with almost 30% growth over the past 2 years. These are very specialized markets that give us the opportunity to gain share in highly profitable and fast-growing markets. Let me give you an example of a molten metal application. We were recently approached by a manufacturer of solid rocket motors, and they were interested in a crucible to produce solid rocket fuel. For all the engineers in the room, this means high temperature and high corrosion resistance. Our team worked together with the customer to find a solution, and we delivered the largest crucible yet, made with boron nitride , solving our customer's problem.
Carlonda is gonna expand later on this material system and how we are expanding even beyond what we're doing today, so that we can access even more applications. But now let's talk about how we are winning and expanding in mining. We've been a valued partner of the mining industry for decades, and our sweet spot has been met coal. What has made us successful is that we offer differentiated solutions that either extend equipment life, improve productivity, or reduce equipment downtime. A lot of our mining products, including our KenCast coatings, are also great applications for surface mining and mineral processing. So we are diversifying our focus beyond our core business into new applications and underserved regions.
Earlier, I shared the example of how we are already growing in our global mining initiative and how we're being successful in Latin America, capturing share with existing products, and we're doing the same in other regions of the world. So we are heavily focused on expanding our market coverage to continue to gain share. Now, we are really focused on working with our OEM partners so that we can gain share in as they are producing new vehicles, and also through the replacement parts through their dealer networks. Now, let me transition to oil and gas. As with mining, we've been supporting oil field service companies for a long time, and we have deep, established relationships with our customers, and we have earned a high market share.
The opportunity for us is to build on this strong market position to protect our core business and win in new high-value applications and underserved regions. One of the vehicles that we use is establishing joint development agreements, in which we come together and work with our customers to solve any wear challenge that they may face. And the case study on this slide is a good example, in which we work together with a customer, and we deliver an additive manufacturing solution to separate oil and water, improving water productivity. Carlonda is gonna expand on this innovation later in her presentation. I have shared several examples in which we tailor our solutions to meet our our customer needs. And this is why our Commercial Excellence process and our customer-first focus are so critical.
Our small customers, for example, they benefit from our standard product line, and they need support on tool selection based on the road milling conditions. Our distributors, they typically support large end users or a territory, and they are interested in a strong brand that can command high margins and provides excellent customer support. Our mining and oil and gas customers are typically large end users, and they are interested in a strong, reliable partner that understands their business and can provide support when they need it and where they need it. At Kennametal, we know that we have to earn our customer's business every day as the only path to high-quality earnings. This path is going to take us to a growth rate of 3%-5% through 2027. As we discussed earlier, we are laser-focused on capitalizing on market growth and gaining share.
We will continue to deliver differentiated solutions to our customers and price for the value that we provide. Through our Commercial Excellence process, our innovation, and our customer-first focus , I am confident we will deliver growth that outpaces the market. I know I covered a lot of content, so let me summarize. First, we are the experts in wear-resistant and earth-cutting solutions, and our ability to solve our customers' problems is second to none. Second, we are well-positioned in large and growing end markets, and we are winning through our strong customer relationships and our portfolio of proven solutions. Third, we are relentlessly focused in driving growth that outpaces the market, both through organic growth opportunities and inorganic opportunities. Finally, through growth and continuous improvement, we are well-positioned to deliver value to our shareholders, improving margins and working capital.
I always say to my team, "We are Kennametal. We have the expertise, the products, the solutions, and the passion to outperform our competitors. We are Kennametal." Thank you, and I will now turn it back to Mike Pici before we go to the break.
Thank you, Frank. Thank you, Franklin. We're gonna take a 15-minute break to allow the participants in the room to browse the innovation showcase and, you know, take a look around and experience some of the products we have to offer here. We'll be back shortly.
Okay, welcome back. I hope you all had a chance to grab some refreshments and browse the innovation showcase if you didn't have a chance to do so. It's my pleasure now to welcome to the stage Dr. Carlonda Reilly, our CTO, who will provide you an overview of our innovation and technological advantages after a brief video.
To me, innovation is the lifeblood of Kennametal. What excites me the most about our modernized future is our ability to respond to, anticipate our customer needs, and to be able to solve those customer needs in unique ways, in innovative ways. Modernization has just simply enabled us to take our innovation to the next level. Well, good morning, everybody, and thank you, Mike. And as Mike said, welcome back from the break, and I certainly hope you all got a chance to take a peek at each of the stations of our innovation room this morning. My name is Carlonda Reilly, and I just two days ago celebrated my fifth-year anniversary with Kennametal. I came to this company after spending 23 years at DuPont, where I had progressive management experience in operations, business, marketing, and of course, technology.
Over the course of my career, I have worked on every aspect of innovation and new product commercialization, and I've cultivated a passion for customer intimacy and translating customer insights into products that are still successful in the market today. That's what attracted me to Kennametal. I saw the same passion at all levels with excellent scientists and engineers. I'm very excited to talk to you today about our technology leadership, how it powers innovation advantage, which contributes to our long-term growth. Kennametal has an expansive toolbox within innovation, where material science and product engineering are at the heart of our capabilities and are key enablers to our growth. Now, I'd like to tell you a story that illustrates this. My team and I recently hosted one of our aerospace customers at our global R&D center in Latrobe, Pennsylvania.
This customer was not only impressed with our facilities, our products, and our engineers, but they've been even more impressed by the fact that we have delivered and demonstrated a 30% cycle time reduction to their new part manufacturing process with our tooling solution, more than anyone else to date. With engagement like this, it's no wonder that we have grown with this customer year-over-year, and it truly demonstrates the enabling power of our world-class technology. We are confident that we are market-leading innovators at Kennametal, and we are providing solutions that are creating increasing value for our customers and transforming how everyday life is built. So how do we do that? There are four key elements that we use in our approach to innovation that help to drive differentiation and competitive advantage.
First of all, I'll talk about our customer-led innovation, what that means to us, and how it's foundational to the impact that we're having in the market, and how it fuels the other three elements, as in development of a market-leading product portfolio and in our approach to extending our technology and leveraging our technology across our enterprise for value and extending our technology reach. The innovation strategy flows out of the enterprise and business strategies, as Chris, Sanjay, and Franklin talked about earlier. Our strategy defines where and how we win for Kennametal and the customer, and the capabilities that we employ to deliver it. We share our strategy with our teams so that we are all aligned and striving toward our aspiration and to drive business results.
And we have a targeted approach to innovation investment and have shifted our focus of new product development to more effectively contribute to that growth. The areas of the circles represent how our investment focus was distributed before simplification modernization, as I've shown in the gray, and after, as shown in the yellow. We're focusing our opportunities more so in that upper right-hand quadrant. That is, higher valued, next generation type of products and new technology development. Key innovation, Smart Factory, process simplifications that we've made during simplification modernization have resulted in a more focused portfolio of higher valued, differentiated products, a portfolio aligned with our business strategy and market drivers, and increased speed and impact of our innovation into the market. We have engineers in the field, along with our sales and marketing, and they alert work really closely with our customers to really understand their technical challenges.
