HNI Purchases the Vermont Castings Group

[Date:2014-10-17 10:43:59]
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by Richard Wright


HNI Purchases the Vermont Castings Group

editor's note: Today morning when I read  the news, I was shocked by this purchase: as Vermont Castings Group and HHT are two of the biggest companies in this industries, I'm surprised about this acquisition. I remember the VCG has just reformed several months ago. What about the details for this acquisition? After the combination of these two giant companies in the industry of Hearth and Heating, what will happen? I look forward to seeing more... 

                                                            -- Kevin Wu (managing director of Genjoy Home Fashion Co., Ltd.)

The press release arrived on Oct. 1, 2014, and it was a major surprise. Ricardo Leon, majority owner of the Vermont Castings Group (VCG), had just sold the company to HNI, the largest hearth company in the world and owner of four top brands in the industry (see timeline at right).

To that stable, it has just added VCG and the Vermont Castings brand itself (a true icon), the Majestic brand (still the number three hearth brand in new construction), the Monessen brand and the Dutchwest brand.

The surprise wasn't that HNI had bought, it was that Ricardo Leon had sold.

Under prior management, Leon was the CFO. When it appeared that owner Riverside was ready to walk and put the company into bankruptcy, Leon stepped forward, convinced Riverside to forgive debt of $100 million (which would have occurred anyway in a bankruptcy) and assembled a team of industry pros around him as he prepared to pare the company back to profitable size.

Leon took ownership in June 2013 and, over the next 14 months, that's exactly what he did. But even with new bank financing, it was a struggle. Product was shipping late, quality was down and dealers were unhappy.

That's when Ricardo Leon decided to sell, and HNI decided to buy.

Hearth & Home caught up with Brad Determan, president of Hearth & Home Technologies, a division owned by HNI, and the person to whom Ricardo Leon now reports.

Hearth & Home: That HNI is the new owner of the Vermont Castings Group is a pretty big deal. Is that how you view it?

Brad Determan: “From our perspective, it's pretty much more of the same. It's more brands, more product solutions for more customers that add value for everybody involved. That's what we've been doing for going on 20 years and this is more of the same. When it was under its prior ownership - Riverside - it was pretty confusing to us what they were doing.

“We were a customer of the cast-iron plant (in Vermont) and really didn't have very good communication lines; we didn't really understand the business model that was being applied under Riverside, and when that changed hands and Ricardo and his team started to refocus the company back to core hearth products, and started to turn the company around, that caught our eye. That's why we're here now and how we got interested. I think they are doing the right things and we're interested in helping them do that and making two and two into five.”

What was it mainly about the Vermont Castings Group that made you want to own it?

Brad Determan: “Well, the brand names are fantastic. There is another suite of product solutions there that I think we can build on, and provide more opportunities for our existing customers and our new customers. Given the way that Ricardo and his team have refocused the business on core hearth products, that's what we're all about.

“We have passion and commitment to the hearth industry and, once it was clear that that's where this company was heading, okay, that was interesting to us and we think we can help stabilize and get these brands back on a growth path and help tune up the back of the business.

“The production side of this business has been - I want to be kind here - not well treated for some time and I think that's something we understand pretty well and we can add value.”

That seemed to be where they needed the help, in terms of being able to deliver a quality product in a timely manner. That surprised me because I thought they had very good people running manufacturing.

Brad Determan: “Oh, I can tell you first-hand there are a lot of good people in this business (VCG). I've spent virtually my entire days all last week meeting and talking to people and there are lots of good people in this company; that's been the case every time we purchased a company. Ricardo has agreed to stay on and his team is staying intact, and we're going to add a few key players from our side of the coin. But there are dozens of very talented people here.”

I'm still surprised that they had this many problems being able to deliver a quality product on time.

Brad Determan: “Well, I think - and again I want to be reasonably respectful - their prior ownership, the bankers and lawyers crowd, didn't help them a bit. They were getting poor leadership and were fighting for survival. They were managing for cash and frankly it wasn't working. By the time Ricardo and his team got hold of it, it was on its death bed. They haven't had a fighting chance to really implement anywhere near the level of operating effectiveness that we have.

“What they've done is to make some very nice structural moves on exiting Mexico and refocusing on core business. They've done a lot of things right, and given the financial distress they've been under, I think they've made great progress.”

I thought that once they had shed about $100 million in debt, found a new bank to work them, plus divesting of the plant in Mexico and distribution facilities in Canada and Texas, they would have been pretty healthy financially.

Brad Determan: “Actually that was a great start but there are still significant opportunities to improve the performance of the business.”

Now you have just added the Majestic brand that goes into new construction, as well as a bit of specialty, and to a lesser extent the same is true of the Monessen brand. Do you really need another brand in that channel?

Brad Determan: “When you say the word ‘need’ it's hard to define that. Does it give us and our customers more opportunity? You bet it does. So there's nothing wrong with having another strong brand on the new construction side of the business. There is a lot of business out there. There is a lot of distribution. There's a lot of segmentation in the housing market in terms of geography and price points. So I feel good about that. I think that helps all of us.”

