Takeovers and Manufacturers and Products and Manufacturing & Technology

Changes flowing at Delta; is sale next?

March 26, 2007

Amid sagging profits, locally based Delta Faucet Co. has parted ways with two of its top executives. And some analysts think Delta's parent corporation--tiring of its sagging performance--is considering selling the faucet manufacturer.

Company officials confirmed that Reinhard Metzger, who had served as Delta's president, and Vasken Altounian, its executive vice president of sales and marketing, have left the company.

Metzger was a longtime employee of Delta's parent company, Taylor, Mich.-based Masco Corp., and had served as Delta president since 2003. Altounian joined Delta in 1983, and became head of the firm's sales and marketing in 2005.

Delta employs about 330 at its headquarters at 55 E. 111th St.

Masco spokeswoman Kathleen Vokes declined to say if the two had resigned or were fired.

"They are pursuing other opportunities," she said.

Sources within the company said Altounian was dismissed and that Metzger left over disagreements about the company's direction.

"Economic downturns exacerbate opinions on what a company should do from within," said Matt Stevens, president of Florida-based construction management consulting firm Stevens Construction Institute Inc. "The construction industry has been hit hard, and a supplier like Delta is going to feel that hit. People get more vocal during these times, and sometimes heads roll."

While Delta's revenue has slowly grown from $3.1 billion in 2004 to $3.3 billion in 2006, its profits in the same period have fallen from $370 million to $280 million and its profit margin from 12.1 percent to 8.5 percent.

Delta has been hit hard by the downturn in the housing market and increases in materials costs, especially brass, industry experts said.

"The downward pressure on the market is just too great for them to keep up with cost increases," Stevens said.

Delta has not named successors to the two departed executives but will do so within 30 days, Vokes said.

The departures of Metzger and Altounian are part of a continued restructuring at publicly traded Masco. On Jan. 12, Masco announced that Jerry Volas would replace John Wills as the company's group president for plumbing and heating products. Delta is a primary property in that group. A Masco press release said Wills, who formerly served as Delta president, had resigned.

Forecasters predict a challenging future for Delta and Masco.

"If the pressure continues, gross margins will continue to contract," said Armando Lopez, industry analyst with Morgan Stanley in New York. "In 2007 and 2008, commodity costs, in addition to the housing markets, are key swing factors."

Housing starts were off 12 percent in 2006, and forecasters are calling for another 7-percent decline this year. Those declines aren't just pushing down the price of homes. They're also driving down the prices of everything that goes into a home, including faucets and other plumbing fixtures, which limits Delta's chances to raise revenue and profits through price increases.

Delta is also feeling pressure from its primary retail channels.

"Home Depots and Lowe's don't want to hear anything about price increases," said Keith Hughes, managing director for equity research for SunTrust Capital Markets in Atlanta.

The personnel shakeup and erosion of profits come in the midst of Delta's transition to selling more high-end products. For years, the company founded in 1954 has focused on basic, inexpensive fixtures.

Led by local ad agency Young & Laramore, Delta has launched a glitzy ad campaign for its upscale products in recent years. Young & Laramore will continue as Delta's advertising agency--at least for now.

The executive changes also come at a time Masco is trying to pare costs, including an announcement in February that 8,000 employees, about 16 percent of its work force, would be let go. Delta, which employs 2,400 at its headquarters and at manufacturing plants in Greensburg, and cities in Tennessee, Oklahoma, Canada and China, has not been immune. Seventy people were sacked at Delta's Greensburg plant--where 860 are still employed--in January, and analysts said more layoffs could be coming.

Hughes said the outlook for Masco is so troubling, company officials might consider selling Delta. A similar fate is faced by New Jersey-based American Standard Cos., which is selling its kitchen and bath division.

"There's equity cash out there to buy a property like Delta, and the situation with American Standard will get investors fishing," Hughes said. "The plumbing division has had some of the most disappointing results within Masco, but it could still bring in some needed cash in a sale."

Stevens said if Delta can contain its costs, expanding its high-end Brizo brand might be a smart strategy.

"Overall, the stock market is doing pretty well," Stevens said. "We're seeing that in the housing market. Most of the pain is being felt in startup and mid-level housing. The demand for high-end housing, and for products like Brizo, are doing much better."

Meanwhile, the strain at Delta is increasing.

"Masco stockholders aren't going to wait all that long for a turnaround," Hughes said. "And Delta is feeling that pressure. As that pressure builds, it increases the possibility of more drastic moves at Delta."

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