Monthly Archives: January 2018

The Best?

By Lloyd Graff

The use of advertising slogans must be as old as advertising itself. But if you are like me, most slogans are immediately forgotten if they were ever remembered in the first place.

But what if you take note of a slogan because it offends you. I thought of this a couple of days ago watching the new Gillette ad, which emphasizes the prowess of American manufacturing and even showed a man working at what appeared to be a Bridgeport mill.

And then the slick TV ad ended with the hackneyed old Gillette slogan “the best a man can get.” It struck me that it was not only an anachronism but it can be offensive to both women and men.

A little context. Gillette which is now a division of Procter and Gamble, was asleep at the switch as Dollar Shave Club and Harry’s attacked them on price and coolness. The beard trend in men also hurt them. For many years Gillette was a cash cow that barely had to advertise. It owned the shelves at drug stores and supermarkets, but the upstarts saw sticker shock on $5 razor cartridges and $25 packages of blades.

Social media and internet sales punctured Gillette’s sense of invulnerability. The company woke up and started buying slots on the declining NFL games, just what an old sluggish brand with a big ad budget might do. But every ad still ends with “The best a man can get.”

Business has really started to deteriorate for Gillette and they finally decided to address it, by taking out ads saying customers were leaving Harry’s in droves after trying it. That approach ended up as a PR disaster for Gillette because it was both false and also gave Harry’s tremendous visibility. Gillette came off as a slobbering bully.

Courtesy of leanluxe.com. April 10, 2017

Now Gillette is discounting its blades and has begun a subscription plan, imitating its competitors.

What bugs me about the Gillette slogan is that it strikes me as so yesterday and obviously sexist. And clearly stupid. The implication is that Gillette isn’t the best product, it’s just “the best a man can get.” Presumably a woman would buy a better razor.

Other interpretations of the slogan can also be made, which some will find offensive. What shocks me is that a company like Proctor and Gamble that makes billions of dollars on Tide, can be so utterly tone deaf in an age of sensitized gender identity.

I can only surmise that owning Playtex and selling cosmetics and tampons has not made the corporate types in Cincinnati more astute, or even politically correct.

For the guys who make the ad decisions at Gillette, the results must seem like, well, “the best a man can get.”

Question: Have you abandoned “big brands” for niche products?

The Gillette ad that backfired

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Manufacturing Value

By Lloyd Graff

I’ve been interested in K&K Screw Products since I sold the founder of the company his first three Davenport screw machines a million years ago. There have been several ownership changes since then. The company now has more than 200 multi-spindles and changed owners once again in December.

One private equity company sold the business to a bigger private equity firm this time around. CapitalWorks out of Cleveland had owned the firm (now KKSP) for five years, paid down the debt used to buy it, utilized the depreciation rules, improved the company by upgrading its data management, and facilitated two plant relocations. It plumped up KKSP’s EBITDA (earnings before interest, taxes, depreciation, amortization), and racked up juicy gains for the equity partners, which included management.

It was a textbook private equity deal and I was keen to find out the ins and outs of the game from an insider. Fortunately, Todd Martin of CapitalWorks was happy to discuss the deal with me.

Todd Martin of CapitalWorks Private Equity Firm

His private equity firm has partners who came out of the manufacturing world, some have sold family businesses, others have come out of corporate America like him (an Alum of GE). He has a wide network of folks who pitch deals to his group and numerous contacts to quickly find key managers who might be crucial in making acquisitions successful.

I was surprised when he told me that his group usually puts up 50% equity and 50% borrowed money into its acquisitions. I had thought that it would push 80% in borrowed money, but his belief is that less leverage makes for a safer investment, particularly in the early stage of ownership. If things are going well, they might recapitalize as they did with KKSP, two years into the deal.

Martin says that the key to a private equity deal is rapid payback of debt, increasing EBITDA, and use of of the tax code to limit taxes. CapitalWorks usually likes to have top management members take a stake in the company, whether they are inherited from the previous regime or recruited from the outside. Skin in the game definitely focuses the mind on the endgame, which is usually a sale of the company. In KKSP’s case it was sold to Mill Point partners, a New York firm with deeper pockets but a similar focus on manufacturing.