Now, you add to that our materials science, design, process, and application engineering expertise, along with our innovative thinking, and you have a formula of solutions to our customers. So I have two examples that I show here. First is our tool with KENionic technology. You saw that prominently displayed out in the innovation room. It was just recognized, just two weeks ago, as a 2023 R&D 100 Innovation Award winner. It is a unique design inspired by bionics to give the optimal combination of strength, power, and metal lightweighting to the tool, and it also produced 50%, that's 50%, more productivity to our transportation customer. And we're finding that this technology approach is really giving us a great tool to enable OEMs to not only look at and convert to new applications in ICE, but also EV component manufacturing.
When one of our oil and gas customers could not efficiently use conventional methods to make complex control devices and systems, we employed our leading additive manufacturing capabilities to provide a solution with wear and corrosion resistance like no one else has been able to to date. So, you know, I've been interviewed many times to share my experience on innovation within industry. In my experience, I've been asked many times how to successfully manage innovation. In my experience, it requires a robust end-to-end framework in place, accountable project leaders, engaged senior leadership for fast decision-making, and effective cross-functional teams for success. We have that, all of that at Kennametal. We take ideas from a variety of different sources, and by the time that we scout them and move them into development, those projects have a validated business case and customer buy-in.
This approach allows us to focus on fewer, but higher impact projects in the R&D development phase. Hence, we're able to move products from development to launch faster. So ultimately, customer-led innovation ensures that we're bringing to market higher valued products with established demand and bigger impact. So let's look at two examples that you saw out in the innovation room of delivering greater value and faster speed to market. Our Fix8 tooling system, for example, provides industry-leading technology for a wide range of turning applications and has produced higher efficiency for the customer. We took our first line of KOR end mills from concept to commercialization four times faster than the average cycle. Now, just last week, I visited one of our large U.S. customers, and I saw our KOR end mill in action across nearly 20 machines.
And I heard the engineer say that our KOR end mill has changed the landscape of this type of operation because of its high metal removal rates versus traditional offerings in its class. Both of these innovations are creating wins for Kennametal and our customers, and I cannot stop here. I'm also excited to talk to you about a sampling of these leading and award-winning innovations across both of our segments and growth markets. So as Chris mentioned earlier, on enhancing our competitive advantages, we do leverage our technology across the enterprise for value. One example of that is some of our mining innovations, which have come from exploiting key design principles that we typically use on Metal Cutting side.
As we strengthen our position in energy and electric vehicles, our additive manufacturing capabilities are allowing us to deliver solutions in the most efficient way while producing highest performance, such as our RIQ reamers or some of our other reaming capabilities, as well as our design complex design nozzles, if you will, with tungsten carbide. Now, I have one other product that I'd like to focus on here, and I have to hold it up, and I know some of you won't get to see it in the back closely, and it's out in the innovation room, and that is our award-winning HARVI I TE solid carbide end mill. It is a recent winner of an Edison Award for innovation.
Now, there are a handful of manufacturers that actually manufacture or supply equipment that can make a solid carbide end mill like our HARVI I TE . And I spoke to one of them when we first launched this product. And let me tell you, this manufacturer was, is experienced and very highly technical, and he took one look at this solid carbon, carbide end mill and said, "Wow, I have never seen a complex design like this in an end mill. You could not have used our equipment to make this end mill." I didn't answer him at the time, but the fact of the matter is, we did use his equipment to make this end mill. The bottom line, our engineers are so innovative that they can create those innovations on equipment that even the makers of the equipment don't know is possible.
In the HARVI I TE 's case, this complex design has translated into unprecedented flexibility and performance with our customers, and it's one of the reasons why it is a preferred product in the Lockheed Martin machining guide. HARVI I TE and all the innovations that you've seen here today are excellent examples of innovation advantage at work in the market, and there's even more to come. We have a rich technology roadmap for the future. Franklin, Sanjay, and I, and all of our teams work together closely to define the differentiated products to launch when the customers want and need them. We have a complete toolbox of materials and process options that ensure that we can bring the right level of technology to our new products and maintain a steady stream of innovations to the market.
Now, while a new product might have a specific value proposition that's really targeted toward one or the other businesses, the work that we do on advanced materials and advanced process technologies apply to both, and they're also enablers to both near and long-term growth opportunities. So our ceramics technology is one great example of that that I'll go through now. As Franklin mentioned earlier, we are applying our current ceramics materials from within his segment, namely boron nitride, to adjacent application spaces for growth in the near term. Thermoconductive materials for electronics is one example of that. In fact, we have ceramic material solutions and processing capabilities across both of our segments, and altogether, it accounts for about $90 million of sales for the company, as with high margins for the company.
So as we leverage, as we leverage our capabilities across our segments, we see opportunity to address some of these new growth applications for us and their growth that could come longer term. So we're not only utilizing our ceramics technology expertise to help us grow now, but we are thinking about what's next and scouting the potential to expand our ceramics technology to a wider range of applications whose future growth is driven by global megatrends. Leveraging materials and process development across our businesses enables us to address and capture the anticipated growth in these applications and attractive end markets. We've proven we can win in ceramics with our current capabilities, technology, and solutions, and as we are in the early stages of expanding our ceramic applications, we are bringing our winning innovation approach to these opportunities with an eye to fuel growth beyond our current planning cycle.
Kennametal is leading in the area of metal alloy additive manufacturing. This is a comment we have heard from a wide range of customers and industry partners. We are unlocking ways to solve and deliver solutions to our customers across both segments in ways that we could never have dreamed of with traditional methods. We have end-to-end capabilities. For example, our proprietary powder grades, which represents pre-print capabilities, as well as our post-print capabilities, which is the finishing of our components and tooling. Now, you saw out in the innovation room, our KENionic technology and KenTIP FS . Both of these innovations have been enabled to a certain extent by additive manufacturing. But I have one other here that you've seen in the innovation room as well, that I'd like to highlight for you, and that is this flow control device.
Now, our customer will take 4-5 manufacturing steps to make this device: cut out the top, cut out the bottom, grind out the flow channel and the top and the bottom, and then join the 2 pieces together. And typically, they can only do this in steel or stainless steel. However, Kennametal can produce this entire device in just 1 step using additive, and not with all the functionality internally, and not only in steel, but we can do it also in tungsten carbide with corrosion resistance and superior wear resistance, which the customer highly values. We are the only ones to produce a solution like this to customers today. It's one of the reasons why a leader like GE Additive selected Kennametal to be its beta test partner for its fast printing technology. So together, we are producing a powerhouse of solutions to the market.
And I have one other part here, and if I can go forward, and I need to be careful, there are a lot of sharp edges here. I'm gonna hold up this. It's actually a part, and I'm gonna ask you to imagine that you are an engineer in a small job shop, and you need to make this small aerospace part, and you need to do it efficiently, but you don't have a lot of resources in your internal department to do it. For some of these customers, we essentially are their engineering department. So with our DCX platform that Sanjay talked about earlier, we are able to effectively collaborate with this customer, and he or she can actually access our unique skills and capabilities for the solution.
We receive a model of the part, and then we utilize our product innovations to produce a proposal of a highly efficient tooling package solution. That customer can place the order of that solution at the click of a button. It is delivered along with everything the customer needs to know in order to make his or her part, along with the application knowledge to back it up. Extending our technology reach in this way is truly an example of transforming how everyday life is built. So I started my presentation today with a video where I told you that innovation is the lifeblood of Kennametal. It was true 85 years ago when we were first founded, and it is even more true today.
