TWST: Could we start out by your giving us an overview of Autocam, its history and products?

Mr. Kennedy: Autocam is a manufacturer of small metal parts that are primarily used in what I call electromechanical systems. An example of an electromechanical system would be ABS or fuel systems for automobiles. The company was founded in 1982 as a division of another company and the business grew to about $8 million in sales in 1987. We were actively looking for buyers for the business while I was running the business from '86 til '87. In 1987 I made an offer to purchase the business from the parent company in a leveraged buyout which we completed in February of 1988.

TWST: You say it was $8 million. What was the growth?

Mr. Kennedy: $8 million in 1988, we just completed our 1997 year over $60 million.

Industry Outlook

TWST: Could you tell us your outlook on the industries you serve, what changes you anticipate, what trends are positive, which trends might be dictating caution?

Mr. Kennedy: We're very heavily involved in the automotive industry, but, we have two other industries we serve on a smaller scale; computer electronics and medical devices. I would definitely say that the caution always in the automotive industry is when is the downturn coming. Although we currently don't see that on the horizon, at least not any big downturn, it's that one of the risks in our business. Our plans already assume that it's going to occur sometime maybe early next year. So the things that we'll be talking about today assume that we're going to have some contraction in automotive volumes. The other thing I would say is that compared to the medical or the electronics industries, we consider the fluctuations that exist in the cyclicality of the automotive industry really to be quite minor. If you look at a peak year of 15 to 16 million vehicle sales, I think the best we've ever had was 16 million in the North American market and the low was about $12 million units. Compared to electronic standards where you're looking at a business going from hundreds of millions of products to zero over night, that's what I would consider to be a much more dynamic business than the automotive. We manage our business to make money at 80% of capacity which is certainly the depths of any recession in the automotive industry. Now we don't make as much money during those periods of time, but we clearly do make money. And, I think another example of that is what we saw in our first quarter of this year. Our biggest customer is GM. They account for about 50% of our business on a direct basis so strikes have a very profound impact on the business. In the month of July, we had the slowest month that we've had in five years and we lost money in that month but it was what I would consider to be a really modest loss considering the percentage of operating capacity. In our Kentwood operation where we do the lion's share of the automotive volume, we were probably 60% of capacity. Our first quarter was profitable, however, our comparable results were down a little bit from the same quarter last year. On one hand we're not happy about being down from last year, however we think the year is going to end up substantially higher than last year. We're expecting to be up 25% to 30% both in revenues and in earnings for the year, despite being down a little bit in the quarter.

TWST: Discuss a little further your outlook for the data storage and the medical instrument industries.

Mr. Kennedy: In the computer electronics business, we're manufacturing small metal precision components for one of the microprocessor companies. We have confidentiality agreements with their customers so I can't mention who they are, but that has significant potential. It's a brand new business for us but we think that we could be doing a couple of million dollars a quarter in sales of this new product by the end of this year.

TWST: What is the new product?

Mr. Kennedy: It's on their new chip. The chip business is going to faster and faster chip technology. This is on the newer, faster chip technology and it's a part the thermo device for the chip. The chips burn much hotter; our part is used in helping dissipate the heat out of the computer box. The medical industry business also continues to go very well for us. We're seeing growth faster than the growth in the rest of our business and at better profit margins, although we're not as comfortable with the lives of the products in that business. It is certainly a feast or famine business. The margins tend to be a little bit higher than what we make in our automotive business, but there's a lot of risk in that business. You have to invest a lot of money to get out a new product and to be the FDA approved supplier. If the product is successful, you'll do very very well. Conversely, we can do a lot of development work and the product doesn't sell or doesn't get the approvals that are needed so you ended up putting a lot of investment into a product that just didn't work. So, I think that the higher margins are warranted and necessary in order to get the same kind of return on capital in that business. But generally speaking, we tend to do a little better in that business.

Corporate Strategy

TWST: What long term goals have you set for Autocam? Which have you accomplished, which are yet to be accomplished and what changes might be made to accomplish them?

