Matandy makes key investments in facilities and equipment to gain better control over production and customer service.

By Corinna Petry,
Managing Editor

• Quick Facts
  

The Bouchard boys were fated to be in the steel business. Their parents met while both worked at Inland Steel Co.

Robert C. Bouchard joined Inland at age 17 as a mailboy in 1941. He took 18 months off to serve in the Army during World War II. When he returned, he married Helen Clancy, a production scheduler at the mill. The couple moved to Kansas City when a sales position opened up there for Robert. Soon, he was the district sales manager and doubled Inland’s sales territory deep into the South and West. Helen gave birth to five children, including Craig and Jim.

Jim P. Bouchard joined U.S. Steel Corp. in 1987, like his father, as a salesman. He was rapidly promoted through sales and marketing posts before becoming vice president-commercial for U.S. Steel-Kosice in the Slovak Republic. He belonged to the small team that managed the financial turnaround of Kosice, a former state-owned enterprise with 16,000 workers. It is one of U.S. Steel’s most successful operations to date.

Craig T. Bouchard took a more circuitous route to steel. He’s had a 25-year career spanning domestic and international finance, corporate mergers and acquisitions, international trading, software and analytics. From 1998-2003, he was president, CEO and co-founder of NumeriX, a software company specializing in risk management. For 20 years prior to that, he headed up derivatives trading and institutional research for First National Bank of Chicago.

The two Bouchard brothers launched Esmark in mid-2003 through a strategic partnership with Mars Steel, the backing of 18 investors, and a minutely detailed five-year business plan.

The company soon formed a commercial venture with Ferrostaal to take over its steel trading activities in the Midwest, calling it United Steel Group. USG, based in Oak Brook, Ill., hired traders from Mitsui and Arcelor and has since “tripled the amount of business Ferrostaal transacts in the Midwest,” says Jim Bouchard. He expects USG to complete export-import transactions exceeding 300,000 tons per year starting in 2005.

Last February, Esmark purchased Sun Steel Co. in suburban Chicago and Electric Coating Technologies in northwest Indiana. In late 2004, the company acquired TriWestern Metals, Bridgeview, Ill., and its Great Western Steel division in Chicago from Triumph Group, as well as U.S. Metals & Supply in St. Louis. Esmark also acquired Century Steel LLC, Chicago Heights, Ill., for $40 million cash on Jan. 4. Century Steel saw 2004 sales of $130 million.

Combining all its acquisitions, Esmark expected to post 2004 pro forma revenues of $400 million. That’s a strong start toward its goal of becoming a $1 billion company and standing among the top 10 service-center operators in North America within two years.

“We’re very direct,” Craig Bouchard says. “We want to be seen as leaders in the consolidation of the industry. Leadership is important. There hasn’t been enough of it.”

He believes Esmark’s timing is great. “Private companies are looking for an end strategy, but the principals want to keep their hand in the business.”

Acquisitions strategy
Esmark’s acquisitions to date have been cash transactions. If an acquired company has debt on its books, Esmark pays it off immediately. “Most successful companies carry very little debt,” asserts Jim.

Esmark spent $80 million cash on acquisitions last year, issuing no equity, and has a wallet bursting with $150 million to spend this year.

Esmark’s acquisitions and operating strategies dovetail into three simple parts. The first is to stick with principal products: cold-rolled coil and sheet, followed by coated coil and sheet.

“We see hot-rolled products remaining imbalanced. Demand will outstrip production capacity. On cold-rolled, supply is in overcapacity. We are creating scale as a major buyer of cold-rolled, which is what the mills need,” Jim explains. “We picked a product line that has growth potential, and we’re buying companies that are focused on that product line.”

Esmark has had numerous offers to buy hot-roll service centers. “We’ve said no to every one of them. We want to stay on track.”

Part two is to focus on the Greater Midwest, the largest steel-consuming region in North America. With a regional focus, and a 200-mile shipping range from each plant, “it’s easier to communicate, manage and troubleshoot,” says Craig.

Part three is a focus on capacity utilization. “We will shut down under-performing or inefficient equipment,” Jim says. For example, at Sun Steel, Esmark dismantled a fourth slitter and yet has wrung 40 percent more volume out of the remaining three lines.

Sun Steel is now operating at 100 percent of its capacity, and the rest of Esmark’s companies have operating rates of between 85 and 100 percent. “This provides a good cushion in a down market, vs. other service centers that typically operate at 70 percent,” Jim notes, adding that high utilization rates mean lower costs and higher returns.

This strategy has already produced results. Since acquiring Sun Steel, its shipments have increased 40 percent to 13,000 tons per month. With revenues historically falling between $50 million and $55 million, Jim says, Sun Steel’s 2004 revenues were expected to exceed $105 million. Annual sales at Electric Coating Technologies were expected to improve from $25 million to $40 million.

