Hose sector dealing with pandemic, tough business climates

Dealing with a global pandemic is tough enough on its own, but throw in a steep decline in demand in a key end market segment, and it just doesn't seem fair.

But many of those in the hose industry have had to do just that, as activity in the oil and gas sector began dropping precipitously even before the novel coronavirus came along and compounded problems not only in that segment, but in other end products and regions around the globe.

Along this rocky journey, players in the hose supply chain have dealt with a constantly changing landscape, tried to keep products flowing as smoothly as possible, and are having to operate in an environment where forecasting is difficult at best and impossible at worst. But they also have learned a few lessons along the way, including the importance of liquidity, as officials look to not only protect the health of workers, but also keep their companies viable going forward.
As for the tumble taken by the oil and gas sector, it came in a hurry. First was the oil war that Russia and Saudi Arabia engaged in, only to have the COVID-19 pandemic cause demand to plummet just as the two nations were ramping up oil production.

"Oil and gas probably set a record for how fast it fell," said Roy Pyle, vice president of distributor sales for the Jason Industrial business of Megadyne America L.L.C.

Activity pretty much came to a halt, as the price of one of the main grades of crude oil even went negative for a few days. Because of that, Pyle said oil wells were capped, with business slowing to a snail's pace, even in such hot beds as the Permian Basin in West Texas, and other areas in Pennsylvania and the Dakotas.

"It's really not just fracking," said Randy Foster, Jason's director of engineering for hose and coupling products. "A lot of it is conventional drilling, and new exploration has pretty much ceased."

The slowdown affects many products Jason supplies to this and related industries, including a lot of traditional rubber hose that is common in industrial uses. Pyle said such mainstays of its product line as petroleum, crude oil suction, water suction, tank truck are down significantly.

Sam Petillo, president of distributor Singer Equities Inc., said it still isn't clear where the bottom is for this sector. "I know (oil prices) are higher now, but we certainly don't expect it will be in the $40 a barrel range anytime soon with the supply glut we're dealing with," he said. "Looking at rig count and activity, we think it will be at 50 percent for awhile."

Wide ranging impact
A mild winter without much snow in the Midwest and Northeast, coupled with a drier than normal spring, also hasn't helped hose suppliers. "There is very little demand for water suction hose for pumping out certain areas," said Tom Tesoro, vice president and general manager for Megadyne's power transmission and fluid power business. "It's been a perfect storm on the demand side for our industrial hose business."

One of the other fallouts of the coronavirus escalation has been a sharp curtailment of investment that hose and other industrial rubber goods suppliers depend on.

"I would say the biggest and most obvious effect has been the abrupt stop of capital spending for 'non-critical' projects," said Brian Dutton, president of Kuriyama of America, Inc. "Anything discretionary has been kicked down the road until people have a better idea of when all of this will peak—and we know some markets may never be the same."

Before it arrived in North America, of course, COVID-19 already had taken a trip around the world.

"We certainly saw the impact of COVID-19 in China first in February and March, but things have been improving there since," said a spokesman for Gates Industrial Corp. "The impact in other regions followed, as stay-at-home orders subsequently went into effect in most other countries."

From there, it went to other parts of Asia, Europe and then to North America. Despite the sharp economic downturn that followed in the pandemic's wake, most of the hose manufacturers and distributors have remained operational as essential businesses, although often at a reduced rate.

The ContiTech business within Germany's Continental A.G. kept its hose operations around the world operational with some exceptions, according to Andreas Gerstenberger, a ContiTech executive vice president and head of the firm's Industrial Fluid Systems global business unit.

ContiTech did shut down in China for several weeks, he said, but reopened quickly. It also shut down operations in Italy, but never in Germany, Hungary or England. It never completely shut down in the U.S., Canada or Brazil. He added that factories only were kept open while strictly abiding by pandemic safety measures from governments, local entities and Continental's own corporate governance.

