Interim CEO Jeff McCreary Discusses Recent Changes at Isola
Isola’s Interim President and CEO Jeff McCreary explains to Barry Matties the impetus for the personnel reduction taking place at Isola, the closing of their northern California facility, and why there’s no need to panic. He also shares his view of what the industry may expect from Isola going forward and what the company is looking for in a new CEO, the name of which McCreary expects to announce in the next few months.
Barry Matties: Jeff, there’s a lot of speculation as to what’s going on at Isola and the condition of the company. People are hearing that there are layoffs and you closed a Northern California manufacturing facility in Elk Grove. Please start by talking about that.
Jeff McCreary: The first and probably most important thing for you and the readers to understand is that Isola is in very good shape from a financial perspective, and we’ve been profitable throughout this round of layoffs. The last couple of years have not been real kind from a revenue standpoint, and that puts a lot of pressure on us, but some of the changes that you see taking place have more to do with being operationally excellent in delivering not just acceptable results, but best-in-class financial results, and not addressing some crisis.
What might be adding some concern to it possibly starts with the leadership changes. Ray Sharpe, the longtime CEO, announced very early in the summer that he was retiring, and this was done in complete coordination with the board, which had a good process in place to do it. At the same time, we actually had a CFO who was more senior than Ray in the context of years of experience, and his perspective was, "Time for me to go as well." At that point in time, basically through a set of strategic reviews and discussions, two board members came in to provide some leadership and energy around a number of strategic initiatives that we felt needed to take place.
Donald Colvin came in to serve as an interim CFO, and I had stepped in to be the interim President and CEO as we went about conducting a search for the right talent to lead Isola forward. I cannot tell you enough good things about Donald Colvin. He’s extraordinarily smart. He’s very strategic in his thinking, and he’s really experienced with the complexities of the world of electronics, having been a CFO at ON Semiconductor and prior to that, Atmel Semiconductor and his tenure at Caesars.
He came to Isola after having been the CFO at Caesars, with its really complicated financing and debt issues that had to be worked through, and he’s just an extraordinary talent. He joined the board in 2011. He also brought strong institutional knowledge, at least from a board member’s perspective.
I joined the board in 2006, and at times, I’ve been the only independent director on the board of Isola because it’s privately held. I think with the combination of my electronics industry background and my knowledge of Isola, that we have a really good perspective to bring to bear.
What Ray knew we faced, and what Donald and I knew as board members, and then learned even more about and raised some urgency around, was that Isola’s manufacturing utilization rate was too low. This was especially true in the U.S. In 2015, our revenue was declining notably from 2014, and we hadn’t really resized things to match that. It was also pretty clear—and this is not a new trend, it’s well known in the industry—that the continued growth all comes out of Asia, and so we felt an urgency around pivoting towards Asia.
Those became our strategic initiatives: pivoting harder towards Asia, really demonstrating best-in-class financial performance, sizing ourselves more consistent to the revenue we were delivering, and addressing our manufacturing capacity.
Those strategic initiatives combined with the fact that a long-term CEO stepped down probably causes people to think, "Oh my gosh, there’s something going on." But the company is truly blessed. With the simplicity in context, we’re basically owned by TPG and Oaktree Capital Management, so we have really good, committed financial owners. They’re not pushing us to pursue an exit strategy. They’re trying to give the company the runway and the capability to be supremely successful.
Even in the light of the changes that we will be making, and I’ll walk you through those in a minute, a couple of things don’t change. Isola stands out, maybe most uniquely for your readers, in that we’re still by far the largest laminate producer in the Americas and in Europe and then, even with that, we have a big, powerful presence in Asia.
While there’s some great Asian competition that we have to take very seriously, the ones that have the ability to import products into the U.S. can be challenging for us financially at times. However, when it comes to building a relationship with OEM-decision makers and board shops, which are so important in the food chain, our strong presence here in the U.S. paired with our high-volume capacity in Asia, really makes the company stand out. None of that gets changed.
Matties: You mentioned declining revenue, year over year. What do you attribute the decline to?
McCreary: There are two dimensions to it. One is the market in general; it’s not been a great year for electronics in Asia. You can see it in some of the semi guys and board shops. We certainly got hit by that. In the second quarter, a lot of people really put the brakes on consumption.
