From Sharpe's mind comes a new Isola: with a new owner, CEO and technology center, the world's 3d largest laminate maker is at last 'Leaning' forward. A PCD&M exclusive.

Isola is coming off perhaps the most turbulent year in the company's storied history. After months of speculation over its future--including a very public announcement of its availability by then-owner Rutgers--Isola was purchased in July by Texas Pacific Group, a large equity concern. With TPG at the helm (a minority stake was bought by Redfern Partners), Isola boasts ownership with a solid track record in building electronics industry businesses, with ON Semiconductor, MEMC Electronic Materials and Seagate among its successes. Now TPG tries its hand with the world's third largest supplier of laminates for printed circuit boards (behind Matsushita and Nanya).

While in business TPG has been known to take risks, when it comes to hirings the firm looks for known quantities. TPG is betting the future of Isola on Ray Sharpe, the former head of Cookson Electronics Materials, one of the world's largest suppliers to the electronics industry and the parent of Polyclad Technologies, a major laminates player in its own right.

In August Printed Circuit Design & Manufacture sat down with the new CEO, who at the time had been on the job for less than two months. In an exclusive interview, Sharpe spanned the company's technology, competitors and how to survive overcapacity. He touted the company's new programs for Lean Manufacturing and Six Sigma and refocus on cash management. And he revealed what's behind the imperative to rebuild quickly: TPG plans to take Isola public within two years.

PCD&M: How does heading Isola compare to what you were expecting?

RS: It's a different challenge. It's different working with a private equity group than a publicly traded company but I've found a lot of really good things. The things that impress me with this new organization are the level of technology within the business, the level of commitment by our investment group [TPG], and the structure. Ala example of commitment is our capital spending budget. Our capex budget went in with virtually no change. TPG approved everything I asked for. Fundamentally, they've been very supportive. The major disappointment is that I've haven't seen the momentum of the market in North American and Europe. The U.S. has been up but not in the right direction, not with all the supply-demand issues out there.

PCD&M: Is that slowing just at the blue-chip level or across the board?

RS: Across the board. Smaller, medium-sized accounts and big accounts seem to be slow.

PCD&M: You notwithstanding, have there been any other significant changes to the management team?

RS: Tarun Amla is now head of worldwide technology. The big move we're making is we're taking technology out of Europe. We're closing the technology center there. We're expanding R&D capability in Chandler, adding people and expanding the building to accommodate the R&D center, expanding it so we can have a bigger force there. We left three to four people in Europe to do technology. And we appointed three or four more in Asia to focus on research. Our whole goal is to drive technology.

As we look at what we're trying to accomplish, we're trying to bring technology into Chandler, expand that, so that's a big move. We also put OEM marketing under Tarun, to marry the strategic concept of marketing and technology. We think that will work very well. We beefed up OEM marketing.

PCD&M: Explain.

RS: We added a person in Europe, a person in Asia. It's status quo in America right now. Structurally made it so that technology will drive the future of the business. PCD&M: What else?

RS: The next thing we've done in terms of organizational structure is begun to lean out the North American operations and combine the regional responsibilities with HQ. We took an extra sales director out (Greg Cooley and Clark Everhart), and continue to put pressure on that group to optimize efficiency. We also restructured the sales force to place a great emphasis on service. We hired Eric Seip [previously with Polyclad and Parlex], as vice president of operational excellence; he is driving our Six Sigma/Lean initiative. We brought in Bain Consulting for a three-month stint to help us kick that off in the right direction. We focus very hard on operational excellence.

In finance we brought in a new CFO, Ted Hull, from Maxtor where he was CFO. Before that he was with IBM for 18 years. Everything used to be in Europe; we're bringing the headquarters to North America. The goal is to have an HQ with 50% less resources than Isola had in Germany.

PCD&M: You sense that Isola even after the restructuring was a little too top-heavy?

RS: Yes, there was too much in Europe.

PCD&M: That's understandable because of where they were located.

