Volume 43 Number 2
Pentair’s Jorge Fernandez Discusses an Evolving Market
The company controls many prominent names in the industry -- Fleck, Structural, Codeline and SIATA, which all hold premium positions in their market segments -- and is the No. 1 maker of water conditioning control valves. Sister subdivision under Pentair Water Technologies, Pentair Pump & Pool Group also includes famous names such as F.E. Myers, PacFab and WellMate.
The parent company employs 14,000 people and has annual sales near $3 billion, of which almost a third come from its water treatment products this year.
Fernandez, who took over as head of Pentair Water Treatment in 1997, is a native of Argentina and holds an MBA from Stanford University. He discussed recent financial shakeups at Pentair Inc. affecting its automotive equipment and tools group, which have lead to the water group becoming the top profit contributor for the company. It's expected to break $1 billion in 2001 compared to $100 million six years ago when it acquired Fleck Controls -- an indication of the growth in the division.
He noted that Pentair Water is stretching out globally with growth in Europe, a new distribution center in Taiwan and a new joint venture company in China -- in addition to efforts in India. Brazil is attractive but will have to wait because of less economic promise in the rest of Latin America comparable to other international regions, he said.
As for the U.S. market, Fernandez calls 2001 a year of caution because of stresses in the national economy that unfolded in the latter half of 2000, pressured by rising petroleum costs, stock market volatility and political uncertainty from the prolonged presidential election.
He talks about continuing undervaluation of the water treatment market by Wall Street, the potential regulatory impact of a new Republican administration, dealing with California's tightening softener salt efficiency guidelines and competitive shifts between manufacturers and distributors with continuing consolidation within the industry.
All of these underscore the need for smaller and mid-level companies to form new alliances, develop new products and come up with innovative ways of doing business and providing services, Fernandez said. Regardless of political or most economic shifts, though, he said the water treatment industry -- and Pentair -- will continue to grow. That is one constant that can be counted on.
For details of WC&P's interview with Pentair's Jorge Fernandez, read on:
Pentair Water Treatment
Fernandez: I've been basically in different marketing and sales positions throughout my career. Prior to joining Pentair I was working for Whirlpool Corp. in Benton Harbor, Mich. And I also have many years of experience with Johnson's Wax in Racine, Wis. When I came to Pentair, I fairly quickly assumed the responsibility of the Fleck business, both in Brookfield and in Europe with SIATA, a valve company in Italy. That was about 3-1/2 years ago and I've been with Pentair ever since. Last year, as you know, we acquired the SF Corporation [Structural Fibers] and we proceeded to add to the Fleck business the Structural pressure vessel business and the Codeline business with headquarters in Chardon, Ohio, to form Pentair Water Treatment. I'm in charge of that whole unit. Like I said, my background is in sales, marketing and operations and I have an MBA degree from Stanford University and an undergraduate in accounting from Buenos Aires University in Argentina.
WC&P: Are you a native of Argentina?
Fernandez: Yes, I'm a native of Argentina but I've been a proud U.S. citizen for the last 15 years now.
WC&P: My father is a native of Colombia. He came here in 1951 and went to L.S.U. and later to Purdue.
Fernandez: I see. And have you gone back to Colombia and visited there?
WC&P: Not recently. It's been a little bit too volatile politically. I got married and my wife is an American and I'm not too comfortable about the idea of visiting with kidnappings there so prevalent.
Fernandez: I understand.
WC&P: But I lived there as a child in 1976-77 in Barranquilla and Bogota.
Fernandez: So you know what it's about...
WC&P: Oh, yes. Let's switch gears a bit and you can tell me about the status of Pentair and particularly it's water treatment businesses right now. What's going on -- what new products do you have planned, where do you see yourselves now and where do you see yourselves going?
Fernandez: Well, Pentair has done a very admirable job of working into a very important position in the water products market. Only six years ago, Pentair had just one single company, F.E. Myer's Pumps in Ashland, Ohio. Their participation in water was about $100 million or less. At that time, they decided to refocus their activity into the water market, the components market. They saw it as a growing market worldwide and resources were put into acquisitions and a number of acquisitions came through Aplex pumps and then Fleck valves and SIATA valves in Italy and the Genteral Sigma Pump Group was incorporated. That was a major acquisition for Pentair, adding Hydromatic, Fairbanks Morse and companies with big names in the pump industry. It took the pump side of our water business into higher shares globally and also in the United States. We have a very strong position in that market. Then the acquistion of SF came with the acquisition of the Structural Group coming to the Water Treatment Group and the pool side of the business, pool components being added to the pump business. So, now Pentair has an organization -- if I may take a sidestep -- that is composed of a pump group and pool products under the direction of Mike Schrock as president. The Water Treatment Group, which is Fleck, Structural, Codeline, under my direction. And we both report to Rick Cathcart who handles the Water Group in Pentair. Sales, again, were $100 million back then and we are quickly approaching $1 billion in all of these components. So it's been a very major contributor and also it's now a major contributor if not THE major contributor in profit generation. Pentair has done very well.
WC&P: When do you expect to break that $1 billion mark?