One of the interesting trends is companies that we knew a decade ago but nobody thought of as equipment players. Take someone like Google. Now if Google says, "Oh, we’re not going to bring in as many servers to support our search activity," it has dramatic ramifications. Or, as an example, if China rolled out 4G base stations.
Those were right in the sweet spot for Isola in the higher-performance space, and we were impacted by that. In the high-performance space, we’re not as dominant as we were five or six years ago—there are some competitors. I would give Panasonic kudos. If you look at a product like Meg-6, it’s maybe our only challenging competitor, and that puts pressure on the company as well.
Matties: Did you miss your sales projections for the year or did you project the decline?
McCreary: The end plan for the company was to have really modest growth, and we were actually experiencing some shrinking. That has required us to accelerate some of these strategic actions.
Matties: I looked at some of your credentials and if I’m right, you were with Texas Instruments for a number of years and responsible for what was $12 billion in revenue at one point, which means that you’re coming at this with a solid sales and marketing background and a deep understanding of the electronics industry. It really looks like you’re coming at it with the label of a turnaround guy, if you will. Is that how you see your role right now?
McCreary: Perhaps in some respects, but I would probably hesitate to embrace that label. If you really ground over my resume, you would see repeated experience with improving the results of operations with some of the things I did Texas Instruments or the tenure that I spent as the interim president/CEO of IDT Semiconductor… I’m comfortable in that world.
Matties: That’s exactly what I noticed.
McCreary: I actually enjoy growing businesses more than sort of straightening things out—where there is an opportunity to make some strategic initiatives and a sense of urgency around them. Donald and I both have the experience and the will to go do some of those things.
In that vein, let’s just get to the difficult decisions that impacted human lives. As you make continued adjustments in the U.S. for example, as electronic manufacturing becomes more diminished here, the hardest thing in the world is when you know you take out direct labor hourly jobs because they tend to be really good jobs, and it’s not like those people have a hundred other great opportunities that they’re going to be able to pursue. So it’s painful to do it, but if you don’t take those steps, if you don’t run your company really well, then you’re going to screw it up for even more people.
So we looked at our manufacturing capacity. It really stood out that we just had too much capacity, especially in the U.S. Elk Grove, CA became the factory that was the best candidate to transition away from. The reason is that our Ridgeway, SC facility is bigger, it has more capacity, and it’s capable of building every product that we build in Ridgeway and Chandler, AZ already. It was the only site that really had the capacity to lean into in that way. You couldn’t take it out and put the volume into Chandler and Elk Grove. We made that very difficult decision and between now and the first quarter of 2016, we will be working with our customers to transition that production elsewhere.
It will be a nice transition. We try to give the employees as much notice as possible. It’s interesting, we took a little critique internally because they thought, “Well you should know exactly when I’m going to get relieved and when Mary is going to get relieved.” It’s a bit of a catch 22. Our collective decision was, we know we’re going to do this. We’re putting a plan in place now. Let’s give the employees as much notice as possible rather than delay 60 more days and then come in and look super organized and say this is the day you’re going to be relieved.
We’re in the process of working through that, but between now and 2016 we’ll close that manufacturing site. We are also going to take a little production out of Chandler, where our largest R&D lab is co-located and lean a little harder into Ridgeway. Chandler will pick up some of the quick turn activity that Elk Grove supports, so we are still able to provide that value to our customers moving forward.
It’s a big savings. I don’t want to declare a precise number. I’ll just tell you it’s measured in millions in terms of saving. It’s not like saving a couple hundred thousand dollars.
Matties: That is significant.
McCreary: Operationally it will make Ridgeway a much better site.
Matties: With the reduction of capacity manufacturing, is it about a 20% reduction you’re looking at?
McCreary: It’s interesting you say that. It’s about 20% if you include the square footage. We also have a glass fabrics facility in Italy, and over the last few years, they’ve been balancing their business a little more, trying to bring in some industrial production. They’re going to basically focus exclusively on that and transition away from electrical glass fabrics that we use. We have secondary suppliers for every glass that they make so it’s a non-issue from that standpoint, and candidly, we can buy glass fabric at a price that’s better than we can make it ourselves.
So we’ll also turn that facility to focus on industrial stuff. We’re open to what will happen with it long term. It’s not entirely clear. They may decide that the right thing to do is pursue more independence. We’ll see, that’s all to be determined, but we already told the employees there. Over the next six months or so they will be taking about half of their headcount out. The total square footage reduction does become close to 20%, and that’s notable and will be very helpful for us.
