Now that American Tire Distributors has successfully closed its $310 million deal to buy out Hercules Tire & Rubber Co., Tire Review editor Jim Smith met with ATD president and CEO Bill Berry to talk about the distribution giant’s plans for the private brander/wholesaler/exporter.
Tire Review: What exactly are Hercules’s operations in China, and how does ATD intend to leverage those going forward?
Berry: Well, they have a regional office there, I think staffed with eight people, and a 250,000-square-foot mixing warehouse where they accumulate the product and then ship containers either to their Hercules direct customers or to the TDW warehouses or to Findlay, Ohio, (Hercules’ main warehouse) as the case may be. So, they’ve got the warehouse operation and the local office over there that helps coordinate all the procurement issues related around that, but it’s still directed heavily out of Findlay. Findlay’s the nerve center for all the Chinese relationship management and product expansion, meaning different sizes and, truthfully, it’s a big area.
We at ATD are going to have to learn from them because we’re much less involved in that with our current brand offerings there. Part of what we saw as very interesting with Hercules is acquiring the technology they have relative to sourcing in China, where they’ve been there for 40 years. In no way does that mean we’re going to diminish our focus on Tiers 1 and 2. We are and always will be a Tier 1- and 2-focused company, but I really think we had a hole in our product stream relative to a well-known, well-built, high-quality value brand, and Hercules’s reputation in the marketplace was certainly a plus and the only reason why we would have even considered this. The brand was the primary motivator behind this. And we’re committed to continuing to develop and going to be very protective of it. We’re going to have to go through many education processes, utilizing the Hercules team to educate the ATD team on the value of a brand. Because in this value segment, so many times it migrates to it’s a tire and a price, and that’s not what [Hercules] has done with the brand. We don’t intend to change their focus on the brand, and we want to market it as such. You won’t see big changes immediately. It’s going to take us a while to educate our people, and our meeting in March will be the first step of really trying to educate our guys to what it is we’ve bought here.
TR: Gaining the Hercules brand, as you mentioned, as well as the Ironman brand and some of the other things that they’re involved in, what will be ATD’s future with regard to being a private brander? Is this a play into expanding into the private brand arena?
Berry: Yeah, we want to enter this segment, and we paid a very handsome price for this, so if we screw it up then there’ll be somebody else sitting here for sure. What we bought was the brand, and we’re committed to the brand. So yeah, we’re going to be a private brand marketer, not the seller of just low-cost tires. I’d say the core of our company – Heafner and Itco – were both private brand marketers. For those of us that have been around a long time, we’ve done this before and were very successful at it and still see an opportunity here. Hercules is a premier brand and gets good ratings. The product is good. We like the Cooper connection (Cooper produces some Hercules tires) and just see an opportunity to further develop it and grow the brand. And the Hercules folks, I think, are excited because they see us being able to provide more resources than they could provide on their own to develop it faster and expand it with the distribution. There are a lot of places in the country where there’s not any Hercules distribution today. We see that as an opportunity, and North Carolina’s one example of that. There’s really no Hercules distribution there. They had canceled a distributor a number of years ago and just never replaced that business.
TR: Do you see there being a supply problem, trying to expand the brand out?
Berry: No, I just think if you look at ATD with 120+ locations, and you were to say we’re going to put it all in there tomorrow and go everywhere, they don’t have the production lines geared up for that kind of surge. I don’t think there’s any shortage of product available through Cooper or through their sources in China, but those things have to be planned and monitored and developed over time. If you make a decision today, you’re at least 90 to 120 days out until you see the first change because supply lines are longer. Number one, we’ve got to learn how they’re doing it. Number two, we’ve got to figure out how do we begin to assimilate into the undistributed areas and so forth. So, we’ll be very deliberate at it because we don’t want to be a bad supplier. I don’t want to end up with fill-rate problems because we try to run before we’re walking. There’s no need to do that, so we’ll be deliberate in how we do that.
TR: What are ATD’s plans with regard to Hercules’s headquarters in Findlay and that operation?
Berry: As I said, that’s the nerve center from the Chinese sourcing part. We don’t have that function at ATD today. What we do there is handed off to people who have much broader responsibilities in other parts of the business. Secondly, we are dying for mixing warehouse space. So, the 400,000 square feet that they have in Findlay is ideally situated to deal with some other issues we have. We’ve already told those folks at the warehouse, hey, this 400,000-square-foot warehouse is going to stay. We’re probably going to expand it at some point. We’re also building a million-square-foot warehouse in California strictly for redistribution. That was coming on-stream even before we got talking about Hercules. We just enlarged it as a result of this, and we’ve had a lot of logistics work done relative to product we bring in from China today.
