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Brian Hedges, CEO of Russel Metals, at the Hamilton plant. (Glenn Lowson for The Globe and Mail/Glenn Lowson for The Globe and Mail)
Brian Hedges, CEO of Russel Metals, at the Hamilton plant. (Glenn Lowson for The Globe and Mail/Glenn Lowson for The Globe and Mail)

Canada Competes

Russel Metals: Secrets to being a global leader Add to ...

It was early in 2009, and Brian Hedges couldn’t believe the numbers he was seeing. In his 15 years as CFO at Russel Metals Inc., he had been through his share of market cycles and had come to appreciate what he calls “the stability of the metals business.”

Then, just as he was readying his transition into the CEO’s office, the recession sent the company off a cliff: a 40-per-cent drop in volume in a single quarter.

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“I had modeled lots of scenarios to figure out how we would manage them,” Mr. Hedges said wryly, “but I can guarantee you that I had never modeled that kind of calamity.”

For Russel Metals – which operates an expansive network of metals service centres for the North American oilpatch, construction and manufacturing sectors – it had the potential to be a crippling blow. The Mississauga-based company reported a loss of $1.54 per share in 2009, compared with record profits of $3.68 per share just one year before.

Indeed, that lone bad year knocked Russel Metals out of the group known as Canada’s Global Leaders – the annual list of Canadian-based companies that rank among the world’s top five in their industry, compiled by the Toronto-based think tank Institute for Competitiveness and Prosperity (ICP). Suddenly, Russel Metals was poised to go from global leader to minor player.

But the strategy that had made Russel Metals into a global leader in the first place is also what saved it from catastrophe: fostering an entrepreneurial culture that can respond quickly to changes in the marketplace.

“That’s not easy to do in a large, publicly traded corporation with $3-billion in revenues,” said Mr. Hedges, who became CEO in May of 2009. “We make sure that our corporate staff are resources to the field, not dictators to the field.”

Mr. Hedges explained: “Head office negotiates price with suppliers, but never places the orders. I don’t ever want to hear one of my service centres complain that head office sent them a bunch of inventory they never asked for and can’t sell.”

That strategy allowed Russel Metals to bounce back fast. The company, already lean on inventory, was able to immediately scale back orders. “In the first quarter of 2009 we lost a billion in revenue, but by the second quarter we were making money again,” Mr. Hedges said.

In a mere two years, Russel’s revenues have risen from their low of $1.97-billion to $2.69-billion in 2011 – and a return to grace among ICP’s list of 89 Canadian global leaders.

The upswing continues. Last week Russel made its latest nimble move: an agreement to acquire Apex Distribution Inc., one of North America’s largest oilfield supply companies, with nearly $500-million in revenues generated through 44 locations in Canada and 14 in the United States.

Fewer than 20 years ago, Russel Metals had been the opposite of nimble – just one arm of Federal Industries Ltd., a 1980s conglomerate that had lumbered into the late 1990s with assets that included Cashway stores, the bookseller WH Smith, and the White Pass Railway, a relic of the Klondike Gold Rush that ran between Alaska and the Yukon.

Following a 1997 proxy battle, won by Prem Watsa’s Fairfax Holdings, most of Federal’s retail and transportation assets were divested and the company was renamed for its new focus on metals.

“Focus has truly become the name of the game,” said Jim Milway, who recently stepped down as ICP executive director, but who has overseen the research on Canada’s Global Leaders since its inception.

“The Edper and Brascan model is not dominant any more [their remains now exist in the form of Brookfield Asset Management]. The global market is such a tough one to face every day. Companies just can’t be that good at too many things.”

Another firm on the ICP’s Global Leaders list, the aerospace firm Héroux-Devtek, also achieved global dominance by focusing, then expanding, on its core business. Héroux-Devtek is the world’s third-largest designer and manufacturer of airplane landing gear systems, reporting revenues of $380-million and gross profits of $64.7-million for 2012.

CEO Gilles Labbé said the merger between Héroux and Devtek in 2000, followed by a number of strategic acquisitions south of the border, turned the company from a parts manufacturer into a full-service landing gear firm.

“It became possible for us to bid on contracts to design and build prototype landing gear systems for new aircraft,” he said. His small team of 15 engineers has grown to nearly 100, complete with its own facility for testing new designs.

Mr. Milway lauds Héroux-Devtek as a company that has achieved global dominance through a singular focus on product innovation. “Our research has shown that most global leaders achieve success through innovation rather than invention,” he said. It’s less important to invent a brand-new product or service than to keep finding creative ways to improve existing products.

Russel Metals, for its part, grew not through product innovation but process innovation: designing a corporate structure that gave its distribution centres as much autonomy as possible. It’s a structure that has allowed Russel to acquire smaller, entrepreneurial businesses without losing the entrepreneurs driving their success.

“We pay a premium for those entrepreneurs’ relationships,” Mr. Hedges said. One oilpatch acquisition was so relationship-driven he said the company didn’t even have real estate; the entrepreneur was storing inventory in trucking yards. “If the people go home, you lose the goodwill and the knowledge of the local market.”

Those kinds of acquisitions can sometimes be difficult to find. The company assesses hundreds of buying opportunities each year. Some sellers are serial entrepreneurs who want to go on to the next thing. Others are looking to cash out and kick back. According to Mr. Hedges, neither makes a good fit. “We’ve walked away from some pretty good deals because we felt the sellers had lost their passion for the business,” he said.

Russel also made key acquisitions south of the border, including JMS Metals in 2007 and Norton Metals in 2008, giving them a strong U.S. market presence stretching from the rust belt states of Illinois and Indiana through to the Midwest and into Texas.

Mr. Milway said both Russel Metals and Héroux-Devtek are prime examples of firms that grew globally through careful, targeted foreign acquisitions.

“We first began the Global Leaders list as a response to fears that Canada was being ‘hollowed out’ of corporate head offices,” he said. “Canadians have the mistaken impression that our firms only ever get purchased by others. Our global leaders are buyers. We can turn the tables when it comes to acquisitions. We already do.”

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