Volume 45 Number 2
Cleaning Up with Harmsco’s Lee Smith
Lee Smith is new at Harmsco. As of June 2002, he came onboard as president of sales, joining Mike Heald, president of manufacturing, and Hank Harms, CEO, owner and son of founders Hank and Laura Harms, in the management team.
The West Palm Beach, Fla., filter cartridge and housing manufacturer has entered a new phase in its development since being launched in 1958 to serve the pool filtration market. Now into residential drinking water, commercial/industrial process water and municipal wastewater also, it's making another transition from being a manufacturing driven company to what Smith calls a "customer delight" driven company.
"We're all about making sure we give the customer value for their dollar," he said. "We want to make sure when we tell someone specifics about what our cartridge and housing will do, it performs above their expectation. By that, I mean making sure our micron ratings are proper, our products last as long as they do… We put more value in our cartridges than anyone in the industry."
Prior to Harmsco, Smith worked for Auto-Chlor, EcoLab and Scott Paper Co., actually buying its CleanWorks janitorial supply division with two investors when Scott was acquired by Kimberly-Clark. They sold it two years ago to the Carroll Company of Garland, Texas. His background gives him strengths in sales, marketing and distribution networks, which is what a group of consultants hired by Harmsco were seeking when they approached him about joining the company.
In the ensuing months, Harmsco has adopted a number of changes to its master distributor/dealer program, expanded its R&D and quality control departments, unveiled a new dynamic website, hired a new technical director and plant manager… and established a program to introduce at least one new product every quarter. One of the first this year will be a new cartridge filter capable of handling higher temperatures required in industrial applications.
Commercial/industrial accounts for 70 percent of its business, Smith said. Fifteen percent remains in the pool industry and 15 percent is in custom-designed systems. Between the three, residential accounts for 10 percent.
"The residential side for whole house filtration is a relatively new program we're just developing," said Smith. "We don't believe anyone's been truly providing a residential whole house filtration system."
While custom products were slightly down in 2002, pools and industrial products rebounded slightly as did overall sales. Competition is fierce right now in all sectors of the business, he points out, stressing Harmsco's manufacturing strengths. "A lot of our competitors would like people to envision them as manufacturers. They're actually just large distributors that import products and try to sell it at a down-and-dirty price."
Below, Smith minces few words also in talking about challenges of a stagnant economy, the impact of terrorism and potential war, assessing distribution systems and the future of the water treatment industry. Before getting to the interview itself, here are a few details on Harmsco:
Facilities: 12-acre campus in Lake Wales, Fla., 5-acre facility in West Palm Beach. Total of 160,000 square feet of manufacturing.
Revenues: About 20 percent growth in 2003
Operations: Liquid solutions manufacturer with product line that includes water filters, residential filtration, industrial cartridges, cartridge housings, whole house filter systems and the Harmsco Hurricane® and Waterbetter® filter series. Markets include industrial process water, municipal water, wastewater, pool-and-spa and point-of-entry residential markets, as well as custom-engineered systems.
And now for the interview:
WC&P: How long have you been in the business and how did you get started?
Smith: I've been in the business since June 2, 2002. I was hired by a consultant group that Hank Harms had hired. He decided he wanted to grow this business to the next level and was looking for some folks with experience in distribution and sales and marketing. I was hired into this industry from another industry. My background has always been distribution and sales with Scott Paper Co., EcoLab and also in the janitorial supply and ware washing and laundry channels.
WC&P: Why don't you tell me a little about your prior experience, some of the details?
Smith: Well, I was director of sales with Scott Paper Co. in its Cleanworks Division, which had a new patented dilution system. Before that, I was vice president of Auto-Chlor System, which was a market leader in low-temperature ware washing—dishwashing machines and ware washing in restaurants for cleaning dishes, industrial-type machines. It basically was called an institutional market. Then, I was with EcoLab for 15 years and was assistant vice president of national accounts handling Holiday Inn Worldwide, Dobbs House, Shoneys and some other large chains.
WC&P: Scott Paper was a big company.
Smith: Yes. It was purchased by Kimberly-Clark in about 1995 and I and two other investors bought the CleanWorks Division. We had a plan to run it for five years and turn it around and sell the company. We sold it two years ago to the Carroll Company of Garland, Texas.