Even though we haven’t been a private brand marketer, we still bring in a lot of product, particularly in truck lines. They have a very good truck line that’ll augment what we’re doing. We’ve just got to figure out all the logistics and the supply lines and be deliberate and careful about it, so that we don’t screw up the customer base they already have. I don’t want to become a bad provider right of the gates to their customers, so we’re going to be careful. There’s no need for ATD to open a new customer in North Carolina if that means we service an existing TDW customer in a bad way. Over the next six months, we’ll have a great chance to review the lines, decide where we want to expand them, figure out what the long-term ramp-up on supply is and go visit with all these key suppliers.
TR: Explain a little bit more about how Hercules International operates and how it will be a benefit to ATD.
Berry: It’s a separate division, based out of Canada, and today they export to various countries around the world – the Hercules brand into Central and South America, Australia, Europe – and we see that as a huge opportunity for us going forward, once we understand what we’ve purchased. We were in Kitchener, Ontario, last week and one of the guys there said, “You know we have this warehouse, are we going to keep that?” I said, “Number one, I didn’t know we had one, and number two is understanding that in the due diligence process, we spent no time on the international business because other than reviewing the numbers we’re not going to change that business.” That’s not something we do. So, we were focused on all the things that impact either the ATD side or the Hercules side domestically. We need Hercules International to come and present it to us, tell us what they’re doing, where they see the growth opportunities, because we see huge opportunity for the brand to grow. They’ve done a nice job with it. They have a nice piece of business. They have relationships, and we just need to understand more about it. That’s a part of the business that we believe is critical to us in growing our business overall.
As you get to be a bigger company, the growth expectations each year continue to mount. Trying to grow your business $400 million-$500 million a year can be challenging. We want to always be thinking ahead on what’s next for us, and that may mean at some point that we have South and Central American warehouses that deal in Hercules brand. We’ve got to figure all that out, but there are some things with this that are kind of an expansion of our opportunities. They’ve got very good people working those areas. We’re hoping Bill Trimarco (Hercules president) will stay on for a long period of time. We’ve gotten to know him over the last three years, and respect him. His approach to the market is ours, and he’s very protective of the brand. He’s going to be around for an extended period to work on transition issues, particularly making sure we don’t run into some ditches along the way, relative to what our long-term strategy is for the brand.
TR: A little-discussed point in the whole deal is Hercules’ Canadian warehouses. How are those going to fit with regard to your TriCan business in Canada? Is this a net plus business opportunity?
Berry: Yeah, and as you know we’re going through a huge expansion in Canada. Neither the RTD warehouses nor the TriCan operations were large enough to put two businesses that size together. So, we’ve got a take all this into consideration. We’ve already started the expansion of some centers this year. We’re going to have the largest warehouse in Moncton, I think that’s 150,000 square feet out there. Their international warehouse will stay as it is. But we’ve got a lot of work to do on that, as well as here in the States.
We’ve got to figure out how the TDW and ATD warehouses coexist in several markets, very similar to any other acquisition we do. The thing we tell those people is that they’re valuable to us. We make sure that we’re always choosing the best. So, they’re not under any disadvantage from this whatsoever, and I believe one of the strengths of the company has been that there are people from all the companies we acquired today that are in very important roles within this company. We make sure we try to get all those who have either operational or sales expertise to become part of the team because they think differently, and it helps us model and change what ATD is. We tell them we’re a family of immigrants united under that one name. All of us are from different places.
TR: How did this entire deal come together? Did Hercules or its equity owner contact ATD, and what was the process?
Berry: We’ve gotten to know Bill Trimarco over a number of years and over the last three years we had discussions at different times about the industry and the business. We bumped into each other at the Bridgestone conference again last year and said, “Hey, we haven’t gotten together in a while, let’s sit down.” When a private equity owner has been in something since 2005, they are way past the normal timeframe, so in those discussions we just said, “If there’s any, anything we can ever do, we’d be interested in engaging.”
They reached back out to us and we met in November at SEMA. We were able to have some very good discussions and get this thing really signed up and have a term sheet by the first of December, with us able to do our due diligence and commit to closing by Jan. 31. We met all those wickets, and it took a lot of effort on their part to be able to do that, but they were very cooperative. They’re good. They have good management people and good relationships, and that just made this work very smoothly. Bill has been a great leader for that company. We were laughing about this, he said he hated to leave the industry, and we said you really don’t have to; if you want a long-term home here, we think that can happen and be a meaningful role. But he’s got to get to know us better, and he’s going to be around for an extended period of time to help us with the transition. They didn’t want to run a process (to facilitate the sale) really. You know, processes are messy and noisy, so we were able to come to agreement, and it was good. I think they would tell you it turned out to be a good investment for them, and we believe a good, one for us.