Even if you only got to spend a few moments out there in our innovation room, you saw just how innovative our products are and experienced the broad reach our applications and solutions are having across markets and various applications. As I stand here today, I can tell you with confidence that we are market-leading innovators. We imagine, create, manufacture products and solutions that others simply cannot, and by doing that, we deliver extraordinary value for our customers, which in turn delivers value for our shareholders. My team and I are focused on this all day and every day, and I'm so proud that I got a chance to share all of this with you here today. So with that, I'd like to thank you for your time, and I'd like to welcome to the stage now our CFO, Pat Watson.
Thanks, Carlonda. We started out planning for this event about six months ago, and when we sat down, we crafted an agenda of the day's events, and the comms team went through it and said, "You know, first, we're gonna have a really great video, and then Chris is gonna take the stage. By the way, what they call this video? Sizzle. So we're gonna have sizzle, and then Chris, and then we're gonna have some more sizzle with Sanjay, and you get it, and it goes all the way through. And we get to me, and I said, "What do I get?" They're like, "You don't get any sizzle. You don't need any sizzle." And they're right, I didn't, because Carlonda brought the sizzle. What a fantastic amount of innovation that our technology team brings to bear every day for our customers.
So good morning, everyone. I'm Pat Watson. I'm the CFO at Kennametal. I've been in this role for just about a year now. I've been with Kennametal, though, for 19 years in total. So I'm new to the executive leadership team, but I'm certainly not new to Kennametal. I came to Kennametal right out of MBA school. I joined a company that had fantastic technology, great application know-how. Some things don't change. Being around 19 years on the executive team, that sometimes makes me the historian of the group, and I've had the great pleasure over the number of years of serving as the company's corporate controller and the finance leader for Metal Cutting and our EMEA business.
You heard from the team today about the strategic pillars we have in place and how they're really foundational to our long-term success and our ability to generate above-market growth and margin expansion. Over the last few years, we made a lot of progress on simplification, modernization. We took $200 million of cost out of the business. We closed six facilities. Today, our facilities are safer, they are more efficient, and they are better equipped than ever before to provide consistent, innovative products to our customers. This is the foundation you heard the team talk about building on. We're building with innovation, the ability to bring products to market faster that we can now make in our modernized facilities. You heard about Commercial Excellence.... Our ability to take market share through targeted growth initiatives and improve product consistency and more innovative products.
You heard about the share gains that we had in aerospace, and really critically, the share gains we've had in aerospace. We believe we can replicate across the other opportunities you've heard as Chris talk about today. Now with Operational Excellence, we're going to continue the good work that we started with simplification, modernization. Together, these strategies, they will help us grow faster than the market and expand margins. Before I introduce our long-term financial targets, I want to take a moment and just reaffirm our outlook for FY 2024, with sales of $2.1 billion-$2.2 billion, and EPS of $1.75-$2.15. These targets are, of course, embedded in our long-term outlook. So let's take a look at our long-term revenue target.
Using 2023 as our starting point, we believe we have line of sight into compound annual sales growth of 4%-6%. We believe that this sales growth rate is achievable and reasonable given the conditions and megatrends that are in our end markets. Together, the megatrends in our end markets, the pricing for the value of our products and innovation bring, we believe that will count for about two-thirds of that sales growth. In the past, our sales performance was highly dependent on end market conditions, and the reality is today, we remain exposed to cyclical end markets. However, under Franklin and Sanjay's leadership, we've been building the capability to take market share. With the addition of these two gentlemen to the management team, we have two leaders focused on building and executing the necessary commercial and management processes to drive market share gains. Sanjay.
Sanjay shared some of the proof points with you that we have Metal Cutting. now, let's recap some of the opportunities we have to grow faster than the market. First, EV. We've staked out a winning position in the emerging EV marketplace using innovation and our application know-how, like with a Kennametal tool. Now, if you haven't taken a look at that tool when you're here in person, I invite you after our presentation, go look at the tool. Talk to the product specialists. They will tell you about the value that type of innovation brings to our customers. Sanjay spoke to you about medical. You know, the medical market is a natural extension of the things we're already good at Metal Cutting, similar material systems. Customers who value precision in a market that's backed up by solid megatrends and is non-cyclical.
You heard from Chris and Sanjay on how we have taken share in aerospace and how we're going to continue to do so. Franklin. Franklin spoke to you about the opportunities we have in ceramic wear parts, and Carlonda spoke about the opportunities we have across a broader portfolio of ceramic applications. Ultimately, with revenue potential that's above and beyond the financial targets we're talking about here today. Franklin also spoke to you about what we're going to be doing in defense, bringing capabilities we have in Europe to the U.S. Department of Defense market. You know, one of the things that's different and one of the things that gives me a lot of confidence in our ability to achieve these results is our cultural transformation.
Starting in 2019, under the direction of the executive leadership team, we began a cultural transformation of this company focused on improving accountability and entrepreneurship. We call this cultural transformation, the Kennametal Way, where every day we challenge ourselves to put the customer first, to be bold and make decisions with speed, and to own it by driving the execution of our strategies. This culture of accountability, it doesn't just help drive market share, it also creates a culture that values continuous improvement across the entire organization. We have a clear path to expand margin by executing targeted initiatives across the business. Let me provide you a few recent examples. In Infrastructure's Mistelgau, Germany, facility, in one of their manufacturing processes, we used value stream mapping to reduce cycle time 2x, while also decreasing inventory requirements.
At our Solon, Ohio, facility, we went from having 171 steel blanks to five, and in doing so, we reduced the cycle time of the manufacturing process. Enterprise-wide, we've deployed better S&OP planning tools, which are allowing us to reduce lead times, lower inventory, both enhancing our customer service and improving our cash flow. Beyond these initiatives, to improve operational performance, we have our Capacity Utilization Optimization 2.0 program, which will enable us to lower structural costs. Building on modernization, over the next four years, we plan to achieve $100 million of cost takeout. The restructuring program we announced in June, that's a down payment on that $100 million.
We will reduce costs in this business by optimizing our inventory levels, improving customer service while we lower costs through continuous improvement projects, and lowering the cost of tungsten by improving our ability to recycle and improving yields in our tungsten processes together, saving about 1% of cost of sales per year. We're gonna continue to invest in our factories, deploying automation where it makes sense, in Smart Factory, and further reducing structural costs by closing 3-5 plants. Together, our sales growth and our cost reduction initiatives will increase cycle peak Adjusted EBITDA margins to 20%-23%. This is EBITDA margin, would place us in the top quartile of industrial companies.
Importantly, above our record EBITDA margin, which we achieved in FY 2019 on about 15% more volume and before 190 basis points of dilution, dilutive effects in margin from unfavorable foreign exchange, lower pension income, and higher inflation. The improvements in sales, pricing, mix, and our Operational Excellence initiatives will partially be offset by inflation, of course. Although our profitability margin model assumes that inflation continues to moderate and returns to pre-pandemic levels. Improving profitability will also drive cash flow. In FY 2023, we demonstrated the ability of this business to generate strong free operating cash flow, generating the best free operating cash flow we've had since 2015, at $169 million, or 130% of Adjusted Net Income.
