March 29, 2024

House Of Glass

David Poppe | 7/1/1996
It seemed like a good idea at the time. Ask Anchor Glass Chairman James R. Malone why he took his current job three years ago, and that's about the best answer he can give. In 1993, Malone left a comfortable position as CEO of Grimes Aerospace, a Columbus, Ohio, maker of airplane lighting systems, valves and engine components, to take the top job at ailing - some would say failing - Anchor Glass in Tampa, a subsidiary of Mexican glass maker Vitro S.A. Grimes was thriving and had been recognized as Boeing Co.'s "supplier of the year" in both 1991 and 1992. Life at Anchor, on the other hand, has been a perpetual crisis. So don't blame Malone if he sometimes second-guesses himself. "It seemed at the time like a pretty smart thing to do," he says a bit sheepishly. "Little did I know that the glass industry would be as lacking in fun as it's been."

Calling the glass industry "lacking in fun" is like calling shock radio host Howard Stern lacking in self-restraint; it's a wild understatement. Though Anchor is one of Florida's biggest manufacturers, with nearly $1 billion in annual sales, 13 plants across the U.S. and a 22% share of the $4.5 billion U.S. market for glass containers, it has been losing money at an alarming pace: $98 million in 1994, followed by $66 million last year. Malone acknowledges Anchor will post another sizable loss this year.

The major problem is one that can't be fixed: soft drink giants Coca-Cola and Pepsico switched all of their domestic bottling from glass to less expensive plastic over the past decade. "That has been a huge loss for the glass industry over the last several years," Malone says.

In fact, it has forced a massive contraction of the industry: in 1980, there were 121 glass manufacturing plants in the U.S.; today, there are 62. Malone says 10,000 industry jobs were lost in 1995 alone. Glass' share of the packaging market has fallen from about one-third to one-fifth since 1980. Anchor closed three plants in 1995 - in West Virginia, Illinois and Southern California - and a fourth in January, in New Jersey. When Malone took over at Anchor, the company employed 7,400 people. Today, some 4,900 workers remain. "That is the unpleasant, ugly part of doing this, and the only thing that keeps you doing it and moving forward is that you know it is required if the company is going to survive," says Malone.

For the time being, at least, one plant that won't close is Anchor's Jacksonville facility, which employs 350 people earning some of Florida's best blue collar wages - an average of $14.15 an hour in wages, plus $12.74 or so in benefits hourly. The Jacksonville plant supplies Anheuser-Busch's local brewery with bottles. Anchor also employs about 320 people at its Tampa headquarters, and Malone says those jobs are safe for now.

Despite the layoffs and plant closings, Anchor may not be nearer to a recovery now than it was when Malone started. Anchor's sales fell by 3% in 1994, to $1.09 billion, and then dropped to $957 million last year. This year, Malone expects sales to bounce back to 1994 levels, but Anchor won't make any money on its increasing sales. Because of manufacturing over-capacity in the U.S., margins are almost non-existent. Anchor spends nearly 95 cents on manufacturing costs for every $1 in sales, making it impossible to cover corporate overhead or interest.

Worse, time is running out on Malone and his management. Anchor restructured its huge debt earlier this year, obtaining a $130 million line of credit from Foothill Capital Corp. and Congress Financial Corp. It used $80 million of the proceeds to pay down principal on long-term bonds that were due this year and next. The move bought Anchor time, as it won't have any more required principal repayments until 1998. But the company at this point has stockholders' equity of less than $290 million and long-term debt of $473.6 million. If the losses continue, Anchor is going to be hard pressed to repay the principal on its debt as it comes due, much less to borrow more. Standard & Poor's gives Anchor Glass a corporate credit rating of "B," which is below investment grade and prevents fiduciary investors from buying Anchor's bonds. "The sense of urgency, I think, is a real one for the industry and for Anchor," Malone says.

Microbrewers, microprofits

Anchor also suffers from a much weaker competitive position than its number one rival, Ohio-based Owens-Illinois. Anchor and Owens-Illinois are among the largest makers of glass bottles and packaging in the U.S., but Owens-Illinois is much healthier. It had total 1995 sales of nearly $3.8 billion, including about $2.7 billion in glass sales. It is profitable, unlike Anchor, and has been using its extra cash to expand in Eastern Europe and Latin America, thus reducing its exposure to the shrinking U.S. market. Anchor, meanwhile, tried and failed to buy two smaller glass makers last year in an effort to improve its economies of scale.

If there is any good news, it is that the deterioration of the glass business seems to have stopped. Beer and spirits companies are not inclined to abandon glass bottles the way soda companies have. Anchor recently struck long-term deals with Coors Brewing Co. and Bacardi International. Also, the rise of specialty beverages, such as microbrewed beers, has created demand for distinctive glass bottles. Recently, Anchor produced a beer bottle for Coors in the shape of a baseball bat to be used in a promotion. Malone calls the project "a huge success."

Anchor's parent company, Vitro, is integrating Anchor's operations into its Mexican bottling subsidiary, Vitro Envases. Monterrey-based Vitro, founded in 1909, is one of Mexico's oldest industrial companies. It makes glass containers, flat glass, automotive glass, plastic containers, aluminum cans and some household goods. It bought Anchor in 1989 with a vision of merging it into Vitro Envases and creating a single glass maker capable of serving customers throughout the Western Hemisphere.

