Volume 43 Number 1
A Word with PHSI’s Craig Story
PHSI Pure Water Technology Division
Key Products: Point-of-use water treatment coolers
Amid the forest fires of late last summer was the first opportunity we had to talk with Craig Story, president of Idaho's Pure Health Solutions Inc. (PHSI) and its Pure Water Technology Division, about the evolution of the cooler business.
"What's amazing is Montana is burning up and it's beautiful here... The smoke's all blowing the other way," Story said. "We don't have any fires here."
PHSI makes and markets plumbed in water purification coolers with up to six stages of treatment, including ozonation, reverse osmosis and microprocessor control.
When the company started more than three years ago, he said, it had developed a cooler, set up manufacturing operations and, in January 1998, opened three corporate-owned dealerships. In the fall of that year, they spun off the dealerships and ramped up a full-blown dealer affiliate recruitment program. In January 2000, PHSI entered into an agreement with its major parts supplier, Oasis Corp., to have Oasis begin manufacturing its coolers.
"The only thing still made in Idaho right now is the printed circuit board for the Pure Water 1 for process control," Story said.
Today, the company has over 70 dealers from the West Coast to the East Coast and even in Europe. It set up a financing program in-house so dealers could rent on a monthly basis rather than sell outright, which is good for recurring income. And it developed a sales and marketing program that includes technical and dealer manuals: "virtually everything it takes for them to be successful." That's important because often they're competing with national bottled water suppliers.
"Most of these dealers out there are guys that aren't doing bottled water commercially and we're helping them put those out there to compete," Story said. "We have a dealer in California, which is basically the Bay Area near San Jose. It was Lafayette, but they moved last year into a new office and warehouse space in Concord -- a much larger facility. They were our first dealer."
The company now has dealers in Ireland and England and is working on affiliates in Saudi Arabia, Turkey and Greece as well. And it's begun working with bottled water companies to market its products in areas where it doesn't have a dealer affiliate.
Now, the full interview with PHSI's Craig Story:
WC&P: Why don't you give us an introduction to who PHSI is and how it came to be? You said you were incorporated in 1996, right?
Story: Correct. I moved (to Idaho) in 1993 from California, where I'd had a hi-tech company that I started in my dad's garage and built it up to a very successful level...
WC&P: Where were you at in California?
Story: In the Bay Area. I sold the company to a public company and, at that point, it was a public company traded on the NASDAQ and so I was semi-retired at 32 years old.
WC&P: What kind of business was it?
Story: We built high purity chemical distribution systems for the semiconductor industry. It's interesting because there are a lot of similarities to what we were doing for the semiconductor industry and what we're doing today. For the semiconductor industry, we basically eliminated the one-gallon bottle of chemicals they would carry into the clean room and pour it into what they called the process station where they processed the silicon wafers. We eliminated the one gallon bottle. Today, we eliminate the five-gallon bottle (for bottled water). With that process, our systems were comprised of pumps, valves, filters, electronics, systems with microprocessor controls. The chemical would come in large containers. We then would recirculate it through submicron filtration and high purity components, clean up the chemicals as to particulate and ionics and then dispense the chemical at the point of use in the clean room. So, we had all purity piping, double containers and so forth and would dispense the chemical at the process station.
WC&P: So, subtract the HAZMAT aspect of it and that's just about what you do today?
Story: Exactly. From a safety standpoint, by eliminating those one gallon bottles they didn't have to be concerned with the safety issues of dropping those bottles, hydrochloric acid, nitric acid and all these very hazardous chemicals handling issues.
WC&P: Now, how long had you been doing that business?
Story: I did that business for nine years.
WC&P: You don't want to say which public company bought it?
Story: Submicron Systems bought it. Once we eliminated the safety issue of the five-gallon jug, which is 40 pounds, we also eliminated contamination issues because it was a completely closed environment system. Whereas, today, we're eliminating the contamination issue because our systems are a completely closed environment and purification system right at the point of use. So, what we were providing there with a company called Systems Chemistry -- that was my last company -- was dispensing pure chemicals at the point of use. Today, it's pure water at the point of use. There were also cost savings because the customer was purchasing the chemicals in bulk. There were labor cost savings. There were storage cost savings. Today, we have labor cost savings because we're eliminating the five-gallon jug. There's storage cost savings and so forth because of eliminating that jug as well. So, there are a lot of similarities. It was really interesting.
