This is the prepared text of the speech and may not reflect the verbatim presentation
Thank you -----------. It's a pleasure to be with all of you this morning to address the many changes facing the auto industry. The old saying that the only constant in life is change is certainly applicable to this industry. We've known that for years. The trick is finding proactive ways to deal with change. And that's never been more important than now, given today's demanding marketplace.
January 16, 2001
Imagine what would happen if you went over budget on a project for work? It's much easier to explain a $2,000 overage on your home project to your spouse, than a $200,000 overage to your boss.
But controlling costs is just one element of being successful. In the business world, we all want the best all around deal. Period. We want quality and speed…advanced technology and supplier efficiency. And each year, we want more for less without sacrificing anything. Whoever our customer is, we're expected to find new synergies, identify inefficiencies and eliminate them, optimize every process, and on and on and on - whatever it takes to delight our customers with the product at a reduced price AND with improved quality.
After being on the OE side at DaimlerChrysler and now being involved on the supply side through our companies at Heartland, I've seen this paradigm from both angles.
I can tell you, it doesn't matter which side you're on, it's a constant challenge. It's difficult being an OEM, with shareholders breathing down your neck. Clearly, you're in one of the industries that truly helped build the world we live in. And yet, Wall Street doesn't respect you as a sage…it calls you "respectable" while its roving eye searches the horizon for something new and better, like dot-coms. Being an established industry doesn't carry the weight it did many years ago.
On the supply side, it's even more difficult. You continually feel the squeeze of the OEs along with the shareholder scrutiny. You're constantly thinking about the benefits and downsides of the merger and acquisition game. Your stocks are undervalued and virtually ignored by the main players on the Street………………
Now that I have gotten everyone depressed……….sorry…………………...
Lets talk about the fun side of our jobs!! One of the things I like best at Heartland is giving good, solid companies an opportunity to face a different future. One with renewed promise. I tell you, after 22 years in the auto industry, I've seen a lot of things come and go. But I believe that we are facing one of the most exciting times in the history of our great industry………and I'm happy to be a part of it.
You'll hear me speak a lot about Heartland today - about why I'm so excited about our goals and how we plan to achieve them. But first a little background.
Heartland Industrial Partners is a private equity firm formed in 1999 by David Stockman, Dan Tredwell and Tim Leuliette to acquire and expand industrial companies ripe for consolidation and growth.
Heartland has committed funds of $1.2 billion to invest in industrial companies, making us one of the top 20 private equity firms. Unlike some of our competitors, though, we have a buy, build and grow strategy. Investments will occur in five, large scale industrial platforms where we can be the dominant, consolidating force. We will also provide $2-4 billion in financing to the platforms for: consolidating acquisitions, factory investments, product innovation, IT upgrades, e-commerce initiatives and business model transformation.
Why was Heartland conceived? Our founding partners realized there are a lot of undervalued industrial companies out there. Notice I said undervalued, not underperforming. Not since World War II have small- and mid-cap stocks in the industrial sector traded so cheaply compared to their peers, and this despite the fact that these companies were posting good results! Why? Because they did not have - and could not raise - the required capital needed to grow. These stocks were being ignored by Wall Street, to the point that their equity could no longer be used as "currency" to provide growth through acquisition.
And if industrial companies don't have at least a two-and-a-half billion dollar market cap, large mutual funds cannot invest in them………the companies' shares are not purchased by index funds………retail interest goes away………and analyst coverage is minimal. Further lack of investor interest is then compounded by these factors. The bottom line is that investors don't expect these industrial companies to participate in the global market. And that's the future. See the problem? No doubt, some of you are living through this right now.
To illustrate the problem, we need only look to the large number of small- and mid-cap stocks, whose relative PE multiples are trading at 50 year lows!! They're suffering from liquidity drain to the New Economy and their currency is now too weak to lead the consolidation process. They need to be scaled-up and transformed. Being removed from the scrutinizing eyes of Wall Street and having the solid foundation of private equity financing will allow these companies to become globally competitive players.
At Heartland, we feel we have a solution to the problems plaguing these undercapitalized industrial companies. But hey, that's what every private equity firm says. Yet we are different from other private equity firms and LBOs. Maybe you've heard this before…
Let me show you how……………
The credo for our Heartland companies is buy, build & grow………not buy, slash & sell.
We - just like all of you - are here to make money. I'd be lying if I said otherwise. But - unlike many others - we're also here to make a difference. We don't want to simply go in, fix a few things, pay down debt, pronounce a company better and sell it off. We could survive doing this, but that's not us. That's short-term thinking. And short term thinkers, unfortunately, miss out on the biggest opportunities.
