MILLS SEEK SOLUTIONS TO THEIR ILLS
Byline: Scott Malone
NEW YORK — What’s next?
After last month’s one-two punch — the bankruptcies of Burlington Industries and Malden Mills — textile executives are losing a lot of sleep wondering what the months ahead hold for them.
Many mill executives said the slide toward bankruptcy will probably remain a common theme in 2002. While Burlington was the largest mill to file for Chapter 11 protection this year, it had plenty of company. Over the past 12 months, Worldtex, Thomaston Mills, JPS Apparel Fabrics and CMI Industries all declared themselves bankrupt. JPS later closed its doors, and several other mills have either taken the ax to their operations or simply turned off the looms, sent workers home and hung a “closed” sign on the front door.
The factors that drove those companies to insolvency — falling demand for locally produced fabrics, evaporating profit margins and heavy debt loads — effect all U.S. textile mills to varying degrees.
Executives at surviving companies are looking closely at their operations and their competitors around the world, trying to find a new path that will allow them to survive in a fiercely competitive market. Some textile companies — notably Burlington — are trying to follow in the footsteps of major apparel brands and contract their production to lower-cost manufacturers. Other firms continue to work on providing full-package garment production services, though mills have found mixed results in this area.
One thing no one is forecasting is a quick turnaround in the economy. While the official recession began in March, mills had been suffering long before that. Executives differed on when a recovery might begin — some are hopeful to see a pickup as early as the second quarter, others don’t expect to see much improvement in the economy until the end of 2002 — but all agreed that it’ll take more than a modest increase in consumer spending to save the domestic textile industry.
Keith Hull, president of marketing and sales at Avondale Mills, said the downturn in the economy and the drop in retail traffic of the past few months would only worsen the state of the textile environment.
“We’re going to see more of this,” he said, referring to the recent bankruptcy filings. “Whether it’s an ugly year ahead of us, I hope not. But this year is not over yet. It’s going to be a relatively slow start to next year.”
He said the grim economic outlook might prompt other mills to seek court protection before their lenders come swooping down on them. Referring to Burlington, he said, “If they had thought [the economy] was going to uptick enough for them to get by without filing, I’m sure they would have held off.”
When Burlington filed, its balance sheet showed $1.05 billion in debts. To illustrate its cash crunch, total sales for its fiscal year ended Sept. 29 were $1.4 billion.
For comparison, according to filings with the Securities and Exchange Commission, when Avondale’s fiscal year ended in August, the company was carrying $229.7 million in long-term debt. Its sales were $772.8 million. It has also been profitable for the past three years, while Burlington has not.
Still, Hull noted that most textile firms have been making major efforts to restructure themselves in recent years — closing aging plants, laying off workers to cut costs, exiting unprofitable market segments and finding new areas in which to expand. Companies that successfully restructure their debts could well find a way to survive, he said.
That’s Burlington’s plan. Chairman and chief executive officer George Henderson said the company hopes to emerge from bankruptcy in 12 to 18 months.
While Burlington hasn’t yet laid out all the details of how it will restructure itself, it recently opened a new Hong Kong-based unit, called Burlington Worldwide Ltd. That business will operate as a contractor, hiring other companies in Asia to produce fabric at a lower cost than Burlington could in the U.S. for sale to customers who are manufacturing their clothing on the region.
“We see ourselves being much more valuable to our customers in the future if we can sell not only what we make, but whatever the customer might need, in terms of offering a lot of different price points, etc.,” said Henderson.
Texfi is also taking the outsourcing road.
The mill went into bankruptcy last year and is winding down operations at its remaining plants, which are due to be liquidated this month. Some form of the name — possibly “Texfi Marketing,” though it’s still subject to bankruptcy court approval — is expected to live on.
President Andrew Parise expects to be part of a new company that will be a marketer of fabrics.
“You have to do business differently going forward,” Parise said. “Owning all the brick and mortar isn’t the way to go in the future.”
In its next incarnation, New York-based Texfi will sell domestically made fabrics, including those of gray mill NRB Industries, but also import fabrics from Indonesia, Taiwan and Korea.
“The Asian products that we will import will be in addition to our domestic goods,” Parise explained. “They will have different styling or be products that aren’t available in this country.”
One of the more vocal fans of the outsourcing model is consultant Nick Hahn, of Stamford, Conn.-based Hahn International Ltd.
“In my view, it’s the only viable way in which an American textile company can compete with Asian mills. If you can’t lick ’em, join ’em,” he said. “If an American textile mill is able to set up relationships with yarn manufacturing or gray goods sources in the Far East, or in other parts of the world that are price competitive, they may be better off doing that than trying to sustain their own facilities here in the States.”
He acknowledged that it will likely prove psychologically challenging for mill executives — who have operated as manufacturers for so many years and are heavily invested in plants and equipment — to make the switch to a contract model.
“This is going to be a new world for these textile guys and most of them are convinced that no one can make yarn or fabric as well as they can,” he said “That may or may not be correct, but the reality is that if they can’t produce at a competitive price with what they could source in Pakistan, then they’re kidding themselves.”
Still, even as Hahn preaches the gospel of outsourcing, he’s not encouraging mills to shut all their U.S. plants. He said he believes companies should purchase gray fabrics from foreign suppliers, but dye and finish them in their existing plants.