WC&P: What prompted you to get into water treatment?
Story: When I moved here to Northern Idaho, I got the only bad well in the whole area -- 50 parts per billion arsenic and higher and other contaminants in the water, bacteria and so forth -- and the problem was this well was feeding 18 homes. It was an association well. And so I was buying bottled water, spending close to $100 a month.
WC&P: When was this?
Story: This would have been in 1995. And so basically at that point, after a year of handling these jugs, I decided in 1996 that this was crazy. I'm lugging five gallon jugs up and down the stairs and they're sitting out on the porch and there were tree branches and particulate matter all over these bottles -- it was a mess! And it was a hassle. So I thought why hasn't someone taken a state of the art purification plant and weed it down to a small footprint and there you go -- right in your kitchen. You've got pure water right at the point of use, it's chilled, the whole deal. I put together a prototype model with an engineer out of California that was from the semiconductor industry. We put the system together -- it was in my kitchen actually until just recently. I just put in the next generation Pure Water 1 in my kitchen, but the original had been in there all this time. The system provides pure water with lots of testing on it. I met a guy right here locally as I was selling stock in my previous company, John Windju, who owned an accounting firm here in town. And John saved me quite a bit of money as I was selling stock. We became friends and I told him what I was possibly interested in doing and John actually went out and did a lot of market research and so forth and he was very interested in the product. He'd also had seven years experience in lease financing in Seattle, Washington, for a company called PACCAR and that's where we really got the strength on the lease side of things and financing. John basically put that program together from scratch to where it is today. It's a fine tuned program that's been extremely beneficial for all of our dealers. It's really a big part of our program. It's not just the products that we have. It's this finance program and it's all the sales and marketing and collateral materials. Well, it just so happens that John is best friends with a guy he went to high school with, Chris Miller. They'd always talked about going into business together and Chris had been living in the Bay Area at this time. They played football together, the whole deal, even went to college together. And John said hey, I know the perfect guy because John was really getting interested in this whole program and I'd been trying to convince him, hey, let's go into business. And he said, hey, I know the perfect guy for VP of sales and that's my buddy. So, we flew out to California and met with Chris and he was very interested. Right around this time I was involved in doing a limited production run of prototypes of this system and put 10 systems together -- this was in September/October of 1997 -- just to see how they'd work and perform and for testing purposes. Chris was in the medical industry, selling devices, equipment and all sorts of medical supplies. He went out to his customer base, which were all doctors, surgeons and so on, and talked to them about this product, oral surgeons and so forth, and sold most of those 10 systems within just a couple weeks. He was convinced and said "Yeah, let's go. I'm ready to sell these." He quit his job for McKesson Corp., which was who he worked for -- which is interesting, ironic in itself. They had a bottled water division at that time. As a matter of fact, he was selling their distilled bottled water to oral surgeons, dentists, doctors and so forth. At that point, we started up our three dealerships. One in the Bay Area, Freemont, Calif., one in the Salt Lake City area, actually Orem, Utah, and a very small dealership in Boise, Idaho. And as I mentioned to you, we sold the Fremont dealership to Taylor Made Water Systems. The Salt Lake operation, we sold to Aquapure and they sold to Superior Water and now we've given that dealership's exclusive rights to Mt. Olympus Water in Salt Lake. They're a bottled water company. So that's sort of it in a nutshell of how we started and the dealerships up to where we are today.
WC&P: What did John's company, PACCAR, do?
Story: They did leasing and John's basically ... Let me get him in here on that.
Windju: PACCAR Corp., out of Seattle, manufactures Kenworth and Peterbilt trucks. And then they also have factories in Mexico and the UK. Anyway, they had a captive finance company -- two companies -- one called PACCAR Financial and another called PACCAR Leasng. I was the finance manager for PACCAR Leasing. I think what Craig was explaining is we have a captive finance company here.
WC&P: So are you the finance manager?
Story: No, he's the CFO. He has a finance manager that reports to him.
WC&P: Chris wasn't with McKesson's bottled water division, now owned by Danone?
Windju: He was with McKesson Medical.
