An Interview with Carlos Cardoso CEO of Kennemetal

Today’s Machining World Archive: September 2007 Vol. 3, Issue 09

Lloyd Graff: Kennametal was a global firm when you took over, but now you are making it more so. Can you describe your product development approach as it relates to your global plan?

Carlos Cardoso: When we do a product development, it’s global. If you go into one of our review meetings for product development, you’ll see somebody from India; from China, from Germany. They are on the phone working on the same CAD system, and then engineering is concurrent. So while the team here goes home at 4:00 or 5:00 p.m., there’s somebody in India who can continue on with the project, somebody in China and so forth. We never sleep.

LG: That’s pretty unique.

CC: This is why this company has become the performance company that we are; we have done some very unique things. We have concurrent engineering, one CAD system around the world, all in the same database.

Noah Graff: Somebody from Motorola told me their engineering branches in different countries don’t share their technology with each other, and basically they all develop their own phones independently. Is it like that here?

CC: No, and I believe that this is better for us. When we develop a tool, even if there are certain nuances for China, 80 to 90 percent of the tool is the same so we can produce that tool anywhere around the world for those markets. We had an instance here when we were developing a product. I went into one of the product reviews here, and they were having some engineering challenges. That evening I flew to Germany, then went to our R&D at 10:00 the next morning. There was a message for me there to see the engineer working on this product. He had already solved the problem. I slept all night on the plane, I got there and the problem was solved. That’s the power of this thing.

Another important part of our strategy is global accounts. Think about Caterpillar – there’s a Kennametal guy in Peoria who works with Caterpillar’s manufacturing people to understand the Caterpillar strategy. One of the challenges with a lot of our big customers is they have the strategies of lean [manufacturing] and do all this stuff with a single focus. Now, when you go to China, when you go south somewhere in the U.S., that plant says, “We’re going to do whatever we want.” So those customers are having their own challenges of getting their whole organization around the strategy. Now we have an engineer at that plant, so our guy can actually help our customers implement their strategy because we can give them the same solutions in Mexico or in China that we do in Peoria. If we sell that solution from the bottom up, those guys feel that they get a feather in their cap because they’re meeting the corporate goal, but it’s their solution in a way. So this global account is a tremendous value proposition for our customers. Caterpillar opened a plant in China – on their first day, we had a half dozen people there teaching their operators how to start up the shop.

LG: That’s a coup.

CC: This is how you focus on the customer versus just selling the product. If I’m selling you a product and that’s all I’m doing, I’m only as good as anybody else in the marketplace. If I’m making sure that you get up and running as fast you can, if I’m making sure that you’re making money as a result of being part of Kennametal, then I’m adding value. We are becoming a customer-focused company. One thing is saying it, the other thing is doing it; and I tell you, making this change is like being at the head of an aircraft carrier. Sometimes you turn the wheel and it takes awhile before that ship moves. It takes a lot of courage to take a company that is doing fairly well and is well recognized and say, “Oh my God, we’ve got to do a 90-degree turn here.” But that’s what we have to do, otherwise we’re going to be a “me-too.” We have to look at how great we’re doing today for 30 seconds – then we’ve got to spend the rest of the day thinking about how can we do better tomorrow, because the world changes fast.

LG: Talking about that, you’ve been growing internally and you’ve been growing with acquisitions. According to the business books, 80 percent of acquisitions fail. What’s been your experience with your acquisitions? How do you make them work?

CC: We have very clear strategies here. One of the things we have that is unique to this company is a

documented management operating system. One part of it is M&A, mergers and acquisitions. People that do M&A for us need to be certified in their process. We have a very disciplined process to make acquisitions. We look at about 120 companies per year. In the last 12 months, we bought five.

LG: Let me ask you about one – Manchester Tools.

CC: They were owned by Federal Signal. Manchester was part of a company that didn’t understand their business, so they were kind of on their own and their growth rates were not very high. It was a very decent company, but they couldn’t grow that much, and the resources were limited. We bought that company strategically. Manchester covers a niche product that Kennametal did not have. They have a very good cutoff line and grooving line, which Kennametal has kind of struggled with. But we now have Manchester Tool, and in the first 12 months we can take that whole line globally.

LG: Phenomenal distribution.

CC: Phenomenal distribution from a Kennametal perspective. We can multi-brand, so we can put some of those products through the Kennametal channel. To be honest with you, Manchester covers a niche that one of our competitors is very good at. I’m an offensive player. I always believe that if you’re not on offense, then you leave yourself open for your customers or competitors to kind of nibble at you. Now we have a line that we can compete with and give our competitors something to be distracted about because we’re going to go into their heart with this line. We’re going to have a product manager that is going to be focused on that line; he’s going to drive that globally. We believe that we can double Manchester’s sales every three years. We’re going to take a regional company and make it a global product line.

LG: Carlos, I understand after our meeting you’re going to Nantucket to talk to an investors’ conference. How much of your corporate job is plugging the stock?

CC: Well, I wouldn’t call it plugging the stock, but it’s a fair question. When I became a CEO, I had to do a lot more with the investor community than before, plus I wanted to put a strategy out there. I wanted people to understand the company. So in the first 18 months it was not so much about plugging the stock as it was to say, “This is the vision. This is the strategy of the company. This is where we’re going and this is what the company is.” I’m changing the focus to where I don’t need to spend as much time with the financial community. My CFO can spend time with the financial community and supplement there, where as I can spend more time with the customers; I can spend more time internally now. God knows, in 12 months my priority is going to be different. It really depends what stage we are at as a company. I spend a lot of time now with acquisitions because it’s important; it’s one of our strategies. I have to sit down every year and reflect on what happened last year; where we are, where the company is going and what will my focus be in the next 12 months.

