AKRON, OHIO (June 10, 10 a.m. EDT) — They made it through 2001.
Chief executive officers and other top officials from top extrusion firms recently sat down with Plastics News to discuss the year behind them and what they see in the future. Executives remain confident that brighter days are ahead, yet terrorist threats are part of their post-Sept. 11 business models.
PVC pipe producers wished the year away. As Lamson & Sessions Co.'s John Schulze put it, “We had no margins in our PVC pipe business last year, for a lot of reasons.” Schulze cited excess PVC capacity for the North American market, “which drove prices down to a level that I don't think anyone in the chain made money.” He also blamed expensive feedstocks.
“It was certainly the worst year, in absolute terms and relative terms, because we had such a terrific year in 2000.”
Things weren't much better in vinyl siding and window profiles.
Vinyl siding manufacturers competed for share in a maturing market where producers shut excess capacity and the U.S. market declined slightly by 0.6 percent. The U.S. window industry itself experienced its second year of sales decline, said one official. But vinyl profile producers are looking toward energy-conscious consumers and mold issues to boost growth over the next few years.
According to Ducker Research Co. Inc. of Bloomfield Hills, Mich., the impact of new materials in the window market continues to be evident. New materials such as pultrusions and composite wood materials will force expansion of market segments in the future, according to the firm's 2001 report on the shipments of prime windows.
Strong statistics support officials' optimism: The National Association of Home Builders projects that housing starts will remain steady this year at 1.6 million. That same strong new-construction market is what kept the economy from sinking lower last year. The remodeling market saw a modest upswing in four quarters ending in 2002's first quarter, according to Harvard's Joint Center for Housing Studies. Gross domestic product grew sharply in the first quarter at 5.8 percent, compared with 1.7 percent in the fourth quarter.
Here's what executives from five firms had to say.
PW Eagle Inc.
2001 extrusion sales: $246.1 million
2000 extrusion sales: $343.9 million
2001 extrusion employees: 701, down from 830 a year earlier
William H. Spell, chief executive officer
“I would characterize [2001 as having] the worst economic conditions in the manufacturing sector since the early 1980s,” Spell told shareholders at PW's annual meeting.
What the firm did:
The publicly held firm offered no salary increases, no bonuses and has not made a charitable donation in more than a year as it realigns itself financially. To pull through the year, the firm permanently shut one plant and has another in Phoenix temporarily mothballed. Officials expect to make a final decision on the status of that smaller plant by the end of the year.
The year ahead:
“We're where we want to be,” Spell said May 21 by telephone. “But we have other initiatives that we're going to implement that will enhance the staying power and resiliency of the company.”
Spell did not elaborate on those changes, but said PW Eagle is considering selling and leasing back some operations. In March, the Minneapolis-based PVC pipe extruder raised $13.7 million by doing the same with three facilities and one office building. Officials also are working with their banks to improve the company's debt structure, Spell said.
“Sept. 11 changed the business model.
“We can't predict as well as we used to,” Spell said. “Before Sept. 11, business managers were concerned about economic cycle, inflation, interest rates, GDP. Because of [the new unpre-dict- —ability], we have to operate our business less leveraged than we have in the past.”
“We have to be careful that in a good year, we don't return to some bad habits with adding capacity by expanding too quickly.
“We know that we have to act judiciously and prudently. If we've had a bad year and a half, I think we have to say that this is a cyclical industry. We plan and can operate our businesses accordingly, viewing this in a long-term context.”
Crane Plastics Co.
2001 extrusion sales: $164 million
2000 extrusion sales: $171 million
2001 extrusion employees: 725, down from 840 a year earlier
Tanny Crane, president and chief executive officer
“Our tough period was the second half of 2000, first half of 2001,” Crane said in an April 19 telephone interview. “Historically, our company is first-in, first-out with a recession, being so closely aligned with the building industry. It was a mild recession, not a very deep trough, and for that reason I don't think we're going to see a sharp rise.”
What the firm did:
In early 2001, the Columbus, Ohio-based company's vinyl siding group went through a marketing overhaul. Officials took a similar approach with the fencing business, where it changed the product name to Maximum. At trade shows, the company began marketing different products together.
Crane officials said they still are experiencing the positive effects of the firm's reorganization in late 1999 into six operating companies. They do not plan to change their status as a family-owned, private business any time soon, even in an increasingly consolidating market.
“[We're] very entrepreneurial, customer-focused, bottom-line driven,” she said. “As we were growing rapidly, we felt we were in so many different businesses and our customers are very different, with different growth patterns, and we felt we needed to address that.”
The company has reduced employment gradually across the board, Crane said.
“There was some reduction through attrition. We put some people in different positions. We really just became more efficient. We really tried to become more of a flatter organization.”
The year ahead:
“We had a huge first quarter,” she said, noting a 21 percent sales increase, which Crane attributed to good weather and restocking by its customers.
