I had the opportunity to talk with Markos Tambakeras, Chairman, President, and CEO of Kennametal Inc. I was very interested in understanding more about the man who, since mid 1999, has been transforming Kennametal. He has also lowered Kennametal’s debt and improved return on investment, cash flow and profitability by streamlining and decreasing the cost structure. He has grown revenues and profitability through the rapid introduction of higher margin new products and by globalization and acquisitions. I asked him about his global experience and he replied “I’m pretty global. I have lived on four continents; Europe, Africa, North America and Asia. I’ve worked for three companies, Unilever, Honeywell and, of course, Kennametal.” He speaks five languages fluently.

Markos served as Vice President of marketing and business operations for Honeywell, and moved on to become the President of Honeywell’s Asia Pacific division from 1992 to 1994 and lived with his family in Hong Kong. He was named President of Honeywell’s Industrial Automation and Control business in 1995.

Tambakeras received a Bachelors degree in Industrial Chemistry from University of Witwatersrand, in Johannesburg, South Africa, and he received his MBA in marketing from Loyola Marymount University in Los Angeles, California.

The Kennametal Board of Directors appointed him as Chairman, President and CEO of Kennametal, because of his very strong experience in managing a large complex industrial company, his extensive global experience, and his passion for success. In speaking to Tambakeras, I found him to have a unique combination of strong vision and focus, creativity, and tough-mindedness.

Markos says that the global transformation of Kennametal is on track. “When I came to Kennametal, the company had become somewhat distracted. We needed to reset our course and stay focused. The last five years, with the manufacturing recession and 9/11 has been a double-whammy for Kennametal. In all of this we have come through; even stronger than before.”

Markos was kind enough to share the strategies and methods which he employed to improve Kennametal’s future.

Phase 1 was to fully integrate the major acquisitions of Greenfield and J&L , which had strained Kennametal’s resources and balance sheet. Markos established a number of strategies for reducing debt and cost structure. He used SAP for systems integration. “J&L had gotten off track”, so he “brought them back into the fold and changed their management, reducing debt in the process. “

In the US, he closed 30 facilities, implemented a wage freeze and reduced the work force (salary and hourly) by 12% to 14%. The wage freeze affected management for two years (including Markos), and one year for other workers.

Phase 2 focuses on organizational development. He strengthened management talent and used 2% of revenue for training and development of his people. He also placed increased emphasis on new product development. “ Four years ago, 17% of sales were from new products (products that are less than 31/2 years old). Today, 41% of sales stem from new products, while focusing on cost, productivity, and the balance sheet.” Markos said, “Never take your eye off the cost structure, or your balance sheet and cash flow. We don’t want to repeat when business goes down, so we must keep lean and competitive.”

“We must always sustain technology and leadership, across the board.” Phase 3 is market driven growth rather than product driven growth; while focusing on cost, debt, and cash flow. As Markos leads Kennametal into the future, organic growth will be augmented by rapid growth through acquisitions, accelerated distribution through geographic distribution, and focusing on developing markets, such as Asia (China and India), Central and Eastern Europe, Latin America particularly Brazil. “I’m not shifting capacity, but creating new capacity through expansion for consumption in those markets.”

In the short term, Markos is looking to China, where he sees competition developing within 3 to 5 years. He wants to have a low cost structure in China, with Kennametal’s technical edge. His big customers will use global standards and will match costs. Many of the customers will be transplants from the United States, Western Europe and Japan, and will expect high quality. In China, Markos also sees the opportunity for a supply chain advantage and lower tungsten costs. In China, Kennametal will compete on localization, innovation, and customer satisfaction. Kennametal will continue its global competitive edge.

Discussing Kennametal’s acquisition of Widia, Markos said that because of the sluggish economy in Europe, Widia was slow to deliver on the top line. However they have accomplished some impressive milestones such as achieving cost objectives and profitability within the first year. Widia products are now being marketed and sold in the US. Widia was well positioned in India, allowing Kennametal to enter that market. Kennametal is now the market leader in India achieving growth rates in India in excess of 40% , higher than that of India itself. The Indian team is all indigenous, solid and a motivated group. Kennametal is expanding capacity in Bangalore. Kennametal is using their entry into India as a model for entering into foreign markets. “We’ll operate India from a long distance. The management team has the same values.” Markos is passionate about the growth of the Indian company, allowing a venue for high quality, consistency, value and performance.

Kennametal supplies training from headquarters, product training, global supply and computer training. Trainers with specialized functional skills, help implement processes and teach know-how for 3 – 12 months. They then get out of the way of local management.

I discussed management selection with Markos . He said, “You need the right person for the right job. Look for good alignment in philosophy and focus, execution, customer orientation, high values and integrity; working well with others, global mindset. Leaders can pick good people.”

Markos spoke about the Kennametal Value Business System (KVBS). “It’s composed of six processes, and is key to our execution. It has become engrained in our culture, and underlies not only our strong performance in 2004 but also our confidence in profitable growth in the future.”

• Talent development – top grading and selection process for “A players” using a uniform measurement system and alignment objectives. 30-40 hours of training per year.
• Lean Perpetual Proven Values
• Strategic Planning
• Mergers and Acquisitions – Using an extremely disciplined approach to the identification, evaluation, closing and integration of acquisitions.
• Customer Acquisition – how to go to market and sell. Over the past year Kennametal has made a major investment in the ability of our technically skilled sales force by incorporating world class sales tools for sales teams across the world. The prime principle is to deliver the best economic value by focusing on improved competitiveness.
• Product development - In Markos’ discussion of new product development, he reviewed Kennametal’s selection of Dr. William Hsu as Chief Technical Officer. Hsu has a global perspective, freshness of ideas, and a PhD. He came from a strong background at E I Dupont. He has a coating and materials background and a new product discipline that leads to repeatable new product success.

Markos said people are the most important asset of Kennametal. “We have the best management team in the business. I am satisfied with where we are, but I am not complacent. We are well on our way to achieving our lofty goals.”

I asked Marcos about Sandvik, He said “They are larger, and a good competitor, but we have a management edge.”

In closing, Markos Tambakeras had this to say, “We have positioned Kennametal to achieve our three year targets of 6 – 10% top line growth including acquisitions, 25-35% earnings growth, and return on invested capital of at least 12%.”

Markos has achieved everything and more than the board expected when they lured him in 1999. Kennametal has also achieved more than the security analysts had expected and the stock has done extremely well.