Jeff Waters: Isola Updates

Nolan Johnson and Barry Matties, I-Connect007 | 11-08-2018

During PCB West 2018, Nolan Johnson and Barry Matties sat down with Jeff Waters, Isola CEO, to catch up on company activities, including the recent sale of the factory in Chandler, Arizona, the plan to build a new facility, product developments, current market dynamics, a new CFO, and much more.

Nolan Johnson: Jeff, could you kick us off with a quick summary and update on Isola and what they do?

Jeff Waters: Yes. We provide advanced PCB laminates and prepregs to the PCB industry, and are the number one provider in both North America and Europe. We’re a global supplier with manufacturing, technical support, and R&D in all three of the major continents for electronics, and do our best to bring value to our market leading customers through this global footprint. We have local R&D where market leaders innovate, such as in Germany for the automotive market, or the West Coast of the US for the Cloud market.  We have local quick turn production and technical support to help them prototype new products faster, and low cost volume manufacturing wherever in the world they choose to ramp.

Further, we have an R&D lab and team in Germany. That group’s focus is primarily in the RF space, including automotive. That's where a lot of the market leaders are, so having a team of German-speaking engineers to work with employees from the Tier 1 companies is always a benefit. In the U.S., we have our main R&D lab in Arizona within spitting distance—and at least half the year in the same time zone—as the Bay Area. Again, we have a group of English-speaking people that are on the same time zone that could be here in a heartbeat and work with them. In Asia, we have a lab in Singapore where the focus is on how do we take what we do, work with the supply chain in Asia, and make those products more cost-effective.

Our premise has always been that if we can execute well, we will be of differentiated value to the market leaders because of our global footprint.  We have facilities where we can get them almost anything we produce promptly. Then, when it transfers to Asia at some point at the volume production, we work with them to follow it over, make that transition as smooth as possible, and support them locally with our plants in Huizhou, Suzhou, or Taiwan.  We’re making progress in execution but it is a work in progress.

Johnson: What are some of the newest events happening right now at Isola?

Waters: First, I’ll talk about what’s going on at the corporate level, and then I can get into some of the things on the product side. At the beginning of this year, we announced a major capital restructuring of the company. When I joined the company nearly three years ago, you could see that the capital structure needed to be reset because we were greatly over-leveraged. We greatly simplified our ownership structure, and decreased our quarterly principal and interest payments by 90%, which helps dramatically with cash flow and being able to invest in our factories.

We also have a strong set of owners led by Cerberus Capital out of New York - a bank that has a lot of investment into longer-term markets like automotive or industrials. They have the broader horizon that we like with our investors and see us as a great growth opportunity due to the opportunity in RF for  automotive and global internet, and high-speed digital going into communications and the cloud.

More recently, we announced the sale of our factory in Chandler, Arizona. In tandem with that, we announced that we're building a new facility in the same area, which was a tremendous step for us as a company. The plant in Chandler is good, but it was built in the ‘70s when the market and our business was high volume and low product mix. Our business today is very different, especially for the West Coast. Within eyeshot of where we're sitting, you can see companies that have a very high mix of products that they want—such as high-speed digital and RF products, or more traditional mid- to high-Tg products—and they need it quickly because they're racing to get to market quickly. Our Chandler factory was trying to service a very high-mix, low-volume market with a factory that just was not a good fit.  If I go back to our strategy, the foundation of it is being a great provider to the North American and European markets. In North America, we were not being a great provider when it came to the quick-turn model. With the sale of the factory to Rogers, we will take the proceeds and put a good chunk of that into building a new facility. It will be the right size for what we need for the market and targeted more toward pressing and finishing, so we'll bring in the front end, prepreg, or the B stage and store it in refrigerators.

It's a good thing for us. We were a bit hamstrung by the factory. It was underutilized, not performing well, and losing money for us. This has allowed us now to create a factory that will be a shot in the arm for us not just in North America, but globally.

Barry Matties: Sounds like a decision that should have been made years ago, realistically.

Waters: Realistically, yes. It's a decision that we've struggled with since I've been here. It was losing money, but QTA supply to our West Coast customers is critical and we can’t do that as effectively from our plant on the East Coast.  The sale of the factory gave us the capital we needed to solve the problem – it was a great for Rogers as well.

Matties: But it stems from your capital restructuring and all these pieces that are here in play. It also gives you an excellent opportunity to build a smart factory as well. I know it's going to be tuned for the market, but what sort of strategies are you bringing there?

Waters: Cerberus, which has a lot of automotive companies in their portfolio, also has a group of ex-Ford and ex-Danaher professionals that are very well-schooled in Lean manufacturing. In the design of this factory, we're targeting more cell-based manufacturing bringing in some of the latest thinking. It will be very Lean and quick-turn with low inventories and fast cycle times.