I asked him if larger companies sell for a bigger multiple of EBITDA. He confirmed that is often the case. The management requirement effort for a company with less than $10 million in sales may reduce the multiple to two to four times EBITDA, while a $100 million-dollar company might bring 7-10 times. Martin emphasized that firms that merge to get to the higher sales number often shoot themselves in the foot because they overshoot their managerial competence. A safer strategy may be to pick up smaller companies just to acquire customers and skilled employees. This is something KKSP did under the CapitalWorks ownership.

Todd Martin ended the interview by relating a story about a private equity hotshot from Wall Street with a Harvard MBA who came to a potential buyout meeting with a briefcase and credentials, but no socks. The nuts and bolts owner of the business in play was unimpressed. “Next time find somebody who wears socks,” he told Mr. Martin.

Private equity is the name of the acquisition game today in manufacturing, but you still have to know what you are doing—and wear socks.

Question: Would you prefer to work for a private equity firm or an individual owner.

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Machining 2025?

By Lloyd Graff

If mighty General Electric is in such bad shape that its Board is considering breaking the company apart, it makes one consider how our best assumptions about the future may be wrong.

A few years ago, the consensus in the marketplace was that we would be running out of electricity generating capacity in less than a decade. With the slow approval process for utility plants, the overriding opinion was that a shortage would drive up the cost of electricity.

It has not played out that way. Natural gas has taken an increasing share of generating capacity. It is now up to 33%. Coal, even the cheap good stuff from Montana, is losing out. Nuclear is dying because of the expense of guarding the plants. Wind and solar, with the help of government subsidies, are growing. Shale drilling has defied the skeptics by expanding American fossil fuel production.

The consensus 10 years ago was wrong about just about everything electrical.

It gives one pause no matter what business you are in.

What about automotive? The internal combustion engine has been the mainstay for 100 years, but do you want to bet on it for 2025? Tesla can’t get out of its own way trying to build its mid-priced car, but the Japanese, Germans and Americans all know how to build cars in volume. They will master the electric car. They might have to buy batteries from Elon Musk for a few years, but electric vehicles seem to be coming in the millions. What will that do to all the machining firms who are so good at building combustion engines and linkages?

Then there is the question of how many cars will be bought if autonomous cars take over the market. Presumably a lot fewer after the big changeover takes place.

As a used machine tool dealer, my bread and butter is the 10- or 15-year-old machine. Companies can now depreciate equipment quickly and can expect a significant residual value 10 to 15 years down the road. But that assumption could be wrong if the demand for machined parts in the marketplace deteriorates significantly in five years with a decreasing auto market. Additive manufacturing could also take a piece.

For example, just look at the challenge faced by Coca Cola, Gillette and Target. Did they see the decline of soft drink popularity, the Dollar Shave Club competition or Amazon’s domination of retail?

The medical implant business has thrived for 20 years, but it has been dependent on third party payment. Can we be confident insurance firms and Medicare will be as generous in 10 years?

I know I have been painting an ugly picture, but I just gave away 40,000 pounds of screw machine bones of the machines that were our mainstays just 10 years ago.

Today most people are optimistic. Private equity firms love machining companies because they are often great five-year investments. Lenders are happy financing machinery for 3 to 5 years today. Manufacturing in America is a good gig today. Hallelujah.

But remember GE’s electricity generation, a business that seemed like it would always be a dynamo.

Change comes fast.

Question: Will the machining business in North America be a good place to be in 2025?

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Acmesaurus

By Lloyd Graff

The sound that a 20 ton traveling crane makes as it stolidly rolls north to south, south to north, on its electrified path, is very much like that of a lumbering freight train.  I heard it all yesterday, backing and forthing, carrying its 700 pound containers of old dinosaur bones closer to their new home, 400 miles to the east.

Of course, they aren’t complete tyrannosaurus skeletons being transported.  They are a pile of Acmesaurus bones, the steel innards of 40-year-old multi-spindle screw machines unearthed from cabinets and shelves after being virtually buried for decades.