RS: And because of how difficult it is to reduce people in Europe. We are looking to reduce the size of our footprint around the world except in Asia, where we plan to expand. We have some moves in Europe underway to reduce what we have in Europe. We're restructuring in Germany now. In North America we've elected to go with a 2/1/2 plant concept; we invested in Fremont to improve the quickturn and high-performance product capability. To beef up our supply-chain efforts we hired Lawrence Conrad, a supply-chain VP at Solectron. He brings a wealth of talent and skills to provide us a structure to leverage our size. We are two times the size of our direct competitors, so we should be buying significantly better; we should be leveraging our resources.

PCD&M: You mentioned Bain. Do they have a track record in our industry?

RS: We used them when I was at Cookson. They have a track record in Lean and Six Sigma, which is what we're driving toward. We put a lot of pressure on them to drive improvements, starting with two focus plants: Ridgeway [South Carolina] and Duren [Germany]. Their primary focus is on productivity and yield. They have made remarkable progress already.

PCD&M: Germany, as well as much of Europe, always presents a dilemma from an employment standpoint because it's so onerous compared to what we deal with in the U.S. I know there were some hurdles for TPG during the acquisition of Isola. What can you tell me about the German laws?

RS: There are some interesting dynamics that have happened. Germany is undergoing a radical transformation, for example, Mercedes Benz increased productivity by negotiating a 40-hour workweek from 35; Siemens did the same, plus they also were able to reduce heads. We're in the same position. We're looking to reduce the excess bodies we have in Germany, and get more productive. We're getting support from our Workers Council. We have a good Workers Council: they are being very supportive and understand that the long-term prospects are better if we have a leaner, harder-working, more productive group. If we achieve this, we can actually save more jobs that way than we can any other way. Fortunately Augusto Meozzi, who has rejoined us to run Europe, has a good relationship with the union and we're making solid progress achieving our productivity goals.

PCD&M: Had Augusto been asked to retire?

RS: He sort of stepped down but stayed on what is like the board of directors of Rutgers and Isola. He decided when TPG bought it there was an opportunity to get back in. He knows his role is limited strictly to Europe, which is fine, and I think he is making a giant contribution.

PCD&M: Who is heading the Asian operations?

RS: The organization that David Lee runs remains intact in Asia and located in Taiwan. David is a seasoned veteran [and] is doing great job. We just invested $3.5 million in Taiwan to exit the CEM-1 product and to improve our multilayer capacity. The key factor is we are investing in Asia where the market is growing. We are looking to expand our Suzhou facility as well. That will happen in the first months of 2005.

PCD&M: Is the intention to keep the Taiwan facility state-of-the-art?

RS: It's a great plant. Taiwan just needs an upgrade for some presses and buildup lines and change out some of the capabilities we can do to make multilayer easier to process. We will continue to invest in Suzhou and other parts of mainland China. We also have a plant in the Philippines, a great plant but a tough location.

PCD&M: Is it safe to say you are trying to implement a single process initiative across Isola?

RS: What you'd see is a Lean/Six Sigma concept throughout, just trying to get more productive. We are evaluating focused factories making certain products so they can be more efficient and competitive.

PCD&M: So the plan is to have factories outputting particular product lines per their expertise and may come down to more cost for shipping in order to gain higher efficiency within a plant.

RS: It's a balance of efficiency versus cost. When it stops being a balance we'll go in whatever direction makes sense.

PCD&M: Do you ship product by air or sea?

RS: It goes both. Right now we're importing product from Asia and a lot from Europe. We ship certain high-performance products from the U.S. to other regions. This will continue until there is sufficient demand for local manufacture.

PCD&M: What will the sales force look like?

RS: Insulectro is our main distributor in the U.S. and that's not going to change. That's a solid asset that we have. We have restructured sales in the U.S. to reflect the changing market and at the same time beefed up service to support Insulectro and our direct customers.

PCD&M: Plus they have a slight ownership position.

RS: Yeah, but that's really two separate deals. Redfern Partners have a small investment; they are minority shareholders. What they obviously have is some expertise in the marketplace. We keep the two discussions separate because otherwise it gets excessive. They know if we do this right they can do very well personally. They are a valued partner, both as shareholder and distributor.

