September 2001: Volume 43, Number 9
Part, 2, Fleming upon Severn Trent Services
by Carlos David Mogollón, WC&P Executive Editor
The following is a continuation of our interview with Severn Trent Services' vice president of water purification services…
WC&P: Well, we noted in our August issue that Perrier has restructured their treatment train to move ozone out of primary treatment, which is fairly significant considering they're the No. 1 bottler in the world.
Fleming: Sure. And of course, you're probably aware that we produce a lot of Perrier systems. Well, we are the guy that produces the Perrier systems.
WC&P: Through UltraDynamics?
Fleming: No, through UAT. We build Perrier's bottled water plants. We have a bunch of more contacts right now. And they're going UV. We've been pushing them to go UV and we like UV. Our activity in UV is substantial, but it's not nearly what we need to do. We're going to be putting a lot more activity into UV. That will mean a lot more internal development, plus probably acquisitions.
WC&P: Talk to me if you could about a few of the companies that you have that we're not as familiar with, such as Exceltec, Samsco, Semblex and Tetra. How do they fit in?
Fleming: Well, taking them individually -- and, again, they're not individual companies anymore -- but, with Exceltec, keep in mind that we're into disinfection in all forms in a major way. Our view is that the most significant disinfectant growth is in hypochlorite. ClorTec gives us excellent entry into municipal hypochlorite, but Exceltec is the industrial side of hypochlorite. The units are different, the requirements are different. And, so, Exceltec is the leading provider in the world of industrial hypochlorite on-site generation systems, primarily power industry, marine industry and industrial utilities. For instance, the petroleum industry is really high up, offshore platforms for example. That's what Exceltec does, although it's not Exceltec. It's Industrial Activity that's sold through our Industrial Network.
WC&P: I'm probably confused because on your website all of these companies are broken down by Water Purification, Analytical Services and Operating Services.
Fleming: Yes, I know. We're trying to change that. It's a work in progress. So, I'm sort of running ahead to where it actually functions. Our website is abysmal and I'll acknowledge that. We're going to get better.
WC&P: Everybody's can always get better. Next year, people will look back at updates they made this year and they'll be out of date.
WC&P: How about Samsco? How does it -- or what was Samsco -- fit in?
Fleming: We have a strategic plan that will increase our activity in the industrial water sector. We were heavily municipal. We are heavily municipal. We're greater than 80 percent on a revenue basis in municipal, and we're decreasing that with selective industrial activity. Part of that activity is to recognize the industrial recycle/reuse market, which is really, really growing. And so the acquisition of Samsco products gives us evaporator and distillation technology to take wastewater in selected industrial markets, primarily metal finishing, and do recycle/recover. We have membrane capability. We have precipitation, biological, all of those things. We didn't have an evaporator or distillation capability.
WC&P: By the way, when was Samsco acquired?
WC&P: And Exceltec?
Fleming: The year before that, 1998. Then, Tetra has really advanced filtration for municipal drinking water and wastewater. They do a lot of advanced biological treatment, advanced media filtration...
WC&P: Anaerobic stuff?
Fleming: Anaerobic, aerobic, deep-bed filtration, some ion exchange systems, clarifiers -- it's really a municipal filtration process engineering company.
WC&P: And Semblex?
Fleming: Semblex is a little unique. It's really chemical feed for drinking water and wastewater. It fits with our attempt to provide a complete package.
WC&P: For disinfection or coagulation and flocculation?
Fleming: The latter.
WC&P: Just to make sure readers aren't confused, that would be...?
Fleming: The latter means flocculation and coagulation. But, it gives us the equipment to provide the disinfectant as well. That was one of the synergies, that these guys give us the capability to provide that equipment.
WC&P: Are you doing tablet chlorination in any of these?
Fleming: Oh, yeah.
WC&P: Which is that through?
Fleming: Chlorination is all done through our Colmar Operations, which was formerly Capital Controls. That facility provides all of what we call our smaller package equipment that we provide, which includes chlorination, chlorine dioxide, chlorine generators, monitors, controls -- all the sorts of things for disinfection. They have facilities actually around the world, but the big one is in Colmar, Pa.
WC&P: When was Semblex acquired and when was Tetra?
Fleming: Semblex was in 1998 and Tetra was 1997.
WC&P: And Capital Controls?
Fleming: Oh, that was earlier, 1993.
WC&P: ClorTec was January 2000, but when was UltraDynamics?
WC&P: Could I go back and touch on labs again real quickly, if you could? The primary issue you mentioned was profitability, but I notice that you have it cross referenced with environmental services in your flow chart.
Fleming: Profitiability is certainly No. 1, but it was a view that the market was growing for environmental services. This doesn't include just water, by the way. It includes air and soils. In fact, that's a very large part of what we do in the laboratories. It also gave us a very strong base in market recognition. That's because if you're doing all the air, water and soil monitoring measurement for let's say a government facility to a municipality, you're in a pretty good position to see their requirements for treatment. And you're monitoring for one reason, either compliance or their need to treat.