Fernandez: We probably are going to achieve $1 billion in 2001. I don't have all the numbers in my head but we are very quickly approaching that number.
WC&P: A large part of it I assume was expanding internationally...
Fernandez: Yes. And I must say that the water treatment group is probably the most pioneering group in our company because it's the one that has the strongest global profile. We have major operations as I said before here in Brookfield and in Chardon, Ohio, in North America. Then in Europe, we have a sister operation to Chardon in Herentals, Belgium, and a sister company to Brookfield Fleck outside Paris and then of course SIATA and the distribution arm of those, which is located in Milan, Italy. What I'm saying is in Europe we have a very strong presence and are able to support global customers evermore because we have this coverage. In Asia, we have established a distribution center in Taiwan that serves Southeast Asia, and we are attempting to organize a new company in 2001 in Shanghai, China, to serve the global Chinese market, and finally in India, with the acquisition of Structural, we have acquired a manufacturing company producing pressure vessels for the Indian market and export markets, particularly Europe and Asia.
WC&P: What's the name of that company?
Fernandez: It's Structural India.
WC&P: Where do you see the U.S. market fitting in with that growth internationally? Where do you see the most growth? Where will Pentair's resources go?
Fernandez: The U.S. market is more mature and the level of competition and maturity of the market is one where growth patterns resemble the general patterns of the broader economy. Europe has been very good for us because the combined companies -- the forces of Structural and Fleck -- continue to give us growth rates that are above the market growth rate. So we have done very well in the last three years in Europe expanding our business and we hope to continue that. We are I think a major market force in Europe and we like that. Obviously, the fast growing markets for us strategically are China and India. And that is the reason for going forward with an investment plan to incorporate a company in China in 2001, establishing the distribution center in Taiwan that was opened last fall and the position we have in India with the manufacturing facility and distribution group there. We're going to be focusing fundamentally on growth strategies in China and India for the next five years.
WC&P: How does the Latin American market look?
Fernandez: Latin American markets, first of all, are smaller in size. And as you well know, Latin America is subject to political and economic variation and I think they're probably fortunate in that they have good water or less water problems. That coupled with -- and I'm thinking commercial and industrial mostly. The residential market is underdeveloped or nonexistant at all for our type of products and we have been forced to prioritize our initiatives and resources in our look at Latin America as a second priority. Now, we are starting to have some interest in Brazil, but we know we have to do a fantastic job in China and India first. Then and only then can we go after Latin America. We see it as lower growth and lower volume potential right now than the two other countries that I mentioned.
WC&P: In looking at the U.S. market itself, talk to me about how you view it, i.e., changes that are happening, the regulatory outlook, whether there are economic issues? In the last several months, there've been problems for everybody over issues of a slowdown, fuel costs, interest rates, market fluctuations, confusion over the presidential election. Where do things stand for Pentair as they look at 2001 in the United States?
Fernandez: I think the 2001 year is a year of caution. For one thing, we need to know the full impact of the latest economic developments. The Federal Reserve has eased interest rates, but those only will benefit the latter part of the year. So there's a lot of companies putting a big question mark on 2001. We are approaching it with a lot of caution. We put priority and full support behind our established businesses and customers. We are reviewing new initiatives with a lot of care and again putting every attention to the current business and supporting our current customers. I think also the U.S. market is going through changes that are significant. Obviously, regulation will be a significant force. And one has only to think of Proposition 65 and the impact it has on not just manufacturers but retailers...
WC&P: Not just in California, but across the country?
Fernandez: Well, it starts in California and it obviously quickly spreads. One can't think that any regulatory impact will remain in a corner and localized for too long. There are issues for significant changes in distribution...
WC&P: Give me some examples of that if you could, please.
Fernandez: I'm speaking of the consolidations that continue to occur in the distribution area. Alamo being bought by Marmon Group is one example. I think the General Electric/Kenmore/Hague drive to the do-it-yourself, Big Box retailers market is something that we've watched very carefully. And we want to provide every piece of support to our customer base to make sure they're not hurt by these moves. We hope to be able to come to the market with more and more news every time in support of our traditional distribution customer base -- but those are changes that cannot be ignored. I think, again in the area of consolidation, the players are fewer and bigger. That is good on one side because I think it brings more resources into the market and tends to develop the market. But on the other hand, that also creates confusion...
WC&P: In that regard, one of your competitors I spoke with about a year ago -- Dean Spatz of Osmonics -- mentioned the issue also of the stock market and where money was flowing. A year ago, everybody was talking about another channel to the market emerging and that being the Internet. That's taken it's bumps and bruises in the last year, but he was saying because of all the investor excitement over the Internet a year ago, effectively investment dollars and R&D resources were being siphoned off that otherwise might be flowing into the water treatment industry. He mentioned some things about profitability in the water treatment industry...
Fernandez: Right, we couldn't compete with the dot-coms in terms of corporate units a year ago. I think Dean had a point when it comes to acquisition ventures, joint ventures, availability of capital and the way overall that companies in the water industry are looked at by the market -- we were not receiving and I don't think we still are receiving the multiples we deserve. And when I say deserve, it's not so much from the individual performance of every company but the overall bright future that I see companies in the water industry worldwide are going to have. That hasn't translated in the market multiples for the outlook of us and other companies. When analyzed rationally, many of the dot-coms didn't have much future income prospects and yet they were getting very critical multiples altogether. Well, the market has now corrected that and it's going to correct that even more.