Mr. Kennedy: We have the ability to see out a couple of years. We have booked business, defined as having have a letter of intent or a purchase order from a customer to manufacture product of about $120 million by our fiscal year 2000. We get there in some uneven steps; it's not a straight line progression. We have a big step this year. We believe we'll be over $80 million from $60 million last year. We have some years that are a little flatter growth than that and actually some years where the growth is a little stronger. So, we're positioning the organization to be able to meet the agreements we already have with customers and to do that appropriately and properly. We're positioning the organization by building the appropriate facilities and putting the people in place to be able to handle that growth. In addition, we have some other strategic objectives that we feel we have to meet. One of the things we try to do in every one of our businesses is to dominate the market that we're in. I'll use fuel systems as an example. We started this business as a supplier of fuel systems, primarily for General Motors Corporation, and we think we've done a good job over time producing a very high quality, low cost product for them. We were supplier of the year for GM last year and this year which is an award that's only rendered to about 150 GM suppliers worldwide. As we look at the fuel systems business for them, what we've developed is some expertise in manufacturing a certain type of component that's used in fuel systems. There are three or four components in there that are machined product that require very very close tolerances like what we build. And when I'm talking close tolerances, we define close tolerance as 10 to 20 microns of bandwidth although we do hold tolerances less than that on some of our products. To give you an example of what 10 to 20 microns is, a human hair is 70 to 80 microns thick, so we're talking very very skilled machining. And we make these in millions. It's not uncommon for us to make over 100,000 or more a day of any component that we have in our building. It's very high volume, very close tolerance work. The same type of technology that we use in making the parts for GM obviously has a natural application to the other major manufacturers of fuel systems in the world. What we have done is aggressively targeted those customers as part of our strategic plan to dominate that market. The biggest portion of our growth in the next few years is expansion in the fuel systems business with the other two principal companies in the fuel system business. Among the three of them, they probably have a 75% market share of the business. We've received contracts and we're going to be supplier of at least three components on each of their new injector programs. We're very excited about being able to dominate in that business. Now dominance is having some very interesting affects on our business. We're clearly dominant with GM right now as their supplier for machine products but, one of the things that they're demanding as part of our dominance is for us to look at following them throughout the world. Right now, they're building facilities in Brazil and Asia and other places in the world. One of the things that we have on our radar screen is exploring opportunities to do joint ventures of some type in the places where our customers are also going to be manufacturing or assembling equipment our end product. That's certainly another strategic objective.

TWST: Do you know where they're going to be or is it too early to tell?

Mr. Kennedy: I think that it looks like we're pretty close to reaching an agreement on a company in Brazil.


TWST: Can you tell us in general terms what else you're looking for or looking at in terms of mergers, acquisitions, joint ventures, partnerships, those kinds of things?

Mr. Kennedy: We wouldn't involve ourselves in an operation as the sole owner outside the U.S. We would only look at joint ventures outside the U.S.; probably a dominant position in terms that we would own a majority of the company but we believe we need local management and local expertise to be able to chart the local waters. We think that's the best way for us to do it and minimize our risks in entering those marketplaces. In the U.S., we have been actively looking at acquisitions for a long time. Part of our growth this year is coming from an acquisition that we just completed June 30; a company that manufactures precision metal components for the brake products industry. This will add about $13 to $15 million in sales this year. One of the reasons we've had difficulty in completing acquisitions is we have a very high hurdle rate in terms of what we think we need to get from a return on invested capital standpoint. We set a target at about 20% and that suggests that you can't pay much more than five times EBIT for a business. Well, I don't think it's any secret to you that the market have been very very frothy for acquisitions and certainly it's been more of a sellers market than a buyers market. We have been very patient and we'll continue to be patient because we don't think it's something we have to do today. It's something we think that will be important for us to do on a long term basis as the automotive industry is talking in terms of continual consolidation. Consolidation has occurred largely at the tier one level so far. We're clearly a tier two company and our tier one suppliers are starting to suggest that they would like to reduce their supplier bases. One of the reasons for this most recent acquisition is one of our key customers today is a major user of the product and it has helped to solidify a relationship with that customer by meeting their objective of consolidating two suppliers down into one. Today we're actually one of their largest, if not the largest, machining supplier in North America. And they had come to us a few years back and said that they would like to figure out a way to reduce the supplier base of 250 suppliers down to maybe a handful. So obviously we'll be looking at acquisition but we're not going to pay a lot of money. My feeling is that we've been trying to keep our powder dry for the time when we think the industry will hit the recession and people get a little more realistic about business valuations.