Going forward, we're going to continue to emphasize generating cash flow in excess of 100% of Adjusted Net Income. To support this, execution of our inventory optimization program will enable us to drive primary working capital as a percent of sales below 30% by 2027. We expect to generate ample cash to support reinvesting in the business and returning cash to shareholders. And with a balanced capital allocation program designed to maximize shareholder value, we're gonna continue to fund organic growth and the reinvestment that's required in the business. Our disciplined approach to capital deployment will result in higher ROIC. Over the course of the periods of 2027, we anticipate generating $1.4 billion-$1.6 billion of cash from operations, and that is net of approximately $100 million to fund restructuring initiatives.
From these funds, we'll deploy about $400 million-$480 million back into the business in the form of capital investment to support organic growth, cost-out programs , and replace aged equipment. That'll leave us about $1 billion-$1.2 billion to return to shareholders through our consistent dividend program, through our share repurchase program, as well as to pursue M&A. Now, we haven't done M&A in a number of years, but it has been an area of increasing focus for us the last few. Starting a few years ago, in leveraging the experience of new leaders like Sanjay, we began rebuilding our corporate development capabilities in both businesses and their respective pipelines.
When we're looking at acquisitions, we're gonna be looking at acquisitions that improve access to markets, give us products into the portfolio that we find useful and would add something to us. We'll be looking at things that are right in the core and near adjacencies. Importantly, these targets will be margin accretive, have attractive organizational cultures, and offer us the potential to realize significant synergies. The management team is committed to delivering strong results for all stakeholders, and we believe we have a clear path forward to delivering 4%-6% annual growth, compounded from 1%-2% market, 1%-2% share gain, and pricing of approximately 2% per year as we expect inflation to continue to moderate.
With this growth target and $100 million of cost savings initiatives, we can achieve cycle peak Adjusted EBITDA margins of 20%-23%, above our prior record EBITDA of 19.6% we achieved in FY 2019 and top quartile performance for an industrial business. This implies operating leverage over the course of the cycle of about 40%. We're also gonna grow adjusted EPS at a compounded annual growth rate of 20%-25% and improve our capital efficiency, delivering free operating cash flow in excess of 100% of net income.... and improving ROIC to 12%-14%, a substantial improvement over where we ended FY 2023. Kennametal is a company founded on a material science breakthrough.
Today, our materials science expertise and know-how, coupled with deep customer insights and our ability to serve customers with innovative products, innovation advantage and customer intimacy, it forms the core of our enduring competitive advantages in the market. Over the past few years, a lot has changed. We've dramatically increased our ability to compete. With modernization, our operations are safer, they are more efficient, and they are better equipped than ever before to deliver innovative, consistent products to our customers. We've built the ability to grow faster than the market, tapping into favorable megatrends and targeting markets and applications we know how to serve. We've changed our culture, improving accountability and entrepreneurship. We're going to continue the modernization journey with Operational Excellence. We've got the right strategies. We've got the ability to execute them.
We will set out and achieve the targets we've given here today, and in doing so, we're going to grow faster than the market. We're going to expand the profitability of this business, and we're going to return cash to shareholders, offering, offering the opportunity for significant value creation. And with that, I'd like the team to come on stage so we can answer your questions. Just a reminder before we begin the Q&A, that, if you'd like to ask a question, again, in fairness to the people online, please enter the question via the QR code, and for those, online, please feel free to do the same. Okay. So our first question: You've laid out a promising strategy and made some fair points regarding modernization. What's different this time compared to the last Investor Day, and what gives you the confidence in delivering this plan?
Yeah, that's a good question, Mike. I think there are several things that, that are certainly different about the company, one of which is, the simplification and modernization. You know, as I said, we were effectively, prior to that program, playing defense and just trying to hold on to share. And as you've heard today, the enablement of innovation through that modernization process, we're now very much on offense to, to take share. I think the other significant change is, Carlonda talked about it. Prior to simplification and modernization, we were doing incremental R&D on existing platforms. Now we have an approach that's customer-led. These are product platforms that are high value-added, and they're transformative type of products that you've seen in the, in the, innovation room.
So that alone, in the last few years, I've seen more new product launches than I had in my prior three or four years. And in this business, that, it takes a while for those new products to get traction. So in my mind, that opportunity for growth on these new product platforms is still very much ahead of us. And then the other thing that I think is significant, and Pat touched on it, and I did in my opening comments, is we've been working on transforming the Kennametal culture to a culture of accountability, and that really means delivering always on our customer commitments. And then when we make commitments to other stakeholders, like we've done today, we are absolutely focused and fully engaged in delivering those commitments to our stakeholders.
I think those are three very significant differences from prior, Mike.
Great. Thank you. Just a follow-up on simplification and modernization. There's a question here, you know, regarding our facilities, and we expect to target to close 3-5 of them as part of the $100 million reduction. Does that get the footprint where you want it, or is that the right number of plants based on your revenue?
Yeah. We're teeing this up as, I would say, Capacity Optimization 2.0 . So the first phase of modernization was the six plants that Pat said we reduced. In this version here, we've got another 3-5 opportunities. But the way manufacturing works and this, you know, this mentality around continuous improvement, we'll continue to always look to optimize that footprint, but that's the sort of the next phase of the journey, I would say, Mike.
Great. We've got a question here for Sanjay, and this one is regarding Lean. The question is: How do you view where Metal Cutting team is in relation to its progression for Lean, and how much more opportunities do you see down the line for that?
You mean?
Just in general, Lean, Lean processing.
Oh, Lean process. Okay. Sorry. I think we are definitely seeing a lot more opportunities going forward, but we have built good foundation.
... and we have implemented many of the lean tools. But I think on a high level, I definitely will say that we have a lot of opportunities. And what Pat, you know, spoke about, the Operational Excellence numbers, we have built those in our model. So it's within our reach to deliver that. We've been doing lean for many years, but I think we can take it to the next level.
Great. So, given the megatrends, especially for Infrastructure spending and the technology innovations, that your Infrastructure growth figure seems to be relatively modest, are there growth headwinds that offset some of these opportunities?
Yeah, I don't, I don't think they're. I wouldn't call them growth headwinds. I mean, we gave the, our outlook largely based on also the consensus of third parties , in terms of what the markets are gonna do, and then we layer on our share gain initiatives on top of that. So there's no, there's no headwinds that are working against us, I would say, Mike.
Great. So we have a question for Franklin: What is the path to improving margins in the Infrastructure segment?
Well, that's a good question. So I think many of us, I know I do, have in our minds our fiscal year 2023. And let me just provide a little bit of context. In fiscal year 2023, we made the decision to adjust inventories for two reasons. One, because our supply chain improved, and second, because our customers also started to manage inventories as supply chains improved, and that created an absorption impact in our financials. Now, excluding that, our margins in Infrastructure are typically linked or affected by two cycles: our end market cycle, some of our end market cycle, as you know, like oil and gas, and our material cycle, and our material cycle is primarily tungsten.