WC&P: So you see some investments flowing more toward safer industries where profits are more apparent?
Fernandez: I think overall the investment community is going to look at companies overall with more tempered ambitions. The result of that is they're going to look at the solid industries that are slated to grow more rapidly in the future. I believe water is one of them.
WC&P: Pentair took a couple of knocks as I recall this year from Wall Street on some earnings reports too.
Fernandez: Yes, we announced yesterday another one like that. It has mainly to do with the performance of one of our sectors, the tools business, where we had a number of operational issues coupled with some sales and distributions. That has hurt our numbers year to year dramatically. But in that picture, our other two businesses are performing well. We're having a banner year in water and enclosures. The tools business is under very serious scrutiny with a number of changes and new dealerships and I trust it will become the lead generator of profits that it has been until this year. Pentair has a very nice portfolio of very nice market positions in either No. 1 or No. 2 in most of the markets it operates.
WC&P: Where does Pentair fit in relative to competitors and market share with respect to the water treatment industry?
Fernandez: In regards to our positions in the water treatment industry, we believe we are No. 1 in the manufacture of components for water softeners and filtration in our global position with Fleck and Structural. We are one of the top five global companies in the water pumps area. And finally we are No. 1 globally in pool products with a very commanding lead of the market through Pentair Pool Products, which used to be PacFab. So, we have very significant market position I think we should be able to capitalize on in the future and we hope and I believe the market will appreciate that.
WC&P: You mentioned earlier the problems in California with respect to Prop. 65. There are other things going on there that are proving to put a lot of pressure on groups such as yours that are in the valve business and the water softener business, i.e., the salt efficiency compromise through Senate Bill 1006 and the push for greater efficiencies with regard to salt usage. How is Pentair looking to fit into that equation? WC&P's Technical Review Committee was curious to know how you might respond in the market?
Fernandez: First of all, all our brass products are lead-free brass and we believe we have a profile of products that still suits very well the overall U.S. market. Nonetheless, we can't ignore perception. And we are in the process of development of alternatives for those that would like to see some options. What we do with product development in our engineering group is fundamental. We have those products. We're in the process of adapting some European products that we have in our portfolio to bring at least some alternatives to the market as soon as possible.
WC&P: What type of products are you referring to?
Fernandez: We have in our SIATA line, for example, a very significant line of commercial valves with very high performance profiles that are the favorite choice of DI applicators in Europe. Obviously we have to do some type of adaptation to the American market so that we go from the metric to North American measuring standards and controls and so forth. We're in the process of doing that. But, as a leader on water valves, we have the portfolio of products that can bring solutions to the market. We hope to have fairly soon product alternatives that serve market needs.
WC&P: This is in the commercial market?
Fernandez: Yes. In the residential market, we have for many year had every possible alternative from brass to plastic to cold water and hot water and every other alternative you can think of.
WC&P: What about the issue of salt efficiency and the valves? Some of the experts in the field such as Chubb Michaud, Mike Gottlieb and Stan Ziarkowski, they're saying that effectively we're pushing the theoretical limits for a softener if we're going to go beyond 4,000 grains per pound of salt.
Fernandez: We believe we can go above that. I think there is an issue of how the efficiency is measured. How valves are rated does not necessarily reflect the pattern of use in a given household. Like with any measurement, if the measurement isn't reflective of the actual use... So, in the beginning, our valves have a very strong performance profile when it comes to performance efficiency. But you can take a look at some of our twin tank valves which maximize the utilization of brine possibly way past the efficiency of any other valve. We are probably the sole manufacturer of twin tank valves so we can exhaust the resin beds to the very last grain very comfortably. Unlike any other valve, we can achieve very significant efficiencies. Now, if you measure the efficiency in the way it's traditionally done, it doesn't come through. But if you measure the efficiency in terms of how much salt a given household uses throughout a year, I know a twin tank system is probably the most efficient way. What I'm trying to say is we have in our portfolio a very strong alternative that really pushes to the limit the efficiency of a system. Now, obviously over time that's what you can do with call it conventional water softener products... the technology will be pushed to do it even better.
WC&P: Are you investigating areas of increasing contact time to improve efficiency as well or developing instrumentation, i.e., say Culligan for instance has a unit that has a sensor in it to monitor breakthrough?
Fernandez: We are working on some proprietary products in the area of sensors and the area of brine recovery and the area of twin tank systems. And, without disclosing anything confidential, that could be very major breakthroughs.
WC&P: Is it likely we'll see those this year -- 2001?
Fernandez: I think we may be in a position that our sense of technology is at a point to where we'll have some patents we're in the process of developing and we could be putting those into field tests this year. These are developments that could radically change how the efficiency of some of these systems is looked at. I'm sorry to be a little cautious here but we definitely are working on those areas and feel we have some good tracks we're coming up with much better alternatives.
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