Richmond Times Dispatch - Oct 07, 2002

Testing their mettle

Prince George company fulfills dream of former Reynolds executives

BY JOHN REID BLACKWELL

The three founders of Service Center Metals were expecting the worst.

Weather reports indicated Mother Nature would probably soak the big party Scott Kelley, Chip Dollins and Randy Weis had planned to celebrate the groundbreaking for the company's new plant.

But the three business partners had already steered their way through several storms in their 16-month quest to get the company off the ground, and a little rain wasn't about to stop them now, so they decided to move the event inside a nearby industrial shell building.

"We're at the point now where nothing fazes us," Dollins said the day before the Sept. 27 ceremony in Prince George County's SouthPoint Business Park, the site of the company's aluminum extrusion plant.

So on the big day, after an indoor ceremony that included comments by Gov. Mark R. Warner, the three men led more than 100 friends, family members and business colleagues outdoors, across muddy ground, to the construction site.

Then the clouds began to clear, and Dollins, Kelley and Weis sank their shovels into the ground beneath a bright, blue sky.

Perhaps it was a good omen for the aluminum industry veterans, who gave up good jobs and put their careers on the line in the hopes of realizing their dream of managing their own company.

With the start of construction on the plant, Service Center Metals is on its way to becoming a reality. The company will be a unique newcomer to the aluminum industry, a small startup in a highly competitive business dominated by corporate giants such as Alcoa Inc. and Kaiser Aluminum Corp.

It's an industry that has been marked in recent years by massive, multibillion-dollar consolidations, a trend Kelley, Weis and Dollins know all too well. All three once worked for Reynolds Metals Co., the venerable Richmond-based powerhouse that was swallowed whole by its largest competitor, Pittsburgh-based Alcoa, in May 2000.

On their own since early 2001, the men devoted 16 months - without pay for almost the whole time - pursuing what they see as a golden opportunity within the industry.

When the company's 77,000-square-foot extrusion plant is completed next year, Service Center Metals will put all of its resources and energy into providing high-quality aluminum extrusions to a niche market of distributors who want some relief from the competitive pressures brought on by the industry's consolidations.

"We'll be the only mill in existence that is 100 percent focused on the distribution market," said Kelley, 42, who left a job with the nation's second-largest aluminum company to become Service Center Metals' president and chief executive officer.

Extrusion plants are a vital link in the aluminum industry chain, responsible for making shaped aluminum used in the construction, electrical, transportation, consumer durables, and machinery and equipment industries.

Service Center Metals will sell its products to distributors to serve all five markets, concentrating on a specific segment, the 700 million pound-per-year market for aluminum rods, bars, shapes, tubes and pipes.

Kelley, Weis and Dollins like to call their business plan, "the anti-dot-com."

"We're actually going to be making a product that people can use," said Weis, the company's 36-year-old vice president of sales, whose career has included working for one business-to-business Internet marketplace that, like so many other dot-coms, ran out of cash and had to shut down.

"This is an opportunity to take all the things we have learned - the good things - and build a new plant with a clean slate," said Dollins, Service Center Metals' 41-year-old vice president of operations.

Getting to this point wasn't easy, and it turned out to be a lot harder than the partners expected.

For Kelley, the journey started five years ago, when he was still working for Reynolds Metals as a manager at the company's Bellwood extrusion plant.

Kelley was among a group of Reynolds managers who made an unsuccessful bid to buy the Bellwood plant when Reynolds put it up for sale in 1997. The plant was eventually sold to Houston-based Kaiser Aluminum.

>Kelley continued to work at the plant for Kaiser, becoming national marketing manager in 1999. But he never gave up on the idea of going into business for himself, and his knowledge of industry trends told him the opportunity was there.

"You see an opportunity, and at some point you have to pull the trigger," Kelley said. For him, the timing seemed right in May 2001, so he resigned from Kaiser to devote himself full time to the creation of a new company.

Kaiser, the second-largest U.S. aluminum company, filed for Chapter 11 bankruptcy protection in February.

After leaving Kaiser, Kelley began looking for business partners willing to take on the challenge of starting a company, and it didn't take long for Dollins and Weis to get on board.

>The three men knew each other as co-workers and "friendly competitors" during their careers, and they knew they each had different talents, experience and business connections that would contribute to building a new business.

Dollins started his 16-year career with Reynolds Metals as an industrial engineer at the Bellwood plant, where he worked with Kelley. He held a series of management positions before Alcoa acquired Reynolds. Rather than relocate to Pittsburgh after the merger, Dollins resigned from the company and took a job with PricewaterhouseCoopers' management consulting practice.

Dollins left that job last year to join his old colleague, Kelley, at Service Center Metals. "For me, it was the opportunity of a lifetime," he said.

Weis started his career with Reynolds Metals in 1989 as a sales representative. For the next 12 years, he held numerous sales management positions for several aluminum companies.

"I've worked for almost every aluminum company in North America, and Alcoa has snapped almost all of them up," said Weis, who was working in Iowa last year when Kelley called him with the idea of starting a new company. After meeting with Kelley over coffee at Starbucks, Weis jumped at the opportunity.

The business plan they hatched involved using the consolidation within the aluminum industry to their advantage. Because of mergers and acquisitions, an estimated 70 percent of the distribution supply market is now controlled by the two largest companies, with the balance spread among other suppliers.

