erehwontim: NCNC CEO interview -
DAVID DUQUETTE - NEW CENTURY COMPANIES INC (NCNC)
CEO Interview - published 10/03/2005
DOCUMENT # ACP612
DAVID DUQUETTE is Chairman, President, Chief Executive Officer and Chief
Financial Officer of New Century Companies, Inc. Mr. Duquette has been
in the CNC machine tool manufacturing and remanufacturing business since
1967. From 1962 to 1965, he studied Electrical Engineering at the
University of Wisconsin. Mr. Duquette founded New Century
Remanufacturing in 1996. Prior to that year, he managed Orange Coast
Rebuilding for approximately eight years. Mr. Duquette was President of
U.S. Machine Tools from 1969 to 1985.
Sector: MACHINE TOOLS & ACCESSORIES
TWST: Can we start with a history and an overview of New Century?
Mr. Duquette: New Century Companies, founded in 1995, specializes in the
manufacture, remanufacture, and retrofitting of computerized metal-
cutting machine tools. Our products are used to make various components
such as jet engine parts used in the defense industry and component
parts for tanks. New Century machines cut and shape round metal parts to
a very precise tolerance without the use of an operator; the machine is
operated by a computer. New Century has chosen to fill this particular
niche because of the lack of such manufacturing companies in the United
States. Our primary competitors in the past have been companies in Japan
and Europe. However, New Century has a major competitive advantage in
the products that we manufacture. We buy used machine tools (these could
be 50 years old), strip them to bare cast iron, maintaining the actual
frame, and then add the latest technology and up-to-date components to
construct top quality machines. Our machines sell on average from 40% to
60% or 70% less than a brand new machine and uphold the same integrity
of a brand new machine. This process is beneficial because the iron is
older, making New Century machines heavier than brand new machines. They
perform as well or better than new machine tools. The market that we
serve varies from companies in the oil and gas industry, which has come
back very strong, to companies in the aviation industry (jet engine
component parts). Other consumers of New Century products are valve
makers that build large valves for pipelines in the oil as well as gas
industry and power gen companies that make turbine component parts. A
recent sale took place with Kayton Bearing, a company that makes very
large bearings for wind turbines; wind power is coming on strong. New
Century machines are also used in the shipbuilding business to
manufacture any round part that goes into ships like vessel tools,
torpedoes and gun turrets. So our machines serve a broad array of
industries, many of which have come back in a very strong way.
TWST: How big is the market?
Mr. Duquette: The machine tool industry, which includes various kinds of
different machines in the United States, was down $2.5 billion last
year, which had shrunk from a high in previous years. However, the
machine tool industry is coming back stronger now; it is going up to
about $5 billion. But our particular market, in the niche that we serve,
is about $300 million.
TWST: Is it growing?
Mr. Duquette: It is growing because machine tools have a usage of 10 to
15 years, and it continues in cycles. Every 10 to 15 years, companies
upgrade machine tools for two reasons: computer technology improves and
tools wear out. Although it is a long lifecycle, we are currently in a
cycle now; actually the 1990s and the early 2000s have not been strong
buying years, so equipment is now starting to wear out and needs to be
replaced.
TWST: Who is your competition in this space?
Mr. Duquette: Our competition, as I mentioned earlier, is the Japanese
and European market; three or four companies from Japan and Europe. The
dollar's recent gains on the euro and on the Japanese yen have made them
less competitive. So there are now a lot of Japanese companies that only
make deliveries seven and nine months, mainly because of the fact that
the Chinese market has increased dramatically and they've switched their
emphasis to that market.
TWST: When you talk about Japanese competition, are they doing the same
thing as you're doing or are you competing with new machines from those
players?
Mr. Duquette: No, we are actually a very unique player in the fact that
we start with the base or casting of a machine; that's where we get our
intrinsic value! These machines weigh 50,000 to 200,000 pounds and
that's just the raw material, iron. That's our big advantage compared to
steel going up the way it has. The raw cast of material in a steel
machine, before it's even molded into the shape it should be, or the
pattern, is over 150,000 pounds. And as I said, the Japanese and
European markets have really switched the emphasis from the US market to
the Chinese market now.
TWST: As you look out over the next two or three years, where do you see
the biggest opportunities for the company?
Mr. Duquette: New Century Companies was formed to be able to grow and
buy other companies in the manufacturing business. Our core business in
the machine tools is coming back strong now, and I expect it to grow
next year to $15 million and continue to grow at a rate of 20%-30% every
year for the foreseeable future. But in the manufacturing sector, we
moved into a building here just prior to 9/11 with 400% more space than
we had before, and our utilization of this building is less than 50%. So
we are looking for other products. I came across a product of a company
called Quilite. Quilite is a plastic sound material for sound barriers.
