Retirement in the pipeline for ADS CEO (sort of)

When clay tiles, popular since the 1800s, lost ground to an innovative product for draining farm fields in the 1970s, Advanced Drainage Systems Inc. and its thermoplastic corrugated pipe took root in the agricultural market.

Then, engineers at the company, which was founded in 1966, developed a way to make dual-wall high density polyethylene pipe with a corrugated exterior for strength and a smooth interior for hydraulics and flow capacity.

The Hilliard, Ohio-based business could compete against concrete and corrugated steel in the storm water management market after this product line (N-12) launched in 1987-88.

This year, ADS introduced a composite pipe with a triple-wall design in diameters of 30 to 60 inches to compete against concrete for storm and sanitary sewers. The pipe (HPXR75) is made of corrugated polypropylene with a smooth interior, ribbed structural core and a fiberglass exterior. The innovation gives it a pipe stiffness of 75 pii to resist deflection under heavy loads, allowing use of a broad range of backfill materials and a 100-year service life.

“What we've done is put an outer wall on it and infused it with fiberglass reinforcement,” ADS's outgoing CEO Joe Chlapaty said in a phone interview. “We believe this will really help us accelerate our conversion in large-diameter storm water.”

With sales of $1.3 billion for its 2017 fiscal year ended March 31, ADS has converted its way to being the third-largest pipe, profile and tubing extruder in North America, according to Plastics News' latest ranking. Chlapaty has witnessed much of it.

Hired in 1980 as the chief financial officer, when annual sales were about $50 million, Chlapaty has seen markets emerge, surge and fall and new plastic products take share from traditional materials. Now, at age 71, he is on the brink of a personal conversion — from a CEO of 13 years to a retiree.

The executive search firm of Korn Ferry is helping line up candidates to succeed Chlapaty, whose base salary is $710,000 but with stock awards and other compensation totals $3.69 million. The goal is to have ADS's next CEO hired and settling into the company by the end of the year.

In the meantime, Chlapaty and the board are figuring out his next role. It could be advisory or a board membership, but one thing is for sure: He will keep his fairly significant ownership — 18.3 percent of shares — of the company.

“It says symbolically to my colleagues that even as I'm no longer CEO, I support what is going on and I stand ready to help the new person and provide on-going expertise and advice,” Chlapaty said. “I don't plan to just go walk off into the sunset. I plan on making continued contributions in an appropriate way.”

ADS officials believe all the U.S. markets it serves represent about $11 billion a year in potential sales. Chlapaty estimates the company has 25 to 30 percent of the market for storm water management products, noting a significant conversion opportunity in this segment, which is worth about $2.5 billion. Gains have been hard fought against traditional materials, he said.

If left unmanaged, runoff from rain and melted snow can cause flooding and erosion, and carry pollutants like hydrocarbons, pesticides and fertilizers to waterways, wetlands and shorelines. ADS's new large-diameter products, which can be used along highways and at shopping centers and high school developments, will help it compete more with concrete and bring the company closer to being the go-to source for products and expertise in holding and filtering storm water.

“We see our ability to penetrate on a more accelerated basis now because of the newer products,” Chlapaty said. “And, let's face it. There's a generational change taking place with the people who hold approval positions. That's another reason why I think the growth of the company will continue.”

Another cause for optimism: President Donald Trump has called for $1 trillion of infrastructure improvements to be paid for with public-private partnerships. His administration also has proposed using a new loan program called the Water Infrastructure Finance and Innovation Act.

In addition to pipe sales, ADS stands to benefit from the related items it offers. A business unit called Allied Products, includes septic chambers, fittings, filters and grates. These products made up 28 percent of ADS's net sales in 2017, up from 24 percent in 2015.

Then, there are ADS engineers who help civil engineers and site developers solve problems as well as influence product specifications.

“Some people think of ADS as a pipe company. We're not,” Chlapaty said. “Our ticker symbol for the New York Stock Exchange is WMS for water management solutions.”

While ADS's initial public offering in July 2014 was a banner, bell-ringing day, the acquisition of Hancor Inc. of Findlay, Ohio, a decade earlier put the company on the road to Wall Street.

The arduous process started not long after Chlapaty became ADS president in 2004.

