May 1, 2011

A New Preference for Growth

After a decade of relatively slow growth, Wayne Bassett and Samuel, Son & Co. are actively looking for acquisitions again.

You can almost hear him lick his chops in anticipation.

“We're a very profitable company, but we haven't grown our sales over the last several years as fast as, say, a Reliance (Reliance Steel and Aluminum) or a Kläckner,” says Wayne Bassett, president and CEO of Samuel, Son, & Co., Ltd., the largest service center operator based in Canada and one of the five largest in North America. “We run our company a little more conservatively. There's no goodwill on our books, for example, and because our main focus is on profitability, we haven't made as many expensive acquisitions as others have.

“But now the Samuel family wants to take a more aggressive approach and grow at a quicker rate. So we are getting much more aggressive about acquisitions.”

It's not that Samuel, Son, at 156 years of age, doesn't have a solid history as an acquirer. Under Bassett's mentor and former boss, the late Ernest “Ernie” Samuel, the company grew from less than $5 million in sales in 1964, when Samuel became CEO, to $2.2 billion when he died in 2000. The company operated just three facilities in Canada in 1964. It grew to 70 throughout North America by 2000

But Ernest Samuel's spectacular business record is only part of the story. In the recent history of the company, Wayne Bassett is another significant factor. Bassett, trained as an accountant, joined Samuel, Son in 1974 as a controller, became vice president and general manager in 1984 and was named the first non-family president in 1994, when sales were $1.2 billion. Today's company has 103 facilities operating in Canada, the United States, Mexico, Australia and the United Kingdom, generating sales of about C$3.3 billion.

Samuel, Son's revenue today includes the manufacturing sales of Samuel Manu-Tech, Inc., the company's manufacturing unit that went public in 1985 — with Samuel, Son retaining a 72% stake — to raise money to help pay for an acquisition surge. The parent bought back all public shares last year, reintegrating Samuel Manu-Tech, which has created a beneficial synergy and a larger, unified business platform to resume the company's rapid growth.

As important as Bassett's leadership has been the Samuel family's transition into a fifth generation of ownership. After Ernie Samuel's death, the company was controlled by his wife, Elizabeth, whose style was more conservative. On her death in 2007, control passed to the next generation. Mark Samuel is chairman of Samuel, Son, and together, the family has directed a return to a faster growth rate.

For the first time, Bassett says, the company has formed a dedicated acquisition team to evaluate prospects. Traditionally a conservative acquirer, it likes to limit the price it pays to five to six times the target's earnings before interest and taxes (EBIT). Now, for a good strategic fit, it is prepared to pay as much as eight times EBIT and assume goodwill and intangibles.

“Our focus in service centers is in the southern United States and Mexico, where we have the biggest opportunities for growth,” he says.

The company's diverse manufacturing arm, which operates 40 facilities, makes steel and plastic strapping systems and engineered packaging, custom-welded stainless steel and alloy tube, roll-formed products for transportation and construction; and highly engineered pressure vessels for the pharmaceutical and energy markets. A steel pickling group provides steel pickling and slitting as well as designing new pickling lines. The manufacturing group too, is on the hunt for compatible targets in Europe, South America and Australia.

“Even in 2009, we didn't lose money,” says Bassett. “Service centers are very low-risk and pretty much a cash business. Manufacturing is the opposite, with a much higher percentage of assets tied up in hard assets in the ground. By putting together Samuel, Son with Manu-Tech, it strengthened the manufacturing group significantly.”

Bassett is a native of Toronto. He joined an accounting firm right out of high school, entering a five-year course that earned him a chartered accountant degree in 1970. His starting pay: $39 each and every week, “and overtime was free,” he recalls. Four years later, to reward staff members for hard work, he took them out to celebrate. When the firm's owners ruled that everyone would be docked a day of pay, Bassett quit in protest. Suddenly jobless, he nonetheless showed up the following day for a scheduled meeting with the finance vice president for his former client, Samuel, Son. “He hired me,” says Bassett. “I started on Monday here, so I actually never had a day that I wasn't working.”

Forward spoke with Bassett at Samuel, Son's offices in Mississauga, Ontario.


Why is the company turning more acquisitive now?

When Ernie Samuel passed away, it marked a significant change for the company. The family took a more conservative approach than he did. And then, unfortunately, we lost (his widow), and we were into another transition period.

Of course we want to enhance the value of the company, but putting that aside for a moment, there's another reason. It is very, very unusual for us to lose a middle or senior manager. We have a very good group of people, but you have to create opportunities for those people. If you're not growing, the opportunities aren't there for them to enhance their careers. We have intense internal training programs. But once you develop better people, you also have to have better opportunities or you will lose them. Another reason is that if you're constantly making acquisitions, you're bringing in a lot of different people with different backgrounds and thought processes.


Is this a good time to make acquisitions in terms of the economy?

I happen to believe that we're in for a good run over the next four or five years. One reason for this is that our industry is only shipping at a rate of about 80% of where we were back in 2006 and 2007. Residential construction will eventually pick up, and automotive is going to continue to recover.

We have a lot of things in the oil and gas and energy sectors that are improving. So, just getting back to what I would call a more normal North American economy, you will see a tremendous increase in industry sales.

I'm also very bullish on North American manufacturing, particularly in the U.S. and Mexico. Canada, though, has some huge issues because of the strength of (its) dollar. At one time 80% of our manufactured products went to the U.S. That number now is below 70% and continues to move down. Our dollar is forcing manufacturers to move their business to the U.S. and Mexico.

