Although Ferro Corp. has enjoyed strong sales and profits in recent years and reported its best earnings ever last year, the Cleveland-based coatings, colors, and chemicals company is by no means resting comfortably on the laurels of positive financial numbers.
Ferro, a major player in the powder-coatings industry, is instead looking to build on its track record of steady sales and earnings growth with a strategy of reshaping its business portfolio, geographic expansion, and acquisitions. Under Chairman and CEO Hector Ortino, who took the helm of the company in 1999, Ferro is staking future growth prospects on emerging or developing technologies such as electronic materials and performance chemicals, while seeking to maximize sales and profits from businesses faced with modest growth potential — porcelain enamels, for example.
In comments on the company’s 1999 financial results, Ortino said Ferro has identified and is developing “a number of high-growth opportunities in each of our business segments. Overall, our strategy is to maximize and use cash flow from more mature businesses to invest in high-growth opportunities.”
For the year ended Dec. 31, 1999, Ferro reported net income of $73.0 million, a 5% increase from 1998. Sales totaled $1.355 billion, a slight decrease from 1998’s $1.362 billion. The company said it finished the year on the upswing, setting sales and earnings records in the fourth quarter as sales volume gained ground in Asia and North America. Overseas results, however, were negatively affected by unfavorable currency translations, particularly in Europe due to the strength of the dollar against the euro.
Ferro’s coatings segment, which includes powder-coatings and porcelain-enamel products, is by far the company’s biggest business, with sales last year of $810.4 million. Sales for the chemicals segment in 1999 were $289.9 million, while the plastics segment reported sales of $254.9 million.
The company’s solid growth trend continued in early 2000, as net income rose 7.1% in the first quarter from the same period a year earlier, to a first-quarter record of $18.4 million. Sales totaled $360.6 million, also a first-quarter record and an 8.1% increase from the year-earlier period. Coatings-segment operating income rose 9%, to $25.7 million, while sales rose 9.2%, to $219.3 million.
Ortino said the first-quarter results reflected the company’s growth initiatives, particularly in the electronic-materials business. The business constitutes a “much larger portion of sales than in prior years,” he said. The company noted that sales gains occurred despite a 4% negative impact of foreign currency translation due to the relative strength of the U.S. dollar.
Ferro’s coatings segment is headed by J. Larry Jameson, senior vice president, Industrial Coatings. Jameson joined Ferro in 1996 as vice president, Powder Coatings, and was formerly president of BASF Corp.’s Coatings and Colorants Division.
Jameson views powder coatings as offering strong growth potential despite the common perception that the powder-manufacturing industry suffers from relatively modest profit margins. A key to maximizing profitability, he says, is optimizing the product mix and focusing on differentiation of technology. With powder, that means giving as much attention to processing and application as formulation, he says.
Thus Ferro, a major force in the appliance-coatings market, is looking to expand the horizons for powder into nonmetallic substrates. One such technology is in-mold powder coatings for plastic substrates. The technique involves the application of powder to the interior of an electrostatically charged metal mold that is used to form the plastic part. The process allows the plastic-part forming and coating to essentially be completed in one step, with no additional bake time required. In addition to the traditional environmental benefits of powder coating, the process results in the generation of very little waste from overspray.
Wood, of course, is the other nonmetallic substrate that is seeing significant development activities in the powder-coatings field. Jameson, however, expects wood applications for powder to expand relatively gradually. Also a key R&D objective is improved application methods in established markets. “Very good, imaginative, and creative applications techniques” will prove to be crucial, Jameson says. An example is the quest for the elusive goal of uniform film thickness. “Nearly every user puts on more powder than he wants,” Jameson says.
Ferro’s powder-coatings business is well established in North America and Europe, and is enjoying robust growth in Asia. Ferro in 1998 acquired a majority stake in Ningbo, a Shanghai-based powder-coatings producer, and the business is doing “very, very well,” says Aidan Gormley, Ferro’s director of Investor Relations. Ferro is looking to expand Ningbo’s production and sales, he says. The business is believed to be one of the top 10 powder producers in China, with a strong position in the appliance and general-industrial markets.
