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Don't blame Hoop Roche if he breaks out in a cold sweat at the mention of the year 2008.
Last year was a nightmare for Roche. It started well enough. Back at the end of 2007, Roche had “several very attractive bids” to buy his company, Erie Plastics Corp. of Corry, Pa. “I pretty much assumed that it was close to being a done deal,” he said.
Less than a year later, the company folded and its assets were sold in bankruptcy court.
Roche, the former chairman and majority owner, shared the story of how the 48-year-old injection molding firm ran into trouble, in a speech at Plastics News' Executive Forum, held March 2-4 in Summerlin.
Roche said he hoped other plastics processors would learn from his experience.
The story really starts prior to the meltdown. Back in 2001, the company invested $11 million to build a highly automated, state-of-the-art, 465,000-square-foot plant in Corry. At the time, Erie also had satellite operations in Westborough, Mass., and Székesfehérvar, Hungary.
Life was good, in large part thanks to growing business from Procter & Gamble Co.
“We did what they wanted. They wanted us to expand, and wanted us to focus on product development,” Roche said. Erie did molding for several P&G businesses, including personal care, feminine care, laundry detergent and Folgers Coffee.
Roche's goal at the time was to get Erie to about $100 million in annual sales.
“I thought in our space, which was typically high-volume packaging, injection molded packaging, $100 million was a good number and we felt that would be a good platform,” he said.
“But while we were doing that, our competitors got very aggressive about acquisitions, and by the time we got to $100 [million], some of our competitors … were up to $1 billion to $3 billion. So obviously we were sort of becoming a small fish in a pretty big sea, and it felt that the time had come to sell” the company.
But that's when Erie was hit by a triple whammy. The economy slumped; credit markets collapsed and Erie was suddenly in a tough spot with its lenders — as would-be buyers for the company mysteriously disappeared.
But the biggest problem was that P&G — which accounted for more than half of Erie's revenues — suddenly pulled all of its business.
“Given the size that we were and the debt we had taken on in the market, that withdraw was pretty much a death blow,” Roche said. He now calls it the “worst-case scenario” for the company.
Layoffs followed, and the news became public. At the time, Roche tried to keep P&G's name out of the media, saying only that a major customer had pulled its business. But P&G's name quickly leaked out.
Only now is Roche ready to explain what happened.
“They [P&G] were shaken by 9-11, and then when [Hurricane] Katrina hit, it shut them down on Folgers, which was one of our product lines. We didn't shut them down, but their coffee plant was on the Gulf, east of New Orleans, and was shut down for a couple of months.”
Losing Folgers production was a big blow to P&G. By the end of 2008, Cincinnati-based P&G sold the brand to Orrville, Ohio-based J.M. Smucker Co. And the experience caused P&G to rethink its supply chain strategy.
“They made a decision, both for their own internal plants, and for external suppliers, that they didn't want sole source, and they didn't want small, they didn't want single locations. All of the sudden, we didn't fit the model anymore,” Roche said.
“It wasn't that they were unhappy with us, I think that we still probably have the best quality rating that any supplier has had on the product lines that we produced. But nonetheless, we didn't fit the business model anymore.
“I think no matter how much confidence you have in the customer and how good the relationship is, if the customer changes the business model you can really be screwed.”
Roche said P&G's decision took him by surprise.
“I grew up believing in relationships and believing that a person's word was his bond. And I found out that really had changed — evolved into a situation where customers were behaving differently. I think they adopted the automotive model. And a dose of healthy skepticism is in order.”
When Erie lost half of its business, its loans were classified in default, and the company was suddenly in deep trouble. The company ended up filing for Chapter 11 protection, with Crawford Group of Cleveland anointed the “stalking horse” bidder.
In the end, though, that deal fell apart, and Evansville, Ind.-based Berry Plastics Corp. bought Erie's assets and shut down the company.
Looking back, Roche offered advice including a list of what he thought he did right:
* Recognized and admitted the problem early.
* Selected a most trusted and seasoned legal counsel as quarterback.
* Initiated open communication with its lead banker.
* Sought help immediately.
* Retained a restructuring firm before it was required by the bank.
* Cut every conceivable cost and downsized immediately.
* Learned new methods to tightly control cash flow.
* Retained bankruptcy counsel.
* Picked a capable stalking horse bidder for the company.
* Picked a small team of employees who were critical to saving the company.
“We made a decision that we were really adrift and we need to have the people in the lifeboat who could save the ship,” Roche said.
As the process went along, he said the company made sure to open up communications with all of its constituents — customers, employees and suppliers.
“One of the things I found was convincing people to stay on board and to believe in what the company was doing became one of my major challenges,” he said.
But Roche also had a list of things he did wrong.
He should have cut staff more deeply, moved more aggressively to find a buyer. He fought bankruptcy for too long, and did not have a strong backup to the stalking-horse bidder.
Roche also offered a list of things he would do differently:
* Be more conservative with debt and expansion.
* Maintain healthy skepticism about customers' intentions.
* Never allow one customer to dominate sales — none should exceed 10 percent.
* Understand that not all restructuring firms are alike. Hire one carefully based on due diligence.
* Keep the pressure on sales and marketing — always oversell.
* Set limits on monthly legal and professional fees.
* Don't look at bankruptcy as a failure but rather as a means to save the company.
* Expect and plan for the unexpected.
* Consider selling the company earlier. “In this market, the consolidators appear to be winning,” he said.
Today Roche has a consulting firm, and he is chairman of a small company, Advantage Puck Group Inc., which makes pucks — standardized assembly-line transport media that allow containers of many sizes and shapes to run through packaging machinery. Roche owns half of the company — it was formerly a customer of Erie Plastics — and he moved it into a former Erie Plastics building.
At the PN forum, some attendees pressed Roche on how he could have handled the P&G situation differently. Could he have insisted on long-term contracts, for example?
Roche said Erie Plastics' high concentration of business at one customer was a concern all along. He knew it was a risk, but it was hard to say no to the P&G-fueled growth.
“We tried, but it's very hard,” he said. “At the end of the day, we're all sales people. If a customer wants to buy something from you, it's very hard to turn an order down, as we all know.”
Roche said molders have to protect themselves with the right business strategy.
“I think in this market sometimes you will just have to make a decision to sacrifice growth in favor of safety. This is not a time to be a gunslinger. That's probably going to be true for a long time to come,” Roche said.
He told the audience, which included executives from several of his largest former competitors, that they need to stay fast on their feet and expect the unexpected.
“These things can be very sudden and very surprising. It was the last thing I thought that would ever happen to me. We've been in business so long and we've been in so many crisises. We've had fires and floods and had a president die unexpectedly one time. I always used to tell people, we're bulletproof, no matter what comes we can live through it. But that's not always true,” he said.