Matties: Has the price of laminate affected this as well? Is it pressure on pricing?
McCreary: Welcome to the world of electronics, right? It continues to be the most amazing industry ever created in the context of the amount of value it can deliver and the way it continues to drive pricing down. In our particular space, if you look at the combination of laminate producers, board fabricators and then EMS companies, sort of the manufacturing process in general, there’s plenty of capacity out there. And because we operate on pretty much fully depreciated resources, you have modest new capital that you have to invest. It’s a market that sees continual price declines, so that pressure is out there.
So you have to differentiate yourself, of course, and deliver higher performance product. It used to be thermal was the best way to differentiate yourself. That’s still a differentiator, but you see more and more people where signal loss, signal integrity, and the skews become super important. You’d probably have to go out between a year and two years from now and I think from an Isola perspective, Tachyon and Tachyon 100G is going to be the product that’s on everybody’s list, in that context.
It’s the same thing if you look at some of the strengths of a type of company like Rogers. They are very strong in the RF field and there’s clearly growth there. Those market elements demand a little higher performance and allow the laminate producer to secure higher prices. I think it’s also clear you are going to see a more competitive Isola out of these adjustments as well. We’re going to prove that we’re not afraid to compete. We have some product that’s similar to what Asia provides that they sell inexpensively. We’re going to prove to the industry that we have some offerings as well. We’re not going to sell a Ferrari for the price of a Volkswagen Beetle, but if the customer’s requirement is only a Volkswagen Beetle equivalency, then we’re going to deliver a competitive solution in that domain.
Matties: The goal is to match the product with the customer’s need, accordingly.
McCreary: Yes, and again, I think we just want to be a little more lean right now. Our manufacturing footprint is better, and we’re going to exploit that in the context of being a bit more aggressive with regard to the business that we’re pursuing.
Matties: For clarification, how many employees do you employ and how many have you reduced by?
McCreary: We are at 1800 full-time employees today after making a 15% reduction in overhead, which was primarily in the U.S.
Matties: And from the customer’s point of view, how would they feel that reduction in labor? Was some of this direct customer contact personnel that you let go?
McCreary: Every organization was impacted. That’s a fact. Some certainly more than others, but we have resources in place to call on everyone. I think you’ll see us lean a little harder on our distribution partner here in the U.S., Insulectro. They have a really skilled workforce themselves, with a lot of capability. They know the customer base as well as our team, and we’ll probably a lean a little harder on them, but we haven’t turned away from anyone as a result of this.
We consolidated some leadership. We rolled a couple of organizations together.Technical services, sales services and inside sales all are now under the one leader, which makes a lot more sense, to me at least. Independent of whether we took cost out or not, I just like that parameter a lot better.
Matties: What does it look like in the short-term future? Maybe one year from now? What can the industry expect from Isola? You’re going to be realigned and retuned?
McCreary: I think there are really three things that are going to look different. One is you’ll have a really extraordinarily talented new CEO in place. Donald and I will transition back to our role as board members so it will be nice continuity, but neither of us will stay in place. I have been super impressed with the caliber of talent that we have been able to attract. I believe that in the world of electronics there’s so much consolidation going on that there is talent available.
Secondly, there is a belief by everybody that they feel a lot of strong capability at Isola. It needs some fine turning, but everybody feels like, “I can go in there and have a very positive impact,” which is exciting for us as board members.
The third thing is that a lot of candidates really like the idea of being associated with Texas Pacific Group and Oaktree Capital. They are both super credible financial partners. That’s actually helped us to attract talent as well. You will see new leadership at the top, which can always be really exciting. You’re going to see a bit of a leaner and meaner Isola with a little stronger pivot towards Asia. Our new head of global technology is actually going to stay in Asia and although the bulk of our resources are going to be in the U.S. for quite some time, we’ll look to grow there rather than continuing to try and grow here. We’ll look to balance that a little better globally.
If you take the Tachyon 100G and Astra MTs of the world, you’re going to see we’re finally going to execute on best-in-class new product as well. I think that combination will allow us to not just stand out financially—that’s the easy part, delivering the great financial result—but it’s going to clearly make us stand out to our customers as well. Especially in the U.S., a lot of the big fabricators and OEMs actually like a laminates producer that has notable presence in the U.S., but then also has serious legitimate manufacturing capacity in Asia. It’s a card that we play that no one else can play quite the same way.