PCD&M: TPG certainly didn't need the extra investment dollars the Redferns brought to the table. So why bring them in?

RS: Because the Redferns were working with another group, Bain Capital, and that wasn't going the way they wanted. TPG was more willing to jump in, more technology familiar because they had investments in Seagate, Smart Modular, ON Semiconductor; they were more adventuresome in that area. What TPG saw in Redferns was technology partners who could help tell them if this was a good or bad investment and what pitfalls to look for.

PCD&M: Did the Redferns have a conflict of interest because they are such a big distributor for Isola?

RS: They may have, but private equity groups are numbers-oriented and they hired Bain to do due diligence to confirm everything. So the Bain team was able to gain access through the Redferns to the major customers. This helped confirm the investment decision. I really do not see a conflict of interest.

PCD&M: Is anyone coming over from Cookson?

RS: I have a nonsolicitation, which was in place and firmed up when I resigned. I have nobody I am allowed to talk to or going to talk to.

PCD&M: How long does that last?

RS: For 15 months.

PCD&M: Does that make it awkward personally?

RS: It makes it easy. I can honestly say I can't help anybody out. Now if Cookson lets someone go, that's a different story. And plus, it works two ways. It gives people at Isola a feeling of comfort that I'm not just going to go in and make wholesale replacements, because I can't. So I think it works to our advantage. There are some great people at Cookson, who I'd love to have, but I can't. That's the way it works.

PCD&M: If you look at Isola in 18 to 24 months, how different will it be from today?

RS: In 18 to 24 months we'll be public. Given current market conditions of today, we'll go public in 18 to 24 months. I think you'll see a company that's driven, with a higher focus on technology. Certainly a lot more operational functional excellence. We're spending lots of money--$5 million--just to implement Lean/Six Sigma programs. And that's just in the first 90 days. We have a 100-day plan that will drive everything we do. It's multi-faceted, not just one single item. In the period you mention you will see a world-class company.

PCDNM: Personally, how do you find the energy to start anew like this?

RS: I don't view it any different than it was at Cookson. People there would tell you I traveled, I worked; I did what I had to do. It's no different here. New challenges are always wonderful. This is certainly a new challenge. I don't find it working any harder or less hard than when I was at Cookson. Certainly more focused; at Cookson, it was whatever the fire of the day was. The other advantage is, I'm my own boss. I report to the board. Everyone else reports to me. I control the tempo, when the meetings are. That's a lot different.

PCD&M: Have you had any experience working with traditional investment groups?

RS: The closest I ever came to that was when Alpha Metals was privately owned. [Ed: Alpha Metals was later purchased by Cookson.] Working for a family business, you learn a lot of the fundamental business practices that a private equity firm has. Cash is king. In a family-run business, you have to look at the family member and say you want to spend money out of his pocket and you don't get it very easy. Same thing here. We spend a lot of time on cash, how to generate cash. The hard part is for the Isola people who are used to a big parent company; cash wasn't so critical, balance sheet forecasting wasn't so critical. It seems more critical in this environment. We have a simple mandate to become profitable in a very short time in North America. We are already profitable elsewhere. We have not lost a penny. On a global basis we've been profitable since February and every month sequentially more profitable, even with down sales, so our initiatives are working and we're doing well. We need to do better; we have a lot to recoup. In order to be public we need to do a lot better.

PCD&M: How would you characterize TPG's involvement at this point? Are they actively involved? Are they benevolent?

RS: [Laughs] They're not benevolent. They are a very active group. My direct boss, we talk every week. We have a conference call every six days. We're on top of things. We have certain projects, a 100-day list. We agreed I'd take certain actions, he'd take other ones, and so we're pretty much a team in how we attack issues. My chairman is Kevin Burns, former senior vice president of supply chains for Solectron. He's a very smart, aggressive guy. The tactic was, one person can't do it all, so Kevin will take what he's good at and I'll take what I'm good at; we'll double-team, and we work this 100-day plan really hard. Once we get on another 100-day plan, then the intensity will start to come down. We already know when the phone calls will slow, when the weekly meetings change to monthly and quarterly. We already have a schedule for that transition.

