A Recap Of TCB’s 2014 Middle-Market Forum

A Recap Of TCB’s 2014 Middle-Market Forum

Mid-sized Minnesota companies are carving out strategic advantages.

At first blush, Dan Zdon, Chuck Mooty and Jeff Kiesel appear to have virtually nothing in common. Zdon sells office furniture and machine tools, Mooty markets class rings and other memorabilia, and Kiesel works with thousands of restaurants, handling their cooking oil.

But as top executives of middle-market companies—with revenues of $10 million to $1 billion—they are facing similar challenges as they navigate business conditions in an economy that is still in recovery mode.

Twin Cities Business hosted a Middle Market Forum in March that featured these company executives, and two of their peers, who shared their insights with a cross section of business leaders from around the region.

The event, held in downtown Minneapolis, addressed issues such as recruiting and retaining talent, making a successful acquisition, adapting to the new economy, carving out a competitive edge in the marketplace and leading employees to reach key company goals. (You can view a video of the event here.)

Finding the competitive edge

Zdon, the blunt-speaking president and chief operating officer of Liberty Diversified International, leads a family-owned company with 1,400 employees.

“At Liberty we make cardboard boxes, office furniture and machine tools. If you are looking for a connection between those, you can stop now,” Zdon told an audience of about 160 people. “We have three very commoditized marketplaces.”

In essence, Liberty has separate business plans for three distinct businesses. “We’ve developed a strategy that makes us a key player in that marketplace,” Zdon says.

In the corrugated boxes arena, LDI has an integrated approach that involves curbside pickup of cardboard, production of corrugated paper and ultimately making the corrugated sheets used for displays and containers that consumers find at Target and Home Depot stores.

“We own that whole [supply] chain,” Zdon explains. “And the value offering along that chain gives us the ability to compete against the much larger national players.”

For its office products market, Zdon says, “we abandoned the people who still work in their office.” Instead, he adds, LDI has chosen to “follow the much younger generation who works in a shared space like CoCo here in Minneapolis,” as well as the home office users.

In the machine tool world, he says, Liberty has developed an integration where “we take the engineering that’s available in Taichung, Taiwan, combine that with the lower cost of building the machines in China, and branded it with an American-made machine tool, and it’s propelled us to the No. 3 machine builder in the United States.”

From a competitive standpoint, Zdon says, “in each of these areas, we have found a way that beats the commoditized market, and the diversity that we have is what we feel makes us a strong player. So we have three legs of the stool.”

Mooty, who is in his first year as president and CEO of Jostens Inc., says the $700 million business has about 4,000 employees scattered across the United States.

Started in 1897, at its core the Jostens products celebrate the accomplishments of youth, Mooty says. Jostens is an industry leader in yearbooks, class rings, graduation products and diplomas. In addition to high school consumers, it serves college students. The company also makes rings for professional athletes, such as Super Bowl and World Series champions.

“It is also involved in collegiate activity as well as professional sports activity. We’ve been fortunate for those sports enthusiasts actually to deliver 31 of the last 44 Super Bowl rings,” he says.

In the digital age, Mooty says, Jostens is focusing on how its products still can be competitive and relevant. To ensure financial success for Jostens, Mooty says he’s taking the 3-D approach, where the “D” stands for “development.”

In contrast to start-up companies, he says, “it’s almost harder in some ways to try to figure out how you move an existing brand that is established as long as Jostens.” With his 3-D strategy, he is targeting a fresh perspective on the following questions: How do we develop our people? How do we develop and clarify our brand? And how do we develop our presence?

While Mooty tackles the challenge of making Jostens products relevant for a new generation of consumers, Kiesel is working with restaurants that many of Mooty’s consumers patronize.

“We are the leading provider of innovative cooking-oil management solutions for the food service industry,” says Kiesel, CEO of Restaurant Technologies Inc.

His company has installed tanks, pumps and other system components to automate the handling of cooking oil, which can be cumbersome when employees need to dispose of used cooking oil.

“Over the past decade we’ve grown from really nothing to 21,000 customers, 750 employees, 41 depots,” Kiesel says. “What is the secret sauce of RTI? Innovation needs to be both broad and continuous.

“When you think about innovation, it’s easy to think about new products, new ways to sell, new pricing schemes and new deals.” Yet for RTI’s next level of growth, Kiesel is focused on using a telemetry system that tracks how much fresh oil customers use.

“We now have a very large platform to capture information within the restaurants,” Kiesel says. “So we want to monetize that by offering data services to our customers.”

David Martin, president and CEO of Cardiovascular Systems Inc., is leading a company with sophisticated products that are highly regulated. His company serves patients who are suffering from vascular disease. “We manufacture and sell a medical device that removes the plaque from vascular arteries,” Martin says.

