September 2001: Volume 43, Number 9
Part 3, Fleming Upon 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: You'd mentioned also that you're expanding with membranes in Brazil. In mentioning particular growth markets, is that one you're targeting?
Fleming: No. Our view of South America is even more conservative. In the large perspective, we're putting more energy in the Middle East and in Asia. Our view of South America is like a lot of people's I think, in that it's one of those big things poised to come that has not.
WC&P: By that, you mean economic problems in Argentina and California-style energy problems in Brazil?
Fleming: Our view is we're doing very narrow selected things. We have a joint venture in Brazil in a selected area but it's just very narrow and very limited and we're not putting any significant interest into South America. Latin America is a little different. We have a major operation in Mexico and we're expanding that. In fact, UAT has an operation in Mexico and we're growing that. Mexico looks very good to us, but not South America.
WC&P: What are the factors that come into playy when you look at Mexico?
Fleming: We're very bullish on Mexico for a couple of reasons. One of them is the migration of U.S. businesses to Mexico, an industrial base that needs water. U.S. industries are there. That's very healthy and doing very well. Also, the Mexican resort industry, that's a strength for us in water and wastewater systems. It's very healthy on both coasts. The scarcity of water in Mexico coupled with U.S. NAFTA funding meant that it's pretty healthy.
WC&P: Some of that funding has only been jogged loose in recent years.
Fleming: Right. It was paper only for a while.
WC&P: Leftover from their peso devaluation in 1994.
Fleming: I don't know. In the last couple years, we're seeing progress from it. With the U.S./Mexican border environmental organizations, there are some good projects. Our view on Mexico in the near term is very bullish.
WC&P: The economy in the United States has been fluctuating and you mentioned yourself it looks as if it's going to continue to soften. What are some of the regulatory factors that enter the equation? Obviously, this is an industry that's somewhat driven by regulations.
Fleming: There's a ton of them in play right now. The biggest impact right now has been a change to the Bush Administration from the Clinton Administration. Ignoring politics, I think everybody would agree that it really is clear that the Bush Administration has pulled back on a lot of environmental drivers.
WC&P: For this market.
Fleming: Yes. It's been everything that people talk about, but there's a number beyond that. For example, the state revolving funds for disseminating money to municipalities for drinking water and wastewater infrastructure network has been either delayed or dried up. Over $1 billion has been pulled out of that by the Bush Administration. That's really hurt municipal capital spending. The obvious high-profile issues -- the arsenic moratorium you're no doubt aware of. And the same thing with reduction of defense spending in cleanup of sites by more than $1 billion, which affects water treatment, laboratory services and so on. More importantly the reduction of the USEPA by 8 percent in their budget in terms of regulators, meaning that the enforcement activity is decreasing. Ignoring the regulations themselves, but the enforcers are being decreased. There have been just an absolutely dramatic number of items.
WC&P: That last point is actually only proposed at this point, correct? I read that the new Democrat-lead Senate was planning to address some of that.
Fleming: The point being the trends. What's happened that is real is the municipalities have taken a look at this and where they said, "We're going to have to float this bond issue to meet these requirements," they're now saying, "Well, we probably don't have to do that." So, there's real impact even though the budget change may or may not happen.
WC&P: It delays or washes out a contract that you potentially could have?
Fleming: It delays. And you could argue the delay is really forever because it never comes back. That project might and then something else won't. The delay is real. The net effect is the Bush Administration in everything from enforcement to regulation has had an impact. It's been dramatic for the first six months. That coupled with the economy has... I don't want to paint to negative a picture because we're doing very well because of the niches in. But it is really tough overall. That's probably not as much true of your readership with point-of-use/point-of-entry. It's not as dramatic there.
WC&P: Yes and no from what we've heard. There are a lot of different niches in the industry that we cover. If you look at the technologies and then the particular product lines and the markets that they go after. Five or 10 years ago, WC&P was simply a softening magazine that also covered reverse osmosis, distillation and filtration. Since then, ozone has emerged. UV has emerged. We offer more extensive coverage now on bottled water, commercial/industrial applications and small systems. And we're much more of an international publication. Domestically, the housing market has remained strong and that drives a lot of the business for the independent residential dealer. That primary reader may be affected by declining consumer confidence and some of the capital drawbacks on Wall Street, but it's more a question of the market slowing than declining. On another note, I'm glad you mentioned the base closings and environmental issues because that's pretty much what's been driving the environmental market for the past several years.
