Royal Group Technologies Limited

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Royal Group Technologies Limited

1 Royal Gate Boulevard
Woodbridge, Ontario L4L 8Z7
Canada
Telephone: (905) 264-0701
Fax: (905) 264-0702
Web site: http://www.royalgrouptech.com

Public Company
Incorporated: 1970 as Royal Plastics Group Limited
Employees: 9,000
Sales: $1.52 billion (2004)
Stock Exchanges: New York
Ticker Symbol: RYG
NAIC: 326122 Plastics Pipe and Pipe Fitting Manufacturing

Royal Group Technologies Limited is a Canadian manufacturer of polymer-based products primarily used in the home building, home renovation, and construction fields. Although most of its business is conducted in Canada and the United States, Royal is a global company, with additional operations located in South America, Europe, and Asia. Home building and renovation products include siding, roofing, window frames, and patio doors, and construction products include pipe and fittings systems and commercial doors. Royal also offers consumer products such as decking, sheds, shutters, furniture, and some housewares. In addition, the company is involved in component-based home construction through its patented Royal Buildings Systems, which uses hollow polymer panels that are fitted together and filled with concrete to produce a highly durable structure requiring little maintenance. The houses have found a market around the world, especially in developing countries. Royal is vertically integrated, capable of producing most of its raw materials and tools in addition to final products. The company is publicly traded, listed on the New York Stock Exchange.

Founder a 1960s Immigrant

The man behind the birth of Royal was Vic De Zen, a man of Dutch heritage who was born in 1941 in a small town near Venice, Italy. He grew up working on his family's farm, but even as a child, he claimed, he knew that he would make his life across the Atlantic Ocean. As a teenager he learned the tool-and-die craft as an apprentice in Italy, but jobs were scarce in the country and in the late 1950s he had to travel to Switzerland to find work as a tool-and-die maker. Two older brothers moved to Canada, and when he was 20 he decided to join them, borrowing money from an aunt to pay for the airfare for himself and his new bride, Angelina. With just $20 in his pocket, he wasted little time in getting to work. According to a story that has become company lore, De Zen got off the plane in Toronto at five in the evening in November 1962 and within the hour was installing television antennas with his brothers who had set up a business installing storm windows, storm doors, and antennas. Although well trained in the tool-and-die craft, he had trouble finding work in the field because of his inability to speak English. In 1995 De Zen recounted his frustration in a Canadian Business profile: "At one point, De Zen took an interpreter into a company with him. 'I said, 'Give me the drawing, give me the steel and the machine. If I cannot make the piece, I'll pay for it,' De Zen shakes his head in recollection. 'He said, 'No. You don't know the language, no job for you.' "

For five years De Zen supported his family doing manual labor. Finally, in 1967, he was hired by Pillar Plastics Ltd., a small Toronto company. Rather than create plastic shapes from molds, it extruded plastic through a die, the so-called "Black Art" of plastic manufacturing. The Financial Post in 1994 described it as "not a pretty business," comparing it with meat going through a grinder: "Extrusion is, however, a highly precise art that demands acute skills and expensive machinery. It involves patience, precision and luck, because every single piece must be an exact clone of its predecessor. So there's a fine line separating a valuable strip of extruded plastic from a useless piece of plastic goop." Building a reputation as an expert tool-and-die craftsman, capable of fashioning virtually any shape out of plastic, De Zen quickly became the key to Pillar's success.

It was during his time at Pillar that De Zen first became involved with plastic houses, for years the goal of many plastic extruders. During the 1950s Monsanto Chemical stoked the dream by displaying a plastic house at a trade show. De Zen did work for a pair of companies creating dies for use in making parts for a plastic house, but both pulled out of the projects, which De Zen considered a mistake. He never forgot the idea, however, and he revisited it 20 years later.

De Zen soon grew disenchanted with Pillar's management: One Christmas his bonus totaled just $2. Management belatedly recognized his valuable contribution and eventually offered him a 10 percent stake in the business only to renege on the promise. Infuriated, De Zen decided to launch his own business, but not before returning to Europe for a year in 1969 to learn the latest developments in the making of dies for vinyl extrusion. Then, in 1970 he joined forces with a pair of fellow immigrants and Pillar employees, Domenic D'Amico and Lorenzo De Meneghi, each of them investing $17,000, although De Zen held a majority stake in the venture. For the name of the new plastic extrusion company, De Zen wanted something to match his ambitions. He considered Imperial Plastics and Monarch Plastics, but because both names were taken he settled on Royal Plastics (the full name becoming Royal Plastics Group Limited).

