Frank Silvestro admits he isn’t sure what went wrong with Ecology & Environment’s ill-fated push into China, but he’s vowing that the Lancaster environmental services firm won’t make the same mistake again.
E&E last year wrote off nearly $7 million in investments it made in China – a big chunk of money for a company with $134 million annual in sales. It was a move that triggered a gut-wrenching shake-up at the company and signaled an abrupt change in course in a market that the firm’s then-president had hailed as one with great opportunity just a year earlier.
“We’re a company in transition,” Silvestro, E&E’s chairman and one of its co-founders, told shareholders last week at the company’s annual meeting.
“Part of it is internal problems of our own making,” he said. “We’re solving our internal problems. It takes time. But we’re going to come out ahead.”
When the dust settled last fall, the 43-year partnership between E&E’s four founders was in shambles. Gerhard J. Neumaier, the firm’s long-time chief executive officer, was stripped of his duties as chairman. Neumaier’s son, Kevin, who had succeeded him as CEO, lost that post. Gerhard Neumaier’s nephew, Volker, was fired as the manager of E&E’s Chinese subsidiary. And in the saddest turn, Gerhard Neumaier, one of the region’s greatest champions of the environment, suffered a heart attack and died in late October.
The crumbling of the partnership left a trail of bitterness. The Neumaier family last week cast its votes against – but failed to block – Silvestro’s reelection to E&E’s board.
E&E’s venture into China was at the heart of E&E’s internal issues. Kevin Neumaier had hailed the effort as a great opportunity for E&E to grow in a vast new market. But when E&E’s board began taking a closer look into the company’s operations as its sales sagged and its stock sank last year, they saw red flags in China and pulled out.
Naturally, that had shareholders like Paul Durnan of Burlington, Ont., wondering what was going on, especially when E&E’s stock fell by 1 percent in last year’s red-hot stock market.
Silvestro’s answer was stunning: Even now, Silvestro said he’s not sure exactly what happened with the Chinese venture. “It was handled by a small group and it was handled pretty much in secret,” he said.
“It was controlled by a family,” Silvestro said, referring to the Neumaiers. “The father was chairman, the son was president and CEO. The nephew was running things in China... The communication was basically between all of them.”
Silvestro said E&E officials are still trying to figure out what went on. “We’re just scratching the surface,” he said. “Our records and our files right now are a mess,” Silvestro said, adding that the company is trying to organize its files and emails to determine what happened. “What I know right now is 99 percent hearsay.”
But China wasn’t E&E’s only problem. The company, which traditionally has been virtually debt-free, was starting to borrow more, with its debt topping $15 million at its peak. And E&E’s cost structure was way out of whack, said Gerald Stroebel, another E&E co-founder who replaced Kevin Neumaier as CEO.
So E&E started remaking itself, starting with a 10 percent reduction in its staff that shaved $8 million off its annual payroll. It stopped borrowing and started using its healthy cash flow to pay down its debt, which already has been cut in half, and will be down to around $6 million after the company makes another $1 million debt payment next week, said John Mye, E&E’s chief financial officer.
And it adopted a much less risky business approach, shunning potentially big opportunities in new, yet unfamiliar, markets like China and Kuwait – where it took years for E&E to get paid for work that it did after the Persian Gulf War. Instead, E&E’s brass prefers to focus on growth opportunities in places, like the United States and South America, where it already has a solid presence and relationships with both clients and government agencies. It’s business in Peru generated $12 million in nicely-profitable sales last year.
“Instead of these one-shot wonders or two-shot wonders, we’re looking for more sustainable opportunities,” Strobel said.
That means expanding its presence in the fast-growing oil and natural gas markets by opening offices in Pittsburgh to serve clients in the Marcellus Shale region in Pennsylvania and in Bismark, N.D., for work in the Bakken Shale – an initiative that already has yielded $1.5 million in new revenue.
It means pursuing more opportunities for work like it did in developing regional sustainability plans for four different regions in New York, developing a road map for improving energy efficiency and developing renewable energy sources, along with other issues, such as better waste management practices. That effort already has been worth $4 million to the company and will yield another $4.5 million as it moves into the implementation phase.
That doesn’t mean E&E won’t consider doing work in riskier markets. But Silvestro vows that the company will be more cautious when it does. “We’re not going to do business with those people on their terms. We are going to do business with them on our terms,” he said.
“We’re not a bank. We’re not a casino,” he said. “We want money in advance and we want contracts that are enforceable.”
The cost-cutting already has paid off. E&E’s profits jumped by 57 percent in the quarter that ended in October, even though sales were off by 6 percent.
John H. Bair, a suburban Cleveland money manager who has been an E&E investor for the past five years, said the shift to more sustainable markets was a “commendable” move by E&E’s executives.
“There’s a real change going on here,” he said. “It’s like the old saying, ‘Fool me once, shame on you. Fool me twice, shame on me.’”