We're exposed to those two cycles, but the most important thing is what we're doing about it. What we're doing about it, as I mentioned in my presentation, is diversifying into markets that are margin accretive, and in some cases, that cycle at a different rate than our current business. The second thing we're doing is running our plants more efficiently to make sure we improve margin. But here we're incorporating recycling to make sure that we also not only meet our ESG target, but also improve the cost of our products. We are reducing our production cycles so that we can take material out of the system, and therefore also reduce our exposure to the raw material cycles.
We believe by the combination of these two elements, again, the growth in higher margin applications, reduction of costs and reduction of inventory, we make progress towards improving the margins of the segment.
Great. We have an interesting question here. It's two-parter, and they're kind of two unrelated parts, but it's one question for somebody. I wanna make sure I get it addressed. So first one relates to the understanding the basis for the 2% price increase and/or the inflation assumptions around that, and how is price tracked over the last 10 years? And then the second part is more related to additive. And it's, you had a lot of exciting new products there, and what type of headwind are you assuming for the growth from additive?
You wanna take the,
Yeah. So from a pricing perspective, you know, we'll talk about what our pricing outlook here is, you know, about 2%. That pricing outlook is really based on where our inflation expectations are at, and we base it basically what you can find in the Treasury yield curve as of a couple of weeks ago. And so that's pretty tied into market expectations right now. I think if we looked at pricing over a longer period of time, outside of a couple moments in seasons when there's been significant raw material price headwinds, which obviously would inflate the price realization, you know, I think that historical rate over a longer period of time would be pretty close, you know?
Okay. Did you want-
You want me to take the additive and the headwinds? I think the way you look at additive is, the way we look at it, is a unique tool to be able to address solutions that are required both Metal Cutting and in Infrastructure, in providing unique ways of solving solution problems. And so, if you combine that with our material science expertise, our application expertise, and our design expertise, we can produce a solution that's required using additive. If we don't need to use additive, we'll use other solutions, and that's what's the power of having our additive capability is that we are able to draw from our complete toolbox of options to solve problems in the most efficient way with the highest performance.
Mike, if I can just add?
Sure.
I think with respect to the market headwinds, this is the right time to really differentiate our performance through solutions like that, I think. That's really the way I would think about that.
So we have a question here that's kind of looking to address the strategic pillars. And it says: When comparing the impact from innovation versus Commercial Excellence versus Operational Excellence, how concurrent are the benefits and the impact, and is there any one of these that you would expect to achieve sooner rather than later?
I think, as I mentioned on innovation, that... We've been working on that a few years. We've made the shift from the sort of incrementalism to these product platforms. And so I think that revenue stream that is gonna be advantaged by that, that's still to come. That's still largely ahead of us. Commercial Excellence, as I said, it took us a few years to get to a point where I felt like we had a systematic process and set of tools that we could actually go in to a targeted area and drive share gain in a systemic way, and also measure ourselves on it. And so I think we're pretty far down the road, but I think the benefits of that are still largely ahead of us.
Operational Excellence, you know, that really created an environment where we could do these new product innovations and launch that. But clearly, we got another $100 million of potential cost savings, so there's still, there's still more opportunity there to continuously improve.
Great. Thank you. We have a question here for you, Pat. You referenced the new operating leverage number in the mid-forties. What gives you the confidence in achieving that?
Yeah, I think if you look back, at some times, you know, outside of periods of time where we've had a significant amount of inflation or raw material costs, going in or out of the business, you know, we've been able to achieve operating leverage in that mid-forties range. And I think one of the things that's different for us here as we kind of go forward, you know, with our inventory optimization program, you know, we will be looking to burn off inventory and set production over the long term here at slightly less than what would be our, you know, our sales rate.
Great. So given the fact that two-thirds of your growth target is coming from outgrowth initiatives, does this require more bolt-on M&A or SG&A to help support the outgrowth initiative?
Yeah, the two-thirds, as Pat said, is the market and the pricing, and one-third is our growth initiatives. But those growth initiatives were inorganic growth initiatives. Excuse me-
Organic.
Organic growth initiatives. So anything inorganic would be to accelerate that and achieve levels higher than that.
Okay. All righty. So now we have a question again for you, Carlonda, and this one is focused around ceramics. And the question is: Can you provide any additional commentary regarding the renewed focus on ceramics?
Yeah. So as you heard Franklin talk about in his business, the opportunity in ceramics, and we have capability, technology, also processing capabilities, a wider range, that we bring to bear for both of our businesses. So what we see is an opportunity for application development of current materials to expand our application spaces primarily on the Infrastructure side. And we see those as nearer term opportunities. But as you look at our ceramics technology and our processing capabilities, there's also opportunity for materials development and process development. A little longer cycle, and we see these opportunities really align with the global megatrends.
So that growth is a little bit further out, and so we have some time, and we're looking at where we can apply our technology to best fit that in the future. And so we see both near and long-term growth opportunities with our ceramic capabilities.
Great, thank you. Your, your presentation this morning really resonated. I have another question for you.
Oh, okay. Ooh!
You launched 24 new products in 2023. How does that look in 2024 and 2025? Any context would be helpful.
Oh, okay. Yeah, so we have a full pipeline of new product launches in play. We have a plan in place, and sometimes we might be a little lower, sometimes we might be a little higher, or whatever, in terms of our averages. But what we look at is the number of products that we really need to get out into the market to help fuel our growth. And so we have targets to do that, and we typically are pretty successful at achieving that with our process that we have in place.
Great. So the macro data in Europe and China, which are big markets for Kennametal, has been soft in recent months. Do you have any context or commentary on how you see that market, those markets evolving as the year progresses?
Yeah, it's. I would say we would, if we look back to our last earnings call that we had in early August, you know, as far as China is concerned, baked into our forecast for fiscal year 2024 was, an assumption that things are recovering slowly. And we said that one of the things that might take us to the high end of our guidance is if that recovery accelerates. So we still see it that way. And Germany, I think we see that, through the first half of our fiscal year, so for the rest of this calendar year, we'll probably stay at about the lower levels that we saw, and then we see maybe an improvement in the second half, Mike, was what we had commented on in our last earnings call.
Okay, great. We have a question here regarding the $100 million savings. And it really is more along the lines of, can you provide any context or color on where those cost savings may come from?
Yeah, I mean, there's some... There was a breakdown that Pat tried to provide. He's got $100 million, $20 million of which was this restructuring of the couple hundred salaried personnel that we've sort of rebalanced our workforce to make sure that we're prioritizing those resources in the growth areas. You've got the 1% of sales, Pat, would equal about what?
About 40, about 45. Yeah.
$45 million. So the rest would be the amount that's associated with the restructuring of the plants.
Okay, great. We have a question here. Looks like it's based on modeling, not our modeling, but external modeling. It says: It appears The Street has really mismodeled the EPS growth trajectory here versus your new guidance today. Oh, question disappeared. Can you provide any context on why that might be?
My guess, the best context I can give is, you know, we, we've not really given a long-term outlook in a number of years.
Mm.
You know, this is at this point in time where we think where we're at. We're excited about what potential we have, both from a cost takeout perspective, and revenue generation on market share capture, and, we're really committed to,
... hitting the targets we put out here today.
