Commercial Metals Builds Strength and Numbers

How has this large publicly held company built up its scrap processing, scrap consuming, and commodity trading businesses? Vital have been its conservative focus on financials and its aggressive plans for the future.

How has the company managed its growth over the last 75 years? And how will it continue to grow in the future?

Part of the answer, says Stanley A. Rabin, CMC's president and chief executive officer, lies in the firm's conservative tradition. But while the company is conservative in its financial dealings--keeping a close eye on net assets and cash flow--CMC also is aggressive, says Rabin--and its size and scope prove it.

One of the most recent testimonies to CMC's conservative assertiveness is its entry into municipal recycling. Since October 1989 the corporation has been operating a materials recovery facility (MRF) next to its previously existing scrap metal processing plant in Jacksonville, Florida. As part of a one-year pilot project, city waste haulers bring paper, glass, plastics, and aluminum to the MRF. CMC separates the materials, loads the mixed paper into containers, sorts the glass by color and crushes it, bales the commingled plastics, and sells each commodity to a local market. Aluminum is sent to the CMC scrap plant next door.

Eyes on the Future

Getting into municipal recycling wasn't by chance. "We were looking at the future," explains Harry J. Heinkele, president of CMC's secondary metals processing division. "Pick up any newspaper or turn on the television and you'll hear about diminishing landfill space and municipal recycling. So we made a specific effort to get involved in this business." Although the Jacksonville project is the first municipal recycling contract CMC bid on, it likely will not be the last. According to Heinkele, the company is talking to local officials in other cities with CMC scrap plants about municipal recycling programs.

The future also may see CMC processing nontraditional scrap materials outside of municipal recycling contracts. Currently, among its 23 processing facilities, the company handles virtually every grade and type of scrap metal except precious metals. In addition, its plants in Shreveport, Louisiana, and Longview, Texas, purchase glass, which is color-sorted and crushed prior to sale. Other facilities may get involved in plastic recycling. "We see ourselves initially as suppliers to some of the major players in secondary plastics," says Heinkele. "Attention in the future might be to look at some sort of processing or manufacturing operation, but that's really long-term."

New business ventures might be part of the future, as well, but Rabin emphasizes, "they'd be related businesses," such as nonferrous manufacturing plants. Adds Bert Romberg, senior vice president of CMC and president of the company's Dallas trading division, "we intend to continue growing, but we won't be buying any fast-food franchises. We want to stay within our range of expertise."

Of course, CMC likely will continue to expand on the number of facilities in the businesses it's already a part of, particularly in scrap processing operations. "The infrastructure is in place," explains Heinkele. "By logically growing we share the cost of allocations per facility and add more facilities to our service." What's involved in logical growth? For one thing, it's examining CMC's consumers. "If we see them growing," he says, "we want to grow with them." For another, it's surveying competition. "To try to cover a market that's already been taken would be counterproductive," Heinkele says. "So we try to grow through acquisitions, and then improve upon those acquisitions through equipment enhancement. Meanwhile, we already have the source of material coming through."

Site location and market base also play in the logic of growth. CMC's scrap processing facilities are now confined to seven nearly contiguous states--New Mexico, Oklahoma, Texas, Louisiana, Mississippi, Florida, and Georgia--but in the past it has maintained sites in California, which posed some problems. The distance between the California facilities and corporate headquarters in Dallas impaired the company's control over the plants, Heinkele says. In addition, he notes, "the West Coast market serves more export business than it does domestic, whereas our other yards handle mostly domestic. It really didn't tie together in terms of getting a package to our consumers, and it fragmented our marketing. So we backed away from that part of the market."

Surviving Market Cycles

CMC's conservative yet aggressive philosophy is evident in Heinkele's explanation of how to endure business swings. "Metals will always have cycles; no one can change the system to eliminate the cycles," he says. "What’s important is to have an understanding with your accounts and with your facilities of how best to exist in cycles." The way CMC's scrap operations have coped, he says, is to never stop buying equipment so its processes continue to advance, to be low-cost producers by employing engineering methods for equipment and material flow, to maintain employee engineering and safety programs, and to turn over scrap as often as possible. They're all practices Heinkele insists upon implementing at all times, but it's the last one that seems particularly ingrained in CMC's philosophy. It's something echoed throughout the company--by the marketing people, by the engineering staff, by the computer department.

Most of the company's scrap is turned over more than once a month--something Heinkele says is quite easy for nonferrous, but more trying for ferrous. The extra effort is beneficial in the long run, however, he says, because "by turning over scrap that frequently you take some of the speculation out of the marketplace."