WC&P: And Cleanworks was focused on janitorial supplies, correct?
Smith: Right, it had distribution through janitorial supply houses and membership through the SSS [Sanitary Supply Systems] organization, which is now owned by Amsan that's based out of North Carolina and has about 130 distributors across the country. Then you have large, independent paper houses and janitorial supply houses. It's a market with selective distribution.
WC&P: So, it sounds as if, through your previous positions, you had some experience with water quality?
Smith: Absolutely. Water quality has been a key in my background because in the ware washing and laundry industries with EcoLab, if you don't have quality water, you can't get good results. We did a lot of things with water—actually water strainers and water softeners, etc., as well as treating the ware washing final rinse water and the washing water.
WC&P: I take it that made your comfort level as far as coming to Harmsco a lot higher because of that familiarity?
Smith: I was very comfortable, but more importantly, I was excited. With all the opportunities we have now, water is more of a precious commodity than it's ever been. With the homeland security threats, with everything going on with people as far as what I call personal protection—that's an important part of water quality. We at Harmsco are developing systems that allow individual homeowners to have personal protection. We do the same for municipal water operations.
WC&P: And Harmsco has a long history in that?
Smith: We've been doing it since 1958. We started in the pool business, but we've grown and diversified into what we call the industrial products division.
WC&P: You mentioned something to me earlier related to market research firm The McIlvaine Company.
Smith: McIlvaine has ranked Harmsco eighth worldwide in terms of nonwoven cartridge sales.
WC&P: As a supplier?
Smith: We are a manufacturer. We have, I believe, over seven patents currently within our office. I think that's important to note. A lot of our competitors would like for people to envision them as manufacturers. They're actually just large distributors that import stuff and try to sell it at a down-and-dirty price. At Harmsco, we're all about quality, we're all about what we call customer delight and we're all about making sure we give the customer value for his or her dollar. The other thing too, David, is we want to make sure, when we tell someone the specifics about what our cartridge and housing will do, it performs above their expectation. By that, I mean making sure our micron ratings are proper, our products last as long as they do, etc. We put more value in our cartridges than anyone in the industry.
WC&P: What do you mean by "customer delight"? As opposed to…?
Smith: If you by something at Sears and you're not happy with it, you can take that back to Sears and they'll give you a new one no questions asked. That's the same thing Harmsco stands for. In other words, we want to make sure the customer is happy with their experience with us, and that goes for both our end-users as well as our customers. In the past, a lot of companies—not just Harmsco—have been difficult to do business with because they're caught up with their own internal policies and procedures and don't really react to the customer's immediate needs in the way they could or should. We want to be a company and we strive to be a company that's easy to do business with, a company that stands behind their products a thousand percent.
WC&P: Harmsco was started by the Harms family, correct?
Smith: Correct. That would be John and Laura Harms. That is the current owner Hank's father and mother. They're both still around—and doing well.
WC&P: I take it, Hank's been involved in the business since he was a young guy?
Smith: Yes, he's probably been here since he was 10 years old. He went to school and college, came back here and worked summers, worked as a welder, worked his way through the company and became president in 1991. He knows filtration backwards, forwards and sideways.
WC&P: You were telling me you were brought in back in June for a specific reason, yes?
Smith: Well, I was brought in to try and take the company in a different direction as far as the marketing and distribution side. We've always been a manufacturing company and a manufacturing driven one. And, in good times, we hum along pretty well. We're still doing well. We had a good year in 2002 and we're looking forward to a good year in 2003. But I was brought in to take the company in a little bit different direction based on my experience in distribution dynamics, master distributor/dealer programs, etc. My vision has always been to grow the market through what I call "customer delight" as well as innovation in R&D. We're spending more money in the R&D area than we have in the past. Our goal is to introduce a new product into the market every three months for this year. And we've done that by expanding our R&D area, we've hired additional engineers, we've hired additional quality control people—so, we're really ramping up for the future of our company. Hank Harms is making that investment to make sure the future of the company is solid.
WC&P: You've also got a new technical director, too.
Smith: Yes, Rich Barreto is technical support director. He's got a wealth of information. He's been in the filtration industry for a number of years, ever since he got out of college. He really understands the basics of filtration as well as the in-depth systems and what happens in certain situations regarding application processes…
WC&P: Different industries, different water quality circumstances…
Smith: Yes. Like working on our website, for instance, we're establishing a sizing guide. He's instrumental in that.