We're doing that from the ground up, which is not something you usually see in our industry.  I can't recall the last time somebody built a factory in North America for laminates. Being able to build it from scratch will be a Godsend for us.

Johnson: You must have some customer demand in the forecast, with short lead times some cases. How are you planning to transition from one factory to another?

Waters: That has been at the top of our minds ever since we embarked on this path. Going back four to six months ago, we knew this was going to be the big task at hand. We shut down a factory in Elk Grove, outside of Sacramento, three years ago right before I joined. The company handled that transition very poorly. It caused a lot of pain for customers and internally. I came in soon after the shutdown, and it was one of the bigger headaches that I’ve had. We learned a lot from that experience—what not to do. A big piece of it is ensuring that we set up with the right inventories and material amounts that we know customers will need, and then supplementing that with a lot more air freighting from our factories in South Carolina and Taiwan until we get the new factory up and running.

The other key piece to it is to try and minimize the time gap between when we're out of the current factory and into the new factory. We're getting the gap down to months, and we're trying to make it as few months as possible. We have some great minds involved, and we've also engaged some customers to provide wisdom to help us make sure we don't miss any details. We're confident that we will be able to do it. We’ve budgeted for holding more inventory and all the negatives that come along with that from a cash and scrap perspective. Everything we’re doing should make this a painless transition.

Johnson: A lot of our readers are consumers of Isola's materials. What advice would you give them for working with you successfully through this transition?

Waters: Not everybody needs to qualify or requalify new material coming from a different plant source; a minority do. But when you do, our salespeople are already engaged, pushing hard to finish qualifications quickly. If we did need to iterate that, we should still have time to make sure we got that done.

Johnson: It sounds like you're already being proactive in identifying requalifications and making that process smoother.

Waters: Yes, we're receiving those orders as we speak on the requalification, so that's one piece. The other piece is where customers have unforecasted or one-off orders. As always, even with the situation we currently have, you still need more time with those kinds of orders, so we're asking them to highlight them. Make sure that you stay in close communication with our people. Our people are working hard. Many times, busy customers don’t spend enough time talking with our sales and tech support personnel as they need. Keep that boulevard of communication going.

The last time we spoke, I discussed the transformation that we were undergoing. As I described then, the company had been through a pretty rough decade.  The new product development engine at Isola was in bad shape and only got worse. When I joined, that was top priority: What do we need to do to get the new product development engine back up and firing.  The challenge was that we had a set of new products that were already out in the market, tough for us to manufacture, that didn't perform as well as they should have. We spent the better part of a year to a year and a half doing two things. The first was putting a better development process in place—a more traditional cross-functional product development phase gate process where you go through four or five different steps. At every step, you have a representative from manufacturing, quality, R&D, sales, and marketing making sure the product is ready to graduate. We have a sound process in place now, and we're already starting to see fruit from that.

The second big effort was fixing some of the challenges that we had with those products that had been released, and I'm very proud to say that as of March of this year, we fixed the last remaining challenges. For example, our Tachyon 100G product is now passing the most stronghent CAF requirements—which is one of the main reliability requirements that our communications customers and automotive customers have—with results that are putting it best in class. There's maybe one other supplier that has achieved the same level of performance with CAF performance as we have, which is a massive achievement for us as a company—especially since we weren’t able to even marginally pass in the past.

We wanted to go through the pains of getting those products ready first, so we had something to sell. There is still a growing market for our Tachyon 100G product. I wanted to be sure that we understood the sins and ills of the past so that when we're approving new products on the roadmap, starting development, and investing the millions of dollars that it takes, I could be confident we knew what we were doing.

March gave the blessing that we knew what we were doing, and since then, the roadmap has started to kick into gear. We have new products in development on the next generation of extremely low-loss products beyond Tachyon. We also have products in research for the RF space. Further, we have a compelling product in development in the high-Tg, thermally robust product space that will be great for electric vehicles.

There are a lot of exciting things going on, and we’re on the cusp of being able to talk about some of those products in a more deliberate and public way. We have great ideas and products, and OEMs are still very engaged with us. We now have an engine that can create those products and get them to market on time in a schedule. We’re bullish on our future.

Matties: How did you bring your team around? Did you bring in new people or reorganize with who you had?

Waters: In product development we essentially did a replacement from top to bottom; that's what it took. We now have our product development group broken into two pieces. First, we have a front-end group, which is our CTO organization where they work with customers on defining products and the roadmap and front-end formulations. They have chemists and scientists that come up with the formulations that will help create the resins that will go in the laminates and drive next-generation products.