Another way the company has ensured its survival through market swings is through its ownership of scrap consuming operations. Romberg--who, probably because he's been with the company for 34 years, has been given the responsibility of honorary historian--says he's not sure if it was by accident or design, but ownership of the steel minimills has helped smooth out the swings for CMC. "When scrap prices went down our yards suffered," he explains, "but our mills, which are scrap buyers, prospered. ... Although none of our mills is very dependent on our own scrap, they're all very dependent on the same general market--just opposite ends of the market."

CMC hasn't always operated at both ends of the market. It wasn't until 1963, more than 45 years after its inception, that the company entered the consuming industry. According to Romberg, one of the partners in a Seguin, Texas, minimill had run into financial difficulty and--since the was one of CMC's major consumers and major accounts receivable--CMC bought his half ownership. Within seven years the scrap processing company had bought the remaining shares and owned its first manufacturing company.

It wasn't the first major step the firm took toward its current stature. In the mid-fifties CMC became the first scrap organization to go public, selling stock in the corporation over the counter (it was first listed on the American Stock Exchange in 1960 and has been on the New York Stock Exchange since 1982). How has being a publicly held company affected CMC? "It's forced us to adhere to practices [required by Securities and Exchange Commission rules] that in the long run are very healthy--integrity, ethical behavior, and regulatory compliance," says Rabin. "The biggest disadvantage is the amount of work created by disclosure requirements. But I feel very strongly that in the long term it's been a big benefit for us and will continue to be."

Keeping the CMC Family Organized

Today CMC includes four divisions:

manufacturing, which includes the steel minimills, steel fabrication plants, a railcar rebuilding facility, the copper tubing plant, and one scrap processing plant (which is part of the division because it's such a major supplier to one of the minimills);

recycling, which consists of the 22 scrap processing plants and 4 scrap feeder plants in the secondary metals division, and a steel rail and track dismantling and recovery operation;

marketing and trading, which buys and sells primary and secondary metals, agricultural products, chemicals, and other commodities through offices located on five continents; and

financial services, a Zug, Switzerland-based operation that handles short-term investments for the corporation.

Growth in the manufacturing segment over the last few years has put it at the top of the list of CMC division profit makers, with recycling right behind it. "While we started out as a scrap company," says Romberg, "it spawned other businesses. In a sense, the children have outgrown the parent, but the parent is still very vigorous."

Although the scrap recycling division is CMC's parent from a historical perspective, in the organization structure it's more of an older brother to the other three divisions. Each of the divisions, in fact, acts as an independent sibling of a corporate parent that has given its children a great deal of autonomy in the last decade. In the seventies, although the company was divisionalized, the divisions shared many of their resources. The scrap processing operation, for example, relied heavily on its corporate parent for computer and accounting services and on the trading group for marketing services. The latter, in particular, "caused some conflict of interest," says Heinkele, since the traders also were marketing other companies' scrap.

Today the secondary metals division, he notes, "is self-contained as a business--we have our own marketing group, our own controller, our own MIS [management and information systems] department for our computers, and our own engineering and safety department." And although the divisions do business with one another, it's accomplished "at arm's length," he says.

For instance, some of the scrap processed by Heinkele's group is used in CMC's consuming operations, but the scrap is sold by the scrap division's marketing department to the individual minimill or tube manufacturer, which also buys scrap from other processing companies through its own purchasing department.

Even within each division there's a substantial amount of decentralization. In the secondary metals recycling division, for example, each of the scrap processing plants is considered a branch and each branch is responsible for preparing its own budget (with assistance and final coordination from the division's chief engineer), figuring its own profits and losses, setting its own scrap purchase prices, buying its own scrap based on its own needs, and budgeting for and hiring its own staff. In addition, even though all the branches' processed products are sold by the division's marketing staff, in essence, each branch sells its materials to the marketers, who, in turn, sell them to scrap consumers.

Managing the Distance

Considering the size, geography, and internal autonomy of CMC's secondary metals recycling division, it's a wonder that Heinkele and his staff stay on top of operations. One way they've managed is through a central focus that's been formalized in the division's policies and procedures manual. The manual details everything from CMC procedure for closing out the books to policy on property transfer to specifics on handling drums, insulated wire, batteries, used oil, and white goods.