Quilite comes in a 16-inch square plastic block with a unique shape that
cancels sound. It is put together in a frame and it can be either 4x10
or whatever size people want. The unique feature of Quilite as a sound
barrier is it is lighter than a concrete block wall as well as anti-
graffiti versus concrete block wall. It can go up 5 times faster than a
concrete block wall on a highway barrier. The cost has gone up
dramatically due to Hurricane Katrina and so forth, cement and building
material blocks have gone up dramatically when compared to the last year
and Quilite is actually cheaper now. To put up a sound barrier along the
highway, Quilite is now cheaper than concrete block wall and can go up 5
times as fast. So we have entered into an agreement with Quilite to do
all the manufacturing assembly here at New Century. Quilite was
developed by a Hughes guy over the last 15 years and he has the patents
for North and South America and Europe. New Century has an exclusive
agreement to manufacture all of it here. Quilite just started their
manufacturing in the last few years with several projects, including a
project in Las Vegas for over $600,000. The unique thing about Quilite
is that the company can grow to be $300 million in a very short period
of time. Currently, they are quoting on a project in Texas for a rail
siding going along behind a housing project. The rail project it is
being quoted on is 30 miles long and $1 million a mile for Quilite.
There are uses in a lot of other areas besides the sound barrier on
freeways. It has also been used around skateboard parks where the kids
are making all kinds of racket with the skateboards. In San Diego, the
Coors Amphitheater is surrounded by a big sound-proof wall. It was used
for the bus stops under harbor freeways locally here in California and
the reason was, it was anti-graffiti; the city saved $1 million in
maintenance by putting up Quilite for the bus shelters versus what they
had before because of the graffiti. So the uses of Quilite are unlimited
and the amazing part of what Quilite will do for us is our overhead is
already fixed and in place and all the manufacturing that we do for
Quilite is profit that will go right to the bottom line.
TWST: Why did they come to you for this?
Mr. Duquette: It was a unique situation. We have a part-time CFO, who
worked for Northrop before becoming the CFO of Quilite. He approached me
about manufacturing Quilite and purchasing everything outside. We agreed
it would be a unique opportunity and because of the relationship with
our CFO, being the same for both, we signed an agreement to complete
this. We have, as I said, the facility to be able to assemble it and
since we are central in California, it will be easy to ship.
TWST: When will this start up?
Mr. Duquette: We have already signed the agreement and will begin
discussing the assembly of the product this month. We are excited to see
the product grow dramatically. We are currently quoting projects in
Calgary and Toronto, $2 million at a clip. I just had a call from a
friend of mine who is a builder/developer who saw our news release about
Quilite. He called me and said, 'David, I am building a massive housing
project in the Phoenix area. What is the price of this?' He priced out
the concrete block wall and Quilite was going to be cheaper, go up
faster, and is anti-graffiti. So he said, 'David, I am going to start
using Quilite in our developments.' And as we grow and our manufacturing
capabilities grow, this is a great product for somebody like Home Depot
or one of the major building supply houses to have in their stores,
where people want to put up a block wall around a house. Another
interesting fact about Quilite, it will be used in a project in the
Seattle area on an overpass on the 405 freeway. They specified it has
to be Quilite since nothing else can be used. We are quoting a project,
for instance, around a railroad switching area in Pomona, where a train
changes the rail cars. That project is $2 million. So Quilite has a huge
upside.
TWST: What is the cost for you to get started on this?
Mr. Duquette: Our cost to get started is only labor. Everything is just
putting the stuff together here because the plastic extrusions come to
us and we assemble them in a frame. So there is no startup cost, just
labor and utilizing our building, which we have.
TWST: Are you able to find the labor you need?
Mr. Duquette: Yes, it is non-skilled labor. That is the other nice part
about it. We set up some tooling to be able to automate it, so that it
goes together very easily.
TWST: If we look out over the next two years, what kind of growth are
you capable of generating with this new product?
Mr. Duquette: We will start off next year, around $15 million in it;
however, once we are really organized, the product can grow to $300
million over the next several years, easily.
TWST: How long is your contract to do this?
Mr. Duquette: We have an exclusive arrangement with Quilite, and the
gentleman who actually started Quilite, Rod Kotter, is looking to our
management to completely take operation over at some point.
TWST: Do you have the management to support the kind of growth you are
talking about?
Mr. Duquette: Yes, we do. As I said, Steve Werkheiser, who is our CFO,
came from Northrop Corporation. At Northrup, he was the CFO in
manufacturing. My background: I have been in manufacturing; I am 60
years old and I have been in the machine tool business and manufacturing
since I was 21 years old. My partner, who I started New Century
Companies with, Josef Czikmantori, is about my age, and he's also been
doing this for many, many years. And then we have our engineering talent
in Jim Dodds, who has been in the field for a long time. As you can see,
we have the necessary support and background to do this.
