ASI asked a handful of business leaders to share their thoughts on the adhesives and sealants industry going into 2006. Here's what they had to say.

The participants:

Richard "Max" Maksimoski, Vice President of Research & Development, Elmer's Glue, Columbus, OH

Jerry Perkins, Vice President, Loctite Industrial, North America, Rocky Hill, CT

Lex Reynolds, President, The Reynolds Co., Greenville, SC

William M. Stratton, III, Vice President and General Manager, ARclad® Division, Adhesives Research, Inc., Glen Rock, PA

Q: What are your predictions for the adhesives and sealants industry in 2006 and beyond?

Maksimoski: (Elmer's) focus is on the consumer side of the adhesives business. We expect the revenue side to continue along historical growth trends. The cost side will be challenged by the volatility of oil prices (raw material and freight). The continuing challenge/opportunity of off-shore sourcing will be a hot topic in 2006.

Perkins: Adhesives and sealants will be an enabling technology in the 21st century that will allow manufacturers to work with the latest substrates and materials to design and assemble the best possible products. Henkel will play a significant role in the future by providing the adhesive technologies of choice for manufacturing and assembly across industries.

Historically, adhesive companies have developed new technologies and then searched for real world applications for their products. We strive to invest time developing products collaboratively with customers, identifying needs and applications based on customer input. By investigating customers' specific design issues, we learn and respond to their specific needs, such as key substrates, material recyclability, and other concerns. Then we deliver solutions.

By offering excellent customer service and support, there is unlimited opportunity to grow the adhesives and sealants business in the future, and Henkel and its shareholders are committed to excelling in this market.Reynolds: As long as the economy continues to rock along, I see no real changes. However, I believe that the high cost of energy is going to take a significant toll on the economy as a whole at some point. I am really amazed that it hasn't had more of an impact thus far.

I believe there are more problems ahead for the American auto industry, which will definitely have repercussions for our market. If any of the Big Three file for bankruptcy, I predict some real problems not only for the economy as a whole, but our industry in particular.

I believe the M & A activity in our market will continue to pick up, as it is still a very fragmented industry, though I do not believe multiples will attain the level they did in the late 90's. Also, I believe buyers will scrutinize deals more closely before closing on them.

Lastly, our nation's ability, or inability, to address some of the issues behind the loss of manufacturing jobs in this country could bode poorly for all of us. I have my doubts as to whether this Administration and the current Congress have the courage and wherewithal to tackle this "political hot potato." If we do not address the problems soon, it will be too late for all of us, but particularly for our children and grandchildren.Stratton: Many of the mainline suppliers will struggle with continued pressures from low-cost foreign competition and increasing raw material costs. However, certain segments of the economy that demand innovative new products will generally offer opportunities to grow prosperously. Overall, the industry will benefit as adhesives and sealants evolve to take on more of the bonding and assembly needs from general manufacturing, assembly, and construction. In addition, the healthcare field offers opportunities for those companies that understand the unmet needs of the industry and are willing to make the needed investments in facilities and technical resources.

Q: Where do you see the greatest opportunities for growth in the adhesives markets? Which chemistries are increasing in demand?

Maksimoski: We have recently introduced some innovative products into the Home Repair market (new spackle, wood fillers, fiberglass repair). With the continuing potential of the home building boom, we believe that consumers will be interested in improving the look and function of their homes. By providing innovative technology that better meets their needs for simplicity, effectiveness and ease-of-use, we believe that Elmer's will continue to be recognized as a leader in this segment. New chemistries, better tools and clearer instructions will drive this and will all be in high demand.

Perkins: Hybrid technologies are currently our hottest area of new product development. These systems combine the best complementary characteristics of two existing technologies into a new product offering. For example, in 1998, Henkel introduced light-curing cyanoacrylate technology, hybrid formulations that surface cure immediately when exposed to light, adapt easily into production lines, and require no second-step accelerators or activators. Any adhesive located in shadowed areas or behind opaque substrates cures naturally and quickly at room temperature due to a secondary moisture cure mechanism. Other hybrids are currently under development.