De Zen acquired Italian-made extruders and cooling devices called vacuum-sizers, worth some CAD 2 million, and set up shop in North York. At the time, European companies dominated the extrusion business, but De Zen's expertise leveled the playing field in terms of quality and Royal's location gave it a pricing edge in the Canadian market. The three-man operation also benefited from the partners' discipline, limiting their own pay to a mere $45 a week. As a result, Royal turned a profit in its first year, posting sales of CAD 273,000 on its first product, PVC weatherstripping. Nevertheless, the partners resisted giving each other a raise. In fact they continued to limit their weekly pay to $45 for another four years.

A major help to Royal's growth was a CAD 250,000 research and development grant from the Canadian government, money the company used to develop technology that essentially reinvented the extrusion process. The Europeans began to turn to Royal to license its cutting-edge technology. Royal also was gaining attention south of the border in the United States, where companies were impressed with both the quality of the product and the price. Royal began importing into the U.S. market in 1973, a watershed moment that marked the beginning of rapid, long-term growth. It was also in 1973 that Royal paid CAD 500,000 to acquire De Zen's former company, Pillar, which had struggled after his departure.

Mid-1970s Expansion

In the mid-1970s Royal began expanding its product offerings in the construction field beyond weatherstripping, becoming the first North American manufacturer to develop PVC window systems. Over the next 15 years a spate of other proprietary products were introduced as well, including garage doors, pipes and gutters, siding, and interior blinds. Aside from his abilities as a master of the Black Art, De Zen also displayed a creative bent for business. According to a 1993 Forbes profile, "Royal would grow, then reap some profits; grow, then reap. During the moneymaking phases, De Zen invested some of the profits into commercial and industrial real estate around Toronto, which boomed during the Seventies and Eighties. When it was time to expand Royal again, he would sell property—a selfmade man building a self-financed business the old-fashioned way, out of scrimping, brains and sweat." De Zen also fashioned a structure for the company that enriched his partners while further driving growth. "As his business expanded," as explained by Forbes, "he set up plastic extrusion factories throughout Canada, the U.S. and Great Britain and incorporated each one separately, each with different minority partners. In each case, De Zen retained a controlling interest. That puts him at the center of a 'circle' of companies." In this way Royal spawned a collection of small companies. Furthermore, in order to better look after customers, once an account grew large enough Royal would build a dedicated plant and bring in the customer with 50 percent equity. Moreover, De Zen, no doubt remembering his experience at Pillar, made sure to award equity stakes to key employees in the factories they ran. De Zen also proved to be a savvy acquirer of struggling companies. In 1989, for example, Royal tried to buy 35 percent of publicly traded Quebec-based Plastibec Ltd., maker of custom profiles, for $2.20 a share. When that deal fell through, Royal was able six months later to acquire 90 percent of the business for just $1.65 a share. De Zen installed both his corporate structure as well as his patented technology to upgrade the operation, and within two years Plastibec had completed a successful turnaround. Whether home grown or acquired, the Royal collection of companies ran the gamut of the extrusion field, making Royal Group very much a vertically integrated enterprise. About all it needed outside the family was resin and some additives.

Company Perspectives:

Our mission is to provide the best products available to renovate, improve or construct a building, while striving to enhance the environment through recycling and maximizing returns for shareholders.