Craig and Jim expect Esmark’s overall shipments in 2005 to grow 10 percent over 2004’s 550,000 tons.

Esmark’s plan for culturally integrating its acquisitions is to sustain the entrepreneurial spirit of each original company.

“That’s where we’re similar to Reliance [Steel & Aluminum Co]. What Reliance has done very successfully is to maintain the entrepreneurial spirit of each one of its operations,” the Bouchard brothers say. “As we buy these companies, we’re not creating a big corporation. We’re cultivating the entrepreneurial attitude that a successful private service center has built. We don’t want to lose that.”

Esmark does centralize and control each acquisition’s finances and purchasing activity, however.

Inventory management
The company’s inventory management philosophy is very simple. “We hold two months’ supply. The Japanese run a one-month supply and the Europeans run a two-month supply. American inventory today stands at 3.5 months,” Jim says. “We don’t think we need to carry more-it ties up capital and exposes us to volatility.”

Some major service centers believe they need to have on hand every possible item a customer might need. Esmark’s companies will just buy the odd stock from another service center. “There’s no extra cost to us. We know the distributors from whom we can get it and complete the sale without carrying excess inventory,” Jim says.

“Keeping inventories low in down markets allows the company to continue making money by eliminating the risk of falling inventory value,” Craig adds. “If you can eliminate risk on both inventory and receivables, it really helps you to focus on the core strategy of the company.”

Esmark collects its receivables in an average of 27 days, well below the 30 to 60 days that is the industry norm. In addition, the company insures all its accounts receivable. If a customer declares bankruptcy, Esmark files a claim and its insurer writes a check. Insuring receivables is much more common in Europe, Craig notes. “We look at our receivables as a total asset. There are no writeoffs.”

Sales management
Jim believes today’s steel sales models are flawed. Both mills and service centers are eliminating sales positions and compelling customers to order materials on-line through their Web sites. Esmark, on the other hand, is banking on the value of consultative salesmanship.

“Esmark will be the exact opposite. We are going to have a very large inside and outside sales force. We are going to stay very close to the customer. Our sales guys are being trained to think and find solutions for their customers.”

With its more aggressive strategy, Esmark forecasts it will grow sales by 10 percent internally—that is, by selling more to existing accounts rather than taking market share from competitors.

The steel industry sales model will eventually begin to mirror that of aluminum, Jim says. “The aluminum industry was fragmented. It consolidated at the mill level, then at the distributor level, so mills made the aluminum and sold to authorized distributors that pursued the value-added business.”

As the consolidation of steel mills and service centers progresses over the next five years, he predicts, steel mills will establish relationships with large authorized distributors. “Instead of just holding steel and delivering it to your customer on time, [the trend is toward] value-added, application-based selling.”

Esmark is doing a lot of training to shift its salespeople from the traditional “sell tons” mentality to a “think solutions” philosophy. “The whole service center business needs a tremendous amount of education in this area,” Jim remarks.

Meanwhile, Esmark will play to its strengths, which include serving as a master distributor. “We are selling to a lot of service centers. We are friendly competitors,” Craig says. “We will not jump over service centers to get into their customers’ business. Trust is very important in this business, and everyone knows everyone. Our friends in the industry have been very helpful to us in building this company.”

Capital expansion
Esmark’s service centers own all their material and perform no toll processing, yet every ton coming in has value added before going out. Ninety percent of the metal centers’ processing activity consists of slitting, 5 percent is blanking and 5 percent is leveling.

On the coating side, Jim claims Esmark is the largest service center supplying non-automotive electro-galvanized products in the country.

Electric Coating Technology’s galvanizing capacity is 300,000 tons a year and the company is at a 97 percent rate of capacity utilization. Half the coated product sells direct to OEMs making commercial doors, office furniture, appliances and electronics. Half sells to service centers.

Construction, containers and appliances are the three largest markets for TriWestern Metals Co.

Esmark’s capital budget in 2004 was a little over $1 million, half of which was spent at Electric Coating Technology. Last year’s projects included a Watermark system from Water Sciences Inc., a closed-loop wastewater recycling system that also recovers zinc particles and helps the company meet EPA standards. “It saves us money [on waste disposal] and we’re a much cleaner, more efficient plant,” Jim says.

Other projects completed last year include the upgrade of all five anodes (positive electrodes that cause zinc to attach to flat-rolled steel surfaces), and installation of a power factor corrector, in partnership with the local utility, which reduces electricity costs by 10 percent. These projects will pay for themselves in 12 months.

The Bouchards are highly confident in the company’s future, as mapped out in their detailed five-year business plan. Their 18 outside investors share that confidence as well. “It helps to have a well-thought-out strategy and financial strength,” Craig says. “We’ve never had trouble getting capital, and we have plenty to achieve our plans.”