Okay, great. This is a strategy-related question. You've listed a large number of customers and products, but many industrial companies have been focusing more on fewer, larger customers, 80/20 on product and customers. Do you have too many customers and products?
Yeah, I think, I don't think we have too many customers. And in fact, you know, what we have is a solution set of products that it seems like it's quite large. But if you remember, we went through a simplification phase, and we reduced the number of SKUs and sort of got ourselves down to a portfolio of products that we think is manageable and that we can continuously improve and innovate on. But we've got this solution set of products that just happen to be applicable to many industries and different kinds of businesses. And I think the way we've organized ourselves to go at and target these customers in an organized fashion.
You know, Sanjay mentioned that part of that Commercial Excellence process is to know what to work on. And I can tell you, when he first came into the company, we were down the path of aerospace. But it took his team a while to figure out, "Hey, what is this? What's the next thing we're gonna tackle? Is it gonna be the small customers in general engineering? Is it gonna be medical?" And so we take the time and have a disciplined process around staying focused on those. So I can see how you could-- it could seem like we've got too many things going on, but because of that disciplined process, I think we can focus in and achieve the targets that we've talked about here today.
Okay, great. We have a question here for you, Sanjay. What’s your target in terms of organic growth and transportation over the next few years, and how will you go about achieving that?
Thank you, Mike. So, as I mentioned earlier, the market, we expected at 0.1%, so roughly let's say 0-1. But through our innovative products, price premium, and also share gain initiatives, we are expecting somewhere between low- to mid-single-digit organic growth in transportation.
Okay, great. Okay, so, Chris, we have a question for you. Can you provide any comments or additional color on the current market conditions by end market?
Yeah, it's similar to what we've already said in our, our last earnings call. And generally, what that was, was that we were expecting to... We left the Q4 seeing some softness in a number of our, end markets and regions, and we kind of expected that to continue through the first half of our fiscal year, and then we start to see an improvement in the second half. So that, that really hasn't changed, Mike.
Okay.
Okay.
Here's a cost question or an SG&A question. It's been in the low 20 range since FY 2018, and that was a target of simplification and modernization. Is there more room for SG&A leverage, or should we assume that it is well optimized, the upside is to come from gross margin expansion?
Yeah. The, there's gonna be a... Inside the deck will be a modeling sheet. And one of the issues that's addressed in there is that we do expect that the OpEx can go below 20%. That's one of our assumptions going forward.
Yes. Yeah, for other modeling-related questions, in the appendix, you'll find a set of assumptions that drive the financials that you see at a higher level throughout the presentation. Okay. So, Pat, you referenced the new operating leverage in the mid-40s. Oh, why'd that question come back? Never mind. Ignore that. How confident are you on the acceleration of growth in the second half of 2024?
This is a new question.
Sorry. New question.
Yeah. I think the way to think about that is, you know, no one knows for sure what's what's gonna happen. But, you know, we've put our best estimate out there, and it's part of our guidance. And, of course, we give a range to sort of factor in the possibility that it might, it might not be as, as good as we think, Mike, or it recovers fast. So that, that's part of what drives the range. But the thing that we are absolutely certain about and can focus on are the things that we can control, all right? So embedded in any forecast are these, what we call growth initiatives, and, and what amount of growth are we gonna achieve above the market?
And that we can control, so we feel quite good about that, and also the actions to improve and take costs out of the business. So while the market is something we can't control, we are very much focused on the things that we can, and we try to reflect that all in the range that we've given for fiscal year 2024.
Great. We have a question for you, Franklin. Why does vertical integration in defense give you a competitive advantage?
Thank you, Mike. Well, a couple of things. As we discussed in the megatrends, the geopolitical instability is driving different decisions by many ministers of defense to have more control of their materials. In the case of the U.S., for example, the U.S. has determined that tungsten is a critical mineral, which means there is a need to establish a more robust supply chain. And the Department of Defense has clearly said they wanna Buy American . So in Kennametal, being the largest U.S.-owned producer of tungsten, that is very clean and graded, this is a great opportunity for us because what the U.S. wants is exactly what we're doing. So, that's where we see the main opportunity.
Great. We have an inventory optimization question, and there was a lot of color on optimizing inventories. How comfortable is Kennametal with its inventory position today, and how about in the distribution and customer channel?
I only heard, I didn't hear all that, Mike. Can you give it to me again?
Okay. Sure. So we'll take it in two parts. If I need it to come back up... So the first part of the question was inventory reductions and how our levels and how are we comfortable with our levels, and then how do we see that level maybe at the distributor and the channel-
Yeah.
-impact?
You know, we, we have an opportunity from an Operational Excellence standpoint to drive our, our inventories down. So right now, they're at the, they're at the right level, given what our processes are capable of. And we think that, they're gonna put us in a position that as there's a potential recovery in the second half of the year, we'll be able to benefit from that. But longer term, we think we can drive the current inventory levels below and still provide the same level of customer service. So that's, that's our objective, is to drive those inventories below the, the 30%. And then in terms of the channels, you know, what's basically been happening in the channels is, customers have been very careful about the inventory they add.
And so if you happen to be supporting, for example, an aerospace business, they're probably holding more inventory because that the market conditions are a little more certain and things are expected to continue to grow. Otherwise, people are still being cautious about how much inventory they're allowing into the channel. We've certainly seen that on Metal Cutting side, and Franklin is experiencing it very much so on the oil and gas companies, where they have significantly reduced their inventory because they were holding a lot of extra inventory due to the supply chain issues. And as those issues were alleviated, they no longer needed the inventory, and we, of course, had to make some significant adjustments that he talked about at the start of the questions.
Great. So we have a question here regarding the Capacity 2.0. In the past, you stated there was no need for, you know, a simplification or a Capacity 2.0 type of exercise. What has changed?
Yeah, I don't, I don't recall ever saying that. So, my philosophy is that you have a set of operations, you look at the footprint, you look at your options to, to drive, you know, more cost and more, more margin expansion. And then also, you have to balance that you're also trying to, at the end of the day, service the customer. If we can't sell the stuff, it doesn't matter what the footprint looks like. So we have to keep in mind with, that we have a certain amount of customer service. Now, these, these plant closures and those type of programs are very disruptive, and they require a lot of management attention and resources, so, it's, it's natural to do this in phases.
So what we heard with simplification and modernization was sort of a phase one. Capacity Optimization 2.0 is the next sort of logical set of steps. But as we said in the previous question, it doesn't mean that it's over at that point. You have to then assess where you are at the end of that process.
Great. So this is a question around the innovation roadmap, and it covered: Does the innovation roadmap cover future materials outside of tungsten and Stellite powders? And can you share at what material or composite materials you're looking at?
So if you notice, our roadmap has really a pyramid, if you will, of areas that we look at. Advanced materials, advanced process technology, and then new product roadmaps. New product roadmaps tend to be those products that we're thinking to launch within this current cycle. But they're within the other areas of advanced materials and advanced process technologies. Those go beyond that, and those really look at not only the near-term technologies that we need for product launches, but longer term. And I think we talked a little bit about ceramics as one example of that.