We're a really good example of that. We closed a major packaging plant in Canada and moved it to Heath, Ohio. We took a major portion of our roll forming business and moved it down to Iuka, Mississippi. Our stainless steel tubing business opened a facility in Saltillo, Mexico, four years ago, and now we're doubling its size. It's where the market is moving. Over the last 10 years or so, manufacturing in Canada has continued to shrink.


Why do you have a strong interest in Mexican expansion?

If you look at our customer base, the fastest growing area of North America is Mexico. We are a fairly big player in automotive and the rail car industry. A significant percentage of rail cars are now being produced in Mexico. Look at companies like Deere and Caterpillar: They've all got operations there.

I actually find Mexico to be much more attractive than China. If you're in North America, it's a lot easier to supply product from Mexico than it is from China. We don't have a problem with transportation, whether it's rail or truck, from Mexico. The workers there are quite good. Distribution in Mexico is very fragmented in carbon flat roll, and I believe there's an opportunity to consolidate, and there's going to be significant growth in consumption.

You want to grow your business everywhere, but for our service centers, the main focus is Mexico and the southeastern United States.


You have had a strategic alliance in Mexico with Grupo Villacero since 2008. Does that figure into your plans?

We have a service provider agreement with Villacero. They process for us in Monterrey, and they will service any of our accounts from their 17 facilities in Mexico. In the future, I would expect to have a much more significant relationship with Villacero. We have been working with them for the last three years. It has gone very well, and we have a great deal of respect for them. We hope to expand that relationship.


Is there competition in the M&A environment of today?

Oh absolutely. There are a lot of other people out there bidding on companies.

I think there's going to be significant consolidation in the service center industry over the next five years. It pretty much has to happen. It is one of the most fragmented industries in North America, and I think this latest downturn has got to have created some concern in a lot of the privately held smaller businesses when they saw how quickly a lot of their equity can disappear. A lot of those companies will be for sale, and we're hoping to acquire some of those. I think some of the larger companies will be sold as well.

When you think about a competitor like Reliance, they are what I would call very responsible in the market. Those are the kind of people you're hoping are going to continue to grow and make the acquisitions. They are what you want to see in the marketplace. That's part of what makes consolidation a plus for the industry. It isn't whether we go out and buy 10 companies that are for sale. What matters is that the industry will be consolidated with responsible companies, and when that happens, the whole industry gains.


You have very few concerns about the future of North American manufacturing.

I think Canadian manufacturing is going to continue to slowly decline. Mexico is going to have higher-than-average growth, and it will more than offset what we're going to lose in Canada. I'm reasonably bullish on manufacturing in the United States. The U.S. dollar has weakened considerably against major currencies in the world, and that obviously helps competitiveness.

I don't see China as being as big of a threat as some people do in North American manufacturing. Our labor and benefit costs in manufacturing run around 15% to 17% of total costs. In China, if you can get that portion for onethird as much, that's a significant saving. But that changes with what's happening now. With the price of raw materials and steel products going up as they have, material has gone from 50% of our total cost of manufacturing to something in the mid-60s. Labor content, as a percent, is getting smaller, and the Chinese savings in labor are less significant.

At the same time, we're investing a lot of time, effort and money in improving the productivity of our plants. A good example is our packaging and steel strapping business. Five years ago, we had four processing plants. Today, we've got two, and by doing that, and by a new, productive line in the United States, we've significantly lowered our cost of production.

At one time, we were buying strapping in China, thinking it would be cheaper. But with these other factors, we can now make it in North America and be cost-competitive against anybody.

Now, if you go to the west coast, the numbers change. It costs me more money to get product from the east coast to the west than it does to ship it from China to the west coast. Put it on a boat from China and it costs maybe $80 a ton to the U.S. But from Toronto to Vancouver, it costs $110 to $120 by rail, and $200 a ton by truck.

As a company, we are very committed to buying carbon product domestically. But on the west coast, you can't be competitive without a significant percentage of product from offshore suppliers from countries such as Korea or China.


What about China's undervalued currency?

The bottom line is that even though it may appreciate slowly, it will appreciate versus the U.S. dollar. The important thing is that it continues to move up, keeps moving in the right direction.


Do you have border issues between the U.S. and Canada?

Yes. One of the big problems is simply getting across the border. There are not enough throughways, and at Windsor, we need another bridge, or a tunnel. We've been talking about that for years.

Let's face it, the two countries are very integrated. Businesses in Canada and the U.S. are so integrated that they're effectively one. When you are integrated like that, you've got to be able to provide service levels that the customer requires. Yet right now the requirements of U.S. Homeland Security mean that you've got a border where you don't know if it's going to take an hour or five hours to get your truck across.


How can companies differentiate themselves from the competition?

You know, we really don't have anything unique. Basically the services that we provide are services that can be provided by most of our competition. So the only way we believe you can be successful in this business, the way to be better than the competition, is in customer service. It starts with a customer bill of rights that we live by. We take the profile of each of our customers, to make sure that we can meet their needs.

We also have a technical team that we can use to find ways to make parts better for our customers. We can help them improve their competitiveness by substitutes such as higher-strength steel. We provide a lot of the technical services that normally would be supplied by a mill.

We offer error-proofing with a computer system that doesn't allow you to ship the wrong product to the customer. We built that and all our systems in house. The odd time that we do have a quality problem somewhere, we have a team to go and fix it.

The average order size for our U.S. service centers is still about $1,100. We're an industry that's supposed to do what the mill can't, and we've got many customers now that order more often and in smaller quantities. One of our big accounts is Vale, the mining company, yet they have one of the smallest order sizes because they want shipments almost hourly. That's what you have to do if you want these accounts, and you've got to be efficient enough, with systems good enough, that you can do this on a cost-effective basis.