TWST: Is Autocam a potential takeover target?

Mr. Kennedy: We believe that our strategy is always to try to provide higher return to the shareholders in the company and I have a strong vested interest in doing that. We're going to continue to try to grow the business and be the consolidator, but I also have said in the past that I'm not going to be stupid about this. I think there are a lot of examples in the stamping industry and maybe the interiors business where some consolidation has occurred and in some cases companies waited too long and they didn't get into a dominant position fast enough. Today we're certainly one of the larger companies, if not the largest that you could consider to be a machining company for the automotive industry and we're certainly dominant in the market segments that we're in: automotive fuel systems and brake systems. But, if somebody came along who was bigger and was consolidating the industry, we're not going to turn them away and not talk to them. But I think that right now, if we do the right things, our stock will be trading at a high enough premium that a good company won't be able to pay what we think the company is worth.

TWST: What changes do you anticipate in your mix of customers over the next several years?

Mr. Kennedy: I think that we're going to continue to be growing the business. Our strategic vision is to focus on two sectors right now, the medical and automotive. I think we clearly understand our role as a tier two and even though we'll probably be trying to expand our product offerings, I'm not sure that the tier one companies that we supply are going to be that much different because if you look at the world players, Delphi Automotive and ITT Automotive, they're big, varied product companies. They provide systems for the vehicles which incorporate precision metal parts. So I don't think the customer list is going to change that dramatically. My hope is that we can grow in additional segments. For example, with GM right now we make fuel system components. We don't do anything directly with GM in brakes or in steering. We think that we'd like to leverage our status as Supplier of the Year to try to penetrate those markets and get opportunities to look at those businesses. I think that we're going to be able to have the opportunity to do that. In the medical industry, on the other hand, that is a highly fragmented business. One of the products that we make is stents. It's a great example. A stent is a metal foil. The primary use for them today is in angioplasty procedures. The stent is inserted in the body through the catheter and they blow the balloon up and the stent expands in the artery preventing the artery from closing back up which occurred in most of the patients. And we make that product today for a number of customers but the sales person is bringing in new names of people that are using stents and different applications of stents all the time. We think we have a good proprietary process for making stents which our customers seem to really like and appreciate so we're obviously going to try to grow that business but the only way we're going to grow it is that if we supply the four or five companies today, we're going to be supplying to 25 companies a year from now.


TWST: How will these developments affect your marketing and sales strategies of the future?

Mr. Kennedy: Once again you have to split them. In automotive we have a very directed approach. We have one person who leads our sales and marketing effort on a corporate basis and then we have product groups that actually manage the business relationship with each of our customers and that is probably not going to change. In the medical business, we have one person who is focused on the stent business. That person is probably going to need support if that business continues to grow like it is. The medical business generally is just way too fragmented and diverse. We're going to have to beef up the whole selling and marketing approach to this business.

Research & Development

TWST: How do you think your R&D expenditures will change in the future in term of amount and emphasis?

Mr. Kennedy: As an organization we spend a lot of money each year on R&D activities. I don't think that's going to change as a percentage of sales. We probably spend a couple percent on sales every year. The total dollars available will continue to expand as the sales of the business continue to expand. It's certainly something our customers are demanding more and more and in order for us to be competitive, we have to come up with new technology and new solutions to solving machining problems and continually improving the processes that we have in the building.