"We had some reduced shifts and produced less here and there," Gerstenberger said. "But to a large degree in the last four months or so, we kept our operations up and running. And to do that and still keep your people safe, makes us extremely happy and proud."

The Gates spokesman said it had to maintain its supplies to such essential industries as agriculture, food and beverage processing, manufacturing, construction, transportation, warehousing and logistics, and medical device production. It did experience a few mandated shutdowns of varying durations, but all of its global hose production facilities are operating.

"Most of our customers have continued to operate at some level and asked us to support them, which we have been able to do while also keeping our employees safe," he said. "Through the dedication and hard work of our employees across the globe, our service levels with customers are at or above normal levels, despite the situation we are in."

Jason Industrial sources its hose products from other manufacturers and has seen some delays in shipment, said Miguel Velazquez, the firm's director of product management for fluid power.

"Most of our rubber hoses are made in Turkey, and that factory was closed for two to three weeks," he said. "Last month that definitely affected us. Our deliveries are suffering a little bit, with some delayed two to three weeks. Thankfully, they continue to flow."

Velazquez said other vendors, including one in South Korea, have not suffered shutdowns, and products have been received without issue.

Most also agree that the impact differs from product to product, and from region to region.

Jason Industrial, for example, has seen weakness in many of its products, but its line of hydraulic hose launched several years ago is up in 2020 over 2019, Velazquez said, acknowledging that the firm still is a small player in that market.

And while the firm's operations continue in the U.S., that is not the case in Latin and South America, he said. It has operating units in Mexico, Colombia, Peru and Brazil, where hose is the top product, but those businesses all are shut down at the moment.

Gerstenberger said Europe can't be considered as one market, because countries like Germany are looking at reopening, while the United Kingdom still is suffering. It's similar in the Americas, with the U.S. and Canada trying to reopen, but business in Mexico and South America remains on a much different path.

Cash is king
One common theme across the hose supply chain is the desire to focus on liquidity.

"One of the first things that happened is that everyone was doing their best to hoard cash," said Rich Balka, president of Home Rubber Co. in Trenton, N.J. "I think that was akin to the industrial version of hoarding toilet paper."

Petillo said that has led to an inventory correction at the customer level. "When consumption is down, they're right-sizing their inventory, and they're trying to preserve cash," he said. "One way to preserve your cash is to manage your inventory level to the incoming order demand."

Tesoro said liquidity is everything right now, and his firm is managing its receivables as aggressively as it can.

"We're trying to make sure we're staying within the terms that we've agreed upon with our distributors, and by the same token we keep getting letters from distributors and OEM customers asking us for extended terms," he said. "We're trying to measure the relationships we have versus the requests we're getting. Good customers and good relationships deserve consideration, while others are difficult. We're trying to be balanced."

Gerstenberger said what is driving behavior in his business—besides safety and health—is cash management. "Our objective clearly is to have a healthy financial situation, which allows us as Continental and as a business unit to get through this crisis," he said. "That's why it is so essential we manage our costs, our spending and investments. Everything is questioned and absolutely only done if it is necessary for safety, health and quality. Everything else is on hold to keep cash in our company."

Lessons learned
When the pandemic first hit, most companies large and small took similar protective measures such as social distancing and use of personal protective equipment when available. Many set up teams to meet daily to keep a handle on the situation, curtailed travel, and sent people to work at home where feasible.

As some regions begin to reopen, officials are fearful that a second or third wave of outbreaks will hamper the efforts to resume business. And while the first quarter brought declines, particularly starting in March, Gates and Continental are among the companies projecting even worse results in the second quarter.

Gerstenberger said his business unit in ContiTech had a strong start to the year, both globally and in North America, with results up for both January and February. Then, in the second half of March and continuing through April and into May, business hit a roadblock.