Story: Part of his effort -- while he was in the medical sales, supplies and equipment group -- since McKesson had the division for bottled water, he would also sell that bottled water to his customers.
WC&P: I'd like to go back a bit to where you were describing how the product had evolved. That first unit you'd developed, what technology was in it?
Story: Basically, similar technology although the system was relay-logic control. It wasn't microprocessor controlled. There was some manual operation to it. In other words, for your second stage ozonation, once a day, I'd have to push a button on the front panel, which would allow the system to inject the drinking water tank with O3. Today, that's all automated. The microprocessor has automated those functions.
WC&P: What did the Pure Water 2 add to the mix?
Story: Probably what we should do is go through the Pure Water 1 and the two generations after that. Actually, three. We did the prototype production run. The 10 initial systems we started out with in 1997, those systems basically you could call that an "after-prototype" or "beta-type" production run. And then we went into full production in January 1998. That was our previous generation before the generation we have now. And today, which was January 2000, we have our next generation system.
WC&P: You mean January 2001?
Story: No, I mean January 2000, the beginning of this year -- that was when we entered into a supplier agreement with Oasis Corp.
WC&P: How did Oasis fit into the picture?
Story: Well, we were working with Oasis and purchasing a part of their product and adding to that the double-stage ozone injection, electronics and so forth. We were already purchasing a lot of product from Oasis and building a relationship all through that timeframe. They became more familiar with what we were doing and how we were doing it. They were impressed with the technology and believed in PHSI as a viable corporation to increase their point of use sales.
WC&P: When did this relationship start?
Story: This relationship started in the summer of 1996. And this is good because this brings us to a person that was very instrumental from Oasis Corp. in making this whole program viable. That's Robin Householder. And you might want to mention as well that we looked at all the other guys out there in bottled water cooler manufacturing, CORDLEY/Temprite, Sunroc and so forth. And it was Oasis Corp. through Robin Householder through which we put this whole program together.
WC&P: What did Robin do for you?
Story: Robin is actually director of point of use for Oasis Corp.
WC&P: That was in 1996 when you were developing the initial prototype?
Story: Yeah, I flew out there to meet with Robin to see if or how interested they'd be in working with us and Robin basically was very interested, conducive to meeting all our specific requirements and needs as a supplier. I was impressed with him and the fact that he was very customer oriented and had the willingness to want to work with us and see our program succeed.
WC&P: How did this evolve from you manufacturing your own product to Oasis taking it over? I take it you were using what -- their basic cooler cabinet?
Story: That's correct. Basically, once again, they saw what we were doing and the success we were having with the product. They saw the success we had bringing on dealers. They saw the success we had with the finance program. They saw the success we were having with the sales and marketing program, that we'd refined over time. They saw the full-page ads in WC&P. You know, all of those things and they kept a close eye on us. They were developing their new product line and basically came to us and said we want to manufacture the PHSI product.
WC&P: And you made that decision when?
Story: We made that decision ... we were talking ... let's see that would have been mid-1999. In the summer of 1999, we were game-planning the viability of that.
WC&P: Were there any issues with that? Was it a difficult decision?
Story: No, there wasn't. We actually were very excited about the whole proposition about them building the whole product for us, so that we could concentrate on dealer recruitment and training, so that we could focus more on the complete program and the success of that and the sales and marketing program.
WC&P: Who else were you working with that were providing you with technology you were installing in the Oasis coolers?
Story: We were working with 20 to 25 different vendors.
WC&P: Any that you'd like to mention?
Story: They were stretched from here to there. A prominent one that we worked with locally I can mention was Zero Defects, which is our board manufacturer in Post Falls, Idaho.
WC&P: Who was doing your ozone systems?
Story: Yeah, they're prominent. I should mention them. They did an excellent job for us. That's Clear Water Technologies out of San Luis Obispo, Calif.
WC&P: What RO supplier were you using?
Story: This is sort of a touchy point right now because we now use Hydrotechnology. And I've got nothing but good things to say about Hydrotechnology, but we have another next generation system coming out here in a few months with our own filtration and RO manifold in our system and our major supplier for that is guys you already know of and that's Omnipure. That's in Idaho as well. So, PHSI, Zero Defects and Omnipure all out of Idaho, pretty cool. You want to support the state that you live in and so there's some neat stuff going on here for the near future.