We’re continuing to invest. If you look at what we’re investing in R&D, we outspend our competitors and we’ve got an advantage because of that, which is proven if you look at the recent jury verdict in a recent infringement case.
Matties: Was that an $11 million award in your favor?
McCreary: The judge just entered that verdict officially. That is absolutely a last resort. You do not want to litigate anything.
Matties: I think the real testament there is that you guys are willing to defend your proprietary information and your patents, because they’re only good as deep as your pockets are willing to go.
McCreary: We’re not going to ignore the investment that we made. We’re going to protect it vigorously.
Matties: So you’re retracting or reorganizing because business conditions change and you have to change with it, or as you said, more people become impacted if you don’t.
McCreary: This is a great company with a long history. It’s profitable and it has remained profitable. We’re having a tough year, and we’re not happy with that. We’ve missed our original annual plan and we let this capacity situation sit a little longer than it should have. But we’ve got the will to take the right actions and that’s what we’re doing.
In the end, what you will end up with is a stronger, healthier Isola that can continue to invest in the right solutions and that helps the whole food chain. Whether you’re designing a backplane or you’re doing line cards with 100 gigahertz coming into the line card, or a 77-gigahertz collision avoidance system on a self-driving system on an automobile, you’ve got to have great partners.
Matties: How did you guys miss the mark? Were you just overly optimistic in your sales projections for the last period?
McCreary: I don’t know if there was one single thing that did it. I wish there was a single magic card I could lay on the table.
Matties: I was just curious going forward how you will avoid repeating the mistake or finding yourself in the same situation?
McCreary: I think we’re just a little more honest. In general, we had a couple of years of just being too optimistic. My experience with new products is they tend to grow more slowly than you think they’re going to. Knowing your current business, where it’s coming from, and what the trends are is almost backcasting as opposed to forecasting. You have to be a good backcaster. You have to really understand your current business. The things that change overnight, the one-offs, you should be able to know what those are and make an adjustment.
My history, and this has been true at every semiconductor company I’ve been at as well—I’ve served on three public company semiconductor boards as well as Isola—is that generally when you’re investing in a lot of new products, you overestimate how quickly that revenue is going to come to you, and at Isola we were probably no different in that respect.
Matties: I think we’re always excited when the new ideas are on the table and we always see the great success, but there are realities that set in over time. Are there any additional thoughts that you would like to share with industry that we haven’t already talked about?
McCreary: The last thing I would tell you is I still think there’s so much runway in the world of electronics for all of us. Now it’s different than it was in the heydays of semiconductors and board manufacturing, but look at a couple of trends like the personalization of electronics. When you think about the amount of electronics that you carry around and utilize nowadays—they are so personal and so much a part of your experience. You are always connected. And for young people, it is amazing the stats on young people and how many are active on Facebook and Instagram and Twitter and Fling, or whatever the social network of the day is.
That puts enormous pressure on the communications network and the compute network. It’s not going to change. People are not going to move away from these electronics. Then you add to that the efficiency that you get in the cloud. It’s really interesting because cloud computing storage has been a bit of a drag on the industry in this context. When you look at a software-defined network and you’re running multiple software apps up inside of those server farms or you’re sharing your storage space, your capacity utilization is basically twice to three times what it historically was even at a great IT shop when they had it all to themselves, whether it was Texas Instruments or IBM, Motorola or even Cisco. Before it went to the cloud, those servers didn’t run at the same efficiency rate as they do now and that almost worked as a suppression of demand for a few years. But what that really does is the whole system becomes more efficient and more affordable. That spurs further growth. I look at that and I get excited. There are also a couple huge trends right now. People right now use the cool language of the Internet of Things. That’s a pretty cool trend. The idea that now not only am I personally connected through a connected device, but everything I touch is going to get connected to the network at all times. Again, all that does is spur a need for more speed and more bandwidth. That’s good for people who make advanced electronics.
Throw in the trend of automotive electronics. We got a nice lift in automotive electronics as infotainment became more important. Now look at what can be done with collision avoidance technology. It’s just amazing. That’s going to take a whole bunch of electronics to pull off.