WC&P: This will be coming out in February, which is one of the two issues (along with March) we also distribute at the WQA trade show. Are there some products you're going to be introducing at the show?
Smith: There will be some things that we will be bringing, but I don't want to commit to that just yet. We wouldn't want something to happen and then not show up with it. We'll be introducing some new products, but I really don't want to say what those will be.
WC&P: Are there things you're introducing in January or February?
Smith: We're going to be introducing a new product in March. What we're working on is more of a high-temperature cartridge that handles the higher temperatures of water and other liquids.
WC&P: This sort of ties in to the second question I had, which was to tell us a little about the company and what's new. Are there any other things new you want to mention?
Smith: It's a very competitive business we're in and we think we're going to surprise some folks with a few of the things we'll be doing. We have some unique media that's proprietary to Harmsco. We'll be introducing some new things along those lines as well as just innovations within filter housings and filters.
WC&P: Can you tell us an interesting anecdote or story about your experience in water treatment?
Smith: The interesting thing I've noticed is, when you approach the business from a business perspective and when I went from one industry to the other, all the sharp business people that own these companies we sell to—the distributors, master distributors, etc.—they're all thinking along the same lines. And it really is the same from industry to industry when you have distribution and end-users involved. They want to make sure they keep their inventory at such a level that it's not too high or too low so they can service their customer quickly and can get their products when they need them. You know, they can do business with a company that's easy to do business with and they can make sure they're selling a quality product they can count on. In other words, it's as hassle free as it can possibly be. That's what an owner wants and a business wants. And that's the type of company they want to do business with. You know Harmsco is a company that's dedicated to be more flexible than we have been in the past, more innovative, more focused on what we need to focus on, regarding customers and end-users and what they may need in the marketplace.
WC&P: Are there any examples you might throw out such as a situation with a particular customer and how that changed—something to illustrate the point?
Smith: I came from a service background and I talked to a couple customers about a service program based on cartridge replacement business and changing air filters as well as water filters as a service company. And some of the companies I talked to are really testing that idea with their customers. When you put a filter in, you can circle back in a few months and take care of his or her water filter needs and air filter needs and any other service you can bring—then you create value for the end-user. There's a lot more there than just: "My price for the cartridge is six bucks." There's a lot more value they can bring to the table.
WC&P: You said something earlier about integrity issues, that help leverage that as well—"unimpeachable integrity"?
Smith: That's something that Harmsco is striving for, unimpeachable integrity.
WC&P: I assume those tie together.
Smith: Absolutely, it goes back really being easy to do business with. That means, when you tell someone you're going to do something, you know in your heart of hearts you're going to do it. You know it's going to be taken care of. It's a relationship we want to continue to develop with our customers and help them to develop with their end-users. Harmsco has always stood for that. That's what I meant when I said you get value when you buy a cartridge from Harmsco or a filter housing. We back it up by telling you exactly what it will do and what it won't do.
WC&P: You know before you commit you can deliver on it.
Smith: Right, and if we can't deliver on it, we'll tell the customer that. As hard as it is to say, "Hey, we can't do it"—we tell them that. And we think they appreciate that better in the long run.
WC&P: More often than not you hope to find a way of satisfying their needs.
Smith: We have to. It's a very competitive business.
WC&P: It's somewhat an unusual arrangement you have in terms of top management. I don't think I've seen too often, if ever, a company where you have two presidents. Why don't you describe how that works there?
Smith: It's almost just like two separate companies under one roof. It's not really like one company with two presidents. It's two separate companies. We have a manufacturing company. And we're the sales, marketing and distribution side.
WC&P: Mike Heald heading up the manufacturing side.
Smith: Right. And let's say I were a company, then I would be Mike's customer. I would tell Mike I need this many widgets and he'd make them for me. That's the way we're setting it up and it's working pretty well.
WC&P: What's a major challenge you or your company faced and how did you overcome it?
Smith: Last year was a major challenge. The talk of war, with the economy the way it was, with a lot of our customers' businesses being down, inventory levels were down. We faced it by, you know, tightening our belt and making sure we were able to deliver on time to our customers. A lot of them ordered more frequently than they ever have because they didn't want to carry a lot of inventory because of the economy. It's a hardship on us as a manufacturer.
