Larger mixers tout economies of scale, along with the need for speed

There's no doubt the larger players in the North American custom mix business look at the market different than their medium and smaller counterparts.

They can service high-volume accounts, benefit from economies of scale and have the flexibility to source customers from more than one facility. And when talking about mergers and acquisitions, they tend to be buyers rather than the sellers.

After years of being the buyer on a long stream of acquisitions, the undisputed leader of the pack is Hexpol N.A., the Americas division of Sweden's Hexpol A.B. After Hexpol bought Preferred Compounding in 2019, that left AirBoss of America Corp, based in Newmarket, Ontario, as the clear No. 2 player on the continent.

And while officials at both Hexpol and AirBoss acknowledge there remains a place for the smaller compounders, they feel their businesses are set up to rival them even in service and agility, areas where the medium and small players were thought to have some advantage.

"I think the difference between smaller companies and bigger companies starts to happen when bigger companies don't move very fast, and we're very intent on making sure that our speed is at least equal to what smaller companies can do," said Chris Bitsakakis, AirBoss president and chief operating officer.

He added that AirBoss has worked hard at improving its service level, including bulking up research and development capabilities so it can quickly develop solutions. The company hired new technical sales people and now offers additional technical services to better support its customers.

And given that 75 percent of the cost of custom compounds generally is based on raw materials, Bitsakakis said smaller competitors lack the size to be able to buy raw materials at a lower cost. "So if we can combine that nimbleness with our scale to be able to leverage our raw material buy, we can give our customers a better product, no degradation of service and at a lower price than someone who would have to pay significantly more for (raw materials)," he said.

Hexpol N.A. President Ken Bloom said the custom mixing business isn't that different from most other industrial sectors, where there are a limited number of players at the top and a few mid-size competitors, followed by a "long tail" of small firms. Those in the "tail" may serve a particular region or market segment, or supply one material type, such as silicone or fluoroelastomers.

And Bloom said there will remain a place for the smaller companies in the custom mixing sector. "I don't have every pound of business. I wish I did, but I don't," he said. "There is still lots of competition every day and lots of different competitors we deal with on a daily basis.

"And it's up to them to figure out what their strategy is going forward and where they want to play in the marketplace. It's a big enough market for everybody."

But there are certain limitations for smaller suppliers, including whether they have the people along with the technical and financial resources to effectively grow their business.

On the flip side, larger companies like Hexpol can do a lot to operate like a smaller company in certain respects, according to Bloom.

"Customers today expect speed. They expect agility. They expect us to be nimble," he said. "They expect us to respond to changes in the marketplace. And they expect us to develop products or solve problems very quickly for them."

The challenge is to make sure everyone has the correct mindset. It doesn't matter that Hexpol is a big company, Bloom said, as it must operate in a very localized way. It doesn't matter that Hexpol has 17 facilities in the U.S. and Mexico, it matters that they can work with customers on an individualized basis.

To this end, Hexpol measures how long projects stay in the lab, the staff strives to get trials to work right the first time, and they are focused on taking care of customers locally.

"If you're at anyone of these plants, you have to make sure you take care of the customers in your region, and you have to do it as well as any other competitor out there," Bloom said. "I don't care if they're small or large, we've got to be the supplier of choice.

"We have to be so good that the customer wants to do business with us. And that's really our mantra going forward. We don't want people doing business with us because they have to. We want people doing business with us because they want to. And that's a very different feel."

Pandemic-dominated year

One area that both large and small custom mixers have had to work around has been the impact of the coronavirus on the global marketplace. While both Hexpol and AirBoss said business has rebounded in most markets, Bloom said changes in the way business is conducted may be here for the long haul.

"Your need to be everywhere in person has changed quite a bit, and I don't think it will go backward," he said. "I think we'll definitely travel more than we're traveling now, but I think there will be some middle road that will make sense."

For sales people, dealing from a home base actually can be more efficient when using new communication technologies, according to Bloom. There is much less time wasted driving or flying, and rather than making two to four calls a day while driving, an office setting allows for eight or more calls.

"Where it's really had an impact, and where we're still figuring out the best way, is on the technical side," he said, "where we really add value by having our chemists and our people in our customers' facilities, helping them with process, helping trial new compounds and work on new ideas. Those interactions aren't happening as frequently as they have before."