After “about 90 seconds of spinning or orbiting around the vessel” with a thin CSI device, Martin explains, “we can remove about 50 years’ worth of plaque.”

There are a couple of hundred employees in Minnesota and the business also has a plant in Texas. There are about 130 sales representatives working for Cardiovascular Systems across the United States.

“At this early date, we’re a very young company,” Martin says. “Both markets, the leg and the heart, are both billion-dollar markets.”

As a startup, Martin says, “we financed the company three times in the last 20 months.” The company is not profitable right now, and Martin says company leaders are focusing on the business’ investments in research and development and its sales infrastructure.

Cary Musech, managing principal and founder of Tonka Bay Equity Partners, says his private equity firm manages money for institutional investors and high net-worth individuals.

“We pool their capital and invest that in a portfolio of companies. We’ve got 10 portfolio companies right now. This is at the smaller end of the middle market, $20 million to $50 million in revenues. Those companies combined are kind of a microcosm of what’s going on in the economy,” Musech says.

“We can see the GDP go up and down, and some of the challenges they are facing are pretty consistent across the board,” Musech explains. “What I spend most of my time doing is working with our management teams, trying to create value or accelerate value creation in these companies.” When Tonka Bay selects a company for investment, he says, “we start out with a strategic plan, which provides a five-year road map of where we’re going. And then the management teams are responsible for putting together the yearly operating plans.”

He adds that Tonka Bay spends a lot of time building the boards and mentoring the management teams. It also provides other resources to help execute the business plans, such as additional capital.

Hiring the right talent

In his leadership role with a private equity firm, Musech stresses that many of his businesses are grappling with talent acquisition and retention issues. Highly engineered manufacturing companies, in particular, are seeing challenges.

“The hardest to find right now are the technical people, both technical sales people and the engineers,” Musech says. “There really is kind of a talent gap out there as to who is unemployed and what some of these companies need.”

“The most extreme example where we are seeking talent is our portfolio company Accumold, based in Ankeny, Iowa,” he says. “We had to add eight people this year because the company is projected to grow by 50 percent, topline by 50 percent. They are going to have 260 some people by the end of this year.” The workforce is a blend of semi-skilled and technical people. The company manufactures micro-molded components. It has some proprietary technology, so it makes molds for its own machines and has to do automation after the parts are produced.

“Accumold has really developed an interesting program with the Des Moines Area Community College,” he adds, funding the Accumold Scholar Program. “We recruit the candidates, interview the candidates and provide internships, and then if they work out, we provide jobs post-graduation,” Musech says.

Like Musech, Zdon says that Liberty also struggles with recruiting talent. “Believe it or not, nobody grows up and says, ‘Geez I want to be a box salesman,’ ” Zdon says wryly.

“So we have to figure out a way to attract the talent to our organization. There’s nothing sexy about our products,” he adds, so managers talk to potential employees about the values of Liberty.

“We are very involved in the community,” Zdon says. “We offer an alternative way for people to earn a living and still be involved in the community and give back to the community.” He says that almost every senior-level manager serves on one or two boards in various organizations.

“I interview almost everyone down to the manager level who comes into our organization, not so much from a competency standpoint but more from a fit,” Zdon says.

“When I talk to them, I make sure that they understand that we’re not hiring them for a job,” he explains. “This is a mission that we’re on, and they’re part of it. It’s us and them together. “

At Restaurant Technologies Inc., Kiesel says, retention is the No. 1 strategic initiative right now.

“It takes a long time to get hired by our company,” he says. “We do psychological testing, we do talent testing. It’s four, five, six interviews. We’re very picky about who we hire.”

He notes that making the wrong hire is a significant waste of money, time and effort.

“We’ve got this great [employee] engagement score, yet our retention has slid over the last year,” Kiesel says. So it’s critical to solve the retention problem, he adds, because strong employee retention is directly linked to company growth, productivity and profits.

Strategic acquisition

When he spoke at the Middle Market Forum, Jostens’ Mooty acknowledged that he was in the midst of a potential acquisition with American Achievement, which he describes as fairly similar to Jostens but about half the size.

“In our world it’s about manufacturing capability, as well as, obviously, infrastructure and product development and service support,” Mooty notes. He also emphasized retention of business through a sales network of independent representatives.

(At the time, the Federal Trade Commission was still reviewing the proposed combination. On April 17, the FTC voted to take action in federal court to block the Jostens deal that was valued at about $500 million.

“The parties’ abandonment of the transaction preserves competition for consumers in the markets for class rings, which are an important memento for millions of high school and college graduates across the country,” the FTC says in a news release. It adds that a combination of two or three leading manufacturers “would have led to higher prices and lower quality.” Jostens is now recalibrating its business approach after dropping its plans to pursue the merger.)

Zdon says that Liberty does about two or three acquisitions a year.