WC&P: When are you planning on unveiling this next generation?
Story: It's between January and March.
WC&P: You're timing it for the greatest impact at the WQA national convention?
Story: That's correct! We'll have the new manifold in the system for the show.
WC&P: So, you reached the agreement with Oasis at the start of this year (2000)...
Story: Actually, it was finalized, but they'd already been working on molds and engineering and so forth. We were just doing the legal minutae you've got to do.
WC&P: I was going to ask about how your dealer development program evolved? Not having to focus on the manufacturing and just worrying about the microprocessor controls kind of allows you time to focus on that dealer network does it not?
Story: That's correct, but what did you say in regard to microprocessor controls?
WC&P: That that's all that's being made in Idaho now (except for what Omnipure would be doing for the new systems).
Story: The company Zero Defects actually did all the manufacturing for us. Now, they're just building the boards. It's a very simple process for us at this point because, basically, they're building the board but it's being shipped directly from Zero Defects to Oasis. So, really, our hands are pretty much clean of all the manufacturing.
WC&P: Tell me about dealer development and how that evolved? When did you decide to spin off the original dealerships and why the new focus on franchises instead of corporate owned stores?
Story: There were a couple of reasons why we set up our own dealerships. We knew that we were going to have some problems with products -- you know, some bugs -- and indeed there were. We had some software issues. We had hardware issues. We had some component issues. But we kept those problems invisible from the customer. We knew that we had to refine our finance program. It was going to take some time. And it has taken some time. It's really taken a couple of years to get that program dialed in. We knew that we had to come up with some good sales and marketing materials. All was done with the idea that we were going to be setting up independent dealers throughout the United States and possibly have a few of our own dealerships down the road, company owned or partnerships. As a matter of fact, we have a partnership dealership right now in Seattle, Wash., with a guy by the name of Chuck Lockhart, and that's working out real well. We plan on expanding that model beyond Seattle to other areas. And also, in having a partnership with a local dealer such as in Seattle, it's allowed us to be involved really in the day to day minutae of the dealership so we can fully understand and grow and refine the dealer program.
WC&P: Describe for me what's all involved in that dealer program?
Story: There's a lot to setting up a dealership and what we provide. There's a lot of steps that have to take place to start a dealership and to grow one. But what we provide today, we provide presentation books, materials and all the brochures and such. We provide a dealer manual, which acts as a "how-to" guide. It has business plans in a section. There's all of the administrative forms that are necessary. There's technical information. There's details in regard to what you need to have in your facility, in your office, how many computers and phones and such. How many sales people should you have? You need to have a van. You need to have a service guy. We explain how to set up your shop, how to set up equipment and how to test your equipment. So, the dealer manual is really everything you need to know about how to set up your dealership. We then also provide sales training seminars. And all of those pieces of the puzzle are being continuously refined as we go. And, once again, there's the financing side of it. We provide all of the rental agreements to the customer. By customer, I mean our dealer. The agreement has their name on the front cover and also our name. It gets filled out with the customer in terms how many systems andwhat the monthly payment is and so forth. We provide all of those rental documents to the dealer as well. And then, of course, we fund off of those rental agreements. So, once the customer fills out the rental agreement and it's faxed to us, we do all the approvals. We do Dun & Bradstreet, Equifax -- anything necessary to provide the credit approval on those agreements. We don't call them rental contracts so it's a little softer language. We then write a check for the full term of that agreement to the dealer and we overnight that check to them.
If it's a $79 a month deal, I divide that by the lease rate, .0257. That's a $3,000-plus sale price for the dealer. The customer's only seeing $79 a month for a 60 month term. The dealer's getting a $3,100 check that's overnighted to them once we did the approval on that rental agreement, we got the fax copy and once we get the hard copy, that's when we get the check to the dealer. So, it provides good cash flow and equity in the company, because at the end of the term -- that system if they've maintained the product and so forth, it just stays at the customer's site and we just bill the customer monthly and provide that monthly $79 to the dealer. You got a thousand out there, that's $7,900 a month coming in.
WC&P: Any challenges in that? Anything that becomes an issue...
Story: Well, here's with the program can be set, there's a lot of creativity to it. We can do 60 month, 48 month, 36 month, 24 months. We can do all those different...
