A sale was the best way to infuse the company with the capital to enable it to grow and thrive in a global marketplace. But before the sale of the specialty chemicals manufacturer could be contemplated, McNeeley had to put his house in order.
He immediately focused on three areas: Improving profitability in product lines and manufacturing facilities, refocusing technology efforts to emphasize process improvement over new product development and reducing sales, general and administrative expenses to no more than 10 percent of sales.
“When I became CEO, I had a few specific issues that needed to be dealt with,” McNeeley says. “A couple of them were short-term issues related to the balance sheet, our working capital and our debt situation. All of those things we tackled very aggressively. We tackled our cost situation very aggressively in 2001, 2002 particularly on the (sales, general and administrative), and operating cost side of the business.”
McNeeley began by examining where the company was investing money and identified areas where that money would be more productive. For example, he started focusing on process improvements rather than on new products.
“If you look at the chemical industry over many, many, many, many years, the returns on technical investment in process improvement far exceed the return the industry gets on new product development,” says McNeeley. “So one thing we did was refocus our technical efforts.”
He did that by eliminating a number of small volume, nonprofitable, specialty products and today, the company is No. 1 or No. 2 in nearly every product line it participates in. But that doesn’t mean McNeeley is content.
“Even if you’re No. 1, you have to continue to get better to remain No. 1. And that means get better in terms of your cost position, get better in your ability to supply your customers what they need, when they need it,” he says. “Even if you are No. 1, you can’t stay at the top of the heap if you don’t continually improve.”
For Reilly, that means constantly working to improve processes.
“We’ve embarked on a number of initiatives over the last few years,” McNeeley says. “We’ve deeply embedded the company in a quality-improvement culture. We have deeply embedded the company into an SAP business enterprise-management culture from a financial perspective.”
And the company just recently adopted a Six Sigma approach to business and hopes to achieve results as it moves forward.
“We have not been standing still,” McNeeley says. “We have been implementing processes like these continually over the past five to 10 years.
Sell to grow
With short-term objectives on a more solid footing, McNeeley was ready to tackle the long-term goal of growing the company. But he needed capital to do that.
While there were various financing options available, a sale to a new ownership group was the one McNeeley ultimately chose.
“We could have taken on significantly more debt,” McNeeley says. “We could have done a leverage recap. There were a number of ways we could do what needed to be done from a capital structure standpoint. But the sale of the company was by far the preferred route because it not only did what needed to be done from a capital structure perspective but it also ensured that we would be able to take advantage of that over the longer term as opposed to some of these somewhat more short-term leverage recap-type of approaches.”
The sales process led to a relationship with Arsenal Capital Partners, which acquired a controlling interest in Reilly for $250 million last year.
“The company is at a very interesting time in its development, where new opportunities are coming about, expanding capacity to meet the demands of new generations of customers that are coming about in Asia,” says Barry Siadat, managing director of Arsenal Capital Partners. “The Asian market is growing and becoming a much larger consumer of chemicals and the kinds of industrial products that we manufacture. That’s pretty exciting. Expansion is very important for us.”
The Far East, for example, is a growth market for the company’s vitamin B3 product.
“As large populations such as China and India move from largely rice-based diets to protein-based diets, that means animals, which means animal feed, and that means nutritional additives for those animals,” McNeeley says. “On a global basis, it’s an extremely exciting opportunity.”
With internal operations optimized and an infusion of cash, Reilly Industries is positioned for continued growth.
There are three keys to that growth: People, technology and customer relationships.
“In every company, the bedrock is the people, particularly in a company like Reilly Industries, which has significant technology and intellectual property,” Siadat says. “Investing in people (means) continuing to make sure we have the best talent in the company. Obviously, salary and benefits are paid competitively to attract the best available talent.”
And the company makes sure that once those individuals are in place, they want to stay.
“Training, recruiting and developmental assignments are some of the key strategic ways that Reilly deals with people,” Siadat says.
For example, key employees will be trained on the Six Sigma initiative, and Reilly hired a number of technical and engineering people to support the growth of the business in late 2005. This included adding a leader of information technology to update the company’s digital infrastructure and the hiring of a business leader to grow and develop its increasingly important business in Asia.
McNeeley agrees that getting and keeping talent is key. The company currently has about 700 employees worldwide and will look to increase that number as expansion moves forward. And while many companies struggle to find quality workers either in the United States or Asia, McNeeley doesn’t expect Reilly to face that problem domestically. Because so many high-quality manufacturing jobs have left this country, he expects quality workers to be available when Reilly is ready to add to its work force.
Technology will also play a key role in the company’s growth.
“We are looking to improve cost and performance of our products by developing technologies that support our customer needs and allow us to differentiate ourselves from potential competitors,” McNeeley says.
Areas of emphasis are providing more flexible and robust manufacturing processes to meet the ever-changing demands in the agricultural and pharmaceutical markets; developing specialty blends and formulations that meet specific customer needs, such as in the plastics additive market; and application technology to make its products easier to use by the end customer, such as in the insect repellent market.
The third key to Reilly’s growth is getting closer to the customer.
“We are very close to our customers now, but the face of our customers is changing as new and different customers are coming about, particularly in Asia and Latin America,” says Siadat.
Getting closer to customers means doing a better job of communicating.
“With our major customers, we continually increase both the depth and the frequency of contact,” McNeeley says. “It’s very useful for us to get to know customers at different levels within their organizations, from the very top to their purchasing people to the project management people. Getting to know a customer on a single level, single person basis, while that used to be the way of doing business in the ’70s and ’80s and maybe even the early ’90s, that is no longer an effective way to get to know your customers.”
Individuals at various levels at both Reilly and at the customer company now communicate regularly.
“We develop CEO-to-CEO contacts, as well as business manager to business manager, sales representative to purchasing representative and research chemist to research chemist contacts,” McNeeley says. “This communication is personal, either through telephone contacts or meeting face-to-face. This is very effective to get a complete understanding of our customer’s needs.”
According to Siadat, who has spent years watching the industry, Reilly has always been very good at developing customer relationships.
“Reilly Industries historically has done a very good job of staying close to its key customers and having a partnership relationship with customers in the U.S. and the rest of the European market,” he says. “The challenge now is, as we’re seeing new customers in Asia, we do the same thing over there.
“We have a manufacturing location in China, so we are close to the local customers. We are strengthening our team by hiring new commercial talent and a general manager for Asia, as well as making new investments in manufacturing and technology in China and Asia.”
McNeeley’s efforts have begun to pay off. Reilly’s revenue grew by 17 percent in 2005 and is expected to grow another 20 percent in 2006 to around $450 million. With the product lines pruned, the sale to new ownership complete and the focus on people, technology and customer relationships, McNeeley expects Reilly Industries to continue moving forward.
“The company is well-positioned to grow and prosper, especially under the Arsenal banner, and we are very positive about the future,” McNeeley says.
HOW TO REACH: Reilly Industries, www.reillyind.com or (317) 247-8141