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5:29am EDT April 25, 2006

As a member of the board of directors, Thomas D. Karol was already familiar with Elk Corp. before he became its chairman and CEO in 2001.

Karol was intrigued by the company’s mix of businesses and by the challenge of making Elk into something better.

“What attracted me to it was that my kind of modus operandi is to try to find what companies do well and exploit or optimize the potential based on the strength of the company,” Karol says. “Elk, I felt, had better potential, and we just needed to figure out what kind of sustainable advantages we had and how to commercialize and exploit those.”

Elk manufactures laminated, architectural asphalt shingles for steep-slope roofing, a product line that was performing well and driving most of the company’s growth. But it also had a puzzling array of other businesses that were performing weakly or losing money.

Those other businesses had evolved from the company’s founders — five petroleum engineers from Midland who were natural-born inventors and tinkerers. They would often tackle challenges presented by customers and colleagues, and when they came up with a solution, they’d form a subsidiary around it.

“To a great extent, that’s one of the strengths of our company,” Karol says. “We have an innovative bent.”

The founders had also bought some businesses that didn’t fit in very well with Elk’s strongest performing business — its roofing products — and none of the subsidiaries made much money.

“They had been in a lot of other businesses, but they had never really, really made a lot of money or done anything else that had been a standout,” Karol says. “So I said, ‘Let’s look at what we do in this business.’... We made the decision that we really were a building products company, and anything that was not in some way adding to or was tangential to that business, we didn’t need.”

Despite his energy and drive, Karol — former president, CEO and owner of L.D. Brinkman Corp., a carpeting manufacturer and flooring distributor that he sold in 2001 — was not in a hurry. His first order of businesses was to examine those tangential businesses and make them healthier, positioning them for sale in the process.

“To a certain extent, you want to sell something when it’s all dressed up in a wedding dress, having dieted and exercised and with a tan,” Karol says. “We said, ‘Let’s see if we can make these better businesses, to see if someone else will want to own them.’”

Selling subsidiaries
The two businesses Karol decided to sell were Cybershield and Ortloff Engineers Ltd. Neither fit in with Elk’s core building products — Cybershield made plastic shielding used in the cell phone industry and Ortloff handled matters related to the natural gas industry.

Karol’s theory proved correct; growth did, in fact, come after a severe pruning. In fiscal 2005, when Elk sold off those two tangential businesses, Elk’s revenue bounced up to $761.7 million for the fiscal year ending June 30, up from $574 million for 2004.

“When I came in, the earnings were 41 cents for the year and the stock price $14,” Karol says. “This year, our earnings should be in the $2.25 to $2.40 range, and the stock price is $37. To be honest with you, I think that’s been OK. We can do better.”

Karol and the board of directors also intend to sell Chromium, which supplies chrome-plated finishes for abrasive environments such as locomotives. So far, though, they have found no buyers.

“When we exit a business, we want to make sure it’s a good deal for everybody, that we get a fair price and that the employees have a good opportunity and that the buyer is getting a fair opportunity to succeed as well,” says Karol. “We have not found that opportunity for Chromium yet.”

In the meantime, Karol has made that subsidiary profitable by paring it down to one manufacturing plant in Cleveland and improving its manufacturing operation, lowering the sale price significantly. He says the company will keep Chromium for now, and he even sees opportunities to turn it into something more if it doesn’t sell. He sees applications in manufacturing and other fields that use fast-moving machinery, as plating can help prevent costly wear-and-tear.

“There is a whole industry that uses very high impact ceramics or very hardened steel,” Karol says. “We said, ‘We can use our hard chrome plating technology to improve wear on machinery in manufacturing.’ That’s a growth opportunity we see down the road.”

Losing fat, adding muscle
As the company is shedding the extra weight, it’s also adding muscle to its product lines. Since its concentration is in building materials, Karol has worked to buy out other manufacturers that create products that fit.

“We’ve invested in four business platforms that all use, in some manner, similar technology or processes, have similar distribution channels and all complement our brand position as a quality leader in building products,” Karol says.

Because the company is a leader in high-quality architectural shingles for roofs with a steep pitch, it made sense buy out a low-slope roofing company. Elk also sought out other complementary building materials, buying a composite lumber business and a composite railing business.

Karol is particularly bullish on the composite lumber business, which creates products made from a blend of plastic and wood fiber. The blend creates a longer-lasting deck and other wood for exterior use.

“The composite technology is really what I think is the next big thing because you can extrude in a continuous fashion, not a batch process, various profiles or shapes of materials that have enhanced features, including that you can put color in it, you can make it more moisture-resistant, and give it strength,” Karol says. “We are believers that the composite technology will be the next big engineered wood breakthrough.”

The company’s third product line revolves around specialty fabrics used as backing on carpet tiles, the facing for gypsum board and underlayments for flooring. VersaShield, a fire and moisture-barrier fabric, is part of that product line.

The fourth product line is what the company calls VersaShield Building Solutions that go underneath the exterior building products it makes.

Of all four lines, roofing is still the strongest performer, accounting for 90 percent of the company’s sales, but other lines are making strides.

“We make good money in each area,” Karol says. “Composites has been losing money, but we feel we are within one or two quarters of profitability there.”

Investing in the company
Elk has invested in two things that Karol says will continue to lead it into more profitable pastures: a new manufacturing plant in Lenexa, Kansas, that provides greater efficiencies, and a research and development laboratory in Ennis, Texas, which has undergone two expansions in the past five years.

“True innovation is how you succeed best in business, in my opinion,” Karol says. “Our job is to give better products that the consumer gets more value out of. We are big believers in true innovation, either that we can lower the cost to the consumer or give them more features for less cost.”

Growth will come as the company continues to expand its product lines through inventions.

“We’re developing various products in each of our business platforms that we think are very cool products that will provide more value and better performance,” Karol says. “We prioritize and work on certain things at a faster pace than others.”

Karol wouldn’t say what, exactly, the company plans to introduce, but says there are plans for siding and trim created from the composite materials business, and it will introduce a solar product this year to go on top of roofing materials and allow homeowners to capture solar energy.

Name-brand recognition
Elk is making a move to promote itself beyond the builders and developers who know its products, Karol says. With help from a new advertising agency, Elk is making a push to become a brand that consumers recognize and request.

With its new tagline, “Confidence Built-In” and a slogan, “For confidence and peace of mind, ask for Elk,” the firm wants to make its brands known among consumers, who are building homes and making improvements at record rates.

Elk has concentrated its advertising in magazines sold commonly in home improvement stores, and Elk products have been featured on several national home and garden shows, including ABC’s Extreme Home Makeover. What Karol wants for his company is the same kind of name recognition that Kohler has gained for its faucets and Pella has for its windows and doors.

“The basic premise is we want people to have enough awareness of our brand that they would consider us,” Karol says. “If you are going to think about putting a roof on, or a deck or siding, we want you to think, ‘I know Elk. That’s a good company, and I will consider them in our choices.’ That’s all we want to do with our brand.

“Then we want to let the channels work to our advantage. They will then talk to their contractors or go to Lowe’s or Home Depot and hopefully, they’ll say, ‘Do you have any Elk?’”

Karol says the exposure is working — since the advertising campaign began, Elk’s Web site traffic is up, as are inquiries from contractors.

As Karol sees it, growth takes time, and he hopes to build on the net income of $46.9 million on sales of $761.7 million posted for fiscal 2005.

“The basic philosophy we have is that we are money managers, if you will,” Karol says. “The investors want us to employ the money in things where we have a competitive advantage. They don’t want us in things that we aren’t good at.”

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