Fleming: Oh, it has been, absolutely.
WC&P: Now, we've got the MTBE issue and I would assume that's an issue that maintains a little business in some of those areas.
Fleming: It does from a laboratory basis. It doesn't from a treatment point of view. No one's treating it. They're all trying to characterize and understand it. So, our laboratory business for MTBE has been very good.
WC&P: You have to be a Calgon Carbon, a Barneby Sutcliffe or a NORIT to be benefiting from that.
Fleming: We can treat it and there has been some treatment, but it's mostly carbon based. We have a carbon capability but we're not Calgon. That's not our focus. If it's just carbon, we don't provide anything value-added.
WC&P: It's just a matter of moving commodity.
Fleming: I hate to put it in those terms, but that's right. Unless, it's a sophisticated process to train that needs multiple operations, which is our strength, it doesn't make any sense.
WC&P: Where is Severn Trent going? What do you see as the long term goal of what you're doing?
Fleming: Well, we are intending to be very modestly, the premier environmental water based company in North America. We have a stated objective to exceed $1 billion in sales in the next five years. We'll do that. But that's only one stated objective. It's not focused on revenue. It's focused on profitability.
WC&P: What was the latest or last sales figures released, emphasis on "released"?
Fleming: We don't split out Severn Trent Services, but I think we've been saying publicly in excess of $600 million. More importantly on the revenue thing, our stated objective is to be No. 1 or 2 in the segments that we choose to be in. That means environmental laboratories, operating services, disinfection products and direct drinking water treatment. It's pretty much that simple.
WC&P: Do you see Severn Trent Service spinning off as a separate company?
Fleming: It's under discussion. There is a discussion of -- and this is truly discussion only -- of potentially going for a public offering for Severn Trent Services to continue to fuel our growth. It could happen. It may not.
WC&P: Under what sort of timeframe is this being pondered?
Fleming: It won't be in a year's time. But it could happen in the next two to five. Severn Trent is a conservative company. It's British based. It's very old. We're in a very good financial situation. We don't carry much debt. We're self-financed completely. We're self-insured completely. The moves are very slow and ponderous and, hopefully, they're the right moves when they're made.
WC&P: In the United States markets, some of the big players that we play with, I assume put you in a position to compete with Osmonics or Ionics. Are those competitors of yours in any particular market niche?
Fleming: Actually, we've never looked at Osmonics or Ionics as competitors. We did potentially value them for acquisition. Just to pick one, Ionics is heavily own-and-operate in the utility industry. That's not something we want to do. Won't happen in the short term. In bottled water, we're very interested in competing; except their focus has been the smaller bottles, the half-liter and liter; our focus has been three-gallon and five-gallon. So, we really don't compete with Ionics in that either. Osmonics is a little different, they're not really a water company; they're a components company. We don't really compete on a components basis. Their model has been to sell whatever components for whatever and to whomever, and that's totally opposite of our model. So, we don't view them as a competitor. Having said that, once in a while we compete with them for a membrane system.
WC&P: I would assume it's similar for a Pentair or a Sta-Rite?
Fleming: Yes, exactly the same. We overlap everybody a little bit, but the ones you mention are very little in overlap and so they haven't really been viewed as competitors. So, we haven't really bought anybody to position ourselves against somebody else. That isn't our approach. Just to pick on UAT, we needed a membrane capability in-house. We had one in England, but it's small so where could we add. And this is not a one-trick pony; I mean we are looking for more. We have a lot of needs in membrane technology that aren't being served today.
WC&P: What was the cost for UAT?
Fleming: I can't tell you. I will tell you that it's been highly profitable. It's been easily one of our best acquisitions.
WC&P: What was its rate of growth prior to you buying it that was attractive?
Fleming: They were doing over 30 percent compound annual adjusted growth. Now, the last two years, that wasn't the case because they had issues since they were growing so fast that are traditional, conventional problems. They're cash flow was negative. They were self-financing and basically having problems supporting their growth.
WC&P: A borrowing from Peter to pay Paul thing against the middle internally?
Fleming: Well, yes. They were a family-owned business and simply could not sustain their growth.
WC&P: Now, the president, Marwan Nesicolaci, he is now vice president of water treatment exports for Severn Trent Services...
