Calculated Growth

Fast-moving consolidators have grabbed a lot of headlines in 1997. While the swift win their share of races, the fable of the tortoise and the hare serves as a reminder that there can also be wisdom in a slower approach. The executive council of Zalev Metals Inc., Windsor, Ontario, has adopted that slower – and they would argue wiser – approach. They have grown through acquisition, but they will not acquire a company for the sole reason of increasing sales and tonnage figures.

"We’re building this company not for the short term, but for the long term," says Zalev Metals Inc. chairman and CEO Dean S. Zalev. Dean, 47, and his younger brother Maxwell, 43, who is president of Zalev Metals, have formed an executive council and a board of directors to guide the company as it implements its calculated growth strategy.

The council and board are part of a corporate structure under development that will allow Zalev to go public in the near future. As befits its management style, the company isn’t guaranteeing that a public stock offering is imminent within a month or two, but rather that it will occur when the time is right.

The company currently consists of two divisions. The Zalev Bros. Ltd. division operates a 50-acre ferrous yard in Windsor, a feeder yard in Windsor, a truck and container fleet under the name Far Western Trucking, a rail system consisting of more than two miles of track, as well as scrap brokerage services. The SLC Recycling division, based in Warren, Mich., consists of a 78,000-square-foot nonferrous processing facility and a feeder yard in Flint, Mich. Max Zalev estimates that 75 to 80 percent of Zalev Metals’ revenues are derived from the Zalev Brothers division with the balance coming from SLC. The two divisions combined employ more than 200 people.

Although they lead an 83-year-old company, Dean and Max Zalev are only one generation removed from their company’s founders. Their uncle Edward Zalev started a metals collection and processing company in Sarnia, Ontario, in 1914. His younger brothers Maxwell and Charles, father of Dean and Max, later joined the firm, which moved to Windsor in 1920. The company was known for most of its history as Zalev Bros. Ltd., the name that remains affixed to Zalev Metals’ largest operating division.

Charles Zalev, now 92 years old and chairman emeritus, guided the company for several decades and helped his sons learn the scrap metal industry beginning at an early age. Under his leadership, Zalev Bros. grew to become one of Windsor’s (and indeed one of the Detroit area’s) leading scrap processing facilities. The company was a pioneer in the manufacture of cold briquettes, going online with that technology in 1938. Four decades later, Zalev Bros. was also among the first to build and operate a hot briquetting plant.

The company’s growth and success during the World War II years caused it to outgrow its original Windsor site. The company purchased land for a new, larger site in 1946, just in time for Zalev Bros. to grow significantly during the post-war boom years. Recent purchases of adjacent land have created a complex with a total of 50 acres.

In 1993, Zalev Metals took all the necessary steps to make an initial public stock offering (IPO) on the Toronto Stock Exchange. Shortly before the IPO was ready to be made, the "Canadian small cap market evaporated," according to Dean and Max, and the company delayed its plans.

Last year, Montreal-based CAI Capital Corp. infused $25 million in investment capital into Zalev Metals. "They have been great partners," says Max. "They have allowed us to move forward in a way that we would never have been able to do without their involvement." The funds have been used to purchase a super-sized shredder that will be installed next year, to buy ownership shares from retiring principals, and to acquire SLC Recycling.

The SLC acquisition, which occurred earlier this year, was the largest ever made by Zalev Metals. The cross-border transaction greatly increased the company’s nonferrous processing volume as well as its presence on the U.S. side of the border.

According to Max Zalev, the synergies with SLC exceeded commodities and geography. "What we looked for was strong management. The result has been that we could turn our nonferrous business over to them. We’ve learned a lot from them," he says of former SLC owner Ansel Aberly and his staff in Warren.

Like Zalev Brothers, SLC’s history is a family story. Ansel’s father Herman and brother Paul started the company in 1946 from their inner city Detroit garage as a battery collection and lead recovery operation. By the 1960s, "it became evident that there was no way we could afford to comply with the strict and ever-changing environmental regulations concerning lead," says Aberly. The company had already branched out into aluminum and other nonferrous scrap (and into a larger Detroit building as well), and determined the time was right to exit the battery collection business.

The company thrived as SLC Recycling and by 1983 began searching for a larger facility, finding the right one just over the Detroit border in Warren. Their 78,000-square-foot plant is home to a series of sorting and processing operations for a range of secondary nonferrous commodities. "This is a manufacturing facility for scrap – there aren’t that many," says Aberly. "We laid it out to package and move scrap."

Aberly says one of the keys to his success has been stressing quality over volume (even though the volume has subsequently added up). Within the plant, for instance, a 60/50 shredder is manually fed aluminum scrap that has been sorted and analyzed to ensure that it can be sold to fit narrow specifications.