WC&P: So it opens the company to serve additional needs that the client may have.
Fleming: Oh, absolutely. Consulting services and so on. It really provides an entré.
WC&P: A couple of these acquisitions in the past year were in piping. How does that fit in?
Fleming: That's true. Another triangle of our business model is operating services. For us, this means not simply taking out a water treatment facility and operating it, but operating it all the way to the tap for a municipality. And, so, we have as one of our operating divisions a pipeline services group. They install piping, they maintain it, they operate it, they clean it -- they do all the things necessary for drinking water and wastewater piping.
WC&P: Is it long-pipe systems for municipal use?
Fleming: Yes, they're all municipal, 100 percent. That's part of the infrastructure. It's not just treatment. I mean it has to get to the tap.
WC&P: On the international side, it looks as if you've also got metering.
Fleming: Well, our goal is to provide whatever is necessary that's appropriate for us to do. And fusion meters is one technology product for water metering in municipalities -- at the home for municipal drinking water usage. Our view is we have a proprietary technology position, which is something we like to do -- establish a proprietary technology position. We do a lot of new technology development. And we like the product and we're trying to introduce it.
WC&P: If you lump these together, international and North American operating services, you've basically got three categories with water purification and analytical services. How much of each of those makes up Severn Trent Services?
Fleming: They're roughly a third and a third and a third on a revenue basis.
WC&P: Where do you see higher growth at, or the best growth, I should say?
Fleming: Our view is that the operating services activity is growing modestly, but not great.
WC&P: It's a more competitive, mature market.
Fleming: More competitive. But there's a bit of a pause in the market for municipalities to decide if they want someone to operate their facilities. Having caveated that, there is the industrial activity where industrial facilities are saying please operate or please own and operate our facilities. That's still growing. Our view is there's growth but it's moderate growth.
WC&P: Is there a little switch occurring between privatization vs. outsourcing?
Fleming: Yes, there was this dramatic move to outsource maybe four or five years ago and now it's gained some sanity where people are saying it makes sense in certain situations but it doesn't in others.
WC&P: I noticed that the city of Indianapolis just bought back their water system and I believe they were competing with American Water for that.
Fleming: I didn't know that because that's not one we're involved with. But there is some of that. I could give you examples of instances where cities are buying back. In fact, we're in the middle of one right now where a city is buying back their facility that we own.
WC&P: Does that have to do with Jacksonville? Oh, that's United Water.
Fleming: In sheer numbers, I would say that we're the largest operator of municipal systems in the country. We have in excess of 500. Having said that, our view is that the growth is going to be modest. Back to your overall question, though, the laboratory services are still growing, also modestly. It's somewhere near approaching double digits, but it's not what it was. The equipment business and total solutions packaged equipment in our view is substantial. We have a lot of growth there that's double digit.
WC&P: I noticed in the Severn Trent PLC first quarter 2001 report that Severn Trent Services has had 44.3 percent growth.
Fleming: It's certainly the fastest growth portion of the business. And our view is, going forward, it probably will continue to be in the near future. The water treatment equipment business is I won't say great. It's not. The market is really poor right now. The economy is down. It's really a problem. But, having said that, it's still double-digit growth. It's gonna be strong for us. Our view is that's where we'll focus our energy.
WC&P: To get a full grasp of this, I'd have to understand pounds sterling as the Severn Trent PLC report I've got is in British currency.
Fleming: The exchange is 1.42 today if that helps.
WC&P: At £350 million, that would be nearly US$500 million.
Fleming: All three of the divisions are growing, the lab business is growing pretty well, the equipment is growing much better and the operating services is also doing OK. You know part of that is not because the overall market is growing, it's the parts we've targeted for growth are doing well. Again, we're not everything to everybody.
WC&P: Who do you view as your primary competition? Who do you bump into most often?
Fleming: It varies. If you mean equipment activity or operating services or laboratories?
WC&P: Let's say purification equipment.
Fleming: Obviously, No. 1 would be Vivendi/USFilter. That's obvious. I mean they have products that mirror ours in a good portion of our product lines. After that, it does vary by market segment. I mean in our marine business, gosh, it's an Italian company. If disinfection, it's Vivendi. If it's for evaporators, well, there's 300 of them. If it's advanced biological or, let's say, deep bed filtration, it's Leopold or Thames. It really does vary. It's just difficult to give you anything other than Vivendi. In operating systems, it's easier because there's three or four. In lab services, it's easier. They're very specific. But in the equipment business, it varies by market.
WC&P: How do you view the point-of-use/point-of-entry market?