How would you rank the four fireplace brands you now have in terms of a good, better, best positioning? I've always looked at Heat & Glo as the flagship brand, the one that I would say is the high end. But where would you go next - Heatilator then Majestic?

Brad Determan: “I don't know that we've gotten that far yet. If you look back at Heatilator and Heat & Glo as number one and number 2 in brand awareness preference and usage for new construction, right behind that is Majestic. So Majestic still has a nice brand presence in new construction and I think we can work with that.”

What about dealers? Are you able to tell me how many dealers HHT has in North America, how many VC has and what kind of an overlap you have there?

Brad Determan: “I would be guessing on the numbers, and the overlap. I don't have that data. I think it's less than you think, but there is more overlap probably with Vermont Castings and some of the other stove lines than anything else.”

“What I can share with you is that we have a lot of confidence regardless of how much overlap there is. This is going to be a healthy transaction. There are lots of brand opportunities on dealers' floors. We share the floor with many other manufacturers on most of our dealer floors and we're okay with that. We're happy to compete for dealer business with anybody.”

Through the years I've heard many different owners of Vermont Castings say, “We're going to bring back the luster that once was VC.” So far it hasn't happened. Is that a real target for you, because there are many dissatisfied VC dealers out there who probably were excited when Ricardo and his group took over, thinking that these guys are going to make a difference. Is that going to be one of your goals?

Brad Determan: “Absolutely. It's one of the assets of this business. The combination of the Vermont Castings brand and the physical asset, the foundry, is one of the real attractions to this business. It just makes perfect sense, and it's part of why we became more interested in it after Ricardo took over.

“Although the VC brand has been a competitor of ours, it still has been painful to watch how mistreated it has been for the last 10-plus years. I think it still has major legs and opportunity and we're delighted to have it in our portfolio.

“I'll be really disappointed if we can't do what you just said - bring that brand back to life, buff it back up, get some products flowing through and get the dealers promoting that brand again. That is absolutely part of our objective here.”

It amazes me how much that brand still resonates even though no one has spent a dime on consumer advertising to support it in decades and decades.

Brad Determan: “I couldn't agree more. When you look at Harman, that's a very similar situation. You could argue Harman didn't originally have the cache that VC had, but we love where Harman has gone. Quadra-Fire is the same thing. I started in the industry with Heat & Glo, so I think we understand the importance of strong brands.

“One of the things that's interesting to me is how we get branded in the industry. I mean just because we're the biggest, people tend to think that we don't have passion and the heart for this business. The VC brand is a fantastic brand and we're going to rebuild it. That's where our head is.”

I'm thrilled to hear you say that. Actually, I look at VC as the Big Green Egg of its era - or vice versa - and right now that company has established a cult following. Their Eggtoberfest, held in Atlanta every year, now attracts upwards of 2,000 loyal Eggheads.

Brad Determan: “I've heard some stories about those kinds of events here in Vermont, and you should never say never. That event might come out of the closet again.”

Ed. Note: In 1981, Vermont Castings held a party in a Vermont farmer's field; it attracted approximately 10,000 VC stove owners. They ate, drank and discussed the benefits of various tree species to use for heat. It was a bit like a rock concert.

You've said that you're sticking to the hearth business. Does that mean you're not interested in the Vermont Castings barbecue business?

 L to R: Richardo Leon, Brad Determan, Robert Wright and Rick Grant.

Brad Determan: “Well, sort of yes and no. What we're seeing now is that the barbecue appears to be an important product category for our customers, particularly our wholesalers and our dealers. So we're committing to making that product available to them. Where exactly we're going to build it and how we handle design going forward, I would say is still up in the air.”

When Ricardo took over, were you one of his foundry customers at that point?

Brad Determan: “Oh yeah, you bet.”

What were you having cast there? Parts or appliances?

Brad Determan: “Stove parts. Parts for Harman and Quadra-Fire have been coming out of there for quite some time in certain quantities. We've had our cast-iron supply lines spread across the globe here and there, so there is a lot of attraction for a much shorter supply line. Buying cast iron, which typically is made in batches, and then putting it on a ship for six weeks is just not a very good plan. So we've been working with these guys for quite a while to bring more parts out of Vermont for Harman and Quadra-Fire.”

Are there other hearth companies presently customers of the VC foundry?

Brad Determan: “Sure.”

Plus they've always done a lot of other OEM stuff, such as Lodge skillets, for example.

Brad Determan: “The investment in a foundry and the fixed expenses are pretty significant. So keeping this facility reasonably loaded is important and we will continue to try and do that.”

What have I not asked that you would like to get out?

Brad Determan: “I would just leave it that this is what should be expected of Hearth & Home Technologies - more brands, more product solutions for more customers, and adding value for everybody involved. We're going to give the customers better and more product solutions. We're going to give our stakeholders better returns, we're going to give our members a better place to work and we are going to give our preferred suppliers more business.

“Frankly, it (the purchase of the Vermont Castings Group) has been fairly quiet. I think it's kind of noteworthy, but I don't think it's a big surprise or earth shattering. We should expect more of the same from Hearth & Home Technologies. It's a great business and we think we are decent at it; we've got a great bunch of members (employees) here that we just added, and we're going to give it a good swing.”


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