The Zalev quality track record was one of several features Aberly saw that made the decision to accept their purchase offer an easy one. "When I started thinking about it, the synergies became apparent. We will be able to house their nonferrous operations and it gives them some room for their auto shredding operations. We also picked up some very capable employees. And, for us to go out and get more manufacturing plant business, it was sometimes a handicap that we were not in the iron and ferrous business." Finally, the reputation and management style of Zalev Metals made the offer attractive, says Aberly.

During his 1992 presidential campaign, Bill Clinton’s campaign staff kept a sign posted prominently in their "war room" to remind them what the central issue was. "It’s the economy, stupid," the sign stated. When weighing a decision such as an acquisition or other strategic move, the central consideration of Zalev’s executive team can be summarized with a similar slogan: "It’s the people."

People who come to work for Zalev Metals tend to say with Zalev Metals – and often their family members join them at the company. One Zalev Bros. newsletter from earlier this decade features a story on seven employees – equipment operators and office personnel – honored for more than 25 years of service. These included one with 52 years of service and three others with 30 or more years of service.

"A company doesn’t consist of buildings and equipment," says Max Zalev. "The real value of a company can be found in its people." The company’s attraction to SLC was based not solely on SLC’s position in the market, but also because Dean, Max and the executive council had confidence in the nonferrous company’s leadership.

"They were clearly doing things here that worked," Max Zalev says of Ansel Aberly and the other managers at SLC. "We looked at this not only as an opportunity to grow, but also as an opportunity to learn."

From Aberly’s perspective, the relationship with the Zalevs has been positive. "It became evident from the beginning that Max and Dean did not want to disturb the culture. They know my business is not a building and equipment, it’s the people who have been loyal to me for years. They are what made the company valuable."

The existing corporate culture is cited as a primary consideration in any past or future acquisition targets for Zalev Metals. "We’ve looked at companies for acquisition, and if their operating style or type of management won’t fit – if the chemistry just isn’t there – we’ll walk away," says Dean Zalev. No major decisions such as acquisitions are made without the input of the entire executive council, he notes. "As we go forward when we’re looking at a transaction, we really need to have consensus among our group that the idea is something everyone can live with. If there’s even one unconvinced person, we won’t go forward," says Dean.

Another way Zalev Metals is drawing upon the power of top-flight personnel is in the makeup of its recently-formed board of directors. The prominent individuals serving on that board include: former Alcan Aluminum Ltd., Montreal, chairman David Culver; Roy F. Bennett, former chairman of Ford Motor Co. of Canada, Oakville, Ontario; CAI Capital principal Peter M. Gottsegen; and former Treasurer of the Province of Ontario Darcy McKeough. "We have a board of directors that is second to none in our industry," says Max Zalev.

The ability of Zalev Metals to attract such talent to its board speaks not only to its reputation within the business community, but also to the vital role it has played operating in the heart of the Great Lakes Region industrial basin.

The story of North American industry in the 20th century features the automotive industry in a starring role. For that reason, there are few better places for a scrap processor to operate than in or near the auto capital of the world. Located directly across the river from Detroit, Windsor has been among Canada’s leading auto manufacturing centers since Henry Ford and other American auto executives began establishing operations there in the 1900s.

Shipping costs may be a necessary expense for scrap processors, but access to nearby consumers such as southern Ontario’s many auto plants can certainly help keep those costs down. In addition to benefiting from proximity to Canada’s auto industry, Max notes that "there is free trade on scrap between the U.S. and Canada, and there has been for decades." Thus the company has access to prompt scrap produced at auto and supplier plants in Michigan and can sell to foundries there as well.

"There are Big Three plants on both sides that are important customers," says Zalev Metals Vice President Bernie Ziff. "We’re in Windsor, but we’re considered a Detroit scrap processor. It’s a very free-flowing system across the border. The truck driver hands over the paperwork and then keeps on going."

While some processors may have concerns regarding changing auto content and a possible shift away from steel, the recent SLC purchase is again cited as a positive in this regard. "It’s a great growth business. We’re very proud of that operation," says Max.

Dean Zalev notes that while a significant amount of the company’s business is auto-related, it is by no means the sole market. "We have very good relationships with the Canadian steel mills and area foundries, and obviously the boom in electric arc furnaces has been a positive." In 1996, the company shipped out processed scrap via rail and truck to 33 states, six provinces and to Mexico.