Fleming: It's a funny one for us because we come from a background of large municipal and so we have viewed it from afar and keep looking at segments to enter into. Our view is that it's a bit of a mirage in the sense that you really have to pay attention to what portion of it is profitable. I mean just going in and doing under-the-counter purification units, generally, there's no money. When you can import a unit from Taiwan cheaper than you manufacture a unit -- I mean landed costs from Taiwan -- what value added is there. It's hard to make any profit. Having said that, there are niches that we like. I mentioned one already which is the arsenic treatment. We like that because we have a proprietary technology. We feel we're very strong. That makes sense to us. But just the general point-of-use market, we have products and we do sell them, not significantly. The point-of-entry is a little different or perhaps I would expand it to village wide. We're doing packages for villages in Vietnam, for Bangladesh, for India. We like that market a lot. But point-of-use to us is not a significant market for us and we won't enter it.
WC&P: In Vietnam and Bangladesh, I assume that ties in very well for arsenic as well.
Fleming: That's an example, but it wouldn't have to be. We do packaged systems for villages in Vietnam that have nothing to do with arsenic.
WC&P: Now, would this be a water station type of thing that's set up?
Fleming: Right. Everything is self contained from pumps to filters to membrane units to disinfection, pre-packaged.
WC&P: You mentioned while Severn Trent Services is based in the United States, it's really a worldwide company set up as the non-regulatory side of Severn Trent PLC. How do North American or U.S. sales measure up in comparison to what you're doing elsewhere? Where do you see natural growth patterns there?
Fleming: Well, to answer your question, the vast majority of sales are North American today. Just to give you sort of a general number, last year was 80 percent North America. Having said that, we recognize that some of the faster growth segments in water are international. There are certain targeted areas. And so, we're putting a lot of resources and focuses internationally. As a matter of fact, our sales this year are going to be easily 30 percent international if not closer to 40 percent.
WC&P: Versus last year, they were?
Fleming: Last year, they were under 20 percent. It's dramatic international expansion and our focus is international. It's not everywhere. It's growth areas. There are certain parts of the Middle East for certain products. It's certain parts of Southeast Asia. It's Europe. Strangely enough for us being a UK-based company, Europe is foreign territory. It's a new area for us to enter.
WC&P: Well, the European market because of regulatory issues wasn't really there until recently, at least for point-of-use/point-of-entry.
Fleming: No, they weren't. But the value of water -- drinking water and wastewater -- is substantially higher than in the U.S., so there is value in putting in treatment both municipally and industrially. Yes, point-of-use/point-of-entry no, but again our overall focus is not there.
WC&P: How do you view some of the regulatory issues that have been going on in Europe, for instance the EU Drinking Water Directive?
Fleming: Well, it's sort of a double-edged sword. On the one hand, things like the EC Drinking Water Directive are complicated. Up until a year ago, there were not even what I would call Safe Drinking Water Act equivalent standards in Europe. Individual countries had individual standards. That created a problem because it meant you were dealing with each country individually. Some had tight regs. Most didn't. Now, there is the EC Drinking Water Directive.
WC&P: I assume that's a problem because the tolerance of what you're equipment is expected to provide, whatever it purifies or reduces contaminants to, varies by country that may focus on different categories of contaminants as well...
Fleming: It does. That's true. The other part is just the ability to sell it to these countries. With the EC directive, it's just extremely difficult. Procurement is difficult in the sense that there is all this requirement to have hands-off or arms-length discussions. The process is fairly formal, more formal than in the U.S. Yet there's still nationalistic interests. If you're in Germany, the competition with German companies is a difficult one. There's still some nation by nation things going on. England is England and Germany is Germany even with an EC directive. So, it's complex. I think we're doing OK and we have only growth there. But on the one hand it should be easier because the value of water is greater in Europe. You're dealing with dollars per thousand gallons, not cents per thousand gallons. Yet, it's difficult to sell.
WC&P: Has the Euro made that easier at all?
Fleming: It will. It hasn't yet. I mean the Euro is theoretically in place, but isn't formally until Jan. 1 of next year. And, in many places, it's simply ignored. If we're making a proposal in Italy, we're doing it in Liras. It's still a problem.
WC&P: How about the general economy? I mean things have been a roller coaster for a number of people for the past nearly couple of years now.
Fleming: For us, you can look at what's publicly available. Our revenue growth has been dramatic, our profitability doubled again last year and we have a very aggressive plan this year for growth. And that's against a framework of a market, an economy that really is a problem both in North America and Europe. Of course, we know where Asia is. That's generally because we've been picking areas selectively that show growth. We're not everything to everybody. If we were, our growth would be mirroring the economies of those countries, but it doesn't because we're only in niche areas. Even this year with the economy turning down in the U.S., our first quarter was very strong. Orders are up.
WC&P: What's some of your numbers?
Fleming: Because we're on an April 1 date, our first quarter ends in June and they aren't out yet. It'll be a week or two weeks still 'til they're released. We just had an analysts meeting and I can't even talk to them. The simple point is though that our view of the economy is it is weakening still in North America and it's worse in Europe. Asia has not recovered, although there are segments of Asia that are doing well.
Click here to view a followup article:
Part 3, Fleming Upon Trent Services