PCD&M: How do those responsibilities fall?

RS: Well, my role as the CEO is to build the company, restructure it, work hard on building the board--we're bringing in two outside directors as we speak--filling in the corporate governance, just building the team. You have to understand, we took this company out of Germany, and so we've got to build the team. I have to replace the whole corporate staff in North America from the first person up, and I can't go back to where I was and hire anybody, so this is all new hires. So my first priority in life is filling slots on the organizational chart. My second charter was working with technology and customers. Kevin's charter is supply chain, where he is very comfortable. He's been there before. Together we work on operation excellence. He's taking the Lean initiatives; I'm taking the restructuring initiatives. We work hand-in-hand on how to pull these things together.

PCD&M: How far along would you say Isola was in its overall restructuring versus where you want to be?

RS: They think they were where they needed to be; we don't think they were anywhere near where they needed to be. We talk in minutes and hours for changes and improvements, something they weren't ready for. We have to educate them on a new style, more flexible and quicker. They didn't do balance sheets, so we had to pull together balance sheets. That sort of thing is very important, especially when you have to live off your own cash flow. By the way, we have no debt. Our only debt is our working capital line. TPG put all equity into this company, and all we have to worry about is our working capital line of credit to finance our inventory and receivables. So we're in a very strong position. The assets are the assets: we financially backed those with our asset line of credit. At the rate we're going, by the end of December we could be totally out of debt, and if things work out we'll be cash positive.

PCD&M: Were terms like "inventory turns" and "return on investment capital" being used at the old Isola?

RS: Not at all. They didn't report "working capital as a percentage of sales," they didn't measure "days outstanding," they didn't report "cash-to-cash."

PCD&M: That was all because of Rutgers?

RS: Right, Isola was a division of a large parent company. [Now] we've knocked our inventory days in half, we've got our working capital down almost in half. Our receivables are still an issue, more so in Asia. We're in a pretty strong position. The Isola team has been very responsive to our desires to drive cash out of the business.

PCD&M: You had oversight over Polyclad, so you have a good sense of where one major laminator was. Are you using that as a baseline, or some other numbers for inventory turns, etc?

RS: We use a combination of what's in the marketplace. We know where Park is because they are public; we know what Cookson Polyclad reports and the same for Nanya and Kingboard. All that is moot: we don't really care. We have to be best in class. Our model is a very different model because we're comparing ourselves against some Japanese companies, some TPG companies. My biggest hurdle is to get past the TPG companies.

PCD&M: All companies that are in this industry, or even ones outside?

RS: Most in this industry. We need to be as good or better than the other TPG companies.

PCD&M: So MEMC is probably a good model, because it's in semiconductor materials.

RS: Right.

PCD&M: You mentioned adding an OEM manager in Europe and also in Asia. They will report to Tarun?

RS: Yes, and that's a big change for this company. We're treating everything as a global business. One of the things I recognized in hindsight, and I met with some of the ex-Isola management team, is that they were very much regionally focused. That will not work today.

PCD&M: Do you think that was result of the various acquisitions, or fiefdoms, or does it even matter?

RS: Doesn't matter. I think it's more a function of who was in what role, doing what, and who had more power on the board. As it stands now, I will be the only member from Isola on our board of directors. The other directors will be Don Redfern, three TPG players, and two outside, independent directors. It's a different structure; no regional fiefdoms. One company, one mission.

PCD&M: Getting back to the OEM marketing, is there a way to distinguish between Asia, Europe and North America in terms of selling into OEMs and ODMs, or would the model be the same?

RS: I believe the U.S. market is clearly the OEM market. You have Cisco, IBM, Lucent, Nortel; it goes on and on. For Asia, in China there's Huawei, but that's not really driving the industry. Who you're selling, where you're selling really is driven by what happens in North America and in Europe. In Europe there's Siemens, Nokia, Bosch, companies like that. I think the main drivers remain North America and secondarily Europe. What you have to achieve is a global presence.

PCD&M: How do you get pricing back to where it needs to be for Isola to be consistently profitable and for the industry to be consistently profitable?