I made my peace with selling the remains of machines that had been our meat and potatoes for so long.  Back in the last century of the last millennium, National Acme screw machines were king.  They were frothing giants like Tyrannosaurus Rex, and they ruled the turning industry, but today we are just shipping some heavy numbered bones, being sold for parts to repair or complete somebody’s fractured Acmesaurus.

Containers of old ACME-GRIDLEY  parts at Graff-Pinkert

I was shocked we had so many unmatched bones left.  They had occupied the shelves so long I no longer really took note of them, sort of like books you forget you own, squatting on cheap space on your shelves.

Eighteen months ago I made a promise to my wife Risa and to myself that I would get out of the dinosaur business one way or another. I was in the midst of suffering through a second straight miserable year in the used screw machine business and knew I had to make major changes or my bank would make them for me.

For 40 years, the business was generally a fun game that I played, but after 2008, it wasn’t nearly as much fun. Multi-spindle automatics were being seen by more and more of my traditional customers as unproductive, clumsy dust catchers—not core equipment to invest in.

In retrospect, one reason I kept investing in Acmes so long was because I was trying to prove to myself that my choices were correct and my brother Jim was wrong in wanting to change the business focus of Graff-Pinkert away from Acmesaureses.  But Jim was shrewder than I was in recognizing the long-term trends in the machinery business.  Acmes were dinosaurs; rebuilding multis was a really hard business to make a living in; and expensive real estate, high wages and big health care costs were eating the profits in the dinosaur resale game.

Overhead crane at Graff-Pinkert carrying old ACME-GRIDLEY parts

The people who bought our Acmesaurus parts knew what they were buying and they paid accordingly. Forty thousand pounds of National Acme parts and pieces went for $13,000, plus $4,000 for a skeleton of a 1-¼  RB8 Acme. The buyers have cheap real estate, productive and not overly expensive employees, low utility costs and a good reputation in the business.  They also acknowledge it’s a hard game.  A lot of stuff they bought from us will never be used, but for 13 grand, they don’t have to worry about it.

I feel lighter getting out of 40,000 pounds of idle iron but I’m a little nostalgic as I hear the rumble of the crane shifting the tonnage to a new owner.  We are still in the multi-spindle refurbishing business, selling primarily Wickmans.  But refurbishing machines is now less than half of Graff-Pinkert’s volume. In a good month, refurbishing pays three quarters of the bills of the total business, which is okay because it builds our brand, augments our spare parts operation and provides a base of talent and knowledge that nourishes the rest of our business.

I know a lot of folks in the machine tool business who love the iron.  I don’t.  Those bones rumbling down the craneways are just dead iron to me.  What I love is the creative challenge of matching buyers and sellers, of turning dross to gold—occasionally hitting the jackpot, of connecting the dots that nobody else even saw, and feeling the combustion of ideas with Noah and Rex Magagnotti.

Question: Does it make sense to invest a lot of money to upgrade an old Acme?

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Making the Nut

By Lloyd Graff

We all absorb things from our childhood that literally wire our cerebral cortex and remain with us as we mature. There are images, sayings, emblems of fear and instigators of smiles. We soak up stories and develop a narrative that frames our lives.

As I thought about writing this piece the line I remembered most vividly from my father while growing up, of a thousand things I heard from him, was, “You’ve always got to make the nut.” To him that meant you had to cover your costs every month. Losing money in business was FAILURE. It was just about the worst thing you could endure short of death.

I was reminded of this after hearing a captivating interview with Sara Blakely, inventor and owner of Spanx, a fabulously successful young company that germinated when Sara cut off the feet of a pair of pantyhose and envisioned a new undergarment that nobody else had imagined. She was interviewed by James Altucher whose podcast I highly recommend.

One of the first things she talked about was her nightly dinner table conversations with her dad. He used to ask her, “How did you fail today?” This was not to tear her down, but to get her comfortable with the idea of failure. She got comfortable with failure when most kids were trying to ace every test or hit a home run every time up at bat.

She also became comfortable with embarrassing herself. Later, she even tried to be a stand up comedian, even though she wasn’t great at it.

Her father was trying to help her understand that failure wasn’t like death. It was a setback, something to learn from. Something even to laugh about – not the end of the world.

This was very different from the narrative I grew up with. I felt like I was the “designated winner,” and I was always expected to be the best. Failure was for other people.