Another way is through regular communication between the branches and the management and marketing staffs in Dallas. Joseph Reichard, chief engineer for the secondary metals division, and Kelly Nash, the division's environmental manager, each spend an average of two days per week at branches outside the Dallas-Ft. Worth area (which contains three CMC scrap plants that receive frequent visitors from the home office). Heinkele manages to communicate over the telephone with each branch one to three times per week and visits whenever he can. And the marketing staff, which is charged with coordinating the 80 or more products available from 22 branches with its hundreds of consumers, is on the phone with each branch probably three to five times per day.

Communication channels are abetted by the secondary metals division's computer system. Each branch has two to eight minicomputers that mainly manage inventory by recording all scale operations. This information is automatically transmitted to the two large minicomputers in the Dallas management and marketing office three to four times per day using modems and telephone lines. From there, the marketing department can coordinate packages to consumers from a number of branches, and send that information back to the branches (via computer) for order preparation. In addition, an electronic mail system tied into the computers allows instant communication among the branches and the home office.

Richard L. Goulde, MIS manager for secondary metals, believes this system, which also ties into an on-line commodity price service and the division's accounting system, is valuable to CMC in more ways than its communications assistance. "When you deal in scrap you buy and sell the same materials that everybody else does. What matters is how fast you react," he says. "Obviously the biggest piece of this is the processing of materials--how fast you can get them in and back out the door. But through information flow we try to get better information to people faster so they can make better, faster decisions. ... That is what our department tries to optimize for the division."

Realizing Results

The work put into the secondary metals division by its employees has paid off.

Among the accomplishments easy to pinpoint is employee productivity. In 1979 CMC's secondary metals division handled 880 tons of scrap per division employee. Last year that figure increased to more than 1,000 tons per employee, which Heinkele attributes to employee training programs and engineering methods. In all, during fiscal year 1989, the division collected, processed, and recycled approximately 669,000 tons of ferrous and 123,000 tons of nonferrous scrap, up 4 percent over fiscal year 1988. Financially, the secondary metals division's fiscal year 1989 operating profits were the highest of the decade at $15 million.

To continue on this path, Heinkele believes, the company will have to continue to do the things it does today, including maintaining good relations with its consumers. This is accomplished, says Robert Melendi, CMC's secondary metals division vice president who oversees the marketing department, by "being honest on transactions, maintaining integrity and reliability, shipping quality products, and being responsive to consumers' needs."

How has this large publicly held company built up its scrap processing, scrap consuming, and commodity trading businesses? Vital have been its conservative focus on financials and its aggressive plans for the future.

How has the company managed its growth over the last 75 years? And how will it continue to grow in the future?

Part of the answer, says Stanley A. Rabin, CMC's president and chief executive officer, lies in the firm's conservative tradition. But while the company is conservative in its financial dealings--keeping a close eye on net assets and cash flow--CMC also is aggressive, says Rabin--and its size and scope prove it.

One of the most recent testimonies to CMC's conservative assertiveness is its entry into municipal recycling. Since October 1989 the corporation has been operating a materials recovery facility (MRF) next to its previously existing scrap metal processing plant in Jacksonville, Florida. As part of a one-year pilot project, city waste haulers bring paper, glass, plastics, and aluminum to the MRF. CMC separates the materials, loads the mixed paper into containers, sorts the glass by color and crushes it, bales the commingled plastics, and sells each commodity to a local market. Aluminum is sent to the CMC scrap plant next door.

Eyes on the Future

Getting into municipal recycling wasn't by chance. "We were looking at the future," explains Harry J. Heinkele, president of CMC's secondary metals processing division. "Pick up any newspaper or turn on the television and you'll hear about diminishing landfill space and municipal recycling. So we made a specific effort to get involved in this business." Although the Jacksonville project is the first municipal recycling contract CMC bid on, it likely will not be the last. According to Heinkele, the company is talking to local officials in other cities with CMC scrap plants about municipal recycling programs.

The future also may see CMC processing nontraditional scrap materials outside of municipal recycling contracts. Currently, among its 23 processing facilities, the company handles virtually every grade and type of scrap metal except precious metals. In addition, its plants in Shreveport, Louisiana, and Longview, Texas, purchase glass, which is color-sorted and crushed prior to sale. Other facilities may get involved in plastic recycling. "We see ourselves initially as suppliers to some of the major players in secondary plastics," says Heinkele. "Attention in the future might be to look at some sort of processing or manufacturing operation, but that's really long-term."