"What we all believe is that the second quarter will be hardest in automotive as well as on the rubber side," he said. "If there is more to come in the third quarter, or not, depends on the ramp-ups we see in Europe and partly in U.S. If there is a second wave and we have to shut down certain locations, states or countries, then that could impact third or fourth quarter, but it's almost unpredictable."

With "business as usual" not an option, companies turned to alternative ways to keep staff engaged and also continue to conduct business with customers.

Jason Industrial's Pyle said his staff did a lot of internal training, going over the topics, products and issues that they'd wanted to train on, but never had the time. "We try to get things for people to participate in to prepare themselves for when we come out on the other side, whatever that may be," he said.

The firm also looked at putting in place a modified sales practice, doing webinars with distributors and end users to demonstrate products and activities on its product offerings. He and Tesoro also worked with the staff on enacting "virtual road trips" as a way to cover their territories.

"We asked them to get their itineraries they had in the past," Pyle said, "and told them they need to work the territory just like they had in the past, but you need to do it virtually. We tried to help them figure out how to go around and call in a pattern."

Gerstenberger added that, at one point, 95 percent of the Continental white collar staff was working at home, and it really shined a light on the importance of having a strong IT infrastructure in place.

"For many years, IT was seen as a cost, but today, if you have a good IT team and landscape, it's a huge advantage in going through crises like this," he said.

The ContiTech executive, though, doesn't believe the virtual world will replace personal relationships, but it can help enhance them.

"If you have a relationship with a customer and you know with whom you are talking, then it is absolutely possible to do it at least for awhile," Gerstenberger said. "I think, personally, this pandemic will lead to different behaviors later in business travel and communication. I think that will be one of the outcomes of this crisis."

Changing course
Early on, companies in all industrial sectors spoke of how their decisions were based solely on keeping staff safe and protected, but there now is more talk of also needing to protect the future viability of the business.

"We're doing everything we can to make sure employees are being taken care of long term," said Petillo of Singer Equities. "But there are two things you have to do: One is protect your employees, and the other is protect your company.

"We've made a lot of acquisitions, which means we've also gathered a lot of debt that we need to pay back. So we're responsible for paying down the debt from the acquisitions. We owe it to our shareholders and to our private equity partner to manage profitably through this crisis."

Gerstenberger said in May that Conti's priorities shifted to a combined objective of keeping its people safe and starting the process of running its businesses again.

"We have to think about our people and their well-being, of course, but we also have to think about the sustainable well-being of the company and our customers," he said. "It's not an easy task for any team individual or manager to balance those two objectives."

The whole process, of course, is made even more difficult because all the normal practices of business planning and forecasting have little or no value in the current situation.

"We try to be optimistic in our forecast, but we have to be realistic," Tesoro said. "There's a reality here that until the oil and gas industry recovers, which is probably not likely until maybe the fourth quarter, it's going to be difficult sledding to try to sell hose into the Permian Basin and into West Texas. The wells are capped, the machines are basically shut down and people are not doing any expansion."

Gates said it will continue to have its teams focus on controlling what it can, while keeping its guiding principles of promoting safety for its employees and communities, while continuing to support its customers.

"We are hopeful that the economic impact of this crisis is contained to a relatively short time period, and look to the recovery in China as a potential model for recovery in other regions," the Gates spokesman said. "Given our focus on new product development and the innovative new hoses we've launched over the last couple of years, we believe we're well positioned for growth as our end markets recover."

Gerstenberger spoke some of the new language in predicting in the COVID-19 era. There is the V-curve, where business drops sharply, but rebounds quickly. China is the only area close to this, he said.

Then there is the U-curve, where the rebound takes a little longer. He hopes that this is where Europe and North America will fall.

But the worst scenario is the L-curve, where the economy drops quickly, and then doesn't come back. Some regions still in shutdown mode may experience this, he said.

"As a business or company, you like predictability, you like stability. You like things that are foreseeable," Gerstenberger said. "This pandemic taught all of us with its impacts on people and businesses that predictability in this situation is almost impossible."