Sage to expand plant in Greenville

By Dick Hughes  

APRIL 13, 2010 8:34 a.m. (0)

The auto business couldn’t have been much worse last fall when two executives of Milliken & Co.’s automobile body cloth division went to Azalea Capital for financing to purchase Milliken’s storied business.

Azalea didn’t blink.

The Greenville-based private equity firm backed Dirk R. Pieper and Brian McSharry to create Sage Automotive Interiors. It was a major transaction, representing sale of a cornerstone division of the Spartanburg family business with roots to 1865.

The auto division had annual revenues in excess of $100 million, 1,100 employees, six factories (four in South Carolina, one in Georgia and one in Brazil), design and marketing staffs in Great Britain, Korea, Japan and China and manufacturing license agreements in Asia and Europe.

Started by Gerrish Milliken, father of Roger Milliken, the division long has been dominant North American supplier of auto textiles and recognized worldwide for top-flight research, cutting-edge synthetic materials and modern factories.

It always has been in Spartanburg, and Sage is renting space on Milliken’s 600-acre  campus until it can move its administrative and design staff of 40 to a new building on the International Center for Automotive Research in Greenville next summer.

Sage announced they'll be adding 80 new jobs and investing about $10 million additional dollars over the next five years.

The deal closed in September.  Financial terms were not disclosed – both parties are privately held– and Milliken, family owned and South Carolina’s largest privately held company, is famously secretive.

But it was the largest investment in Azalea’s 15-year history, and twice the size of its target of acquisitions up to $50 million in revenues, acknowledged Sage Chairman James M. Micali, who became an Azalea principal upon retiring as chairman and president of Michelin North American in 2008.

“Azalea took great comfort in knowing that when you buy a business from Milliken, you are buying a well-run, well-managed business that has stood the test of time,” said Micali.

Micali, Pieper and McSharry talked with the Journal about how the acquisition came about and their plans to grow the business with new products and more aggressive expansion in world markets.

Collectively, they bring more than 80 years of experience in the auto supply business to Sage.  Micali spent more than 30 years with Michelin.   Pieper, Sage president and CEO, and McSharry, chief operating officer, are veterans of 30 and 20 years respectively at Milliken. They all have high-level experience working in Europe, Asia and South America, areas targeted for Sage’s long-term growth.

The opportunity to buy the division grew out of Milliken’s decision to focus resources growing its other four divisions, even though the auto division “historically had been one of the more profitable divisions in the company,” said McSharry.

“I think they were looking out 40 or 50 years and saw that the North American automobile market probably was capped at 15 million units and that means the number of cars built in North America, so there weren’t the growth rates they thought were necessary.”

Also playing a role was the shrinking market share of GM, Ford and Chrysler, Milliken’s core business customers, and the growing share of Asian automakers.  Even as the purchase discussions were taking place, China surpassed the United States in production.

“Historically, a lot of our business at Milliken was focused around the Detroit Three,” said Pieper. “We had a dominant share and still do.   We’re the market leader, but in recent years we worked diligently to expand our share with the Asian transplants and have been successful … driven by the fact that we have a global footprint to service Asia and Europe and North America.”

Still, he said, Milliken realized considerable commitments of money and manpower would be required to compete in the changing world marketplace.

“Part of it was that because there were five operating divisions and they wanted to grow top-line growth.  To try to grow all five was a challenge for them, and I think strategically there were challenges to reduce the focal point,” he said.

Also playing into the decision, McSharry believes, was that Milliken as “a very traditional company, a company based in North America, their appetite for that global side of the market probably was not what was required in order to participate in those growth rates in other regions of the world.”

McSharry said plants inherited from Milliken “are the most modern automotive textile manufacturing locations probably in the world” and will not require additional investment beyond perhaps some new technology for perfecting higher performance materials.

The plants are Sage’s Cotton Blossom plant in Spartanburg, Gayley in Marietta, Sharon and Abbeville in Abbeville, Avalon in Tocca, Ga., and Autotex in San Paolo, Brazil.  Sharon, which Milliken planned to close, was kept open by Sage, saving 70 jobs.

In Asia and Europe, Milliken used “the Nike model” for manufacturing, providing the marketing, design and development staff and contracting with third parties to produce the goods.

While the Sage team is satisfied with that arrangement, Pieper said, “that’s one of the strategic issues in front of us. As to those investments, we may need to expand our global footprint to give us a low-cost manufacturing base in Asia. It is a definite possibility that we would do it.”

Micali, Pieper and McSharry said among the new products being considered are headliners and floor mats.

Pieper believes there are untapped markets for “what we call Yes Essentials,” consumer-driven fabrics for clean interiors now in their third generation with the next generation focused on sustainable fabrics.

“We feel like that has more market potential than anything else we do today,” said Pieper. “Performance, cleanable, anti-microbe, anti-static textiles in automobile is something we haven’t reached even a 10^th of the market.”

In the six months since the acquisition – when automobile production was running at the lowest rate in 27 years – Sage saw sales pick up in late 2009 and has had “a very good start to our 2010,” McSharry said.  He expects North American production “to go up each year until it gets back to that 15 million.”

“To put it into perspective,” added Pieper, “when we were looking at the business at the time we went to Azalea, the build rate was probably about 7 ½ million. So the year started around 8 ½ million and now is around 11 ½.  With no share loss, we’re clearly enjoying some reasonable growth just based on the market recovery.”

Still, said Pieper, “our assumption is that we are not going to grow the business only in North America because it will be some time predictably until it is 15 million, so we can’t rely on that to achieve the levels that satisfy the investors.”

Immediately, Pieper said, Sage is looking for – and “seeing excellent progress” in – growth in Brazil and for the longer term is “investigating a stronger presence in Asia and try to capture” the Chinese market.

“If you want to be able to participate in this business, you need to really have a global presence, and this is one of Sage’s strengths,” said Micali. “We’re going to continue to grow that over time.”

Micali said Sage was the first investment of a third Azalea equity fund that will have an order of magnitude of somewhere between $75 million and $80 million.