RS: More capacity has to go out. There are too many players chasing too little volume. One of us is going to flinch and that will alter the market. And the other thing is, the players realize that if you win one account you'll lose another. There's give and take. You're not going to "volume" your way to profitability. When raw material prices keep going up, people are on allocation, giving away on price is not a smart play--for anybody. But we see it happen. The interesting thing to me is, the cloth manufacturers have gotten so tired of dealing with the electronics industry--they get beat up for high quality and low prices--they have gone into alternative marketplaces. Now they are allocating extra production to those customers; they don't want to deal with electronics. So until the electronics industry allows its suppliers to make a buck, it's going to be very difficult.

PCD&M: The model as it stands now is an OEM designs a product, says it needs to be this form factor, calls around looking for materials, components, everything that fits the size, weight and performance requirements, then starts beating up suppliers which in turn beat up their suppliers, like dominos. At the end of the day, these companies aren't making money. So the model is broken. But can that model be changed?

RS: The model can't sustain itself if nobody makes positive margins. There will be no investment in technology. We see the path for investing in technology but we have to shift from where we are today. If we stay where we are, the prospects aren't good. So we have to move up the chain. Same with every board shop in America: they have to move the technology ladder up and change the speed of delivery to compete against the Asians, because they are not going to compete against the Asians on cost.

PCD&M: What kinds of things are fabricators asking of Isola these days?

RS: We're not doing engineering at all. We're doing materials testing, getting performance data and qualifications. We help our customers gain OEM approvals.

PCD&M: Are they leaning on you to provide guarantees as they move to lead-free processes?

RS: I haven't heard any guarantees for lead-free processes. Lead-free processes should be a disruptive technology that allows laminators to upgrade the quality and performance of the material and finally make some margins, if they don't give it away. The propensity to sell material at the same price you sold it before will just lead to losses.

PCD&M: You came through the Montreal Protocol, and we both came through Y2K. Where does lead-free fit on that spectrum?

RS: Lead-free is a longer term play but it's in that spectrum. Lead-free will clearly change but so many things have to change before it becomes a standard process. We're talking about changing from eutectic solders to high-temperature alloys. The components aren't ready, the boards aren't ready. But it's coming, it's definitely coming. So is high-frequency. That's a great area of opportunity.

PCD&M: Should Rogers be worried?

RS: They're a leader. They need to be worried about people knocking at their heels. We've got a competitive product to 4350; we're pushing hard. Getting some successes. That's what we have that distinguishes us from our three other major competitors in North America. We have these advanced technologies. Small volumes today, but potentially a great opportunity.

PCD&M: Rogers' model has been to own the markets that it's in.

RS: Right.

PCD&M: So it can't compete with you on volume but it's really a single source for ...

RS: It's service model.

PCD&M: Do you see that in Isola's future?

RS: We're moving to a high-performance factory. We put in a prototype treater in Chandler to deal with some of the new high-end products, like our IS 640, the high-frequency, low Dk materials, I think we're going to be knocking on the door. My goal is to be aggressive on this. You have to be.

PCD&M: We've talked about the raw material constraints, with the cloth makers finding different outlets for their products. Where does that stand now?

RS: We're still there. For copper, there's still a limited amount of capacity. They did a good job of taking down capacity so that creates a constraint. Raw copper prices have stabilized. We're still seeing a shortage of some fabric.

PCD&M: On the commodities markets, what do you pay attention to?

RS: Copper prices and exchange rates. We worry about the fuel prices and the North American benefits costs.

PCD&M: Do you do most transactions in U.S. dollars, or local currencies?

RS: A lot of them are local currencies. In Europe, it's all euros.

PCD&M: What do you think of the competitive landscape in laminates?

RS: I think it's great that Nelco still remains the class act for profitability that everyone is trying to emulate and chase. They have a good business model and can make good returns. When everyone else was losing money they lost less. When everyone started making money, they made more.

PCD&M: With a company that's the size of Isola, with its global footprint, how do you instill the right corporate culture --or do you even try?