The men knew that consolidation was putting pressure on distributors by reducing price competition and squeezing their margins. They also knew that the trend was hurting customer service and support, a critical need for distributors.

"We felt there was an opportunity for someone to come in with a new model," Kelley said.

The three men figured that if they built their own extrusion plant and focused on providing high-quality goods, greater flexibility and reduced costs, customers would flock to them.

The Service Center Metals executives say they want to do something similar to what has happened in the banking industry. As major banks have merged into ever-larger corporate entities in recent years, a number of smaller, community banks have sprouted with the goal of attracting customers by putting more emphasis on service, thereby countering the "bigger is better" trend.

"We went into it knowing it was going to be successful," Kelley said. But they also knew it wouldn't be easy to persuade investors. When they set out to find financing last year, they couldn't have known just how difficult the environment was about to become.

For advice, Kelley went to see Gary LeClair, chairman of the Richmond law firm LeClair Ryan, which advises startup technology companies. LeClair's first response was skepticism.

"Having done venture capital work for 20 years, and looking at the markets, I thought this was a great idea, but I was skeptical whether there would be any capital in Richmond for a startup aluminum plant," LeClair said.

"I tried to talk him out of it," LeClair said of his first meeting with Kelley.

It wasn't that Kelley's idea was bad, the lawyer said. "It's just very hard these days to do a pure startup, especially those that require this much capital. We haven't seen many manufacturing, old-industry type startups in Richmond in the last six years."

But Kelley, Weis and Dollins were determined to move ahead with their plans. They found a supportive hand in Ken Smither, president of the Richmond-based investment banking firm Smither & Co., who took on their cause and offered them space in his Glen Allen office.

"I've always liked entrepreneurial-type projects like this," said Smither, who was recently named president of the Community Pride supermarket chain. "I was intrigued by their business model and the management team they put together."

The men came up with a business plan and made a presentation to potential lenders the first week of September 2001.

Then came Sept. 11. The economy, which had already slipped into recession, took a turn for the worse. The stock market went into a dive. "It was the most difficult time to get into the capital markets in 10 years," Kelley said.

In November, the men thought they had finally found an equity partner, but that deal didn't work out, and "we had to regroup after that and look at some new avenues," Kelley said.

>So they went back to the drawing board and scaled back their plans for the plant, reducing its size from 120,000 to 77,000 square feet and cutting the initial costs from $27 million to $13 million.

Their new plan called for building a plant with one extrusion press instead of two. They would expand the plant as the company's revenue grew over the next few years.

It took until August, but eventually investors saw the value of the company, Service Center Metals executives and others involved in the project said.

"Coming off of the technology bust, we are seeing more lenders and investors looking at the old economy type model," Smither said.

LeClair said Kelley and his partners' commitment to the project, their willingness to devote everything to its success, was the most convincing part of their business plan.

>"This is a deal that has three very good managers, and a good support group around them. I think the three entrepreneurs created a lot of confidence. They really know this industry and its customers, and they have identified a niche that people know needs to be served," he said.

>One thing that has helped Service Center Metals is that the company has a pool of aluminum industry expertise to draw from in the Richmond area.

Besides their own experience, Kelley, Dollins and Weis have put together a team of consultants and advisory board members that includes former executives for several aluminum companies.

Another factor that helped convince investors was that Service Center Metals has already rounded up a lengthy list of customers and has managed to pre-sell all of its production for its first year of operations. "Our customers have really stepped forward to support us," Kelley said.

In August, the partners inked a deal for the financing through a combination of private investments, bank loans and state grants.

They were also helped by some "creative financing" offered by the Italian company that is manufacturing their equipment. The developer of the SouthPoint Business Park in Prince George, The Hollingsworth Companies, also invested in Service Center Metals and agreed to let the company lease the new building, a key component because it meant Service Center Metals didn't have to borrow the money to buy it.

"You are looking at a world-class manufacturer in Service Center Metals," said Joe Hollingsworth, the development company's president, at the groundbreaking on Sept. 27. "It is the best example I know of dreams coming true."

LeClair said the Service Center Metals deal is one of his few successful ones this year. "I call it my miracle baby," he said. One lesson to be learned, he said, is "never trust a pessimist lawyer who tells you it can't be done."

The Service Center Metals plant should begin production in August, with an initial employment of about 50 people. Although the economy is still stumbling, Kelley, Weis and Dollins think they've started construction of the plant at just the right time. The aluminum distribution market contracted in 2001, but it is expected to rebound next year and grow during the next two years.

"It's all speculative, but we could be coming out of the economic doldrums next year, and we'll have the plant up and ready and to go by then," Weis said.

>The plant will start its operations with state-of-the-art extrusion equipment. Kelly, Weis and Dollins have devised a system aimed at cutting costs to an absolute minimum while maintaining service and quality.

Eventually, the company hopes to set up a performance-based compensation plan to reward employees for productivity and efficiency. And borrowing an idea from Alcoa, the executives have planned an "open" layout for the plant's offices. No one will be in closed offices. "Everyone will be in cubicles or bullpens," Kelley said.

"We're going to run this like a family business," Weis said.

Raising the money and breaking ground for the new plant was just the first step. Kelley set off last week on a 14-day national tour to visit customers and round up more business.

"We're very confident that the market is there. Now we just need to execute. That's the hard part," Kelley said.