Confluence continues to paddle rough water

Confluence Watersports was forced to eliminate 71 positions on April 19, resulting in 69 layoffs. What follows is our attempt to separate fact from fiction and offer some meaning to the difficulty Confluence is in, if we can.
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Confluence Watersports was forced to eliminate 71 positions on April 19, resulting in 69 layoffs. Of the two who were not laid off, one was a company controller who was let go in January and the company has decided not to fill the position. The other, Keith Wallace, was the brand manager for Wave Sport who has resigned and, again, the company elected to eliminate the position.

Needless to say, SNEWS®phones have been burning off the hook since Friday with anyone and everyone trying to get a word in and ferret an opinion out. What follows then is our attempt to separate fact from fiction and offer some meaning, if we can:

What happened?

Though senior management pulled the trigger on the layoffs, the decision to reduce the staff came as a result of direction from Confluence's new majority owner, American Capital Strategies (ACS) -- www.american-capital.com. SNEWS® has quietly been watching ACS since we became aware of its majority position in the company as of February 2002.

By all accounts, it is a company of shrewd investors and has long had a stake in Confluence -- since November of 1998 -- along with another equity company, Westbury Equity Partners -- www.westburypartners.com -- and a group of original owners/investors including company founder Andy Zimmerman. ACS gained control of the company this February when it became apparent Confluence needed additional capital -- as much as $3.5 million worth by our best estimates. Westbury apparently balked. ACS stepped forward and committed, but at a price -- majority control. ACS now owns 75 percent of Confluence. Westbury retains a 20-percent share. As for the original private investors, they've been relegated to a 5-percent share according to sources.

It is important to understand that ACS would not have risked continued investment in Confluence if it did not see potential. After all, the company is very much about making money for its investors. Since money is its ultimate and only real product, profits are of paramount concern.

So, ACS sent a team into Confluence to analyze the company from top to bottom. What that team determined, according to company insiders, is that the company had numerous duplications in staff duties and was running too rich on staff in other areas.

Bill Medlin, CEO of Confluence, told us -- certainly more diplomatically than many who've contacted SNEWS® -- that ACS felt the company needed to position itself to ensure success in a lean market and that layoffs were necessitated by the perception that the economy is flat and that product research and development were still critically important.

The result of all the analysis is that ACS mandated that Confluence management cut its staff by 30 percent, which resulted in the layoffs among office staff, customer support staff, and administrative staff.

At its peak, in January of last year, Confluence retained 327 employees on payroll. While staffing reductions and adjustments were already commencing, the first significant layoffs in company history hit the end of March 2001, when 48 folks in North Carolina and 7 in Vermont (Confluence was still operating its Mad River facility there) were given walking papers. At the end of that layoff and employee reduction spate, Confluence ran with a leaner staff of 250. The payroll grew as production ramped up again to 268 employees at the time of the layoffs. Currently, Confluence has 197 staff with 187 of those in house and the other 10 split among Canadian sales support and direct sales positions.

Was Confluence losing money?

According to our best estimate, piecing together numerous conversations, Confluence was, in fact, profitable, though apparently not enough for ACS. Looking back at notes from last year, by early December, Confluence had increased profits by nearly 9 percent over the year prior, despite shipping about 2 percent fewer boats than the year prior.

We also know that this year Confluence was expecting sales to increase nearly 18 percent and that profitability would be up 50 percent.

When pressed, Medlin confirmed that the first few months had not panned out as plotted, with only 1- to 2-percent growth instead of the 5 percent anticipated for the first half of the year.

Medlin also told us company inventory levels are 15 percent below where they were at the same time last year, which is a good thing. He also told us that Confluence management still believed it would realize the sales increases during the second half of the year.

So, if the company was profitable, why the cuts?

Welcome to Business 101, taught firsthand by the financial experts of ACS. The cuts are harsh, yes, but, frankly, not unexpected given the reality of the situation. Confluence is now owned by investors who can be expected to vigilantly watch every dime coming in and going out. All ACS has really done is force Confluence to be unbelievably fiscally responsible to the point that the company is in position to self-fund its own R&D, self-fund its own financials -- carrying costs, interest, etc. -- and still have sufficient cash flow for the investors to be able to have some say in what is done with the profits, including the possibility of paying dividends, we're sure.

True, the timing of this decision couldn't have come at a worse time for Confluence as now is when a boat manufacturer is revving into high speed with preseason deliveries, some fill-in, and ramping up for Outdoor Retailer Summer Market -- not exactly slack time anywhere. So, now Confluence will have to do more with less or it will end up delivering less simply because someone wanted more.

Is Confluence in trouble?

Only time will tell. At first glance, it appears as if Confluence may have been forced into operating as a lean, mean, paddling machine, and that's not necessarily bad. No, you may not get a customer service person first ring anymore, but as long as they're still answering phones, all should be well with the world. The senior management team is still solidly in place and key folks, such as Mad River's Buff Grub, remain firmly in place.

And, while some have worried aloud about Mad River's future, Medlin told us that Jim Henry and a team of other designers is working on outfitting changes and modifications for Mad River that will have as much impact as Phase 3 had last year in kayaks.

Is ACS wrong in its assessment of the market conditions?

Possibly, but then again, only time will tell.

We do know that Watermark told us it just finished filling more orders for boats this month than in any month ever. Old Town canoe also told us that while January and February were tough, March was well above budget and April appears to be every bit as strong. Two big players moving volume doesn't really indicate a dip in the market.

Our check in with retailers offers a mix of good and flat, depending on the region and the prevailing weather patterns. By all accounts, sales to appear to be climbing across the board as April moves into May.

We do know that while Confluence scrapped its plans for a bigger and fancier booth at the upcoming Summer Market, it'll still have a completely redesigned booth in the same size space as last year.

Kelley Woolsey, senior vice president of sales and marketing for Confluence, is equally upbeat about the future for the company. "You will see us at OR with a much more aggressive product line and approach than ever before. Now, we can grow this company on our own and as painful as these cuts have been and continue to be, we are in a great position to continue to move forward with purpose."

One word of caution from SNEWS®:
We repeat -- only time will tell what this means to Confluence and its place in the industry. IF Confluence can prosper with a leaner staff, it might be a harbinger for similar approaches at other companies in similar situations. IF ACS can now get out of Confluence's way and let the folks that know the business run the company unimpeded, that will be good too. Still, we can't lose sight of this little fact any time we are dealing with an investment group -- money is its lifestyle, its raison d'etre. Investors, for the most part, do not invest in a company because they get all warm and fuzzy talking about the spiritual lift or adrenaline rush paddling gives them. Investors only get all warm and fuzzy talking about the ROI.

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