When Jay Gould joined American Standard Brands as president and CEO in January 2012, the company was on life support.
“We were coming off a quarter of losing $20 million in cash flow. We were dipping into our revolver and my controller was saying, ‘Jay, I’m not sure we have enough cash to last the year,” Gould recalled.
What had gone so wrong for the venerable manufacturer of bathroom and kitchen products? The once dominant plumbing brand in the United States had lost its leadership position, competing against Kohler in every category of fixtures and fittings, and against so-called “short line” companies in specific categories, such as Delta and Moen in faucets.
By the late 2000s, the company had been acquired and split up, the North American plumbing group acquired by Bain Capital, and then acquired again by Sun Capital. At the same time, the company underwent frequent chief executive changes, dating back more than a decade, as well as priority shifts and layoffs.
“My predecessor had a tendency to reorganize three times a year and downsize twice a year,” Gould said.
So it was little wonder that when Gould commissioned a culture survey in early 2012, American Standard Brands scored in the lowest quartile of all companies measured by the Denison Organizational Culture Survey. “You could literally feel the fear in the culture,” said Gould.
“Previous leadership had taken costs out of the company, but to what end? Jay Gould was probably their last ditch effort at value creation,” said Bill Neale of Denison Consulting.
Gould relished the opportunity to, in his words, “energize an iconic American brand.” One of his first steps was to hold a town hall meeting for employees at the company’s headquarters in New Jersey. He used this meeting to start to rally employees around what he saw as core values of American Standard innovation, teamwork and responsibility. Then he hit the road, visiting American Standard facilities and customers across the U.S., Canada, and Mexico.
“Jay’s willingness to get in front of people and say he didn’t have all of the answers was important,” said Rocky Jacopetti, a change management and human resource consultant brought in to help with the American Standard turnaround. “So was his team’s commitment to transparency and accountability. First there was a 90-day action plan, and a 100-day assessment period that included interviews from direct reports – the first time, incidentally, they had ever been asked for feedback.”
Gould brought to American Standard a fundamental belief that “strategy matters but people make it happen.” The Denison survey revealed that employees didn’t have a sense of where the company was headed and so they had little engagement in the process. So he looked for ways to bring the company’s culture together.
“I realized right away that job one was mine, to carve out a new purpose-driven strategy for the company,” Gould said. “I’m a believer that you get the best results from people when they bring not only their heads but their hearts to the office.”
To facilitate that, Gould decided to focus the company’s mission on “raising the standard for daily living in people’s lives.” A research effort with the Bill and Melinda Gates Foundation to develop a low-cost latrine for the developing world has been a key to that effort. According to the United Nations, approximately 1.6 million people, many of them young children, die each year because of lack of clean water and safe sanitation.
American Standard sent a team of engineers to Bangladesh to study sanitary conditions. Within a few months, they had developed an innovative, affordable latrine pan called SaTo (for Safe Toilet). The pan uses a simple mechanical seal and water seal to reduce disease transmission by closing off pit latrines from the open air.
In early 2013, the company unveiled Flush for Good, a campaign to increase awareness of the global sanitation crisis and to involve customers in the company’s sanitation crusade. The campaign promised that for everyone who purchased a Champion toilet, American Standard would donate one of the SaTo latrines to people in Bangladesh.
“The results have been amazing,” says Gould. “During the promotion, sales of our Champion toilet, which is our most expensive toilet, have been up 62%. It made me realize that people want more than to just buy a toilet that functions. They want to join a brand that can make a difference in the world.”
Gould says the firm’s dedication to improved global sanitation is also proving attractive to young talent. “The fact that we are trying to make a difference in the world makes them want to come work here,” he said.
These steps to repair American Standard’s culture have shown traction already. A follow-up employee survey by Denison raised American Standard’s ranking from the bottom quartile to the top quartile, one of the most startling transformations Denison had measured in the last 30 years. Gould says their “archeological” approach to rediscovering the company’s core values, rather than inventing new ones, allowed for the rapid turnaround.
Back on the Growth Track
While Gould has made dramatic strides in bringing the company together, he didn’t ignore the financial realities facing the company. He took three existing supply chains and integrated them into one that reported to him. He also focused on revenue and gross margins so that the company had money to invest in its products, processes and people.
Gould says American Standard has increased its revenue by $200 million and expects top-line revenue to increase 15% in 2014, accelerating from the 9.5% growth it enjoyed in 2013. In 23 months, the company has grown its gross margins by 700 basis points, Gould notes.
Of American Standard’s 5,500 employees, 4,000 are in Mexico, where it has had had operations for more than 30 years. Gould says the large manufacturing footprint in Mexico is a source of competitive advantage but he had culture repair to do there as well. Gould noted that one of the cornerstones of American Standard’s turnaround has been disciplined execution with the right metrics, and Mexican managers felt they had been disenfranchised to a degree and not provided the right metrics.
“The management team didn’t feel they owned the metrics,” he explained, “so we asked them to develop their own metrics.”
Gould says the wage inflation in China has made American Standards’ investment in Mexico increasingly valuable. As the company’s financial picture has improved, it has ramped up its capital investment in Mexico, from $12 million in 2012 to $18 million last year and an expected $30 million in 2014.
The investments in Mexico are designed not only to modernize plant equipment but also to accommodate expected growth. Gould points to the company’s new product development, in particular its launch of a new luxury line, DXV by American Standard. DXV refers to American Standard’s 15th decade in business and will offer classic design themes in products combined with modern engineering. The company also expects significant growth from a deal with Ferguson Enterprises, the largest wholesale plumbing distributor in North America, to carry American Standard's products.
Innovation has been a major focus of Gould, a former chief innovation officer at Coca Cola. He has reinvigorated the firm’s marketing research “to allow us to have the right customer insights to drive innovation.” American Standard has added an advanced concepts team to work on new technologies and built a network of strategic suppliers to help with technology development. Gould says income from new products will grow from $15 million in 2013 to more than $70 million in 2014.
Gould adds that the other important piece of the innovation puzzle is “making sure that our innovations aren’t secrets in the marketplace.” American Standard launched its first national advertising campaign for Champion toilets last year. In 2014, Gould says the company will continue to market Champion toilets, introduce a campaign for the new DXV line and in the fourth quarter “launch a new hydraulic system for toilets that will be the most revolutionary new product in the toilet category in the last 20 years.”
Under New Ownership
American Standard’s financial picture received a substantial boost when Lixil Group Corp., the Japanese building products company (IW 1000/309), purchased the company for $542 million in June 2013. The acquisition was part of a strategy, led by Lixil CEO Yoshiaki Fujimori, a 25-year veteran of General Electric, to globalize the company.
“It has provided us the capital stability to continue to win in the marketplace,” said Gould. “With Lixil, we get expanded manufacturing and some tremendous engineering capabilities.”
Add to that Lixil’s 2013 acquisition of Germany’s Grohe Group, said Gould, and the combined enterprise “will be the world’s largest kitchen and bath business again.”
Gould said American Standard’s improved culture scores, its distribution deal with Ferguson and the purchase by Lixil all point to a company on the right track again.
“When Lixil committed to buy us at a 13 multiple, they knew the future of the company was valuable,” said Gould. “It’s our customers, employees and investors. When we can have all three of those constituents aligned about where we are going as a business, magic happens.”