While access to major consumers may be the primary benefit of being in the heart of auto country, an added bonus came disguised as a challenge. The quality programs mandated by automotive and other manufacturers for their suppliers were met head on by Zalev Metals. "We jumped on the quality wagon in the 1980s. We were the first scrap company to achieve Ford’s Q1 for a full line of products," says Dean.

Max Zalev in particular immersed himself in the details of ISO 9000 and its successors as well as the "Q" quality programs devised by each of the Big Three auto companies. "Max was the guy," Dean says of his brother, who has led seminars for other suppliers and scrap processors on the quality programs.

In addition to learning from the international quality programs, Zalev Metals has taken many other steps to ensure product quality. The company operates not only a spectrometer, but also a "wet lab" that allows it to more closely analyze and identify scrap composition.

A tour of the Zalev Brothers office and transportation/dispatch center reveals the extent of the company’s 50-terminal computer network. Inventory is carefully monitored and tracked as are vehicles entering and exiting the yard. Every shipment entering the yard passes through radiation detection equipment and a videotaping system records the cargo of inbound trucks and archives it for a period of three years.

Says Max, "we’ve got a high confidence level in our product. We can ship it almost anywhere in the world. Our rejection rate is almost nil."

While Dean admits that "it wasn’t easy," he also notes that "our customers helped us see that it was a worthwhile goal. Thank goodness for the auto industry, it helped us get ahead on this issue. Drive around Windsor, you’ll see more quality flags than anywhere else."

Fittingly, in a region where cars are produced and assembled by the hundreds of thousands, Zalev Metals will soon be shredding obsolete autos in a Newell super-sized shredder.

While acquiring other companies is one way to grow, Zalev Metals is by no means neglecting its existing operations. Central to its growth plans is the installation of the Newell Mega Shredder. The foundation and housings for the shredder and its accessories are under construction now. The target start-up date is March or April of 1998.

Activity at the 50-acre Zalev complex is already beginning to form around the shredder site. "I think every contractor in town has a truck here," says Bernie Ziff of the construction activity at Zalev, both for the shredder installation and for renovations at the hot briquette facility.

In addition to the digging, wiring, and construction near the shredder site, a steady stream of crushed cars is delivered to the Zalev yard. The company is building up an inventory of feedstock on land surrounding the shredder. "At this point in time we have enough captive supply to operate the shredder for quite some time. This inventory will be consumed by the new shredder in its first year of operation," says Zalev Brothers Vice President Sheldon Jarcaig.

Jarcaig says that "a lot of the feedstock that used to go the shears will go to the shredder." The purchase of the super-sized shredder—one of just ten of its magnitude in the world—makes the statement that Zalev Metals is prepared to compete in a changing market.

Recent purchases by consolidators have shown that an impressive history is no guarantee that a family name will necessarily make it into the next century. The rapid changes taking place within the scrap processing industry have caused Max and Dean Zalev to spend the majority of their time (they estimate it at 75 percent) addressing strategic issues.

Dean and Max express confidence in their company’s future. "We’re in the game. That’s part of our strategic focus," says Dean. Without revealing any specific information, the brothers say that further acquisitions are likely. "We’re working on several things. A deal is never a deal until the money is in the bank. Until that happens we’re not announcing anything," says Dean.

The option of going public remains attractive, they say. "It offers access to capital. It provides currency for making acquisitions. There is liquidity for shareholders. There are compensation considerations for employees and executives," says Dean. Both Dean and Max point to their board of directors and new vice president Michael Bank, who is an attorney and an accountant, as key members of the team that can help them accomplish this goal.

Fiscal year 1998 is shaping up as a good year for the company, and they are timing the start-up of their super-sized shredder to coincide with the start of fiscal year 1999. "We’re very excited about fiscal year 1999, when we’ll have the new shredder coming on stream," says Max.

Max says he welcomes the trend toward consolidation in the industry. "It’s been somewhat of a Renaissance for the industry. It is a maturing of sorts. The industry is moving from a family business mode to one of professionally managed companies. I think a certain credibility has been gained by the scrap processing industry. The great interest in consolidation on Wall Street and Bay Street is driven by astute financial people who have recognized the strength of this industry."

Windsor has proven to be an ideal place to take part in this resurgence, according to Dean and Max. "We’re the hottest spot of economic growth in Canada."

Surrounded by prosperity, Zalev Metals has also flourished. "In five years, we’ve tripled our sales," says Max. "We’re excited about the future. We’ve got great accounts, great customers, a super supply base."

Says Dean, "We’ve now done a number of things to put our business in condition to move forward. We’ve made the right investments and lined up the right people. We have a long-term vision and we’re now beginning to make it become a reality."

The author is managing editor of Recycling Today.

Paper Trail to the Past