Reborn
in the
Grain Belt

A family company lost its way during the consolidation craze, but came out the other side a healthier business with a renewed local identity.

By Corinna C. Petry,
Managing Editor

• Quick Facts
• All in the Family
  

After an up-and-down 84-year history in the steel market, one of the service center industry’s oldest names, Steel Manufacturing & Warehouse Co., is “new again,” says President Charles Donnelly.

The Kansas City firm was established in 1921 as a “steel jobber” and service center by the Kramer family and partners. After the primary owner-operator died in 1974, the general manager, Herb Ferney, purchased the company.

In 1988, Donnelly and three other investors purchased the company from Ferney and operated it successfully as a full-line service center until 1998, which Donnelly calls “the mistake year.”

That was the year Steel Manufacturing’s investors decided to cash in. The company was ripe for sale, having just relocated to an expanded facility with rail access, where a new Red Bud cut-to-length line was being installed. Plus, one of the partners wished to retire.

“There was a lot of consolidation going on at the time and prices were good. So we decided to sell,” Donnelly recalls. Steel Manufacturing became part of Metals USA Inc. Donnelly and his partners received a combination of stock and cash, and Donnelly stayed on as manager. It was a decision they would all come to regret.

“One thing you can tell your readers is, never believe anyone who says, ‘You’re the entrepreneur. Your company will stay the same. We’re just going to leverage the synergies,’” he warns. “We lost our identity under Metals USA, and it did not help us at all. When they [acquirers] mess with the chemistries of companies, it can be devastating.”

The change that bothered Donnelly most was the directive to lay off some personnel. “All of a sudden, the love relationship you have with your employees—they are the key in any business—is gone. They start to look for other jobs. We lost some great people, and I had to let some great people go. I was in business for 32 years, and that was one of the toughest periods of my life. Physically, it was exhausting.”

In a high-profile financial failure, Metals USA filed for Chapter 11 bankruptcy protection in November 2001. Despite cost reduction and asset rationalization efforts—including slashing 19 percent of the workforce—Metals USA was not able to overcome the difficulties of a troubled metals market and a recessionary manufacturing economy, then-Chairman and CEO J. Michael Kirksey explained. A smaller, reorganized Metals USA emerged from Chapter 11 in October 2002.

“I am happy they’re doing well today, but I had a hard time getting over it,” Donnelly adds, referring to the many owners and employees who were burned by the “death spiral” of Metals USA stock.

As part of its reorganization effort, Metals USA began divesting former family-owned businesses that it had acquired during its quick roll-up growth campaign. Several were repurchased by former owners.

“They came to me in November 2001 and asked me if I wanted to buy the business back. I said sure, hung up the phone and started doing cartwheels around the office,” Donnelly says. Offering Metals USA a “fair price” because he didn’t want them shopping around for another buyer, he approached his previous investors who were able to raise the necessary financing.

“I will always remember the day in May 2002, after we signed all the papers,” says Donnelly, recalling the cheers and applause from all the employees gathered in the office to celebrate the company’s return to independence. “I started to cry [with joy]. Everybody loved Steel Manufacturing.”

Reinventing the business
Steel Manufacturing was a full-line service center under Metals USA. Donnelly owned one building and had a 12-month lease on a second facility across the street. One building held flat-roll, and the other held plate, beams, tubing and bar stock. The leased building’s owners insisted that Steel Manufacturing purchase the building or evacuate when the lease ended.

Donnelly felt the timing was wrong for a real estate deal, so he closed up the leased facility and consolidated into a single location. “We had a huge decision to make, and had to look at reinventing our business. When you are in your comfort zone as a full-line service center, change is scary. At the time, business was terrible. When we blew the smoke away, we focused on the equipment we owned and decided it was logical to sell flat-roll and plate, and stay with precision blanking and flame cutting.”

Today, with its more streamlined product focus, Steel Manufacturing ships within a 250-mile radius to fabricators, manufacturers, sheet metal shops and others—some new customers, some who have been buying from the company for 30 years, Donnelly says. Steel Manufacturing adds value to almost every order through some form of processing service. “Quality, service and competitive price are what we are all about,” he adds.

Steel Manufacturing runs 15 shifts a week on the shop floor. The day shift processes steel for orders, unloads mill shipments and takes care of walk-in traffic. The swing shift processes orders, and pulls and bundles raw materials for the midnight shift. The midnight shift prepares finished orders for shipment and loads the trucks.

Donnelly values his truck drivers “as ambassadors for the company,” and because they report what’s going on at customer sites, such as competitors delivering steel, production slowdowns, or a new equipment purchase that could signal an increased need for steel.

‘Hairy but fun’
No one in the service center sector has yet tired of talking about the wild ride of 2004, when sales hit record heights.

“When Steel Manufacturing started back up [in 2002], we were a new company as far as the mills were concerned,” Donnelly says, and so supplier relationships had to be reestablished.

“Our company, like every other service center, was placed on allocation last year. We had a very tough time getting steel.”

One factor that helped was when U.S. Steel’s Straightline Source venture went out of business in late 2003. “All that inventory was up for sale. We lived off that inventory for four or five months.” After that, he says, “U.S. Steel helped us out. They have always been there when we needed them.”

2004 was “hairy but fun,” says Donnelly, describing the challenge of applying crisis management techniques to both the purchasing and the sales effort as orders boomed. “Nobody had ever seen a market like that.” He was highly dubious of claims by “people who said they saw it coming. It was a godsend for anybody in our sector—from manufacturing, to the service centers, to the mills.”
Inventory overhang

As first quarter 2005 recedes, Steel Manufacturing is among the legions of North American metals distributors whose warehouses are overfilled with steel.

“After going through last year, having orders in with every Tom, Dick and Harry trying to get steel for our customers, now all the steel that the mills were late in delivering is sitting here. Business is still good, but the margins are a little tighter because everyone is trying to get rid of excess inventory.”

The good news is that Steel Manufacturing’s customers tell Donnelly they are not expecting to reduce their order input this year.

Supporting SCS
For nearly two years, Steel Manufacturing has been buying and selling The Materials Works’ SCS (stretched cold-roll surface) product to customers that laser-cut steel. SCS uses a patented brushing process to give hot-rolled black steel a clean, rust-inhibited cold-rolled surface ready for fabrication, painting or intermediate processing. Typically, when a processor puts pickled & oiled or temper pass steel on a laser cutter or flame cutter, “the heat has a tendency to distort the material,” Donnelly says. The stretcher-leveled SCS product from

The Material Works “stays dead flat, with no distortion at all.”
Gradually, more customers are trying the product, and Donnelly plans to stick with it. He says he’ll also stick with Red Bud Industries, which supplied two of the company’s precision blanking lines.

“As it says on our brochure, ‘If it’s not accurate, nothing else matters,’” Donnelly notes, predicting that his company will grow its market area using a simple recipe: “Doing what we do better than anyone else.”