New business ventures might be part of the future, as well, but Rabin emphasizes, "they'd be related businesses," such as nonferrous manufacturing plants. Adds Bert Romberg, senior vice president of CMC and president of the company's Dallas trading division, "we intend to continue growing, but we won't be buying any fast-food franchises. We want to stay within our range of expertise."

Of course, CMC likely will continue to expand on the number of facilities in the businesses it's already a part of, particularly in scrap processing operations. "The infrastructure is in place," explains Heinkele. "By logically growing we share the cost of allocations per facility and add more facilities to our service." What's involved in logical growth? For one thing, it's examining CMC's consumers. "If we see them growing," he says, "we want to grow with them." For another, it's surveying competition. "To try to cover a market that's already been taken would be counterproductive," Heinkele says. "So we try to grow through acquisitions, and then improve upon those acquisitions through equipment enhancement. Meanwhile, we already have the source of material coming through."

Site location and market base also play in the logic of growth. CMC's scrap processing facilities are now confined to seven nearly contiguous states--New Mexico, Oklahoma, Texas, Louisiana, Mississippi, Florida, and Georgia--but in the past it has maintained sites in California, which posed some problems. The distance between the California facilities and corporate headquarters in Dallas impaired the company's control over the plants, Heinkele says. In addition, he notes, "the West Coast market serves more export business than it does domestic, whereas our other yards handle mostly domestic. It really didn't tie together in terms of getting a package to our consumers, and it fragmented our marketing. So we backed away from that part of the market."

Surviving Market Cycles

CMC's conservative yet aggressive philosophy is evident in Heinkele's explanation of how to endure business swings. "Metals will always have cycles; no one can change the system to eliminate the cycles," he says. "What’s important is to have an understanding with your accounts and with your facilities of how best to exist in cycles." The way CMC's scrap operations have coped, he says, is to never stop buying equipment so its processes continue to advance, to be low-cost producers by employing engineering methods for equipment and material flow, to maintain employee engineering and safety programs, and to turn over scrap as often as possible. They're all practices Heinkele insists upon implementing at all times, but it's the last one that seems particularly ingrained in CMC's philosophy. It's something echoed throughout the company--by the marketing people, by the engineering staff, by the computer department.

Most of the company's scrap is turned over more than once a month--something Heinkele says is quite easy for nonferrous, but more trying for ferrous. The extra effort is beneficial in the long run, however, he says, because "by turning over scrap that frequently you take some of the speculation out of the marketplace."

Another way the company has ensured its survival through market swings is through its ownership of scrap consuming operations. Romberg--who, probably because he's been with the company for 34 years, has been given the responsibility of honorary historian--says he's not sure if it was by accident or design, but ownership of the steel minimills has helped smooth out the swings for CMC. "When scrap prices went down our yards suffered," he explains, "but our mills, which are scrap buyers, prospered. ... Although none of our mills is very dependent on our own scrap, they're all very dependent on the same general market--just opposite ends of the market."

CMC hasn't always operated at both ends of the market. It wasn't until 1963, more than 45 years after its inception, that the company entered the consuming industry. According to Romberg, one of the partners in a Seguin, Texas, minimill had run into financial difficulty and--since the was one of CMC's major consumers and major accounts receivable--CMC bought his half ownership. Within seven years the scrap processing company had bought the remaining shares and owned its first manufacturing company.

It wasn't the first major step the firm took toward its current stature. In the mid-fifties CMC became the first scrap organization to go public, selling stock in the corporation over the counter (it was first listed on the American Stock Exchange in 1960 and has been on the New York Stock Exchange since 1982). How has being a publicly held company affected CMC? "It's forced us to adhere to practices [required by Securities and Exchange Commission rules] that in the long run are very healthy--integrity, ethical behavior, and regulatory compliance," says Rabin. "The biggest disadvantage is the amount of work created by disclosure requirements. But I feel very strongly that in the long term it's been a big benefit for us and will continue to be."

Keeping the CMC Family Organized

Today CMC includes four divisions:

manufacturing, which includes the steel minimills, steel fabrication plants, a railcar rebuilding facility, the copper tubing plant, and one scrap processing plant (which is part of the division because it's such a major supplier to one of the minimills);

recycling, which consists of the 22 scrap processing plants and 4 scrap feeder plants in the secondary metals division, and a steel rail and track dismantling and recovery operation;

marketing and trading, which buys and sells primary and secondary metals, agricultural products, chemicals, and other commodities through offices located on five continents; and

financial services, a Zug, Switzerland-based operation that handles short-term investments for the corporation.