New Products

TWST: Any new products in the pipeline you can tell us about without spilling the beans to your competition?

Mr. Kennedy: We don't tend to be a product focused company, we tend to be more of a process focused company. I think the laser machining that we use for making the stents is one example of that. We also are very heavily focused on what we call ultra precision machining in high volume and we've made significant strides in the last year or two in developing that technology. We have that process technology in our building today and, quite frankly, we're running around searching for a customer. But ours tend to be much more process focused than it does product focused.

TWST: What is Autocam's competitive edge? What are your competitive advantages?

Mr. Kennedy: I think that our customers would say that certainly from a quality standpoint we are very strong in comparison to our competition. And, obviously that's important but it's very important when you're getting millions of components into your facility and you've got to make sure that every one of them is exactly the same. But I think probably the greatest strength of the company is not the quality but the way in which we get there. Obviously, you have to be competitive in this world and I would credit the culture of continuous improvements that exist in our organization. There's no one here that says, "if it works don't fix it" because we don't have that operating philosophy. We actually operate exactly the opposite. We think there isn't a product or process that we make today that we can't manufacture at a higher quality for lower cost tomorrow. And we must do the things that will get us a higher quality, lower cost product, or else we won't remain competitive.

TWST: Do you have any restructuring plans of management, operations, systems, so forth?

Mr. Kennedy: Part of the systems that we have in the building to support QS9000 registration, which we received in 1996 for the Company's Kentwood, Michigan operation, are all done on paper. One of the things from a systems standpoint that we think we need to do is computerize these systems. It would ease the implementation of our system at some of these new facilities.

TWST: What kinds of people will Autocam be looking to hire in the next couple of years in terms of their skills, functions, experience and so forth?

Mr. Kennedy: Engineers, which you probably hear all the time, and machinists. Michigan's a very tough labor market for both of those skills. One of the reasons we will locate our new facility in Marshall, Michigan is that there are some companies in that area that had labor with significant machining skills that have done a fair amount of laying off because they moved south. There's a labor pool there. Grand Rapids has less than 3% unemployment.

TWST: How does the company help its employees improve and maintain their productivity?

Mr. Kennedy: Training, training, training. We've developed a lot of techniques for skill development in house and invested considerable amounts of money in doing that. We think one of the advantages we have over our competition. We spent $250,000 developing a video-based training system for the operation of our equipment. Young apprentices with no experience could have really strong machine skills but typically companies wouldn't spend that kind of money on that type of system. We look at that as an investment. It's no different than buying the machine tool. We have an apprenticeship program where we've got about 15 people who are in their first year right now and probably about 10 people that are in their second year. We're running apprentice programs all the time and that's as much a function of trying to get adequate staffing as anything else.

TWST: Do you have perks too, such as stock options?

Mr. Kennedy: Every employee in our Kentwood, Michigan and California operations are owners of options to purchase stock. They also receive matching contributions of stock in their 401(k) plan. Our tenet is to try to make the employees shareholders and share in the growth of the business from an equity standpoint.

TWST: What do you see ahead for capital spending for the company, the requirements and how you'll meet those needs?

Mr. Kennedy: Over the next year, we're going to generate between $15 and $20 million in cash and obviously that will help finance the significant capital expenditure program we've got set up for next year. We can't get to $120 million in sales in the year 2000 without spending any money and in our business the capital is always very heavily front loaded too, but we expect to about $12 million of capital purchases for the fiscal 1998 year.

TWST: Have you set financial benchmarks for the company in terms of sales, earnings, margins and so forth?

Mr. Kennedy: Certainly, we have benchmarks. We like to average 25% to 30% revenue growth and it's our belief that margins should grow a faster rate than sales by properly managing the business. We have a target of 20% income from operations in our business, a target we have trouble hitting, but that's a function of the reality that often we have to give price decreases before we can see the full impact of the continuous improvements that we've implemented. We have periods where we do hit it, we hope to be pretty close to that this year.