“There was a time when we acquired a company, [that] we often acquired a fair amount of talent along with it,” Zdon says. “That is no longer the case. Frankly, the entrepreneur selling the company often finds himself in an uncomfortable position of working for an acquirer, and typically that fizzles within a year.

“So when we look at acquisitions now, almost before we look at anything else, we look at the talent that we think we are going to retain through the acquisition. If we are not going to retain enough talent to run that organization, we’ll pass on the acquisition.”

Adapting to slow growth

The slow pace of growth in the U.S. economy has touched numerous industries.

In his work with the restaurant sector, Kiesel says that same-store sales are down for many of his customers. A higher minimum wage—proposed in Congress, and recently passed in several states, including Minnesota— also has been an issue with restaurants, so Kiesel says that his customer base has a “very dim view” of the health of the U.S. economy over the next few years.

In the medical device industry, Martin says that insurance companies and others paying for health procedures are looking to control costs and want durable devices.

“On the payer side,” he adds. “They don’t want the patient to come back, because the biggest expense to the health-care system is re-intervention”—treating the patient again for the same problem.

At Liberty, Zdon says, “our position is this is it—this is the new normal. If you are waiting for something to improve, stop waiting.”

However, “in our organization we don’t mind, because we have a lot of cost-saving and efficiency-improving products.”

From Jostens’ perspective, Mooty says that many school districts are facing challenging financial circumstances, but school enrollments are increasing in some regions, which benefits Jostens.

“Our customers would like to feel better than they are,” says Tonka Bay’s Musech. “It’s hard to put your finger on it—whether it’s the increasing role of government, whether it’s what’s going on around the world—it’s all translating into a little unwillingness to spend money and invest.”

An engaged workforce

All five executives had opinions and advice on what leadership can do to connect with employees and achieve company goals.

“We have a highly engaged workforce,” says Kiesel of Restaurant Technologies. “We do that by focusing on trust. We do that by focusing on culture.”

“We expect our managers to have one-on-one meetings at least bi-weekly with their employees,” he explains, “so when it comes down to a performance review that’s all very clear.”

By sharing information broadly, Kiesel says, “we can change rapidly, and our people understand our strategy and what they can do to affect it.”

At CSI, Martin says it’s vital to make a personal connection with employees. “We hit rock-bottom,” Martin says. “We were down to one payroll twice. We didn’t know where our next dollar was going to come from.”

Yet, he says, employees responded well when the leaders outlined their company survival plan. “The key for restoring our retention at CSI, even though we didn’t have a dollar to our name, was communication and personal relationships. We chose as a group to stick together.”

Mooty, who’s led other large companies such as International Dairy Queen, says, he focuses on “being incredibly truthful” with employees.

“Creating a sense of integrity for the organization is huge,” Mooty adds. “You have to find a way that everybody respects one another and people feel open to create dialogue and debate and discussions.” In a for-profit environment, he says, “a sense of competition and team orientation really helps feed the right environment.”

From Musech’s vantage point, “It’s all about setting clear expectations for people. People like to know what’s expected of them and where they are going. When it’s kind of fuzzy what the end game is, I think they are just kind of lost. I also think people like to be held accountable.”

Zdon rarely fires anyone. “They don’t feel threatened,” Zdon says, which allows for open communication. “They don’t feel like if they don’t make their number next year that they’re going to be fired.

“I’ve had a number of people come in and say, ‘I just can’t do what you are looking for me to do. Can I do something else or can I exit the company?’ People feel a real part of our organization.”

Employment Growth Accelerates at Mid-Sized Companies in the U.S.

The job growth rate at mid-sized U.S. companies was 3.7 percent in the first quarter of this year, according to new survey data from the National Center for the Middle Market.

“With the government shutdown and debt-ceiling debates seemingly behind us, and less confusion about health care, mid-sized companies are getting back to the business of doing business,” Tom Stewart, executive director of the National Center for the Middle Market, says in a recent statement.

The survey examined business activity at companies with revenue of $10 million to $1 billion.

Middle-market jobs were added at a pace of 2.5 percent for 2013. For 2014, middle-market executives are projecting a job growth rate of 3.2 percent.

The National Center for the Middle Market, located at Ohio State University, also is seeing solid revenue growth among mid-sized businesses.

The center characterized mid-market companies as a “key engine of growth for the U.S. economy,” based on 5 percent revenue increases in 2013.

“Despite challenges like health care and increasing operating costs, the overall financial health of middle-market companies continues to improve,” John Martin, president and CEO of GE Antares Capital, says in a statement. GE Antares Capital, a lender for mid-market firms, adds that middle-market executives are seeing an increased need for working capital, capital expenditures and acquisitions.

“We anticipate increased investment activity, especially within the technology, media, telecom and energy sectors throughout the year,” Martin says.

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