Great. So does the megatrend of onshoring or nearshoring provide competitive advantage over the overseas players, especially when the company is adopting customer-driven innovation? Is it better to have production closer to home?
I think the question is, first of all, as I said in my opening comments, the reshoring, if you will, or the production of new facilities by our customers to de-risk their supply chain, you know, they have to tool up these new facilities. And it's true that many of these facilities are moving to the U.S. or to, out, you know, frankly, outside of China, as an example. And we have a better opportunity to win business, because of our strong position, really anywhere in the world, Mike, it doesn't really matter. But in China, in China, we also have a good position.
So whether the factories were originally in China and moving to the U.S., we should be able to have a leg up in terms of getting more business because we're positioned in the U.S. very well. But frankly, we have the coverage to regardless of where these facilities are located, to advantage from that.
Great. So we have a secular tooling demand question, and it centered around headwinds like the ICE to EV transition. Are there categories of secular tooling demand expansion other than hybrid cars?
Other than
Other than hybrid vehicles, are there other secular trends that you see as an opportunity for further expansion within tooling?
Okay. I'm not sure of the intent of the question. You know, if the question is intending toward like hydrogen fuel or some of the other fuel, there will be several components.
I think they're looking for more... Okay, so you have a trend that's shifting from ICE to EV.
Yes.
Are there other trends out there that provide an opportunity other than hybrid, to take advantage of tooling capabilities outside of maybe what we're currently doing?
Okay. Yeah, I don't know if I have anything new to add to what I already talked about it, so I'll just recap that we are launching, have launched several solutions really help our customer in the hybrid and electric vehicle. At the same time, we are also improving our technology for internal combustion engine, which is not gonna go away anytime soon. So our overall strategy here is to make sure that we will deliver above-market growth in transportation.
Mm-hmm.
We're staying very close to our customers. As things evolve, we'll continue to come up with new solutions.
Okay, we've had several questions on EBITDA margin, as you would imagine. So I'm gonna kinda summarize them all together here, really kind of focusing on what's the main difference between the 20%-23% margin targets now versus the prior targets?
Yeah, so I think when we think about the targets we're putting together now, a couple things about those targets. Number one, we look at what's funneled from that from a growth perspective. You know, obviously, we're gonna get some leverage off of what's coming on from a megatrend perspective. We're gonna have our share capture initiatives as well, and the demonstrated ability we have really to take market share. I think our confidence in hitting the sales number and driving the volume here is really important in terms of our ability to generate the EBITDA. You know, likewise, I think historically, we've demonstrated the ability to take costs out of the business as well.
And so with our, you know, optimization programs and, Operational Excellence going after $100 million, you know, that's a sizable chunk in terms of what the overall margin expansion has been. And I'd also just like to point out is when we peaked the last time, before we hit COVID and some of this inflation, you know, we were just under 20% at that point in time as well. And so coming in at 19.6%, you know, the bottom end of our range is at 20%-23%, and we have a lot of confidence, in our ability to get into that range.
Great. So there's a question here around labor, and it's focused on the importance of it to execute our strategic plan, and that we have a highly skilled workforce. But, you know, we reference customers relying on our engineering expertise due to retirements at the customer level. How are you ensuring that Kennametal has a deep and well-trained sales team, and any challenges related to that?
Yeah, we have several programs inside the company where we cultivate new engineers and people that are earlier in their careers to come into the company, and that's a very proactive process. It's very much focused on the technical skills to be able to sell this product, as well as to be able to someday work in the technology organization. So, this is an ongoing process. It's very active and, you know, we've been very successful in bringing in new talent to make sure that we got a good pipeline to backfill any potential retirements.
The other thing that we take advantage of is that a lot of our retirees, they, you know, they wanna, they wanna retire, but they also wanna keep, keep consulting or, or stay engaged, and so we have programs by which they can become mentors and train, train some of the newer engineers and stay in connection to them. So we feel pretty good about our ability to maintain that pipeline.
Great. No, Q&A would be complete without the potential upside, downside to your model question, so...
Yeah, so look, if we think about what's the upside and downside, you know, as Chris talked about, the end market growth numbers that we've put together, you know, we as best as can, tied those to some external indicators. Obviously, that's a variable for us, right? In terms of what's actually going to happen over the next couple of years from an end market perspective. But very critically, you know, we believe they're tied to fundamental megatrend s that are going on in our end market. So regardless of what happens in the short term from a cyclical perspective, that potential is there, right? In over the long term. We feel very much the things like market share gains, our Operational Excellence, that those things are very much inside of our control.
Great. There's a question regarding the medical market. Looking at the medical market as a large growth opportunity, what investments will need to be made to expand into that market? And are you looking to acquire a player in that segment to gain share?
Go ahead, Sanjay.
Okay. Yeah, so definitely, we have built in our model the technical expertise, application support, product development, you know, we have roadmaps. So some of those things are already in the model. We do expect to make those investments. Along with that, you know, inorganic investments, as I talked, we'll definitely pursue that. Of course, we have a pipeline, but, you know, it has to also fit what you heard from Chris and Pat, that it has to be overall good for our all our stakeholders, but not gonna make anything just blindly just because we wanna grow. So we have both paths to take, organic and also inorganic.
Great. Okay, just a reminder, if anybody would like to ask a question, please either scan the QR code and enter your question or utilize the chat feature. We have a few more here. So how much is ceramics a part of your costs today, and where do you see that going? How will it affect your supply chain process and your margins?
As part of our cost today?
Yeah.
Yeah. Well, I think, I think maybe to put it in perspective, we said it was about a $90 million business. So, you know, the material cost portion of that is, you know, still relatively small compared to everything else we buy. But, I'm not sure it's gonna really necessarily change our supply chain. You know, we have a—we, part of, part of simplification modernization was actually to top-grade that supply chain organization so that we could really drive continuous improvement and take cost out of whatever the material we were sourcing.... And so ceramics is something that we have experience buying, and so the fact that we're gonna grow in that area, I think we've already got the sort of supply chain structure there and talent to, to do a good job with that.
Okay, great. We have a DCX-related question. With DCX, can you discuss the possible channel conflict with your existing distributor network, and what kind of impact has it had at the enterprise level?
Yeah, thank you. So DCX, as I spoke earlier, you know, has multiple different aspects to it. The first one, where we're really making it easier for all our customers and channel partners to access right product information and, you know, tooling packages and things like that, so that's not gonna create any channel conflict because it's good for everybody. When you go to the second piece of DCX, which is demand generation, that also, you know, we're working to reach out to more customers, and as we get the questions and demand generation leads, we're working with our channel partners together to fulfill that. So that also doesn't create any conflict with, with our channel. Now, the third option of DCX is e-commerce. In the case of e-commerce, if there are customers who only will buy online, they get all the options.
They can buy through our channel partners, you know, e-commerce site, but our main focus is what I spoke to in the number one and number two bucket. And I think what we will do overall is to make the pie bigger for our channel partners and us both, and take care of our customer needs. That's the main focus of DCX.