WC&P: I would imagine smaller orders makes it kind of hard to fill a semi-trailer to get the best shipping rate possible?
Smith: It does. We're set up to deliver in pallet quantities where we shrink-wrap a pallet. Individual boxes and cases are very difficult for us to do. But we stretched last year to do that for our customers. It costs so much money as you know to generate an invoice. Everybody has a number. From what we've seen, it's probably somewhere around $35-40 by the time you generate an invoice, pick the product, put it through the system, have the stock guy get it, package it and put it on the UPS truck or plane or wherever it goes. It can be a pretty expensive proposition.
WC&P: Which means the more you can fill space you've got allocated to make it ship at a lower rate, the better.
Smith: Plus, we see that more as a distributor function, not as a manufacturing function. So, what we've done as we get small orders from time to time—any size orders—we will call and put those orders through our master distributors, our largest distributors. That's what we do and that's how we're setting up our distribution dynamic.
WC&P: Tell me a little bit, if you could, about how current or prior distribution for Harmsco was working and how you've maybe adjusted that?
Smith: Well, we really didn't have a distribution program per se. We had one that was sort of haphazard, I guess.
WC&P: It had been set up and kind of worked so it hadn't been tinkered with for a long time?
Smith: Yes, and some things were a bit outdated. Some people were on certain discounts they didn't necessarily deserve based on pricing and order levels.
WC&P: Just as an outgrowth of how long they'd been doing business with Harmsco?
Smith: How long they'd been there to some degree, yes. We had to modify that. It was a painful process, but we had to go through with it. Many of our customers, on their behalf, they understood why we were doing what we did. And we set up a distribution dynamic now that's better for all of our customers, because it involves our master distributors selling to smaller distributors across the country. It works better that way.
WC&P: With more pass-along from you.
Smith: Not only that, but it also gives smaller distributors the ability to buy other things on one order from a master distributor. In other words, if he needed a smaller housing, pumps, fittings and water filters, he can buy them all from a master distributor. And we hope it's a Harmsco master distributor.
WC&P: Now, you mentioned the economy and the threat of war being factors affecting business and inventory levels in the past year. Both are still issues today. How did that affect specific market segments for you? What we've been hearing here is the commercial/industrial side has been more affected than the residential side. Residential seems to have held steady or gotten a boost because of how low interest rates are and refinancing saving homeowners hundreds of dollars a month that they can then spend on home improvements.
Smith: Well, the majority of Harmsco's business is in the commercial/industrial side. That's where we play.
WC&P: What's the split on that?
Smith: Oh, I'd say about 70 percent of our business is on the industrial side. The residential side for whole house filtration is a new program we're just developing. We've been in the smaller cartridge filters but, see, we don't believe anyone's been truly on a residential whole house filtration system.
WC&P: Very few.
Smith: Yes, very few, if any. We have a unique offering we're bringing to the market in a small, stainless steel housing that can handle the whole house. You can have bottled water quality throughout your whole home.
WC&P: Anything else?
Smith: We've got a new differentiated filtering system we can use at the point-of-entry. We're pretty excited about it. We've got some large retail customers that might be pretty interested in it, too. We have to kind of keep our hat on that one for a while.
WC&P: When's the rollout plan?
Smith: We've rolled it out in a small way already and it's been pretty successful.
WC&P: What are some of the media involved that you currently have? You mentioned some proprietary ones Harmsco has at its disposal to employ?
Smith: Polypleat media is one. It removes Crypto and Giardia. Then there are some of our carbon block technologies. And we combine the materials.
WC&P: Now, from your perspective in the market, where do you see the industry going?
Smith: My hope is that we break out after the first quarter. In the end, it depends upon what happens. Some folks feel that a war might be good for the U.S. economy. I don't know that I share that belief. You know, how can a war be good for the U.S.?
WC&P: It's somewhat of a question mark a lot of people are wrestling with, I imagine.
Smith: Yes, it is. It's really how everybody reacts in the industrial sector. I believe for Harmsco itself, however, there are a lot of new opportunities that exist already in the market that we have to take advantage of.
WC&P: What kind of markets do you target when you look at end-users?
Smith: We don't really target end-users as much as we do to help our master distributors. We never sell direct. We sell everything through distribution.