AirBoss' Bitsakakis said oil and gas is one market that's still a bit weak, and automotive is hit-and-miss depending on which vehicle lines customers are on. The tire and retreading markets have recovered nicely since last summer, with business progressively improving since early July.

"Right now for AirBoss, our revenue is actually higher than it was the year before," Bitsakakis said.

Since the start of 2021, its Rubber Solutions business, which includes custom compounding, has exceeded the revenues of early 2020.

"When the pandemic hit and some of our customers had to shut down their factories, we saw probably a 35-percent reduction in sales," he said. "But since then, it all came back to 100 percent by the fall, and in the New Year, more than 100 percent of where we were pre-pandemic."

In addition, things are better when looking at the entire AirBoss portfolio because it had such prolific growth in its PPE defense products "that we basically tripled our profitability and eliminated almost all of our debt," Bitsakakis said.

M&A to heat back up

The pandemic put a damper on much of the mergers and acquisitions activity in 2020, but that should change as businesses regain a sense of normalcy and vaccination programs ramp up.

"Without being able to conduct plant tours or even fly over borders," Bitsakakis said, "it's been extremely difficult to have these kinds of in-depth meetings and conversations about a transaction that, although it may make sense, it's very difficult to pull the trigger on something major over a Zoom call."

Bloom added that the depressed business climate also made potential sellers less likely to divest when their businesses are off 30-50 percent of traditional levels. In a climate like that, he said it is extremely difficult to agree on a business value.

"It's something we look at every day and will continue to look at aggressively, but the market was not supportive of doing much for the last nine months," Bloom said.

When M&A does begin to pick up as expected, AirBoss' clean balance sheet will allow it to be a major player in the action, Bitsakakis said.

"We are very interested in transacting this year and next year on some opportunities to expand our rubber mixing footprint, in the United States mostly," he said. "We are well-poised now with a very effective and successful rubber mixing group to be able to add more pieces to that puzzle."

AirBoss will look at candidates that can bring them one of three things: a specialty compounder that has a commanding lead in a niche it serves; a firm that can extend its reach into regions where AirBoss may not be as strong; or one that can bring AirBoss a new technology that makes sense for the firm.

"Over the last 18 months we've really elevated our R&D team to a new level," Bitsakakis said, "and we inaugurated our new state-of-the-art laboratory in Kitchener, Ontario.

"We are really looking at an innovation piece. If there's a compounder, for example, that has a specific type of technology in a product that we have not sold yet, then we would certainly look at them as well."

AirBoss, though, will never be a company that looks for all of its growth through acquisitions.

"At AirBoss, we spent two to three years proving that we could grow organically significantly faster than the market, which means we were gaining market share," the company president said. "Now that our organic growth systems are really well-tuned, we are looking to bolt-on some inorganic growth opportunities so that we have both running."

Hexpol keeps a deep list of potential acquisitions in various parts of the world and in a number of industries, Bloom said.

"But they have to make sense. You don't buy things just to buy them, you buy them for a particular reason," he said. "Hexpol has done a lot of acquisitions, including Preferred when I worked there. They've done a very good job at synergies and incorporating those businesses into the network."

Bloom said it is hard to see out from behind the pandemic. There is optimism the world is turning a corner on the outbreak, however uncertainty still dominates the demand side.

"There are still lots of unknowns," he said. "I am very optimistic about the future, but in the back of my mind I always have what we went through last year in my head."

Bitsakakis said he is a bit less guarded in his expectations for the coming year, though he knows things could change in a hurry if another major lockdown occurred in North America. He expects AirBoss to pick up where it left off in 2019, when it was running at a 10 percent compounded annual growth rate. "We expect that trajectory of growth to continue," he said.

To back up his optimism, a mixing line has been added at an AirBoss plant in North Carolina, and work is ongoing to boost its capacity utilization throughout its network.

Specialty lines also are becoming an increasing part of the firm's fabric. A dedicated color rubber mixing line installed last year already is about 60 percent sold out, he said, and a smaller specialty mixing line is starting to gain traction as well.

"In 2019, with the capital investments we made, we really broadened our product capabilities, and we increased the capabilities of our laboratory to match that up," Bitsakakis said. "We plan to see the fruits of that labor as we come out of the pandemic, and certainly into 2022."