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Striking while the iron is hot

17/10/06
From: Globes – 17 October 2006 
Golan Fridenfeld

 

A measure of the character of a public company is the congruence between the statements by its chiefs and the performance on the ground. A leading CEO once told us, “I don’t mind making statements about the long term, because if I’m wrong no one will remember anyway, and if I’m right, I’m a big winner.” 

Scope Metals controlling shareholder and general manager Shmuel Shiloh can look back and say with assurance that he has carried out what he promised two years ago.

At an analyst conference Scope Metals Trading and Technical Services Limited. (TASE: SCOP) held in September 2004, Shiloh set a long-term sales target of $230 million. The company’s financial reports for the first half of 2006 indicate that Shiloh's target was overly cautious; the company is expected to reach Shiloh’s long-term target within only two years, and will post NIS 940 million, or $220 million in revenue in 2006.

“My job is to come to work each morning, and work,” says Shiloh. “I have no secretary, no Outlook; only a small diary that I carry around with me. I rarely go out to meetings, and anyone wishing to meet me can come here at any time. My only task is to meet Scope Metal’s ambitious targets.”

Shiloh predicts that the company’s turnover from the United States could reach $100 million, but a lot of work will be needed to achieve this. Scope Metals owns two companies in the United States: Material Technology Solutions LLC (MTS), which markets metals to traders; and Hadco Metal Trading Co. LLC, which was acquired in February for $11 million, including $8 million for inventory. The American company has distribution centers on the East Coast and 6,000 customers.

Bringing a different attitude overseas

The question is, what relative advantage has a trading company like Scope Metals in the American market over similar local companies? “Our advantage is that our approach is different from the approach of corresponding American companies,” explains Shiloh. “In the United States, each business operates in a different area. Our advantage, as Israelis, is that we can operate in a number of fields simultaneously. I’m not talking about operating in parallel in the pharmaceutical industry, but simply marketing a broader range of metal products.

“In the United States, if someone markets stainless steel, he does only that and barely touches any other sector. I instill in my customers a new approach, in which they can get everything they need in one place. This won’t happen overnight, but we’re already beginning to see a positive approach among our customers in the United States,” says Shiloh.

He adds, “The other thing we’re bringing to the international activity, especially to the Czech Republic and Romania where we’ve set up shop, is our ability to bring money and move forward more quickly than the locals.”

Scope Metals Trading imports and trades various metals, including stainless steel, nickel, aluminum and titanium, and markets them after cutting and customizing them for its various customers. Products include cans, pipes, screws, pipe accessories, poles and nets.

“We mainly deal with logistics,” says Shiloh. “We promise the goods will arrive at our customers in Israel within 24 hours, thereby eliminating the need for our customers to maintain large inventory and its attendant costs. This is also why we maintain large inventory at the company. Our inventory is our strength, even though most people in the capital market think it’s a problem when this item is too high.”

Scope Metals has NIS 498 million in inventory. Shiloh says, “We’re not like every other business where a large inventory item implies problems at the company. That is because our inventory doesn’t have a limited life span, and because it’s part of our business strategy. The moment we can’t rapidly respond to my customers, either in Israel or overseas, I’ve immediately lost my competitive edge against my competitors.”

Prices are up and everyone is happy

Scope Metal’s international plans can be understood from the recent measures the company has taken. First Israel Mezzanine Investors Ltd. (FIMI), headed by CEO Ishay Davidi, has invested NIS 157 million in the company. This investment helped the company develop internationally in two ways. In the immediate stage, the company’s shareholder’s equity was strengthened, which enabled it to initiate international actions more calmly.

In the next stage, Scope Metals anticipates that FIMI will help the company expand overseas through mergers and acquisitions. Shiloh hopes that the collaboration with FIMI is for the long haul, and if the company’s international activities develop as projected, FIMI also assist with public offerings. “I don’t understand this subject. I understand commerce, and I understand that FIMI’s strengthening the company could help us in areas where we’re weak,” he says.

One of the big risks for a company like Scope Metals is the extreme volatility in the prices for various metals. However, Shiloh notes that this has greatly abated in the past few years. “Before 2000, the metals market was extremely volatile, which eroded profitability when the prices of goods fell,” he says. “However, a number of subsequent mergers and acquisitions transferred the power in the market to the manufacturers. Prices rose to a level that satisfied both the manufacturers and the traders, and consumers were willing to pay those prices because they couldn’t function without the goods. They offset production to prevent the creation of a floor, and prices remain high. Therefore, the chances of sharp price falls of the kind that occurred in the past are low.”

“In addition,” he adds, “we have a broad product line of 40,000 products. A fall in the price for one metal affects only some of the products, not all of them.”

In December 2005, Scope Metals made a futures deal in aluminum in order to set a cumulative profit on part of its inventory, because of the rise in prices in the aluminum and copper sectors. The plan did not go well, and the deal was closed in February with a loss of about NIS 1 million. “This was a one-time experience that will not be repeated. We will try to make our profits through trade in metals and in paper deals,” says Shiloh today.

Scope Metal’s record since becoming a public company is quite satisfactory. The company has distributed NIS 96.5 million in dividends in the past five years, and has made a 160% return for shareholders over the past three years. 

The company benefits from calculated and responsible management. The company’s semiannual financial report shows 59% growth in revenue (mostly as a result of acquisitions). The company’s operating profit of approximately NIS 67 million represents 39% growth compared with the corresponding half of last year. On the bottom line, the company posted a profit of NIS 34 million, 48% higher than in the corresponding half.

Scope Metals once bid for Israel Mendelson Ltd. (now Israel Mendelson Technical And Eng. Supply Kaman (2005) Ltd., (TASE:MNSU.B1)), a supplier of fluid products, but the company was instead acquired by Kaman Holdings (Mendelson Group) Ltd. (TASE:KMNH), controlled by Ron Alroy, from under Scope Metal’s nose during the acquisition negotiations. Scope Metals is now seeking international markets, where it has pinned its hopes, and if the company meets Shiloh’s targets, the capital market attitude towards the company will change fundamentally, especially if it enters the Tel Aviv 100 Index at some point.