WC&P: Right, what I'm asking moreso is, among those distributors, what markets is your product primarily being sold?
Smith: Any kind of process water filtration.
WC&P: Are there specific industries that are better customers for your products or where you see more potential or actual growth? What's happening in niches you serve?
Smith: Yes, our electronic discharging machine, or EDM, market is down. It's down vs. the last year.
WC&P: That's something I've also heard up in the Northeast.
Smith: Our overall industrial business is up, meaning our Hurricane 170 cartridges for large water processes, municipal operations, etc., are doing well.
WC&P: How do you pick up the slack? What do you do?
Smith: Well, I think you have to constantly look for new business opportunities to rebuild distribution. We're looking for new competitive distributors that were carrying other lines and perhaps aren't as happy with those companies as they would be with Harmsco. We're constantly looking for quality distributors that can carry our line. Now, we don't believe in putting everybody and his brother on as a distributor. We have what we call selective distribution.
WC&P: By that, you mean?
Smith: I mean we're very selective in the distributors we choose and we don't put one distributor on top of another in the same market, which erodes margins as you know.
WC&P: It also erodes your client distributor's confidence in you.
Smith: True. My desire as president of the sales group is to create long-term partnerships and alliances with our existing distribution and grow with it through them. We're doing things that are different as a company through e-commerce as well as communicating much more effectively with our customers than we have in the past. We're doing that through newsletters, through emails, through direct mail marketing campaigns, etc. Through telephone with t-commerce, we're setting sales appointments for sales people. We're doing all kind of things.
WC&P: E-commerce-wise what have you done that's new?
Smith: We have a brand new website—www.harmsco.com. Please visit.
WC&P: Go ahead and plug it.
Smith: Interactive customers are able to enter orders there, look up technical information, distributor access points, areas where our representatives can pull up their information and place an order online, etc. A complete spare parts and product catalog will be online as well. Now, we have a full-time person here who does nothing but handle that—our webmaster, or web meister, if you will. They do nothing but manage that site for us. There are always new things coming up on the site, changes, advances. We're very excited about that for this year.
WC&P: Before we shift into final gear, tell me about where your markets are geographically, if you could? Where are your strengths?
Smith: I would say in the sunbelt states all the way down from the East Coast to the Gulf Coast, Texas and up California—like a big "U." We've got markets in Florida and, then, up in the Ohio Valley.
WC&P: Are there areas you're trying to push now?
Smith: We're starting to make a push in the West, into Colorado, South Dakota, Nebraska, Montana and that area. We're pushing in Florida more. And we're getting better representation out there with both direct and manufacturer's reps.
WC&P: Has there been a big change in the numbers in terms of what you discussed regarding distributors?
Smith: We're adding some, but I wouldn't say a big change. Because of what we've done, we're actually lowering the number of distributors we have. Many of those distributors are actually buying through our master distributors.
WC&P: The shift you'd mentioned earlier?
Smith: Yes, and they're happier because they're getting the same discount they've always gotten and they're able to buy other products.
WC&P: They're probably getting it quicker too.
WC&P: What about as far as internationally?
Smith: We do business in Russia, Italy, Saudi Arabia, South America, Mexico…
WC&P: What are the strongest markets for you?
Smith: Southern Europe, Mexico's a good market and we're just opening now in Russia.
WC&P: Do you do all production in the United States?
Smith: All production is done in West Palm Beach and Lake Wales, Florida. We have about 160,000 square feet of manufacturing in both locations. The Lake Wales facility is a 12-acre campus. And, then, here we have five acres in West Palm Beach.
WC&P: That's a lot of land, particularly for the value of property in South Florida.
Smith: If we ever get in trouble, we can sell it. But you were asking me about the channels we were in and where we are. Let me just recap that for you. Anything with boiler water is where we're going with the high temps, the high-temperature cartridges, which are new. The cooling towers for sidestream filtration, potable water we have, process water, which is the EDM market. We're also looking at new things with respect to new laws in Texas on storm water and runoff from storm water and filtering that. We have some unique opportunities there. And, then, we have wastewater.
WC&P: Is storm water just a Texas issue, though?
Smith: Actually, it's not. I went to the National Storm Water Conference this past summer and more and more the EPA is requiring the first couple inches of runoff from these parking lots be filtered prior to being fed back into the main stream.