“When the recession hit, our customers started reducing inventories dramatically. Across all businesses, all steps in the channel were cutting back inventory. We had good times for so long that all levels of distribution were fairly fat and happy. I think all channels were stuffed. This was a pretty big wake-up call.”
Crane is guardedly optimistic about the remainder of the year. “Unfortunately, resin prices are dramatically increasing and it may have a negative impact in the marketplace,” she said. “These are record-percent resin price increases, but the absolute price is not the highest we've seen. It's very, very discouraging to all of us and it may slow down any potential growth we had. Other than that, I look to 2002 to be a recovery year with volume increases. I don't look to the whole year to be anywhere like the first quarter.”
“In a number of our business units, we're growing at a great pace. We are focusing on new products and we will again take market share.”
Examples? Crane cited siding, decking and fencing. The company's gutter-guard business had a tremendous first quarter and, the firm experienced decent growth in custom extrusion as well.
Crane primarily will seek organic growth, though the firm is looking for opportunistic acquisitions.
“We're looking at some international opportunities, whether it's licensing or joint ventures,” she said. “We have an international director and his mission is to ensure that our products are being placed globally.”
Crane Plastics has no physical plant expansions planned for this year.
“It's continuing to do more with less,” Crane said. “The industry needs to work on continued productivity gains. Better use of efficiencies is a challenge to the industry.”
Lamson & Sessions Co.
2001 extrusion sales: $222 million
2000 extrusion sales: $310 million
2001 extrusion employees: not available, but in its 2001 annual report, the company reported 902 employees at manufacturing facilities and distribution centers. A year earlier, that number was 1,020.
John Schulze, chairman, president and chief executive officer
“We were surprised at the timing [of the telecommunications market collapse]. When we made our acquisitions in 2000, we said we knew the volumes were going to drop off. We thought it was going to happen in 2002 [but] it dropped off almost immediately upon the acquisitions.
“The severity of the decline has surprised us, no question about that.”
What the firm did:
In 2001's second quarter, Lamson diversified into high density polyethylene pipe used in gas-collection applications. The firm, based in the Cleveland suburb of Beachwood, laid off about 17 percent of its salaried work force last year, including 10 percent in the fourth quarter. In March it temporarily decreased production at two HDPE pipe and conduit facilities in Erie, Pa., and Tennille, Ga.
“We had normal salary increases to keep us competitive, but no bonuses from top to bottom,” Schulze said.
One-third of Lamson's sales volume came from the telecommunications sector. In late 2000, the firm acquired two conduit producers: Erie-based Pyramid Industries Inc. and Ameriduct Worldwide Inc. in Fort Myers, Fla.
“It was our belief that as the telecommunications infrastructure got built out, it would be moving more into the metropolitan areas where they would be more restricted in terms of these huge reels of HDPE,” Schulze said.
The year ahead:
Like other pipe companies, Lamson looks to 2002 for a recovery, expecting a profit on an annualized basis. In its first quarter, sales decreased 23.2 percent. But officials look to the second and third quarters for stronger activity, especially in PVC pipe. Sales in that sector declined 40 percent in the first quarter compared with the same period in 2001.
“We are on pace to be profitable for the second quarter and then on for the year,” Schulze said.
In their first-quarter conference call to analysts, officials said they will continue to maximize cash flow and pay down debt. Lamson's year-end goal is to pay down $11 million in term debt.
On the production side, Lamson's HDPE conduit facilities only ran at 35-40 percent of capacity in the first quarter. A year ago, the same facilities were operating at 65-70 percent, according to first-quarter results.
Lamson is projecting that the housing market will remain strong. However, Schulze said, the commercial sector of construction could be down.
“There are a lot of vacancies and I would expect that spending to be down over 2001,” he said. “It's already running below last year's level. The industrial sector is relatively weak, so we don't expect growth in that area. But institutional is relatively strong.”
Still, Lamson & Sessions officials think that interest rates will remain relatively low.
“Consumer confidence remains high,” Schulze said. “As long as interest is low and mortgage rates are low and people have jobs, my sense is there will be a strong market.”
“We are being very cautious in terms of capital expenditure spending and we've certainly cut back on travel and entertainment spending,” he said.
Lamson remains confident in the telecommunication sector. Schulze said he does not regret making the acquisitions.
“I'm disappointed that we're not getting the kind of return that we thought we would. But we anticipate over time these making a major contribution to profitability.”
Dayton Technologies Inc.
2001 extrusion sales: $87 million
2000 extrusion sales: $87 million
2001 extrusion employees: 350, down from 425 a year earlier
Darwin Brown, president and chief executive officer
“We believe firmly that vinyl will continue to take market share from wood and aluminum — not at the double-digit rate like we did for a lot of years — but I think very conservatively, 5-7 percent,” Brown said in an April 11 interview at Dayton's headquarters in Monroe, Ohio. “In the last couple years now, there's been negative growth in units, but I think the whole window industry didn't grow in units, so [wood and aluminum] didn't pick up market share in that process, I'm sure of that.”