Not that I was always successful, but success was always expected. Just like my father always had to “make the nut,” I felt like I always had to be successful to be valued, though that may not have really been the case.

Sara Blakely’s experience of having a parent normalize failure, though not extol it, was much healthier. Being able to experience disappointment without withering or blowing up seems like an ideal way to grow up healthy and be comfortable taking risks.

Through the years, I’ve had plenty of failure. I’ve lived through excruciating periods when I didn’t “make the nut,” and my life did not end in disaster.

In retrospect, I wish I had not gone through childhood and high school always being “successful” even when I knew in my heart of hearts that I failed often, like almost everybody else.

I also feel sad for my father who was so terrified of losing money in business, of not “making the nut” even for one month. He was always desperate about economic security, though by most standards, he had nothing to worry about financially.

“Failure” is such a subjective word. Sara Blakely’s father attempted to frame it for her in a positive way. If he truly succeeded at it, I think he was one of the very few.

Question: What was one failure you had this week?

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5 Spindles of Fury

By Lloyd Graff

New Year, new opportunities. I foresee a flurry of activity in 2018 in acquisitions in the machining world. Recently one of the largest screw machine operations in the country changed hands. KKSP Precision Machining based in the Chicago suburbs was sold by its owner, CapitalWorks of Cleveland, to Mill Point Capital of New York.

CapitalWorks bought KKSP in 2012 with management participation. They successfully integrated the Monterrey, Mexico, plant which has around 25 Davenport screw machines with the Chicago and Wisconsin plants. The Wisconsin plant is in Pheasant Prairie, just across the border from Illinois. KKSP also has a plant in East China, Michigan.

Graff-Pinkert sold K&K Screw Products, KKSP’s predecessor business, some of its first Davenports in the late 1960s. Today, the company has over 200 of the little dynamos producing 280 million parts a year.

Davenport Screw Machine

The Davenport machine is close to my heart. My father had a Davenport shop during and after World War II. Earl Brinkman, who had apprenticed to Mr. Davenport, the inventor of the original 5-spindle automatic, took a liking to my dad and helped him acquire the machines and get them running in 1942. Brinkman made a personal appearance at the inauguration of our new Oak Forest machinery warehouse in 1984.

Some people believe that the 3500-pound 5-spindle Davenport automatic won World War II for the Allies. The rigid Germans, despite their renowned engineering prowess, only ran 4-spindle multis during the War. Americans, running shells on the little Davenports with an index time of one second, slaughtered the Nazis in efficiency.

The basic brilliant design of Mr. Davenport and the improvements of Earl Brinkman are still very much alive, just ask the folks at KKSP.

******

I did not vote for Donald Trump because his impulsiveness scared the heck out of me, but after 14 months in office he has been remarkably successful. Yes, his behavior is unconventional, even erratic and scary, but the results are certainly positive in many ways.

From a business standpoint, many people in the machining arena changed their view of the world almost immediately after the election. It was a signal that the extremely corrosive attitude of the Obama administration toward business, especially represented in its oppressive regulation, was over for now. This has proved to be true. The EPA bureaucracy has really eased up. There is still enforcement, but the attitude has shifted from “gottcha” to “you need to improve this.” Citations are much less frequent.

Equally important is the phenomenal rise of the stock market in 2017. Virtually all asset classes gained in value last year. Unemployment dropped to 4%. Oil production grew to a rate of 10 million barrels a day, the highest in 47 years. The tax bill of 2017 is a major positive for American manufacturing just with its depreciation rules. The pass-throughs for LLC firms are an improvement, though more of a break would have been nice.

I still think Trump is scary, but what a remarkably successful or lucky first year he has had.

******

Today’s Machining World is moving into an exciting new arena, Podcasts. Noah and I will soon be interviewing some really fascinating people in the machining realm and disseminating the audio on Podcast smartphone apps. In recent months I have really gotten hooked on this radio show format. I think it will work well for us, and I am really stoked about trying something new. There is a flavor and feel that comes through on an audio interview that you just cannot capture in print.

Don’t worry, the blog will continue; but I think the Podcast will be a terrific addition.

Question: Has President Trump been successful in 2018?

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