HARRIS AIMS TO KEEP RAISING THE (RE)BAR

Fabricator's record profit attracts analysts' attention

BY TIM LAI
MONDAY JUNE 13, 2005
UPDATED AT 11:28 AM EDT.

BURLINGTON, ONT. - Coming off 2004, during which it raised its financial and production bar to record levels, Harris Steel Group Inc. is trying to cement itself at the top of the industry this year.

The Toronto-based steel fabrication and processing company has emerged significantly stronger despite soaring steel costs by making smart acquisitions in key locations, maintaining its entrepreneurial culture and achieving a smooth succession after the company founder's death.

“While opportunities continue to flourish in the current high-priced steel market, finding the best human capital to manage the branches of this decentralized company is the greatest challenge”, said chairman and chief executive officer John Harris, 52, who took over the top spot after the death of his uncle, company founder Milton Harris.
"The scarce resource of any business is the energy of management," the 31-year industry veteran said.

President and chief operating officer Paul Kelly agrees: "Our ability to grow our business is today constrained more by [the challenge of finding] the right people than it is by our financial ability to finance growing the business."

Earlier this year, Harris Steel, which has 1,600 employees, acquired four businesses in the booming B.C. and Alberta markets to go along with its 37 operations in Canada and the United States. Through its three divisions ~ Harris Rebar, Laurel Steel and Fisher & Ludlow — the 51-year-old company has prospered in producing and selling rebar, cold-finished bars, cold-drawn and welded wire and iron gratings to the construction, automotive and mining sectors.

The company's plants work fairly independently of each other, but report back to head offices.

"There's a very unique entrepreneurial culture [at Harris,]" said Mr. Kelly, 46. "Our branch managers, as an example, in some senses manage their own businesses without having to risk their own capital."

Company founder Milton Harris died from cancer in March at the age of 77. Because of his age, succession plans had been discussed for several years. So when his nephew took over, management principles remained the same.

"The secret of Harris Steel didn't lie with any one individual," John Harris says, who mainly looks after the reinforcing side of the company, while Mr. Kelly, who has three decades of steel experience, manages the industrial side. Over the past year, several moves were made to increase the liquidity of company stock. A common share was created, then split four-to-one last July. Harris Steel had a record annual profit of $71.5-million or $2.67 a share last year. In the first quarter of 2005, it posted a $12-million profit, steady with the year-earlier figure.

Its highly capitalized balance sheet has allowed the company to advance its position in the marketplace. Mr. Harris says that, by having significantly more cash than its smaller, privately owned competitors, the company has a distinct edge when bidding for big projects because it has the resources to complete the jobs.

"They are struggling to do half the business that they were doing two years ago," he said. "If you compare us to anybody else we compete with in these product lines, we buy more steel in more places and sell more steel in more places."

Mr. Kelly says high steel prices haven't been a hindrance to Harris Steel, rather a welcomed opportunity. "We're able to take advantage of a high-priced steel environment where many of our competitors don't have the same resources to do the same volumes of business. If they can’t do the work, we can step in and fill the voids."

Harris executives predict the industry will continue to see high steel costs in the foreseeable future. But it says it has the capital to cope with significant price changes.
"We do best with the volatility, but that's because we've never experienced a long period of steady steel pricing," Mr. Kelly said.

While Harris Steel has been prominent in its sector for years, analysts have finally started to pay attention. "We've gone from no analyst coverage to six," said Flora Wood, investor relations manager.

For the most part, analysts say that Harris Steel is raising the bar in the industry.

"You've got a company with no long-term debt and you have a company with a substantial working capital position," said analyst Sara Elford at Canaccord Capital Corp. She said she expects Harris to grow further, and to play a significant role as North America heads into a cycle of replacing and refurbishing much of its infrastructure because of age and population growth. She suggests it's a company that investors should closely examine-Meanwhile, steel customers profess satisfaction with their dealings with Harris, especially the way the company foresaw the escalation in raw material prices, and gave them advance warning so they could prepare themselves. "They [Harris] follow their business and supply side very well," said Bill Fraig, president of Calgary-based Graham Construction and Engineering Inc.
Although the developing world ~ especially China and India — is becoming a major player in the steel industry, Harris Steel doesn't have foreseeable plans to expand into those markets. "We see opportunities far closer to home, and more opportunities than we can manage," Mr. Harris said.

He said the company will work to increase its public profile, but will mainly stick to the principles that got it to where it is today. "I'm confident we'll continue to grow, and probably at a faster pace."

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