And they are complicated technologies. It’s very RF centric and it is wireless. You’ve got a car connected wirelessly. So again, that portends really good things to the higher performance side of the world of electronics as well. For those of us in the laminate space, we’re going to have to be competitive and feisty to be great. You’re going to have to fight for business for sure and you’re going to have to earn that value every day. I just think it’s still a great place to be.
There aren’t a lot of markets that have the runway left that the world of electronics has. I’m standing in the airport right now, I can see there are probably thirty people within twenty feet of me, and eight out of ten are doing something on a smart mobile phone right now.
Matties: I think electronics is just moving from its infancy to its next level because, when you look at electronics, it’s really only been for around the last 25 years or so that it began to reach the hands of consumers. Now you look at it, and as you’re pointing out, it’s really in the hands of consumers and growing exponentially.
As an example, we just put out our automotive electronics issue, which we called, “Cars, the driving force in electronics industry.” You’re absolutely right. When we look at the autonomous cars, the sensors, the displays inside, it’s truly a computer that you sit in that will take you places. It’s phenomenal.
McCreary: Yes, and that’s why you see companies getting into the automotive industry. A company like Apple is a credible one. When people say, “Apple could never get into the car business.” Well sure they could, because as you just articulated, it’s gone from a piece of transportation to a computer that just happens to have wheels.
We’ve seen this enormous personalization of electronics for an individual, but now it’s just going to be all kinds of other things and sensors that get connected in as well. The amount of connectivity is not going to change. I know a lot of people take a harsh view of electronics and how it’s changed our human interaction, and yes, I’m not going to say it’s not a distraction or whatever. But what we can get done with the amount of information we have access to and the personal connections that we can maintain, I just think that those connection points for all kinds of things in your home, in your life, is only going to accelerate. It will change our experience, but I think there is more good than bad when you go down this path.
Matties: Jeff, I certainly appreciate you taking time to talk with us and sharing your Isola story of what’s going on. We greatly appreciate that.
McCreary: I’m glad your readers are interested, and again I’ll just close by reiterating that we have a number of strategic initiatives that will make us a better company. We feel there’s some urgency with it, but it wasn’t because we were on a path to go out of business or anything close to that. We’re not going to accept being mediocre. You’ve got a very committed and aggressive board and ownership group that wants to be best in class.
For Donald and myself, we feel like we have a good steady hand on the wheel. We’re going to be there through the transition and then we’re going right back on the board. So we’re not going anywhere and I know we’re going to bring great talent in at the top. I’ve spent more time with the candidates than any other board member, as you might suspect, just because of the institutional knowledge that I’ve collected, and I’m very excited about it.
Matties: When do you expect the transition to take place?
McCreary: I’m 95% certain that we’ll announce it before the end of the year. But what we want to do is make sure that we evaluate and get the candidate we want. As you might suspect, every individual might have a different set of situations on how quickly they would be available and this is one of the reasons Donald and I stepped in. We didn’t want to choose someone simply because they were available next week. If we found what we felt was a better leader, but it might take a few months to navigate through the sea of change, we wanted to have that tool available that we could apply. We wanted to be judicious with what we were doing, and by Donald and I having the time currently to provide a little onsite leadership, that allowed us to do it. There’s urgency, but whether it is thirty days from now or sixty, it doesn’t matter.
Matties: When you look for a skillset in the leadership, are you looking for somebody that’s more systems based or marketing based? What sort of lens do you focus with?
McCreary: First and foremost, we did decide that we wanted someone who had proven experience based in the world of electronics. They didn’t have to be a laminator or a fabricator or an EMSI guy or a semiconductor gal, but we felt that somewhere in that food chain was very important. We wanted somebody who had demonstrated a lot of hands-on capability, had some turnaround experience, and had experience with complexity. We talked to a couple of people who had a primary product that they had tremendous success with. We were more intrigued by candidates that had to deal with hundreds of things, some of that complexity, and we wanted somebody that we felt had a deep appreciation for the business in Asia because so much of it is in Asia.
The other thing with Gordon, our former CFO, and Ray is they’re highly seasoned executives. I think we wanted to find somebody that would bring a cultural shift. Maybe a different level of energy that sometimes only youth can bring, but somebody that really likes getting in and energizing cultures, who is hands on, and has dealt with some product complexity and experience turning things around. Those are the things we are looking for.
Matties: Great, well I’m sure you’re down to a short list by now if you’re looking at making an announcement, so good for you guys. Thanks for taking the time to share what’s going on.
McCreary: Yes, thank you.