Great. There was a question from the audience around the competitor chart Metal Cutting, and that there was one major competitor not shown. I just wanna ground everybody in the context for that slide. What we were doing there was trying to compare ourselves to companies that have publicly available data. We understand there's other players in the space, that we don't have access to their data, so that comparison is strictly driven by companies that you can go out and benchmark and measure yourself. We have a question for additive, again, for you, Carlonda. Some people view it as a threat to subtractive manufacturing. You know, you've talked about some products here today and some applications for that. What are your-- what is your overall view on that?
Yeah. We don't see additive manufacturing replacing many of the applications that we serve from a tooling perspective or even a Infrastructure component perspective. You utilize additive manufacturing for flexibility and design. You utilize additive manufacturing for perhaps reduction of lead time or for prototyping. And so if you take a look at the type of applications that we have, particularly Metal Cutting, perhaps it does require. Those applications themselves don't require additive manufacturing, but perhaps they require unique solutions to do the tooling to get to that part that you're trying to get to. And that's where we have strength in that design, also in the materials development.
We see it as a valuable tool in our toolbox to pull from if we need to give a solution for either a unique component design or a unique tool design for whatever part or component that we are servicing for our customers.
Great. So we have a portfolio SKU-type question. Can you describe how you keep track of 70,000 SKUs in order to determine which areas you can launch new products? What does your internal database look like, as this seems like a large task?
Yeah, I'll let you add to this, Sanjay, if you want. But you know, when I came into the company, the big part of the simplification program was to reduce the number of SKUs. And if you think about what Carlonda said, prior to simplification and modernization, the R&D process was actually generating incremental product improvements that... You know, I always use the example, if it were making Solo cups, you had a red Solo cup, and then you'd make one that's blue, which is a whole another SKU, but no one's gonna pay any more money for the two Solo cups, right? And so we had a lot of that was perpetuated over a number of years. So the first phase of sort of simplification was to clean all that out, reduce powder formulations.
Pat just used a modern example of a recent example of in Solon, where we had all these steel blanks that we now reduced it down to five. So we've done a lot of that work to simplify the product. And, you know, the number sounds a little overwhelming. We think of 70,000, it seems like that's a big number, but you gotta recognize that a lot of these tools have applicability across a wide range of applications and industries and customers. We're not focused on 80,000 SKUs. We're focused on this type of customer, this type of customer, this type of customer, and we provide the product portfolio that we think we need to go to market and be successful. Anything you'd like to add to that, Sanjay?
Yeah, I just would like to add that we do have process for product lifecycle management, where we're looking at what needs to come out, but importantly, we also have a process, what comes in. So the new product process is led by business based on customer needs. We're not launching something just for the sake of coming up with a new product. So managing both ends of that will continue to help us continue on the journey that Chris talked about.
So we have a question about the cadence for the 4%-6% growth. And how should we think about that cadence over the next 4 years, given this year's guidance is below that at the midpoint? Does growth accelerate as we enter into 2027?
... Yeah, so obviously, when we think about, you know, FY 2024 here, and Chris talked a little bit about our outlook already, you know, we expected, expect this first half of the year to be a little soft as end market conditions were soft in the Q4, and then for end market conditions to pick up. And I think, you know, mathematically, we looked at the 4%-6%, that obviously implies that we'll get a little bit more growth after we get out of FY 2024. And again, I go back to, as we think about the buildup of that 4%-6%, you know, we've got a 2% pricing assumption in, that, that's in there, and then 1%-2% from market and 1%-2% from share gain as well.
That market of 1%-2% really you know, tied into what's going on from a megatrend perspective, in our end markets. So while there may be some toing and froing in a cyclical business, we're really confident about what the end markets have for us, over the long term.
Great. We have a two-parter here, somewhat unrelated, but both of the topics we discussed this morning. So there's, it's about DCX and additive, and they usually take years to come to fruition. Can you share how long you've been on this path as to be able to highlight them today? And when do you think they will be a mature part of your company and your business?
You're asking me, or you want to?
Go ahead.
Yeah. So, it's been a couple of years, and we always focus our opportunity on the opportunities that we have in place. And so we work, as you saw, on a variety of different advanced technologies and for the future, and additive has been one of those over the last couple of years. And certainly now we have a really good foundation of capability, not only in design, but also in materials, as well as the actual manufacturing pieces as well.
Great. Sanjay, you want to-
Yes, on the DCX, we have been on this for a few years, but like I said earlier, as we launch new product, new features, and all of those things have to be updated in the online world. So it will be an ongoing process. Along with that, you know, we're building new tools, new simulation, you know, packages and all that, so that will be ongoing. So just like when you look at the physical assets, same way, some of the web tools will require ongoing improvements. That will be part of our package. In parallel, we'll continue to look at evolving needs of our customers and make sure we launch new products in the DCX space.
I think also, if I might add, Sanjay, when Carlonda talked about the collaboration space, as a vehicle to reach some of these small, small customers. You know, imagine you are an engineer sitting there. You're the industrial engineering department, all right? And, that collaboration space is still in the early stages. So this, our ability to connect with these smaller customers through that, I think that benefit is still, still very much ahead of us.
Yep. Great. Well, that concludes the Q&A portion of today's event. Thank you for your questions today. After Chris's closing remarks, there's going to be a brief survey that pops up on your screen. We'd ask for you to provide us your feedback. We'd really appreciate it. For participants in the room, there's also a paper copy that you can complete as well. Thank you.
Okay. Thanks, everyone, for the great questions and attending today. I just want to take a minute to close out, but I want the full team up here. So Judy, our Chief Administrative Officer, and Michelle Keating, our General Counsel, please come up on stage. So in closing today, let me just say on behalf of the whole team, that we've never been more excited about the opportunity ahead of us with Kennametal. And collectively, we're all committed 100% - achieving the targets that we've talked about today. As you heard from the team, a lot has changed with Kennametal.
You know, Pat talked about the culture change and driving to a culture of accountability, where we're really very much focused on delivering on our customer commitments, then also delivering on our commitments to our shareholders via making the targets that we just talked about today. Carlonda shared the shift from this incremental product innovation to now a, a process where we're launching new platforms, customer-led, that are high value-added products. And the benefits and the revenue generation capability of that change in R&D focus, I think is still very much ahead of us. Sanjay and Franklin discussed the fundamentals of their growth strategy and the important role that Commercial Excellence and the share gain process, the tools that we developed to focus on driving and taking share.
You know, these two business leaders, they came into the company, and they are not of a mind that it's okay, where we're just gonna continue to focus on the same customers, and that's gonna put us in a position where all we're gonna do is ride the cycle up and down. They're absolutely driving their teams and measuring their teams on the key to success, and the way to win is to gain share, and that's what these guys are focused on. And our ability to take share, as I talked about, has been significantly enhanced with the modernization investment. Before, as I said, we were essentially playing defense and just trying not to lose share. We're now in a position, for all the reasons we discussed today, that we're now taking the field as the offensive team to gain share.
And all these changes, in my mind, equal a compelling investment decision that we share with you. The entire team is confident that we're gonna be able to drive above-market growth, we're gonna expand the margins of this business, and we're gonna do that. In the process, we're gonna be generating a significant amount of free operating cash flow and great returns for our shareholders. So on behalf of all of Kennametal and this leadership team, you know, thank you very much for attending, and we hope to see you soon on another call, perhaps. Thank you very much.