“Gray goods and yarn, that is a commodity area and that is where the real price competition is. When you get into the dyeing and finishing, you’re adding a lot of value,” he said. ‘Dyeing and finishing is as much art as it’s science. It’s a very touchy-feely kind of a process. I have a feeling that the dyeing and finishing end of the business will at least remain in this hemisphere, if not in this country.”
That’s not quite the model Burlington is looking at. Its intent is to hire Asian mills to produce finished fabric to Burlington’s specifications to sell to companies that are going to cut and sew the fabric in Asia.
Some of Burlington’s competitors aren’t convinced of the soundness of that strategy.
James Martin, president of Dan River Inc., said he’s explored the outsourcing idea, but has not found good opportunities.
“It’s a model that we’ve looked at,” he said. “You’ve got to ask the question, ‘Does the apparel manufacturer need you to do that?’ So many of the apparel manufacturers already deal directly with textile mills and garment operators in Asia. Why do they need you? That’s the critical question. Do you have competencies and patents and design capabilities that maybe those textile and garment operations could use in combination with you?
“In the areas where I’ve looked to do exactly that, I’m finding the customer I’d want to sell that product to is already dealing with those mills, say in India, directly. So they don’t need me.”
Further proof that there are no clear answers to the textile industry’s problems is that Dan River is instead trying its hand at a business that has burned other mills — full-package garment production. Last year, it opened a shirt plant in Mexico, which Martin said has been performing satisfactorily so far.
Galey & Lord this year pulled the plug on its garment plant, finding that it was a difficult operation to make profitable. Textile executives trying their hand at the garment business have become frustrated at the lower levels of productivity in the labor-intensive sewing business, compared to the more automated fabric sector.
For instance, switching from producing one style of pants to another at a garment plant can take more time than switching from running one variety of denim to another at a mill.
“I don’t think we’ve had any issue there, just because we’re not running it with textile people,” said Dan River’s Martin. “We’re not trying to put in textile disciplines. We’re putting in garment disciplines.”
He added that it’s helped the Danville, Va.-based company to attract new customers who previously had produced all their garments in Asia, but liked the idea of having some manufacturing closer to the U.S. consumer market.
“They’re interested in getting some worldwide sourcing balance to their requirements,” he said. “They need some sort of a balance if they are 100 percent in Asia. Is it going to be 50 percent [in Mexico]? No way. But 10 percent, 20 percent? Yeah, that’s reasonable.”
The value of having some local production became apparent this fall following the Sept. 11 terrorist attacks, when the Customs Service stepped up security at the nation’s ports, causing some shipments to be delayed. Sourcing executives also paused to consider whether they wanted to spend as much time traveling overseas, while the U.S. was conducting a military campaign against terrorists.
That sparked renewed interest in Caribbean Basin production. A trade law passed last year allows garments made in that region using U.S. fabric and yarn to enter the country duty- and quota-free. Several executives said they’d seen their shipments to the CBI region rise this year and expect the trend to continue.
“We’re shipping much more towards that region,” said Neal Grover, president of the wool mill The Forstmann Co. of New York. “It seems to be growing every quarter.”
While Malden Mills filed for bankruptcy protection last week, the company said it will continue to operate as usual while it works out an agreement with its creditors. Part of that company’s focus is on building its presence in the CBI market.
Cesar Aguilar, senior vice president of sales and marketing worldwide at the Lawrence, Mass.-based mill, said his company has increased its shipments to the Caribbean.
“People are realizing that CBI is important because if we start cutting closer to home, the turnaround time for product is faster,” he said. “Quality checks and other things they need to do are closed and less expensive to manage.”
Another question facing executives is what will happen to the plants and equipment of their rivals who go bankrupt or out if business. While many observers argue that there is too much textile manufacturing capacity in the U.S. and that the best thing to do is to allow those plants to be closed and converted for another purpose, some suggest that smart companies could cherry-pick the best plants of stumbling competitors and use those assets to make themselves more competitive.
Hull of Graniteville, S.C.-based Avondale said one thing that might scare companies away from acquisitions of any kind is the possibility of having to take on more debt.
“It’s hard to get a stomach for an acquisition that you have to leverage up to do, even at bargain basement prices. If you have to increase debt load to buy something, I don’t think that’s a wise strategy,” he said. “Also, not all the assets out there are modern. There’s some that I don’t think we’d take as a gift.”
Since a lot of U.S. manufacturing capacity was shut down this year, it leaves many executives confident they will be able to at least maintain their sales next year and some are planning for growth of as much as 10 percent. They also said that since retailers and apparel vendors have spent much of this year cutting back their inventories, the industry is well positioned to ramp up production again when consumer demand picks up.
The question is when that will happen.
“Inventories throughout the pipeline are in relatively good position because nobody is buying anything [commercially],” said John Heldrich, president of the Atlanta-based Swift Denim division of Galey & Lord. “Any type of improvement will start a return to normal buying patterns. That’s what we’re interested in, some type of return to normalcy.”
Heldrich said he defined “normalcy” as about 5 percent growth in retail spending. But he was reluctant to guess as to when retail growth might resume.
“Hopefully, there is some retail pickup over the holidays, which is anticipated, and we can get back to doing business the way it should be done,” he said. “But it’s so hard to project, because the world has changed so much since Sept. 11.”