Growth in the manufacturing segment over the last few years has put it at the top of the list of CMC division profit makers, with recycling right behind it. "While we started out as a scrap company," says Romberg, "it spawned other businesses. In a sense, the children have outgrown the parent, but the parent is still very vigorous."

Although the scrap recycling division is CMC's parent from a historical perspective, in the organization structure it's more of an older brother to the other three divisions. Each of the divisions, in fact, acts as an independent sibling of a corporate parent that has given its children a great deal of autonomy in the last decade. In the seventies, although the company was divisionalized, the divisions shared many of their resources. The scrap processing operation, for example, relied heavily on its corporate parent for computer and accounting services and on the trading group for marketing services. The latter, in particular, "caused some conflict of interest," says Heinkele, since the traders also were marketing other companies' scrap.

Today the secondary metals division, he notes, "is self-contained as a business--we have our own marketing group, our own controller, our own MIS [management and information systems] department for our computers, and our own engineering and safety department." And although the divisions do business with one another, it's accomplished "at arm's length," he says.

For instance, some of the scrap processed by Heinkele's group is used in CMC's consuming operations, but the scrap is sold by the scrap division's marketing department to the individual minimill or tube manufacturer, which also buys scrap from other processing companies through its own purchasing department.

Even within each division there's a substantial amount of decentralization. In the secondary metals recycling division, for example, each of the scrap processing plants is considered a branch and each branch is responsible for preparing its own budget (with assistance and final coordination from the division's chief engineer), figuring its own profits and losses, setting its own scrap purchase prices, buying its own scrap based on its own needs, and budgeting for and hiring its own staff. In addition, even though all the branches' processed products are sold by the division's marketing staff, in essence, each branch sells its materials to the marketers, who, in turn, sell them to scrap consumers.

Managing the Distance

Considering the size, geography, and internal autonomy of CMC's secondary metals recycling division, it's a wonder that Heinkele and his staff stay on top of operations. One way they've managed is through a central focus that's been formalized in the division's policies and procedures manual. The manual details everything from CMC procedure for closing out the books to policy on property transfer to specifics on handling drums, insulated wire, batteries, used oil, and white goods.

Another way is through regular communication between the branches and the management and marketing staffs in Dallas. Joseph Reichard, chief engineer for the secondary metals division, and Kelly Nash, the division's environmental manager, each spend an average of two days per week at branches outside the Dallas-Ft. Worth area (which contains three CMC scrap plants that receive frequent visitors from the home office). Heinkele manages to communicate over the telephone with each branch one to three times per week and visits whenever he can. And the marketing staff, which is charged with coordinating the 80 or more products available from 22 branches with its hundreds of consumers, is on the phone with each branch probably three to five times per day.

Communication channels are abetted by the secondary metals division's computer system. Each branch has two to eight minicomputers that mainly manage inventory by recording all scale operations. This information is automatically transmitted to the two large minicomputers in the Dallas management and marketing office three to four times per day using modems and telephone lines. From there, the marketing department can coordinate packages to consumers from a number of branches, and send that information back to the branches (via computer) for order preparation. In addition, an electronic mail system tied into the computers allows instant communication among the branches and the home office.

Richard L. Goulde, MIS manager for secondary metals, believes this system, which also ties into an on-line commodity price service and the division's accounting system, is valuable to CMC in more ways than its communications assistance. "When you deal in scrap you buy and sell the same materials that everybody else does. What matters is how fast you react," he says. "Obviously the biggest piece of this is the processing of materials--how fast you can get them in and back out the door. But through information flow we try to get better information to people faster so they can make better, faster decisions. ... That is what our department tries to optimize for the division."

Realizing Results

The work put into the secondary metals division by its employees has paid off.

Among the accomplishments easy to pinpoint is employee productivity. In 1979 CMC's secondary metals division handled 880 tons of scrap per division employee. Last year that figure increased to more than 1,000 tons per employee, which Heinkele attributes to employee training programs and engineering methods. In all, during fiscal year 1989, the division collected, processed, and recycled approximately 669,000 tons of ferrous and 123,000 tons of nonferrous scrap, up 4 percent over fiscal year 1988. Financially, the secondary metals division's fiscal year 1989 operating profits were the highest of the decade at $15 million.

To continue on this path, Heinkele believes, the company will have to continue to do the things it does today, including maintaining good relations with its consumers. This is accomplished, says Robert Melendi, CMC's secondary metals division vice president who oversees the marketing department, by "being honest on transactions, maintaining integrity and reliability, shipping quality products, and being responsive to consumers' needs."