Also on the horizon for 2006 is an improved range of cyanoacrylates. The Loctite brand popularized cyanoacrylates for the industrial market in the 1970's as ideal one-part, rapid-curing, room-temperature adhesives. Next generation products will be more robust and versatile for an even broader range of applications and substrates.

One chemistry we've seen an increasing interest in is light cure. To address this demand, we have introduced a next generation of light cure technology that offers even greater capabilities, such as the ability to cure through colored substrates, reduced capital investment and maintenance costs, as well as reduced requirements for personal protective equipment and an increase in product throughput due to cure on demand.Reynolds: I believe there is good opportunity for new technologies and chemistries to compete against the traditional high-performance, high-cost products like PURs and Polyamids. Raising the performance bar with traditional chemistries, if it can be done, is one area of possibility.

I think hot melts will continue to grow at the expense of waterborne and solvent chemistries, especially in this country where energy costs have spiraled out of control and are not likely to come down anytime soon.

Stratton: The greatest opportunities for growth exist in meeting the needs of applications that require higher levels of performance beyond standard mechanical fasteners or traditional adhesives. Adhesives Research's focus is on developing the best solutions for our customers' specific needs, irrespective of the chemistry to solve their problem. As a pressure-sensitive tape manufacturer with capabilities in all of the key chemistries (e.g. rubber-based, acrylic, silicone), we typically apply the most appropriate chemistry and tape construction to meet our customers' needs.

Q: Do you see an increase or continuation in offshoring for production of adhesives and sealants?

Maksimoski: We see this trend continuing to grow. With the cost-innovation balance being so critical, we believe that the offshore production trends will continue, given their cost advantages. We do see the need for North American companies to use these savings to fund new product development and true innovation.

Perkins: Henkel is already well positioned to operate and leverage our competencies globally. As we already have a strong and established global footprint, moving offshore for Henkel is just a way of focusing our sales, marketing and production capabilities in another part of the world where we already do business.

Reynolds: I certainly see more raw materials coming this way. I am not sure about adhesives at this point in time, but it doubtlessly weighs on everyone's minds these days. Forgive me for "getting on my high horse," but American manufacturers have to deal with other nations (particularly China) on an uneven playing field, and unless that field is leveled somehow, the threat remains. Not only are adhesive manufacturers at risk, but our customers as well. We're all in this together, and something must be done to address the problems.

Stratton: We manufacture our products in Pennsylvania and Ireland. Our primary motivation for location of production facilities is proximity to our customers so that we may service them to the best of our abilities and fulfill their needs for new products more quickly. We have looked to Asia as a third area for product manufacturing to support our rapidly growing Asian business (much of it in China). However, with intellectual property protection in China being a major concern, any offshoring of production there will likely be limited to finishing operations, such as slitting and packing.

Q: How are raw material/feedstock price increases affecting product development and your bottom line? Will this activity continue through 2006?

Maksimoski: Oil prices are a key factor for the chemicals that go into our products, the resins used to make our packaging, and the fuel for running our processes and shipping our products. Though oil prices seem to have stabilized recently, 2005 was a clear indication to our industry that alternatives need to be developed. The more dollars that are required to pay for materials, the less money that is available for new product development, advertising and other critical business drivers.

Perkins: On an ongoing basis, Henkel monitors changes in petroleum prices and assesses their impact on feedstocks. Being a large global organization, we can leverage our purchasing power to source materials at the best prices worldwide. By continuously improving our sourcing, manufacturing, and distribution processes, we create the greatest possible value for our customers.Reynolds: Everyone that I talk to has suffered from what has happened over the last year or so with regard to escalating costs. Not only has it come in the form of raw materials, but in energy to run our boilers and fuel to power our trucks. Everything has been affected and no one has been spared. Let me give you an example: as of October 26, here were some of the prices countries were paying for Natural Gas (in U.S. $ per million BTU)- U.S. $13.90; Argentina $1.60; India $3.25; China $4.85; Saudi Arabia $0.75. The U.S. is at a great disadvantage and this will continue to affect our bottom line for years to come.

My crystal ball broke a few months ago, but my "palm reader" sees more of the same for the foreseeable future, unless, of course, we go into a recession.