TWST: Are there any key variables or challenges, such as governmental, economic, political, social, that you expect will have an impact on the company?

Mr. Kennedy: I guess I would say two; there's one issue that we have relative to steel that could have an adverse effect on the pricing and availability of certain steels that we use. Right now, some of the steel processors are before the International Trade Commission trying to get a higher duty imposed on steel coming from Germany and Japan and we do buy steel from suppliers in those countries. My concern, is that they can levy duty high enough to hurt the competitiveness of the Japanese and German steel, which is what's right now keeping down the price. I don't know that they're going to approve the duties this time. The other more positive issue is that the State of Michigan gave us incredible tax incentives for locating our new facility in Marshall, Michigan and it's going to have a very positive impact on the margins in that facility.

TWST: What's your worst nightmare about the company? What keeps you up at night, if anything?

Mr. Kennedy: Making sure you don't get a leak in the boat somewhere. It's a fast changing business and it's obviously growing.

TWST: Do you anticipate any fundamental changes in the type of leadership that will be needed by your industries over the next few years?

Mr. Kennedy: Most of the companies in our business are smaller companies. Typically, there is a highly technical person running the business and that's really their expertise which allowed the business to grow. They're business kind of grew around an individual, who is the designer, lead engineer, lead processing guy. That's the kind of companies we compete with, so they tend to be smaller businesses. Some of them have gotten to $25 million or $30 million in sales, but that would be even a relatively good sized business. We think more of the organizations are going to have to go to what we've tried to go to which is a professionally managed approach. One person cannot keep their thumb on the number of products that run through an $80 million company.


TWST: How do you feel about the market price of your stock now?

Mr. Kennedy: We think it's cheap. We're looking at 25% to 30% growth for next year, that would normally suggest that you would have a p/e much closer to the average market multiple, which I think is 18 to 20, but we're trading at 11 to 12 p/e.

TWST: What programs or plans have you developed to attract new investors to the company?

Mr. Kennedy: We're trying to do whatever we can to try to get the word out on the story of the business, but for small cap companies, that's a very tough thing to do. We try to encourage analysts whenever we can to follow and then write on the company, but it takes a lot of effort. What's going to happen is the people that are following the business right now are going to be made heroes when we lay in some of these numbers and the business starts performing at a level of 25% to 30% growth. The people that told their clients to buy at $12.00 a share are going to be pretty happy when it's trading at $25.00. That's what we're trying to do: get that message out. It's interesting because we do very well when we have an opportunity to sit down and talk to investors. One of the large investors in our company is Fidelity. They own 9.3% of the business and we have a person there who has followed the company for a while. He understands that story and must be pretty bullish on the business in terms of where we're going.

TWST: What are the most important reasons why potential long-term investors should take a closer look at Autocam stock now?

Mr. Kennedy: I think that if you want to invest in automotive stocks, then it's an undervalued sector today as it relates to the overall market. The reason for that undervaluation, I think, is because of the impression that that sector has left in past recessions. All the automotive companies and automotive suppliers lose money in a downturn. We think Autocam is a great investment. We expect to make money all the way through a recession. It would have to be catastrophic before we would be in a money losing position. We consider Autocam to be an opportunity to invest in a company at a multiple which is trading below even the sector multiple that's growing at 25% to 30% a year.

TWST: Thank you.

For CEO Interview/Investors Brief


Each Chief Executive Officer who is the featured subject of a TWST Chief Executive Officer Forum or Interview is offered the opportunity to back- up the Forum or Interview with a sponsored Investors Brief or other financial highlight material to be provided and published by and for the company. This Chief Executive Officer Interview with John C. Kennedy, CEO of Autocam Corp., is backed-up with an Investors Brief containing financial information.

JOHN C. KENNEDY Chairm., Pres. and CEO Autocam Corp. 4070 East Paris Avenue Kentwood, MI 49512 (612) 698-0707 (CEO) (606) 698-6876 (FAX)