Interim CEO Jeff McCreary Discusses Recent Changes at Isola

Estimated reading time: 26 minutes

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?Page 2 of 4

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