During the late 1980s De Zen revisited the dream of developing a commercially viable plastic house. Over the course of the decade both GE Plastics and BF Goodrich had invested millions in the quest, but all they had to show for their efforts were showcase prototypes, not practical products. De Zen proved tenacious in his pursuit of a practical concept, spending $50 million and devoting about five years to the development of a plastic house. Royal's plastic house relied on interlocking panels and connectors. The hollow sections were then filled with concrete to provide stability, while the exterior could be covered with any number of materials, such as brick or stucco. Construction was quick, taking three people using common hand tools just three days to put up a 500-square-foot house, a vast improvement over the months a conventional house required. The marriage of plastic and concrete offered another benefit: the houses tended to stay cool in the summer and warm in the winter. Furthermore, they were virtually maintenance free, impervious to rot, mold, mildew, and insects. The first Royal plastic house was constructed in Germany in 1991 and found ready markets in the Caribbean and Latin America. The structures soon proved their sturdiness, able to ride out hurricane-force winds and major earthquakes while wooden buildings were devastated. Within three years Royal plastic houses, schools, churches, factories, and medical centers were to be found in more than 40 countries, and were especially popular following such natural disasters as hurricanes and earthquakes when speed of construction to replace destroyed buildings was at a premium. As De Zen had always done, Royal spun off separate companies wherever there was strong demand for the housing system. Although there was a limited demand for such structures in Canada and the United States, Royal still found a use for the technology. In January 1995 the company launched a joint venture with Rubbermaid Incorporated, creating Royal Rubbermaid Structures Ltd. to make and market modular consumer storage sheds. Utilizing the same kind of interlocking plastic panels, the sheds could be put up by a lone person without tools in a matter of a few hours. At the end of 1996 Royal bought out Rubbermaid's share of the business.

Strong Growth in the 1990s

De Zen took Royal public in November 1994, keeping most of the voting stock for himself, more than 80 percent of voting shares as opposed to about 17 percent of equity. The fortunes of the company soared over the next several years, with sales improving from 20 to 25 percent each year. In 1997, in light of its increasing emphasis on technology, the company changed its name to Royal Group Technologies Limited. A year later it cracked CAD 1 billion in annual sales and approached CAD 1.3 billion in 1999. Royal continued to make strategic acquisitions that brought with them new product lines including fencing and decking. The company's research and development efforts also led to the introduction of a bevy of new products, such as wood grain finish siding, PVC window blinds that had the feel of fabric, imitation slate roof tile, and roof tiles and door frames that made used of recycled materials.

However business began to sour somewhat with the start of the 2000s. Royal invested a great deal of money to beef up capacity, but was unable to use it efficiently. It also had to contend with the rising cost of raw materials and the high valuation of the Canadian dollar. The company compounded its problems by consistently downgrading its earnings projections. Investors lost faith and the price of Royal shares dropped from more than $32 in June 2002 to just $7 in March 2003. De Zen did not help improve shareholder relations by accepting a $5.6 million bonus for 2002, which led to a contentious annual meeting and a number of shareholders voicing their anger.

No doubt feeling the pressure, De Zen announced his retirement in November 2003, although he retained 80 percent of the voting rights. The situation only turned grimmer for both De Zen and Royal when word leaked out that the Royal Canadian Mounted Police was launching an investigation to address allegations that De Zen and other executives defrauded shareholders by transferring money in 1998 to the St. Kitts Marriott Resort and the Royal Beach Casino, a luxury Caribbean development controlled by De Zen. In an effort at damage control, the Royal board of directors established a special committee of three independent board members to look into the questionable dealings. Although an outside firm hired to do the investigation found no wrongdoing on the part of the company, it uncovered conduct by executives and a lack of controls that the board found troubling. In November 2004 De Zen as well as CEO Douglas Dunsmuir and CFO Ron Groegan were ousted. According to a company press release, in 1998 a De Zen-owned company bought 185 acres of land for $20 million and immediately sold it to Royal for $27 million. The board neither authorized the sale nor was aware of the details of the transactions.

An interim management team was installed and began the task of rebuilding Royal's stock price and reputation. It remained a very valuable property, as demonstrated by the $1.05 billion bid for the company made by New York money manager Cerberus Capital Management LP in the spring of 2005. De Zen and other shareholders entered into an agreement with Cerberus supporting the offer, making it likely that Royal was about to return to being a private company as it entered a new phase in its history, minus its charismatic founder.

Principal Subsidiaries

Plastibec Ltd.; Novo Industries, Inc.; Novo Europe B.V.

Principal Competitors

Certainteed Corporation; Newell Rubbermaid Incorporated; Nortek Holdings, Inc.

Key Dates:

1970:: Royal Plastics Group Limited is founded by Vic De Zen and two partners.
1973:: The company begins exporting to the United States.
1991:: The first plastic house is constructed.
1994:: The company is taken public.
1997:: The name is changed to Royal Group Technologies Limited.
2004:: Top management is forced out.