Editorial Advisory Board Roundtable

Positive indicators

By Meghan Boyer

Editorial Advisory Board
Frank Arteaga
, Head of Product Management, Market Region NAFTA, Bystronic Inc.
George Blankenship, President, Lincoln Electric North America
William E. Bossard, President, Salvagnini America Inc.
Stewart Cramer, President, LAI International Inc.
René De Moura, Director, R&D, Begneaud Mfg.
Phil Gilbert, Managing Director, P&M Corporate Finance LLC
Joe Moretti, President, Service Metal Fabricating Inc.
Nick Ostrowski, General Manager, Marketing, Amada America Inc.
Troy Roberts, President, Aida-America
Ron Whitley, President & COO , Ranger Steel LP

April 2011- Pent-up demand and increased stability in select market segments contributed to healthy 2010 growth for some companies, particularly in the fourth quarter. Looking optimistically toward 2011, many FFJournal editorial advisory board members are predicting continued improvement.

Success coming out of the recession is related directly to a company's actions during the downturn, as those that reevaluated and made adjustments to business practices and operations are well-positioned moving forward while those that did not are more likely to be struggling. However, even the best preparations couldn't ensure a company did not face challenges - or that they will be without them in the future.

"The companies with strong systems and processes and that had been nimble in downsizing both staff and costs back in the 2008/2009 timeframe saw significant jumps in profitability," says Phil Gilbert, managing director at P&M Corporate Finance LLC, Southfield, Mich. "As volumes began to pick up, these companies didn't restaff indirect positions. They maintained their low-cost structure," he says. Ultimately, the companies that have experienced the most success recently are those that have strong operating infrastructure and were quick to resize their businesses to market conditions, Gilbert notes. Companies that did not transform themselves to meet the changing market "either are falling further behind or are no longer around," says Nick Ostrowski, general manager of marketing at Amada America Inc., Buena Park, Calif. "Companies lose ground if they are not reevaluating how they are doing business during a down market, especially one as bad as weÕve seen since 2008," he says.

Positive indicators, from an increase in stable orders to greater focus on domestic manufacturing, are contributing to companies' positive outlook for the future, and many are continuing to reevaluate their business plans and add necessary equipment and workers to ensure they are prepared to meet ever-changing market needs.

Good news in 2010
Early in 2010, business remained sluggish, says Bill Bossard, president of Salvagnini America Inc., Hamilton, Ohio. "But by the end of the year, there was an overall sense that things are stabilizing pretty well," with business becoming more consistent and stable, he says. Companies again began to make investments in capital equipment for new capacity, which indicates they expect positive results in the coming years.

At LAI International Inc., "we can see the tail end of the recession," says Stewart Cramer, president of the Scottsdale, Ariz.-based company. The company's uptick began around July and August. "We started to hear a big difference in what our customers were telling us and in orders being placed," he says, noting the average order size began to move toward levels last seen in roughly 2006.

The fourth quarter of 2010 was particularly healthy for some industry companies, because different metalworking businesses evaluated their positions late in the year and determined they may not be able to handle increased demand with their existing equipment, which led to increased purchasing in November and December, says Bossard. Many of them had taken a hiatus from purchasing in recent years because of the recession, he notes. Indeed, there was pent-up demand going into the fourth quarter, says Ostrowski. "Throughout 2010, machine utilization gradually increased to a point near pre-2008 levels," he says. Additionally, companies may have purchased machinery late in the year to take advantage of the capital equipment tax break. The different sectors the industry serves also are gaining strength once again. Service Metal Fabricating Inc., Rockaway, N.J., is seeing a lot of activity in the architectural field as well as semiconductor and biomedical, says Joe Moretti, company president. "We're seeing some good activity from our normal OEM customers, too," he says.

The automotive industry has restructured and emerged leaner and more able to compete in today's market, says Troy Roberts, president of Aida-America, Dayton, Ohio. Shifts took place among automotive's Tier 1 and Tier 2 supply base, and the surviving businesses are much stronger and beginning to reinvest because of new projects, he says. Not all sectors are improving at the same rate, however. "There's still a lot of correction that needs to take place" in the housing market, says Roberts, noting Aida-America's key markets are automotive and appliance.

"Certain industries that we serve are really starting to get busy, like commercial aerospace," says Cramer. "There's been a great deal of outreach to the supply base just to make sure we're still here. That's always encouraging." LAI's biggest sector, energy, turned a corner last year, but the defense market remains fairly flat, he says.