“It was a major undertaking. It was a nail-biter,” he recalled.

The plan to combine ADS, the largest player in corrugated HDPE pipe, with Hancor, the second-largest, prompted a Federal Trade Commission review of possible antitrust issues.

The combined company would have about 80 percent of the corrugated plastic pipe business.

“But we were really just one small alternative in the greater market of storm water management, which was dominated by concrete and steel,” Chlapaty said. “So there were alternatives out there. We were able to convince the FTC of that, and it was a real key turning point.”

The transaction united ADS's production capabilities, equipment and marketing network with Hancor's material advancements, including a means to blend post-consumer and virgin HDPE and make good pipe.

Chlapaty said the process is sophisticated and involves controlling a range of properties so the material can be reprocessed and manufactured into pipe without diminishing quality or performance.

ADS has gone from using 70 percent virgin material and 24 percent recycled material in 2005 to 37 percent virgin and 57 percent recycled today.

“We're keeping 450 million pounds of material out of the landfill each year,” Chlapaty said. “ADS is a very green company.”

After the acquisition, Chlapaty went to Hancor's home office and told employees no one needed to worry about layoffs.

“It's one company, one culture,” he said. “That's the way we presented it, and that's the way we've been.”

Maintaining a “caring” culture of inclusion has always been a priority. ADS has safe, clean plants — 48 in the U.S. and 60 in all — and Chlapaty makes regular visits to learn about operations, answer questions or share a meal.

“We truly not only respect but appreciate the hard work people at all levels and in all positions do,” Chlapaty said. “Our people work in stressful conditions in the depth of summer in our plants down in Houston, Texas, or Wintergarden, Fla., or loading a dock or working the winter up in Buxton, N.D.”

Paying a living wage with good benefits is important to the CEO, who grew up in a modest, blue-collar family in Roselle, Ill., near Chicago. His father was a tool-and-die maker. His parents bought and sold a homesite to help pay for his education at the University of Dubuque, where Chlapaty got a football scholarship and worked as a residence hall adviser during the school year and at local industries during the summer to pay for his books and incidentals.

As he gets ready to hand over the helm of ADS, Chlapaty said he hopes his successor maintains a culture of providing jobs that enable employees and their families “to live as best we can a middle-class life.”

The company offers a starting salary with a chance to earn more in six months through training or additional responsibilities. Workers also get medical coverage, life insurance and a retirement program centered on an employee stock ownership plan. Started in 1993, the ESOP essentially makes employees shareholders. They own 25.1 percent of the company.

“We've got folks with very meaningful balances in their retirement account, and we pay a dividend on that stock,” Chlapaty said.

As for his own retirement, Chlapaty said he will stay involved with ADS to some degree and spend more time on his two other big passions: his family and the University of Dubuque, located in eastern Iowa.

He also supports the Nationwide Children's Hospital in Columbus, Ohio, a 610-bed research hospital with advanced treatments for pediatric patients, and Columbus' Knowledge Is Power Program, which is part of a network of 200 free college prep public charter schools.

At his college alma mater, Chlapaty chairs the board of trustees. He and his wife, Linda, have donated at least $70 million to the university. The couple's gift of $30 million in 2009 to support math, science and theological programs as well as build a campus center and student housing put them on a list of the top 50 philanthropic Americans, with Bill and Melinda Gates and Oprah Winfrey.

“I love the place,” Chlapaty said of Dubuque. “It's a school with a tradition of first-generation college students going there and a long history of diversity. The kids are just as smart as the kids going to the more well-known schools; they just haven't had the opportunity, whether its primary or high school exposures, to develop the way kids from affluent backgrounds do. We have some unique programs to help students who need some guidance getting ready for college.”

The Bridge Program, for example, starts in the summer for incoming freshman to bolster reading skills and then offers online tutoring, peer mentoring and mandatory study labs twice a week.

“By the time they're graduating, they're where they need to be,” Chlapaty said.

Along with the college kids, he sees good things for ADS, too.

“I would like for ADS to remain a strong, vibrant, independent company,” Chlapaty said. “Through a lot of hard work by a lot of people, we've accomplished a lot in our first 50 years. But I remain convinced that the best years for ADS lie ahead for it.”