WC&P: Because of the oil and grime?
Smith: Oil, tar, trash, etc.
WC&P: Makes sense. I understood, as much as 10 years ago, that was something that was going to become increasingly an issue.
Smith: We think it is, but the EPA really doesn't have the people to enforce the issue.
WC&P: The current administration has somewhat tamed that regulatory enforcement outlook as well.
Smith: But people who are ahead of the curve are already doing it. To continue, you know, we do some things in the food processing industry with juice, wine, Minute Maid and those kinds of things. We do petrochemicals, photo processing has worked for us, the printing industry is a good industry for us as well.
WC&P: Now, the pool industry is where Harmsco started. I would imagine it's still a big chunk of your business.
Smith: Yes, it is. It's about 15 percent, somewhere around there.
WC&P: That's a niche in this industry I've noticed a few dealers get involved in to leverage their expertise, i.e., residential drinking water dealers.
Smith: Right, we consider that a separate division within Harmsco. The pools and industrial setup are two different divisions. I'm responsible for both of those. Then, we have a custom products division, too.
WC&P: What's that?
Smith: Custom products would be what we talked about earlier. Somebody comes to us with an opportunity. They want a cartridge or housing that does something particular to their industry and they have the volume to support it. We'll design it, engineer it and build it for them.
WC&P: What's happened at the company in say percentage growth, overall and for the particular divisions you just mentioned?
Smith: Our custom business was down in revenues this year. Our pool and industrial division were both up. Overall, we were up as a company this year. We've actually budgeted about a 21 percent increase in our budget in 2003.
WC&P: That's pretty optimistic.
Smith: Yes, it is. We're doing a lot of new things, David. Like I said, we're into a lot of stuff, e-commerce, t-commerce, promotions for customers, new products, new distribution strategy. It's an exciting time here at Harmsco. We've invested in people, we've invested in machines to do things we need to be able to do. We're ready to go. We've got capacity in Lake Wales. We're excited about the future.
WC&P: What revenue figure do you toss out for recent years?
Smith: We don't. It's a privately owned company and I'm not aware we've ever given that out.
WC&P: We usually ask for some sort of indication of the size of a company based on revenue. Is there some way you could say how many figures or a general range that the company's revenues fall in?
Smith: I wouldn't want to do that without getting permission.
WC&P: What's one hot-button issue facing water treatment dealers and the industry will have the most impact over the next few years, do you think?
Smith: I believe the hot-button issue is value-added selling. I think, for one side of this business, when you go into a Home Depot or a Lowes and you see a filter cartridge for your home for a buck twenty-five or a buck fifty—whatever they're selling it for—then the dealer has to have value-added selling to compete with that. He has to offering something else. While we all know in our business that cartridge doesn't perform very well and the cost in use of that includes the fact you have to change it more often than a quality cartridge—the homeowner's not really seeing that side of the equation. They're just looking at the immediate price. So, the opportunity for someone to add value by servicing the businesses they sell, by making sure they take care of the residential water, industrial water, air filtration—you know, a combination of services is where I think the business needs to go. It's where I would go.
WC&P: You've mentioned air filtration twice. Can you elaborate?
Smith: To me, it's a natural combination. Let's say you went and changed light bulbs and filters and you had a service company that did that. Now, to my way of thinking, if you change the light bulbs, you want to change the air filters; if you change the air filters, you should want to change the water filters.
WC&P: Or the reverse.
WC&P: That's a link other companies have mentioned to me about the natural affinity between air and water filtration as an in-home service.
Smith: Let's say you're a distributor sales rep and you're calling on a customer such as Corning Glass. You're in there and you've got the air handler, you've got a cooling tower with HVAC. So, you say, what have I got for you here. Well, on the air handler, you've got to have this filter for the air. You need to change the filter on your sidestream filtration for the cooling tower. You've got boiler treatment filters to change. You've got drinking water filters to change. It all ties together. Why not sell the customer everything that they need while you're there. It cuts down on the number of vendors they've got to deal with, as well as the number of invoices and checks they've got to cut. As I mentioned before, that saves them money.
WC&P: Does Harmsco do air filters too?
Smith: No, we do not. And, I'll put a little carrot out there by saying, not at this time.