The manufacturing activity indexes have been growing for 18 months, and the expectation is that they will continue to grow into 2011, says Gilbert. "It's not going to be a thoroughbred race. It's going to be slow and steady, but trends on GDP are positive. Trends in the Purchasing Managers Index are positive. I think all the fundamentals are good," he says.

At LAI, "we expect a very good year this year," says Cramer. "There were a bunch of times during the heart of the recession where we thought we were coming out of it, but the uptick wasn't sustained." Late 2010 was the first time the company saw stable growth, and backlogs started to climb as well, he says.

Challenges and opportunities
The positive indicators at the end of 2010 came after a prolonged period of challenges for many companies. "It was a really long recession," says Cramer. The metals industry faced inconsistency in orders month-to-month and rising prices for commodities throughout 2010, says Frank Arteaga, head of product management, Market Region NAFTA, at Bystronic Inc., Hauppauge, N.Y. "Manufacturing businesses had an average capacity utilization just over 70 percent. Capacity utilization must reach closer to 80 percent before there is an actual pull from the market for new equipment to meet expanding needs," he says.

LAI focused on continuous improvement during the core of the downturn and implemented cost-reduction measures. Like many companies, LAI reduced head count and "tried to improve throughputs and efficiencies on our floor," including implementing lean-manufacturing methods, says Cramer. "It was a really good way to use people's time when they weren't as busy as we wanted them to be. It was certainly good for morale that people saw we were training and teaching," he says.

Fiscal 2009 was the worst economic period in Aida-America's history, and the company implemented restructuring methods "to try and fit that new reality, because there were no new orders," says Roberts. Once business picked up in 2010, the largest challenge became meeting customers' delivery requirements because "demand is exceeding supply," he says. The company is in the process of adding people and readjusting again, but it is taking very measured steps to ensure it's reacting properly to market conditions.

"Every time there is a downturn, it forces a company to reevaluate the way they are doing things," says Ostrowski. "The good companies make changes once that reevaluation occurs because they are forced to develop new ways of finding business or become stagnant and potentially go away," he says, noting Amada focused in recent years on diversifying sales efforts.

The downturn helped reduce equipment prices, which created an opportunity for some companies. Service Metal Fabricating added roughly $2.5 million worth of capital equipment last year, including a waterjet, a press brake and machining center, says Moretti. "We took the opportunity to take advantage of some good financing deals and depressed prices on the machine tool side," he says. However, financing troubles created difficulties for some companies because of tightened financial institution lending practices. "Companies that are ready to do something and have an opportunity can't always get funding," says Bossard. A bank will determine that the fundamentals of a company's business plan look good, but because the company has lost money the last few years, the bank won't lend to it. "The banks went from not very conservative to being extraordinarily conservative," he says.

Despite the different challenges companies face, "the people that are out there, the companies that are out there are doing the right things," says Bossard. "There are a lot of people that are innovating and modernizing, and my hat's off to them, because that's absolutely the right way to go." FFJ

Additional factors
The industry's future is dependent not only on the economy and business strength but also on factors outside its control. While the economic fundamentals will continue to improve broadly, "there are a couple of wild cards in 2011 that could set back the recovery," says Phil Gilbert, managing director at P&M Corporate Finance LLC, Southfield, Mich. Commodity prices are going up, and companies may be unable to pass through raw-material price increases to customers, says Gilbert. "That is going to have a potentially significant negative impact on profitability," he says, noting the situation could worsen for businesses as demand grows stronger.

The companies that have positioned themselves to be protected from commodity price increases through resale programs or material cost brackets will continue to do well, while those that have not likely will face significant challenges, says Gilbert.

Additionally, government policies from healthcare to the federal budget effect every business, not only those in metalworking, says Bill Bossard, president of Salvagnini America Inc., Hamilton, Ohio. In terms of policies, "there's nothing out there that stabilizes anything on the expense side of operating companies in the United States," he says.

Of special importance to the industry are government policies regarding currency manipulation, says Troy Roberts, president of Aida-America, Dayton, Ohio. "Everybody in manufacturing in America wants to see a level playing field," because the manipulation in countries such as China creates an uneven competitive landscape, he says. Inflation and costs in China are rising, including worker salaries, which has made the country less cost-effective for businesses, says Roberts.

Increasingly, companies are bringing production back from foreign locations, says Bossard. "In outsourcing far away, your supply chain or the pipeline in which product flows is so long and has so many things in it that it is extraordinarily difficult to control," he says. A company that is supposed to receive 50 products from China but instead only receives 42 usable items will have a problem satisfying customers. In that situation, the company has no control and no ability to rush the manufacturing of additional products. More businesses are beginning to reconsider U.S. locations for production because of the difficulties and costs associated with overseas locations, he says.

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