TWST: At the manufacturing level, do you have the people you need to
supervise the construction of this?
Mr. Duquette: We have an extremely strong core of people who have been
with our company for the last 10 years. Since we started our core
management group this year and as we grow, we're basically adding
laborers, mainly machinists and mechanics, and California, over the
years, has had a lot of aerospace manufacturing and defense
manufacturing, so the potential is here.
TWST: Do you have the financial resources to support that kind of
growth?
Mr. Duquette: The interesting thing about both Quilite and New Century,
the machine tool part of our business, is that when we secure an order,
we get significant upfront payments. We get 35% in the machine tool
business with our order and then process payments as we go along. By the
time we get our second payment, which is usually 30 or 45 days, we have
55% of the money and so, as we grow, the cash flow comes from our
customer base and the same goes for Quilite. In that case, Quilite is
generally dealing with either municipalities or very, very large
contractors, and there is an upfront fee for the material cost of the
job to start with. So a lot will be financed directly from the customer
base that we'll have. As our stock appreciates (I feel we are
undervalued now), we will probably do some outside equity financing as
well.
TWST: Why is the stock undervalued?
Mr. Duquette: I think the word hasn't really gotten out. What's happened
is after 9/11, we took some significant losses because the majority of
our business was in aerospace, and everybody knows what happened to
aviation after 9/11. And then the second hit we took, a large share of
our customer base was in the energy business and when Enron collapsed,
it took another major portion of our customer base away. So we suffered
significant losses for three years and, as of the beginning this year,
we've finally cut our losses and returned to profitability in the first
and second quarters. That's because business has come back in all areas
with the glut of machine tools on the market after the collapse of 9/11
in the industry. That's all absorbed now, so the market has turned from
a buyers' market to a sellers' market, and our pricing has been able to
come up. Our pricing is now up 30% from what it was a couple of years
ago and the market will bear it. That's the difference right now. Now
it's just getting the word out that the industry has turned around.
TWST: What did you do internally to speed the turnaround?
Mr. Duquette: Internally, we branched out into other marketplaces over
the last three years. We were, as I said, highly dependent on energy
companies like Enron, the people there who made turbines, and also
highly dependent on people who manufactured jet engines. So when those
two markets failed, I started looking at other markets and we found it
in oil and gas, in defense, construction, and a lot of companies such as
Caterpillar and their support people use machine tools to manufacture
their products. So by diversifying into other marketplaces and looking
for other markets, we actually have everything coming back now. We are
hitting on a lot of markets that are all very strong right now. And even
the cleanup from Katrina, all the reconstruction that has to be done
down there, will generate tremendous construction emphasis and that
drives people to buy backhoes and buy John Deere tractors and
Caterpillar bulldozers and things, so you just look at CAT, CAT's come
back very, very strong.
TWST: If you were sitting down with potential long-term investors, what
are the two or three reasons you would give them to take a look at New
Century?
Mr. Duquette: Take a look at our growth opportunities; now that the
economy is in turnaround in all areas, with Quilite, New Century is well
poised to grow very, very rapidly. And second, our bottom-line profits
as we get back to where we were in sales, our next year sales at an
annual level of just New Century, the machine tool part, had $15 million
and would generate over 20% bottom line profits, mainly with no tax
because we have very significant tax loss carry forwards. And then, if
Quilite, based on $15 to $20 million sales, puts significant profits on
New Century's bottom line. We have the facility and the fixed overheads
now to generate those kinds of profits without adding any additional
overheads.
TWST: What's the risk? What can go wrong?
Mr. Duquette: What could go wrong? Another 9/11 or something that can
devastate an industry, or a recession ' but those things are very
unlikely. I mean the cleanup alone that Congress has authorized in the
construction area means construction is going to stay very, very solid.
We're seeing a tremendous amount of activity for the oil and gas
industry. What has to be done to replace the platforms that were lost?
All those markets are going to stay strong. I don't believe that they
are going to weaken.
TWST: Is there anything else we should touch on?
Mr. Duquette: As I said, I think our stock is very, very undervalued at
this point in time. We only have 8 million shares out total, with less
than 3 million shares in the float, so it's a good opportunity at this
time for people.
TWST: Thank you. (TJM)
DAVID DUQUETTE
Chairman, President, CEO & CFO
New Century Companies, Inc.
9835 Santa Fe Springs Road
Santa Fe Springs, CA 90670
(562) 906-8455
(562) 906-8459 ' FAX
www.newcenturyinc.com
e-mail: info@newcenturyinc.com
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