Heartland is different because we have both operational and financial expertise. Heartland isn't just a bunch of suspender guys out of New York. Our headquarters aren't just in New York. We have the epicenter of our firm in Bloomfield on Woodward Avenue, right in the center of America's industrial heartland. It's the best of both worlds - as I like to say, we're on the corner of Wall Street and Woodward.
But, to give them credit, our financial team is the best around. With David Stockman and Dan Tredwell leading the way...they're the whiz kids. On the operating side we have an IT guru, Gary Banks. At Monsanto, he managed the largest implementation of the well-known ERP system SAP - and it actually worked!! Gary ensures our companies have the IT tools they need to be successful in this rapidly changing business environment.
Then, we of course have Tim Leuliette, former President and COO of Penske Corporation and myself, with the operational experience I have from over 22 years at DaimlerChrysler in engineering, manufacturing, quality, and procurement and supply.
The diversity we have in our managing partners - finance + operations + IT + buyout expertise + industrial + investment - makes for a winning formula when it comes to the industrial private equity market. We use all of these areas of expertise to drive improvements in our new companies.
There's a quote I think best describes Heartland's strategy. "Conductors of great symphony orchestras do not play every musical instrument; yet through leadership the ultimate production is an expressive and unified combination of tones." (Thomas D. Bailey)
Getting back to operations……that's where I'm from and what I can best speak to. Our operations team understands the "ins" and "outs" of the industry. And we help the companies we acquire get to the next level by working with their management teams. We take all of the great things that they are doing and add to them. We look at all disciplines; manufacturing, supply chain management, logistics, sales and marketing, ………………..everything.
To get to the next level, we follow a simple formula at Heartland. It was developed by someone whose Ph.D. dissertation was rejected in 1905 for being "irrelevant and fanciful" - Albert Einstein. You all know his formula, e=mc squared. At Heartland, we look at it with a new twist.
"M" is the mass of talented employees at the companies we acquire.
"C squared" is the speed of light squared, which is just about how fast Heartland is going. We completed the purchase of three companies since the end of November and there is activity still taking place. And last Saturday, we announced our intention to purchase Collins & Aikman. Given the volatility and uncertainty in today's market, that's pretty amazing.
When you combine these two variables, talent and speed, you have Energy beyond even Einstein's "fanciful" imagination.
Let's talk for a second about the companies Heartland has purchased and how they fit into our platform goals. The first platform we are building is in metal forming. Since "metal forming platform" is a mouthful, I'm going to refer to this platform as Metallica from now on.
[PAUSE FOR MUSIC]
Hope Lars Ulrich, Metallica's drummer, doesn't sue us for borrowing the name in this presentation (recall the recent Napster situation).
Last November, we purchased MascoTech…the leading global supplier of metal-formed products. They have expertise in forgings, powder metals, fasteners and other products. Approximately 80 percent of their North American sales are derived from businesses where they hold number one market share positions. That's pretty impressive.
In December, we purchased Simpson Industries. Started 67 years ago, Simpson has become one of the two largest independent precision-machining houses in North America. They are leaders in metal machining, finishing and sub-assembly. Their products fall into three primary areas: front-end NVH components, modular engine assembly and wheel-end and suspension. Simpson's customer base is comprised of the leading North American OEMs of light vehicles, diesel engines and heavy-duty equipment.
These companies are the first building blocks in Heartland's Metallica platform. Notice, I did not say the only companies. If you look at these two companies, you can see there's not quite perfect synergy, yet. But there is a strategic long-term platform buildup underway.
Our Metallica platform is based on a vision…to create customer value by being the leading global designer and supplier of high quality, low-cost metal-formed components, assemblies and modules for the transportation industry.
Here's a snapshot of our metal house industrial model. As a full metal supplier, Metallica will develop engineered forgings, powder metal and other metal formed products. All the while, we will have our own machining, finishing and sub-assembly capabilities to give our customers what they want……. and……how they want it.
There will be one point of contact on projects, faster design and production, seamless engineering and streamlined operations. In short, we will be the one-stop-shop for an OE's metal forming needs. Rather than pushing one process on the OEs, now we will sell the one best solution.
Historically, business units of MascoTech were very entrepreneurial, which means they were very decentralized, including the purchasing function. The Metallica platform will have many centralized functions as we combine other companies with MascoTech. With purchasing as one of these, obviously, we'll now have a much larger buy to leverage.