RS: it's an interesting thing. One of the first dynamics to change is you have to demonstrate there's a need. There's no question that the Isola team had a wakeup call during the sale process that there was a need to change. So to move change forward on the back of what they've had happen in the last 18 or so months, we have a receptive and willing organizational structure. For us to say, we're going to be more global and share resources--the barriers that were there before truly no longer exist. Everybody understands the need to change and the reasons to change.

PCD&M: Is that because you've employed individuals who will drive that down in their respective regions?

RS: That helps. We brought them in and made their roles very clear. I've talked to each plant, made presentations on why we need to change, what the cause is for our problems. It's clear that they understand what we have to do. The goal is very simple: Articulate why we are where we are, what we have to do to change, devise a strategy for what we have to exceed and how we are going to change and a forum to do that, then align everyone's incentives around change. We have the entire organization aligned around common incentives, common goals for success. That goes a long way.

PCD&M: Now that you've been on the job for a few months, how does it compare to what you expected?

RS: There are a few more challenges than I anticipated.

PCD&M: How so?

RS: Well, as I said, recruiting an entire organization. Normally when you come in as an executive, there's an entire organizational structure in place. This is novel in that I'm the only executive in that building. I have to build a corporate staff, from scratch. That's a different set of challenges. TPG has been a valuable partner in helping me get that done. I actually went to TPG before going to Isola, because they saw this organizational gap. That's been the perhaps the biggest challenge. It always is: finding the right people to do the right job. We had been looking for a CFO for a long time; we just found one. It takes time.

PCD&M: Were you familiar with TPG before you made that connection?

RS: Redfern Partners were a key factor in me joining the group. I have known Don Redfern for 20 years. He is a class act guy, a senior statesman. He's a great salesman.

PCD&M: Insulectro has a lock on distribution in North America. Can you describe what that relationship will be like globally? Will that extend to Europe?

RS: They already opened in Europe but we don't use them there. There's no pressure, no drive, no need to force something into the organization. We have a different strategy for how we are going to deal with Europe, more of a direct basis. In Asia, we have two competitive distributors nut are mostly direct.

PCD&M: You talked a bit about working for a privately owned company, having worked for Alpha when it was family owned, if there is a single defining difference, what would that be in terms of the way you go about doing your job everyday?

RS: There are a couple things. One, there's a greater emphasis on cash management. Two, there's a greater emphasis on profitability. And three, you have a whole lot more autonomy to make decisions and get things done. There's no fancy board to go to; we're it. You can run your business. You're the CEO; the owner of your business. You can make decisions, move fast. I think our ability to react quickly is going to be the most important factor

PCD&M: But TPG's exit strategy is to go public, liquidate the company ...

RS: They'll never totally liquidate it. If you look at their pattern, they never totally liquidate. They'll sell enough to get their equity back and a reasonable return, but I anticipate they'll be a long-term shareholder in this business. Certainly the Redferns should also be described as long-term investors.

PCD&M: In looking at Isola and saying, "Here's our competitive position," what excites you?

RS: Our new technology. We have some technologies displacing existing products and as we get those spec'd in we'll be hard to compete with, because we have patents on them. I think we have a very strong and knowledgeable lab that's world class, the people are world-class. I think the thing that excites most about Isola is the future of technology. Clearly the Chandler technology center is fantastic.

PCD&M: Are we looking primarily at high-performance multilayers, high Tg materials? Will Isola embed fiber?

RS: We're looking at a lot of different things. I'm not going to say what we're going to do or not going to do, but we have programs in chip carrier packages, we have programs in the low loss areas; we have programs in the military area; we have programs for high temperature. The high temperature, everybody has it now, it's the high frequency, the low loss, where the future lies.

PCD&M: That's where Rogers has made its living--the microwave and high-frequency areas.

RS: We have some products there that we think are different, and better and have a better cost structure.

PCD&M: Can you give a sense of where your R&D spending is versus overall revenue.

RS: Probably 3, 3.5%.

PCD&M: And your competition?

RS: We're up with the best of the best. I think we have some things other people don't have.

MIKE BUETOW is editor in chief of Circuits Assembly.