“We will continue to expand internationally,” Jameson says. “The powder-coatings business today is primarily a North Atlantic business — Europe and North America. We’d like to balance that out with better penetration in the Far East.” Ferro operates three powder-coatings plants in Europe, two in the United States and one in Latin America, in addition to Ningbo in China. Volume growth rates tend to be lower in Europe — where powder technology originated — due to extensive conversion from solventborne liquid coatings that took place earlier than in North America.
Ferro also enjoys a strong market position in Asia in the ceramic tile glaze and color industry. Elsewhere, the company is seeking powder-coatings growth opportunities by achieving greater penetration of the general-industrial market, where powder sales gains are being driven partially by a greater rate of conversion from liquid-coating processes than are occurring in the bigger segments such as appliances. Also helping to boost sales and profit potential in the general-industrial market, Gormley says, is the customized nature of the highly diversified end uses, which places more of a premium on product differentiation.
Even within the appliance segment, the company sees growth opportunities for powder, although Jameson estimated that powder already commands 60% of the market. “There’s still that 40%,” he says.
Looking to boost sales in the appliance segment, Ferro recently named Dale G. Kramer worldwide business director for the company’s appliance materials business, with responsibility for refining and implementing Ferro’s strategic plan for the appliance-materials unit. The business is part of Ferro’s Industrial Coatings group. Kramer, a veteran of the specialty plastics and chemicals industry, formerly held a series of operations and senior-management positions with BFGoodrich Co. over a 22-year period.
Ferro notes that it is the only company that offers both powder and porcelain enamel coatings applied to appliances and heating and ventilation equipment.
In the automotive segment, Ferro is a major supplier of powder coatings for components and parts, and enjoys a dominant position in powder clearcoats for wheel covers. The company also is a supplier of an autobody primer marketed by DuPont under an agreement between the two companies.
Ferro’s powder-coatings business is considered by DuPont to be a major source of strong, though not spectacular, revenue growth rates. Under the company’s recently developed strategic plans, powder coatings are viewed as being part of a second tier of “platform” businesses serving markets that are still growing, albeit not at a breakneck pace. For those businesses, better sales growth and profits are the objective. In its “foundation” businesses serving mature, low-growth markets — such as the ceramics operations — the company’s plan is to maximize efficiencies and profit margins. A third tier of businesses, the so-called “springboard” units, are being looked to for strong long-term growth. A focal point of this tier of businesses is the company’s electronic materials business, which Ferro is seeking to expand from annual sales of approximately $150 million to $500 million over the next five years. Other businesses seen as offering strong growth prospects are fine chemicals and specialty chemicals.
Overall, the company has set a goal of 6–8% sales growth annually — 3–4% from volume gains, 1–2% from geographic expansion and 2–3% from acquisitions.
In addition to maximizing sales and profits from mature businesses, Ferro also will weigh divestitures. In one recent deal, the company announced its intention to sell its PRYO-CHEK® flame-retardant chemical business to Albemarle Corp., a producer of flame retardants and other specialty chemicals. Ferro Chairman and CEO Ortino said the transaction reflects the company’s strategy “to reposition our portfolio of businesses.”
Sidebar: Ortino Charts Strategy to 'Transform' FerroHector R. Ortino, a longtime Ferro Corp. executive who rose through the ranks to become chairman and CEO in 1999, is looking to drive sales and earnings growth by maximizing operations efficiencies in Ferro’s mature, “foundation” businesses and generating sales gains in the company’s higher-growth “platform” units.
Prospects for more dramatic sales and earnings growth are anticipated from the company’s “springboard” businesses, which are viewed as offering the greatest opportunity to “transform” the company, in Ortino’s view. These springboard units include electronic ceramic materials and performance and fine chemicals.
Ortino, a native of South America, has held a series of key management positions since joining Ferro in 1971 as treasurer of Ferro Enamel Argentina. He later was named managing director of the business, and then was appointed managing director of Ferro Mexico and four subsidiary companies. After moving to the company’s corporate headquarters in Cleveland, he held increasingly responsible positions in corporate finance, including chief financial officer. He was named president and chief operating officer in 1996 and chairman and CEO last year.