LG: What are you reading these days?

CC: I just finished a book called The Whisper of Your Heart. It talks about how you listen to your subconscious, because people are going at you 200 miles per hour and your conscious is not getting enough information from your subconscious, and you’re just not as aware as you should be.

NG: What is an average day for you as a CEO?

CC: My day today is meeting with you guys in the morning. I took the first hour to prepare for the day. I

work with my assistant throughout the day because my calendar is probably the most challenging thing to manage, and she does a great job. I’m doing a review today of our M&A, looking at what’s in the pipeline, what is not. I’m doing a strategic review for one of the units to try to figure out – where are we going to go next? Most often I work through lunch. Today one of the top guys from Fairfield University, my alma mater, is coming to talk to me to see if I can get more involved with the school. This afternoon, I fly to Nantucket to spend part of the afternoon and tomorrow doing investor meetings.

We do quarterly reviews with all the business, so I spend two days per quarter on that. Our fiscal year ends this month. It starts in July, so we just finished planning review meetings and that takes a week for me and my CFO. I want to make sure all the people understand the P&L in front of me, because I want to look them in the eyes and say, “Are you committed to this?” It’s very important that we have these meetings.

NG: How many hours a week do you work?

CC: The life of a CEO, you are on 24 hours a day, which is kind of sad in some ways. Because we are a global company, I can get a call at 1:00 in the morning. When you have 14,000 employees, there’s something going on

somewhere around the world that I need to know about. I would say that on average I probably work about 60/70 hours a week. I feel that now we have a good team and so maybe I can get a little bit of relief on that. I spend one week a quarter in the shops. I wish I could spend 90 percent of my time in the shops because I just love it. I’m a different style of CEO. There’s CEOs that spend all their time in the office. I spend the time in the office that I have to. The rest of the time I’m on the road.

LG: Are you talking about the shop here or customers’ shops?

CC: Both, but I like to go into our shops. I’m a shop rat, so that’s exciting for me.

LG: What’s the hardest part of being a CEO?

CC: You don’t own your time anymore. Everybody knows where I am at any time. I’m a private person. I don’t mind working 70 hours, but on Sunday I like to be able to get up and not shave and go have brunch. I can’t do that anymore because everywhere I go people know me, and people come to my table, they want to shake my hand and talk to me. I understand that comes with the job, but it’s sort of difficult for me.

LG: Are you going to enjoy visiting Nantucket, or just get out of there as soon as your meetings are over?

CC: I’m getting out of there as soon as the meetings are over.

LG: What a shame.

CC: Isn’t it? My family is very important to me. I have two boys, both at Arizona State University. This Friday I’m actually going to the Caribbean with them, just the three of us. That’s very important. I recharge. I retreat. But when I go on a business trip, it’s a business trip. When you’re with employees, investors or customers, you have to be on top of your game. I often tell people that if you want to be a leader, you have to smile even if it hurts, all the time, because the way you present yourself really creates the environment for the company. If people see that I’m not smiling, they get worried about the company.

LG: It must be tough being a public person.

CC: I think it’s tough. Some people like it, some people don’t like it. I don’t like it, but I also know it comes with the job. I have to do that for the company because if I’m recognized, then the company’s recognized and I can’t shy away from that. I’m at airports around the world, I hear my name and I turn around, there’s somebody who knows me at the Hong Kong Airport or the Berlin Airport. Sometimes it’s an uncomfortable feeling. You feel like you don’t own your life anymore.

LG: That must be tough. You talked about your two sons. I saw that you’re a sponsor for the NIMs and for the Skills Contest. I was talking to one of our freelance writers whose two sons go to Dartmouth. He went to Dartmouth. He was in a fraternity there and every year he gets a letter from the fraternity saying what the seniors are going to be doing after they get out. He said that of the 23 seniors last year, 20 of them are going to work on Wall Street. I’m thinking to myself, what a pity. Where are the guys going into manufacturing, the clergy, becoming soldiers or artists?

CC: We have a challenge in this country, to be honest with you. I’m fortunate that I have an education that covered everything from finance to manufacturing to engineering, so I have a pretty well-rounded background. I’ve worked basically in every function in the company. I love manufacturing. You make things. I tell people that Kennametal is a pervasive company. Everything that you touch, Kennametal is part of it. Think about that. You get up in the morning, you turn the light switch on – Kennametal helped make that light switch. You go have breakfast, you have cereal. Kennametal helped make that. That’s an exciting thing, but people don’t look at manufacturing as sexy. That concerns me most – that engineering and manufacturing are no longer a sexy thing.

LG: Do you think your sons will end up working for a big manufacturing company or do they have no interest in that?

CC: They have no interest in that, as much as I try. Both kids are in liberal arts/marketing. They could work for a manufacturing company but not as an engineer. But I find it exciting. I just finished a trip last week on the road in the shops, and I came back recharged. I get recharged when I spend the time in the shop if it smells like oil. I love it. Talking to an operator to me is knowing that that operator knows what the company is, what the vision of the company is, knowing that he’s aligned, knowing that he’s excited about being part of the company. That’s what drives me. That’s what makes a difference for me. It’s knowing that that guy’s excited about Kennametal. I hope that guy loves what he does and his family is secure because of Kennametal. That really is what makes you say, “I’m really making a difference.”

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