MEGA BRANDS lays building blocks for growth

The business of making toys isn’t exactly fun and games — more like the latest extreme roller coaster ride, complete with white knuckle loops, plummets, and 180-degree turns.

Take Montreal-based toy manufacturer Mega Brands Inc. Four years ago, the company was close to collapse, struggling under the weight of more than $300 million in debt stemming from its 2005 purchase of the Rose Art group of companies. Then, in 2010, it launched a sweeping five-year recapitalization plan to rebuild the business, in particular its flagship Mega Bloks construction-toy division. The results so far would’ve made Steve Jobs smile. The company capped a strong year in 2012 with soaring North American sales in the fourth quarter that contributed to a nearly 20-fold growth in net income; the toy maker earned $4 million for the period ended December 31, up from $234,000 a year earlier. Most recently, Mega Brands reported net earnings of $4 million in second quarter 2013 alone, strong results that bring it closer to achieving its goal of delivering $500 million of annual sales by 2014.

It hasn’t been easy and it hasn’t been done alone, but the turnaround promises to do more than replenish the company coffers; in a reversal of the now-familiar migration route, it’s also taking manufacturing from China and returning it home, in the process creating jobs — and possibly changing lives — in Montreal.

TOY STORY

Founded in 1967 by Victor and Rita Bertrand as Ritvik Toys, the company spent years simply importing toys from the U.S. and Asia into Montreal. The big change came in 1985, when Victor Bertrand invented the Mega Bloks line of stackable plastic brick toys. Five years later, the company began manufacturing this and other products in China through a series of subcontractors. The first name change, from Ritvik Toys to Mega Bloks Inc., came in 2002, when the company became publicly traded; the second, to Mega Brands Inc., came in 2006 following the acquisition of several brand names — Rose Art among them — not associated with construction brick toys. By this point, the familiar shift of manufacturing from the home base to overseas had become almost total. “Rose Art had its own factory in Guangdong province, China, and by 2006 we produced 80 per cent of our globally-distributed goods in China and the rest in Montreal,” said Jean-Francois Albert, vice president of manufacturing with Mega Brands. “An obvious, and unfortunate, result was the gradual reduction of our staff in Montreal between the early 1990s and 2006.”

Cut to 2010. Mega Brands begins implementing its five-year recapitalization plan, which includes a three-year $35 million expansion, $11 million of which comes from interest-free loans from the Quebec provincial and the federal government. “We wanted to accomplish two things with the $35 million investment: modernize our production facility, and bring manufacturing that was being done in China back to Montreal,” Albert said. “The goals were in fact related — we needed new injection molding and counting equipment to make it cost-effective enough to justify reshoring production.” Over the past two years, Albert said, Mega Brands has bought eight new 300 ton Wittmann Battenfeld all-electric machines and related auxiliary equipment, along with injection systems from Mold-Masters Ltd. “The new machines operate 40 per cent faster than our other injection molding units, use 40 per cent less energy, and offer precision molding that saves $1 million in resin per year,” he said. “We now have approximately 80 molding machines in total, and plan on buying another 30 new units in the near future.”

The new automated counting equipment, meanwhile, was developed by Mega Brands in collaboration with a U.S.-based product filling machinery maker. “We mold an average of seven million parts per day in Montreal, in a wide variety of sizes, shapes, and colors, making it potentially difficult to obtain the accurate part counts per product bag that our customers require,” Albert said. “Counting machines typically operate by weighing each part; some of our products are too light for that, however, so we worked with the U.S. company to create machines that use a visual system, and each machine can fill up to 150,000 bags per day without miscounting a single part.” As efficient as the molding machines are, the counting machines were perhaps the single most important component in the company’s reshoring plan. “We were able to come back to Quebec in large part because today’s automated counting equipment made it possible,” Albert said. “We’re also closer to most of our market here, which saves transport costs, and much closer to our design centre in Montreal.” Nor do their customers seem to mind. “All else being equal, big box stores like Wal-Mart prefer to buy products that are made in North America,” he added.

MADE IN MONTREAL

The 830,000-square-foot Montreal facility currently employs more than 1,200 of Mega Brands global workforce of 1,600; in addition to its Montreal and China locations, the company also runs a manufacturing facility in Tennessee. All of which still isn’t enough; Mega Brands also leases an additional 300,000 square feet of factory space in Montreal, and has approached the Quebec provincial and the federal government for up to $50 million in financial support to build a new production facility in the city.

In addition to housing the vast majority of its staff, the Montreal plant also cranks out more than half of the company’s global toy production, at least double what it did just a few short years ago. “We plan to continue bringing even more plastic block production back to Montreal,” Albert said. “The manufacturing of other kinds of plastic parts, however — such as figurines that have to be hand painted — will remain in China.” The company also plans to hire another 150 workers in Montreal, and — given that it’s currently gobbling up market share like a ravenous Pac-Man — these probably can’t start too soon; in the fourth quarter of 2012, Mega Brands outperformed larger competitors Mattel and Hasbro for the fifth consecutive quarter, its toy sales grew by 21 per cent, North American sales rose by 22 per cent, and international sales were up seven per cent. “As our business continues to grow, it’s important to us that any new hires in our manufacturing facility are local residents,” Albert said. “It’s not always easy to find qualified local workers, so we often have to invest in their training. But it’s worth the effort, because importing employees from China defeats some of the purpose of reshoring to Montreal. We’re proud to have employees from more than 40 countries working in our Montreal plant.”

In the end, while the financial turnaround is nothing to sneeze at, it might just be the success of the reshoring plan that the Mega Brands management is most proud of. “We’ve demonstrated that it’s possible to bring jobs in the plastics industry back to Canada from China, which is something almost no one thought possible a few years ago,” Albert said.

It’s a toy story we should all get a little excited about.