Lastly, one of the greatest challenges facing us all is making sure we all do our part to act in a responsible fashion in response to all of these challenges. If we don't work together and show some discipline, it will hurt us all even more.

Stratton: The rapid rise in petrochemical feedstock costs, followed by the shortages arising from Hurricanes Katrina and Rita, has resulted in double-digit cost increases for many of our key raw materials. These have impacted our bottom line over the past year. In several of our markets, it is very difficult to offset all of these cost increases with increases in our product prices. This is especially evident in highly competitive markets, such as electronics or automotive.

The best way to offset these rapid price increases is to focus our new product development activities on those markets and applications where our customers have true unmet needs and are willing to pay for the value that we provide.

Q: What other challenges does your company currently face? What is being done to address these issues?

Maksimoski: Innovation is a key driver for Elmer's. Costs and prices can only be reduced so far. Innovation needs to be the driver of growth, both top and bottom line. New technology, new packages, new applicators, new manufacturing techniques, and new systems are just some of our innovation needs. We see external sourcing partnerships as the key to our future. Leveraging cross-company and cross-industry innovation will be key as we develop our own "Connect & Develop" model. In addition, the world continues to get smaller and faster. The winners will be those companies who can leverage global partnerships for overall business strength. Elmer's is actively seeking the partnerships that can help us achieve our growth goals.

Perkins: Sustainability is a global challenge and is a key focus for Henkel. As a global market leader in adhesives, sealants, and surface treatment, Henkel offers individually tailored system solutions worldwide. In dialogue with its industrial customers, Henkel addresses their specific problems and jointly develops new processes with them. Work is often carried out in a team context with plant manufacturers and suppliers of raw materials. Henkel continuously develops innovative products and technologies that offer customers benefits in environmental and health protection, and are also economically advantageous. In many cases, optimized processes result in major reductions in costs for energy, water and waste disposal. Society benefits from these innovations, as they reduce consumption of resources and prolong the products' service life. Examples include chrome-free processes to protect automobiles against corrosion, efficiency boosting, solvent-free packaging adhesives, and weight-saving adhesives for the aerospace industry that are resistant to extreme temperatures.

Tailor-made adhesives and sealants from Henkel Technologies also make a major contribution to the development of new, clean sources of energy, such as fuel cells and flexible, lightweight solar cells.

Continuing the education and development of our employees to meet the increasing demands of a cutting-edge, technology-driven industry is another challenge, but one that we take very seriously. Henkel invests heavily in its key employees, as evidenced by two development opportunities: the Global Academy and the Triple 2 Program. The Henkel Global Academy is an international program for junior- to upper-level managers that offers a variety of training programs in cooperation with colleges and universities, including Henley Management College in the UK and the University of Navarra in Spain.

The "Triple 2 Program" offers an opportunity for upper-level managers to gain international experience by working in two countries in two business sectors and serving two functions during their career. This gives them the broad experience needed to assume a senior level position.

This, combined with our ongoing training programs for all levels at our state-of-the-art Training Center located in Rocky Hill, CT, ensures that our team is equipped with the necessary skills to maintain its high standards of performance and will be among the "Best in Class" in all areas.

Reynolds: With rising costs, we are trying to act responsibly and demand that our sales people do the same. On the topic of outsourcing, we are keeping the heat on our legislators to do something about the inequities that exist. Shortages of certain raw materials have forced us to cull bad business and focus on more profitable products and customers. We're trying to educate our customers about what is going on. Lower margins are making us look harder at processes to see if we can take labor out of them, and we are making some inroads. We are not dealing with customers whose standard response is "we don't accept price increases." Internet bidding practices are helping to destroy our industry, and we won't participate in these "one-way streets."

Stratton: Aside from the challenges associated with raw material availability and cost disparity, we are continuously being challenged to meet the increasing service needs from our diverse set of existing customers. Our customers tell us that loyalty comes when we do more than deliver high-quality products on time. They need innovative suppliers who have the insight to understand their business and anticipate their future product and service needs almost before they do. To address this challenge, Adhesives Research recently completed a successful reorganization that resulted in several operating divisions, each with focused operations, sales, and development resources that are driven by the needs of the customer base.