The lead for the chemistry team is a relatively new hire, somebody who is well-experienced in the industry but came from outside of Isola. He was the guy who came in and quickly helped us fix our CAF issue with Tachyon 100G. The man who runs that organization, Ed Kelley, was with the company before in another function, but Ed came from Polyclad. From my perspective, a lot of the successes that we've had as a company came from the Polyclad acquisition. Putting him in more of a leadership position has been great.

Second, we have another organization run by Bill Mazotti who comes from the semiconductor industry and is well-schooled in the process of bringing products from ideas and first-pass samples, to how to make something that can scale into mass production. He's bringing processes and tools that we used in semiconductors going back to the ‘80s, but with a lot more rigor and a greater time reduction around how to get products to market as quickly as possible. He's also new to the company. It's been a pretty whole-scale change out for us.

Matties: You stepped into the organization when it was in pretty rough shape. How's the morale and the culture of the organization now?

Waters: I don't want to send the message that people are dancing in the streets, hugging me, and giving me their babies to kiss, but we're making good progress. One of the changes we made approximately six months after I joined was we moved from a regional organization to global one. We had a president of Asia, Europe, and North America. We wiped out that structure and went with one global structure. This has been tough, but was necessary to help improve corss-regional communication. I heard repeatedly from customers that we were very difficult to do business with when business and opportunity crossed regions. 

We needed to clean a lot of that up from sales communication to R&D communication—it was a lot of silos that were built from regions that were effectively competing with each other. We made the change to a global organization, and it was absolutely the right thing to do. We're seeing significant gains and efficiencies from it, but I'd be lying if I said it wasn't a painful change. As an example, our people in Hong Kong used to work normal eight to five days, but now they sometimes work from early in the morning with calls to the US, until late with calls to Europe. That said, we’re getting better at coordinating global communication and the challenges are getting less. It also helps that people are seeing the benefits of being a global organization.

The other ongoing morale challenge was in Arizona, where our corporate headquarters, R&D and factory are located. People saw that factory being utilized at about 20–25% capacity, and were expectgin a closure of it, and were concerned about the implications for their jobs. With the move that we made with the factory now, by the beginning of November, we'll be able to start talking to people specifically about what the address is and where we will be in the Chandler area. The factory that we’re building with also have the headquarters and a new R&D lab co-located with it. This sends a message to all of our employees in Arizona that we're there to stay.

The other announcement is we have a new CFO, Troy Ruhrer, who was our VP of finance. He's a long-time employee with Isola based out of Chandler, Arizona, so it's another indication that we're committed to that location. This is already starting to help with some of the uneasiness.

As for the other areas, we're starting to see more stability in the company. We've been able to stabilize revenues and profits, and that more than anything helps with morale.

I tell the story about how it's hard to get people excited when you're still sharing with them that revenues are shrinking and profits aren't growing. I likened it to the Golden State Warriors basketball team, which we’re very familiar with in the Bay Area. People would talk about their high morale and great culture, while they were winning at historic levels. They then had a brief period where one of their stars, Kevin Durant, got hurt. After on ly a few losses the team members fought with each other, and things began to fall apart. If you're not performing well, it's hard to keep morale high—even when you have a great culture.

Isola is starting to consitenly win, and we’re seeing more people get on board with where we're going. That is bringing a lift to morale.

Matties: I think it makes a big difference when there's clear alignment in a direction that people can start counting on and trusting. Your words are turning into actions.

Waters: When we came out with a corporate set of values, one of them is “be courageous.” It's something I've been harping on since I joined the company; it was part of the culture change. Historically, changes have been very hierarchical. We've tried to create more of a bottom-up culture. The “be courageous” piece is that if you see something that could be done better or something that we're doing that you disagree with or is wrong—especially if it's coming out of my mouth—we urge and expect our employees to speak out. We demand that. We're starting to see this happen now in the company. It's a slow boat to turn, but we're getting there.

Matties: Supply chain management is a big issue. Would you like to give any advice to manufacturers on how to best manage supply chain issues?

Waters: There are a lot of crazy things going on in the world with natural disasters and trade disasters. Being a company that has a global footprint, we must have the ability to be flexible, shift production, and do a variety of things to help keep our customers up and running no matter what the circumstances. I was in the semiconductor industry and living in Japan at the time when the tsunami hit in 2011. I saw firsthand the impact those kinds of events can have on the supply chain.

The beauty of Isola is that we are everywhere. We're in Europe, both coasts of the U.S., China, and Taiwan, so we can and will take care of you. If you had a bad experience with Isola three to 12 years ago, come back and try us again. We are improving and making things better every month. We’ve made enormous progress.

Matties: Thank you very much, Jeff.

Johnson: Great to hear from you.

Waters: Thank you.