What the firm did:
The supplier of window and door lineals avoided a $1 million capital investment in its reclaim area last year by implementing “total productive maintenance” and 5S, a workplace organization program. During the past 12 months, it also started implementing single-minute exchange of dies, or SMED.
In January, Brown appointed Michael Hutfless as president.
“We've been working really hard to understand things that we can do for faster start-ups, lower scrap rates, higher throughputs on our dies,” Brown said.
The year ahead:
Brown and Hutfless plan to grow the business to nearly $100 million in sales this year. At the Monroe campus they have the infrastructure in place to add 30 extrusion lines.
“All of the growth this year will come from new customers and, secondly, we've got customers we know that are growing their market share,” Brown said. “We have one of our major customers that is doing significant business with Lowe's Home Improvement Stores. The market itself we expect to grow this year. If those things happen, what we're predicting on our budgets is double-digit growth this year.”
He's still confident in an improved economy this year, barring any additional terrorist attacks. “If we have another catastrophe in our country, what that would do, who knows,” he said.
“Companies that are not planning on a global basis are at serious risk,” he said. “The global competitors will achieve economies of scale that will give them a significant competitive advantage.”
Royal Group Technologies Ltd.
2001 extrusion sales: $915 million, including $110 million in sales from Marley Mouldings LLC, which Royal acquired Dec. 10.
2000 extrusion sales: $749 million
2001 extrusion employees: 8,680, up from 6,100 in 2000
Vic De Zen, chairman and chief executive officer; and Doug Duns-muir, president
“We [will] have no problem meeting C$3 billion in sales in 2005,” De Zen said in a May 15 interview at Royal's headquarters in Woodbridge, Ontario. “In vinyl siding, fencing, decking, railing, profiles, we're getting our share more than anyone else out there. You can see the growth in North America. We're growing more than anybody else, and it's not by luck.”
What the firm did:
The company completed the consolidation of 24 manufacturing facilities into 14. In the latter part of 2001 Royal acquired Marley Mouldings of Marion, Va., and Pittsburgh-based Thermal Industries Inc.'s extrusion operations. Additionally, Royal struck a joint venture in composite ABS lineals. In March, De Zen appointed Duns-muir as president, heading up the management team charged with meeting the firm's goal of C$3 billion in sales by 2005.
Despite Sept. 11, Royal pushed on with the Marley deal when other potential buyers backed away, Dunsmuir said.
“We didn't back off from that transaction,” he said. “We're so happy with that business. We ended up buying that business for substantially less than we had prepared to pay for it.”
But 2001 was not all positive for Royal. It was the first year in Royal's seven-year history as a publicly held firm that it did not generate growth in profit. According to its annual report, sales growth was insufficient to offset higher raw material costs and higher costs associated with the manufacturing expansion.
“Still, we were able to generate operating cash flow in excess of capital expenditures, in spite of the difficult economic environment and completion of the expansion program,” De Zen said.
The year ahead:
The focus is on running the business after “years of hard work,” officials said.
“Our focus now is return on investment, free cash utilization and repayment of debt,” Duns-muir said. “In terms of acquisitions, we're always looking. It has to be a really good deal for us to do it right now.”
The firm has trimmed capital expenditures and is selling nonstrategic assets, including undeveloped land near Royal's new manufacturing complex.
Royal reported sales of US$515 million (C$789 million) for the first half of this fiscal year.
“Nobody in extrusion puts any money in research and development the way Royal does,” De Zen said. “This is the key of Royal, because we keep putting $20 million to $30 million every year in research and development.
“You're going to see, in three to four months, we're going to have brand-new products that will shock the market out there. … We are pioneers on this. We're spending the money and we want this business to grow.”
Reasoning and strategy:
Royal's plan is to go after the wood window market, officials said. They're also focusing on international growth with the firm's Royal Building System technology, used to construct whole units, including houses and industrial buildings.
“The biggest thing about Marley is, and the whole reason for its existence, is to replace wood,” Dunsmuir said. “Vinyl replaced aluminum. This is going to replace wood.”
De Zen said Royal is planning five to 10 years down the road.
“If you pick any of our competitors, they have only a PVC window,” De Zen said. “We have ABS, we have the foamed window, we have the composite window and we have PVC.”
Marley's strength in retail distribution also intrigued Royal, which already had a foot in the foam market with Royal Foam.
Expansion in big-box stores has been a key for Royal's sales growth, officials said.
“That's what a lot of the growth in recent years is based on and it will continue to be based on that,” Dunsmuir said.
“We're now starting to get involved with Home Depot and Menard's in international transactions, where they're establishing stores in additional countries, where we would like to get in on the ground floor with them, providing our [array] of products.”