Progress has been slow, however. It was not until six months ago that Alfonso Gomez Palacio, the CEO of Vitro Envases, took over as CEO of Anchor. Malone, who had been Anchor's CEO, assumed the title of chairman.

Analysts, in fact, say the integration of Anchor's business into Vitro Envases has been too slow. Ro Kolakowski, an equity analyst with D.A. Campbell Co. in Los Angeles, says Anchor's only hope of achieving profitability is to pare its costs dramatically, because it can't expect much future growth. "Glass making is basically on its way out," he says.

Glass makers may have gotten a bit too optimistic about an industry turnaround in the early 1990s, he suggests, because Snapple and other iced teas and flavored waters created a boomlet for glass packaging. But now Snapple is packaging some of its teas in plastic. Kolakowski believes that if consumers accept the plastic bottles, the iced tea makers, who themselves are looking for ways to cut costs, will switch. "The first thing I think to go is the glass bottle," he says.

Kolakowski says Vitro and Anchor have been slow to accept the need for dramatic cost-cutting. "I think they are going in the right direction. I don't think they are going as fast as they could," he says. "The writing is on the wall. Glass is on the way out [and] there is just too much manufacturing capacity in the market."

Other assessments are even harsher. "They've been prehistoric" in restructuring, says Sarah Lavers, director of research at LatInvest Securities Inc. in New York City. "They've been promising a restructuring for three years. Every time there's a conference call they say ?we're restructuring Anchor and we're making an investment and this should do it.'" Lavers notes this started before the Mexican devaluation, when Vitro was in a better position to help Anchor. "I don't understand the pace," she says.

Too much debt

Lavers says her firm is dubious not just about Anchor's future but about Vitro's. Vitro's stock is up about 50% since December, but at a recent price of $7.50, Lavers notes the company trades at "bankruptcy levels."

And rightfully so, she adds. Though Vitro is well-run, margins are dropping industrywide. And Vitro is burdened by such a huge debt level - much of it taken on to acquire Anchor back in 1989 - that it can't afford to see its margins erode.

"They've burdened themselves with too much debt to buy a rotten company," she says of Vitro's purchase of Anchor. "I think the perception is they made the wrong acquisition at the wrong price."

For years, Vitro has been pumping money into Anchor, mostly to upgrade its aging manufacturing plants. In January, Vitro injected $40 million into Anchor and pledged $86 million more by the end of next year. While Vitro earned a profit for the first quarter of 1996, it is not in financial position to pump cash into Anchor much longer. It's short-term liquidity is acceptable - it has $1.15 in current assets for every $1 of current liabilities - but its total liabilities amount to 1.6 times stockholders' equity, not a good ratio.

Getting back to zero

Indeed, there are signs Vitro may be ready to give up. At Vitro's shareholders meeting in April, President and CEO Federico Sada said Vitro "had fallen short of what was needed to deliver higher returns to investors" and would reevaluate its glass manufacturing operations. The company, he added, would not add any more debt and would consider divesting any business not generating a 14% return on equity. That would suggest Anchor could go up for sale.

Meanwhile, Malone tries to make the best of a bad situation. Recently, Anchor entered into a joint venture with the Coors Brewing Co. to operate a bottling plant in Colorado that will supply Coors for the next decade. And Anchor's ties to Vitro Envases paid off earlier this year when spirits giant Bacardi contracted the companies to supply it with bottles throughout North America for the next five years, an estimated $350 million deal. Malone says that the further integration of Anchor and Vitro Envases should result in procurement savings of $12 million to $15 million this year, as the combined entity forces suppliers to accept price cuts. More plant closings could also be in store. "Anchor and Vitro Envases have a lot of duplication when it comes to costs," Malone says. "By putting the two together and managing them as one and by utilizing all of the common assets, it makes for a much better use of capital." There are a few bright spots on Anchor's horizon. Malone recently visited Washington, D.C., where he met with U.S. Department of Energy Sec. Hazel O'Leary. The DOE is helping fund research into making the glass industry more energy-efficient. Glass makers, who shape glass in 2700 degree Fahrenheit furnaces, are among the biggest users of natural gas in the U.S. Malone is also making some headway in his efforts to promote glass as more environmentally friendly than plastic.

Generally, however, the outlook for Anchor and its industry brethren is bleak. "I don't see the industry growing. I see the industry probably stabilizing itself in 1996 and 1997," with perhaps a tiny amount of growth after that, Malone says.

While Malone insists he doesn't regret his decision to leave Grimes in 1993, he acknowledges the unending pressure to cut costs takes a toll. "It is maddening for the first time in my life to be in a situation that seemingly has so many things going against it," he says.

Right now, he's taking heart that the industry has stopped shrinking. But he concedes that when it comes to good news, the glass industry doesn't have much to share.

Says a rueful Malone: "It is not very often that you'll talk to the chairman of a company who is happy that his industry has stabilized."

Tags: Florida Small Business, Politics & Law, Business Florida

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