WC&P: What I mean is what issues pop up for the dealer, i.e., examples of challenges they faced and how the program helped them through it?
Story: What we've done in terms of that rental agreement is we've simplified it. And it's basically a custom agreement for this product for this industry. The contract language is much softer. And since it's a private label program, so the rental agreement has the dealer's name on it and the invoice that goes to the customer has the dealer's name on it. You don't get this just by going out and getting some lease company to handle the paper for you.
We have a vested interest, so we're going to do everything possible to get that deal funded and for the dealer. So, at times, with certain accounts that our finance manager has worked on -- her name is Penny Brown -- she may spend two, three, four and five hours on one deal to get it approved. There's no lease company that's going to take that interest. They do a quick approval. They don't see it. It doesn't look right on the D&B, they throw it out. We go in and go on the Internet, we check out the company; if it's a public company, we go through their record, check out their financial data -- we have to provide this information to our bank. Our bank is providing the cash. We're not providing the capital for these leases, so we're basically because we have this vested interest we're spending a lot of time and energy to make sure we can fund every possible deal.
WC&P: Talk to me if you could about the manuals and what all went into the manuals. I mean that's a pretty involved thing, is it not?
Story: It is a very involved thing. And what it's been is from experience over time. Compiling the information that we have learned over the past three years.
WC&P: What can a dealer look forward to seeing that's going to help him or her be able to know how to do things right off the bat or to grow into it?
Story: This is where we provide a lot of hands on, I have to say this. Chris Miller, VP of sales, also Peter Rushmore, who's a regional manager, we go to the dealer's site. We spend two, three, four days at their facility. We help in their hiring process. We help train their sales people. We help train the sales manager. We also help them go out and show them how to sell the product. We go out in the field. We go out to the customer. Chris is doing this today -- what is it, Panavision, I believe, in Southern California. It's about a 48 unit deal. He's going in even today on his own -- after the dealer went in yesterday -- he's going in to close the deal. So, we do this. But basically in the dealer manual we have office set up. We have a sample business plan. We have sales information. Section Four is our financing program. Section Five is marketing. Section Six is sample commission plan. Section Seven is maintenance. Section Eight is telemarketing. Section Nine is parts. Section Ten is service centers, where they are, certificate of analysis and so forth that we have on our product.
WC&P: Talk to me about some of the dealers that you have. You mentioned earlier that they have some interesting backgrounds.
Story: Not only did we enter into a supplies agreement with Oasis, which is a very large corporation in this industry, but also with RainSoft Corp. We basically worked with a Mike Hall, who is director of commercial and national account sales. We put together a program with RainSoft in which all of the RainSoft dealers within their organization have an opportunity to be in the commercial market as well as the residential market. Their focus has always been the residential market -- water treatment systems. Through Mike Hall and RainSoft Corp., they're allowing their dealers to go into commercial point-of-use. Now, Mike in the past when I said direct commercial national account sales, he was basically promoting large RO-type skid systems for the RainSoft dealers. Today, he's also promoting the commercial point-of-use through us to the RainSoft dealers to purchase product from us and to build a commercial division. I believe they have over 350 dealers throughout the United States -- I mean the world.
WC&P: Five hundred I believe is the number.
Story: Y'know, I think you're right.
WC&P: When did that program start with RainSoft?
Story: We inked the deal in February 2000. We did do a beta-site run there to see how it would work out.
WC&P: Are these private label units?
Story: They're RainSoft private label systems, correct.
WC&P: Are you doing other private label cooler systems for other companies as well?
Story: No, not at this time.
WC&P: I guess that means basically, you're working with both of Aquion's partners now because RainSoft is owned by the company as well as ClearWater Tech.
Story: That's correct. What's interesting here again -- it being a small world -- Aquion Partners being the corporation, RainSoft being the dealers, ClearWater being a subsidiary of Aquion...
WC&P: And they just bought Erie Manufacturing's water treatment valve and controls business as well.
Story: No kidding. That's good stuff. Where I was going was we're working with Aquion, RainSoft dealers and ClearWater which produces ozonaters that go into our systems. And that was decided way before we knew we were ever going to be working with RainSoft.
For the rest of the interview, see Executive Q&A/January/Part II
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