We're also in the process of Supply Chain Mapping. We're looking at our supply chain from the very beginning to the end. That is, all the way back to "earth" thru the many tiers of our suppliers to the Metallica end product and finally, to the ultimate customer, the vehicle owner. I know it's a complicated slide, but I want to show just how complete our process is. We're scrutinizing every process to see where it can be improved, or, possibly eliminated. For example, can our steel suppliers reduce the number of times they need to move a finished coil of steel? At $3 a ton per move, savings add up fast. By eliminating unnecessary or redundant steps, we cut costs for the OEMs, our suppliers and ourselves. Everyone wins.
Speed is key here. As the theme of this conference indicates, speed, coupled with connectivity, is the only way companies are going to win in the future.
How is Heartland using speed and connectivity to get ahead? Well, we're already leveraging it internally, with our customers and suppliers. Let me go into more detail on each.
Internally, we are commonizing supplier codes, part numbers and financial reporting across Metallica to improve our data sharing. This leads to: better coordination between facilities, cooperative efforts to get solutions to OEMs faster, improved supplier management and overall better decision making.
When it comes to our customers, increased connectivity results in: further outsourcing opportunities, elimination of non-value added costs, improved design and engineering coordination, and, once again, better decision making.
With our suppliers, improved communication flow leads to: cost reduction opportunities, elimination of non-value added costs, improved inventory management, and yet again, better decision making.
So you're saying, "ok Cindy, I've heard all this before"………well, here's a practical example of how we're using connectivity within a new business model. Traditionally Metallica has been very decentralized in its MRO & indirect purchases. Thousands of suppliers were used across the platform, creating high administrative costs to manage the MRO supply base. In addition, because the components of the MRO buy were not tracked company-wide, it was not known where the "big dollars" were being spent. Few company-wide MRO purchase agreements were in place, which caused excessive working capital throughout the system.
At Heartland, we view ourselves as the "enabling" agent…bridging from this old model to the new one by identifying opportunities, bringing parties together and putting systems and IT infrastructure in place.
In the new model, Metallica's MRO buy is being consolidated. Thousands of suppliers are being reduced to hundreds, resulting in significant cost reductions. The components of the MRO buy will also be tracked by a new system, which should allow management to better understand the nature and level of costs being incurred. Capturing the scale of the buy also provides for favorable supplier agreement terms, thus facilitating improved working capital management. Capable suppliers will be rewarded with increased business. It's a win-win situation-and connectivity and speed are the keys.
But not only is Heartland using connectivity intra-platform, like in Metallica, we are also going to take advantage of opportunities to use it across platforms. In particular, we will use connectivity across all platforms to leverage our scale, operational expertise and financial resources. There are plenty of opportunities - ranging from tooling "best practices" to an aggregated energy buy. In doing this, we can make use of best practices, shared services and aggregated buys throughout all of our prospective platforms.
The ultimate vision is to align, or connect, all of the players in the supply chain. Under this scenario, Metallica will be communicating with its entire supply base, both direct and indirect suppliers. Critical information such as daily production volumes and part requirements will guide production and delivery throughout the supply chain, thereby minimizing excessive working capital.
Even beyond this platform-specific vision is Heartland's "ultimate connectivity" vision, in which the information flow and seamless connectivity is expanded across all of the Heartland platforms - automotive and non-automotive. Under this nirvana of speed and connectivity we expect to realize a quantum leap in new opportunities.
As we have now seen, the companies we acquire fulfill a strategic need, and will ultimately compliment one another. We aren't attempting the traditional private equity roll-up, just to consolidate, reengineer a little and make a larger player in the market. We're building our platforms with a strategic vision dedicated to servicing our customers. And that requires a different mindset than most of our private equity competitors.
Right now, we are developing a comprehensive metal solutions provider. We've already established the framework. You can expect to hear more about Heartland in the coming months.
Now, I've talked about a number of formulas in this presentation…Heartland's buy, build and grow formula…and the diversity formula that makes up our management team (financial + operations + IT=success)…Einstein's e=mc squared…you'd think we were in a calculus class.
But in the world we live in today, nothing is simple. Even the best business formulas of yesterday are being replaced with new ones today. At Heartland, we believe we have the winning formula to compete in the ever-changing automotive world. We also believe we are going to help transform the automotive supplier industry by the example we're setting with Metallica.
Our one-stop-shop strategy is unique among our private equity comrades. They work with numbers and multiples. We take it a step further and combine tremendous energy with operations and information technology expertise. So in the end our formula looks something like this:
Financial expertise + operational expertise + IT expertise x energy = success.