Fleming: I'm glad you mentioned that because it's a differentiator between Severn Trent and some others. We bought UAT not for UAT but for the very technology and then we looked at their people internally and Marwan we recognized to have a lot more capability than what he was doing. We didn't want to constrain him to being an operations manager for UAT activity. What we asked him to do was to take on the job of vice president of international sales, so he's got sales for all Severn Trent products on a worldwide basis outside of North America. He's done very well with it. It's a larger mantle for him to assume. What we did then was backfill someone to manage the Torrance operation to relieve Marwan of that, although he's intimately involved on a daily basis.
WC&P: Who'd you bring in to do that?
Fleming: A guy named Ken Goodboy, the vice president of operations for Zenon Environmental. He's in my mind the best operations manager in the membrane business and he's done great things. The key was that Marwan is very capable and knowledgeable internationally and had the mindset to take on product ranges beyond UAT's products. It's working. He's doing a great job.
WC&P: What's your background?
Fleming: Well, I have a Ph.D. in chemical engineering and an MBA. I was a director at Alcoa Separations back in the days when it was together and left very early on to join Zenon. I was one of the original people at Zenon. I left that when we took Zenon public and then was president of Crane Fluid Systems.
WC&P: Is that what is now Crane Environmental?
Fleming: Crane Environmental is part of that. That was Cochrane and Environmental Products. I left that to really go off on my own and then was asked to join Severn Trent.
Fleming: It's sort of a funny story. I'd left to start a consulting service and one of my clients was Severn Trent. This was about three years ago. They were looking at requirements for strategic planning and what they should be doing in the U.S. and in putting together what became Severn Trent Services. So, I was involved in putting together a strategic plan and making acquisitions. Then, when Bill Cook came on as chairman of Severn Trent Services, Bill asked me to come inside and manage the water purification unit. That was I guess the beginning of April of last year -- about a year and a half.
WC&P: Kind of nice the way that worked out?
Fleming: It was. In a sense, I already knew the company well. And I knew Bill Cook. He brought in his own management team. He's from Hercules/BetzDearborn. He was the chairman. So, I knew him from those days.
WC&P: They've had their own trials and tribulations recently.
Fleming: They have, but not when Bill was there.
WC&P: It kind of looks as if you've been sailing a smooth ship through stormy waters.
Fleming: We like to think so; it's not that easy.
WC&P: Do you see any other challenges ahead?
Fleming: Challenges for us in the near term are the economy, not just North America but worldwide. It's a challenge for everybody, but it really is a challenge for us because of our size. Obviously, the regulations and the Bush Administration is a huge challenge. But internally, we're still missing some core competencies. For example, membrane technologies, we're not where we want to be there. We're missing some other competencies. Advanced biological treatment, we need some things. And in market coverage, in certain parts of the world and even in the U.S., we're not where we want to be. And we haven't rationalized everything yet. We're trying to create centers of manufacturing excellence, so we're going to rationalize more manufacturing centers. There's a lot of consolidation to go to drive costs out, so we have a lot of challenges.
WC&P: When you say manufacturing centers, do you envision seeing a company that may fit in with a weakness you may have and acquiring them in the near term or opening your own facility for that?
Fleming: No, I actually mean taking them out. We have ones all over the place and we will consolidate them. It probably won't be an acquisition for manufacturing. We're pretty well positioned. We have some low-cost centers that are very large and underutilized. We'll be expanding some and contracting others. We have a lot to do over the next few years. There's only a couple ways to win in water. The market is not growing dramatically, so you have to be the low-cost producer and you've got to expand internationally. That means international manufacturing -- low-cost, offshore manufacturing and distribution. We really have to get better at that. We're expanding our operation in India right now. We're modifying the ones we have in China.
WC&P: What do you do in India?
Fleming: We have a plant in India that we're expanding right now. Today, it' produces chlorine handling equipment, hypochlorite generation systems and a few monitors and controls. But we're actually trying to expand that to build membrane systems and point-of-use units, not only for the Indian market but Southeast Asia.
WC&P: In China, where are you?
Fleming: Headquarters is Hong Kong, but we have a Beijing facility as well. It's making disinfection right now.
WC&P: And I assume you're doing the same thing there?
Fleming: Well, the jury is still out. We're not sure it's the same situation. Our view is that we may not need to manufacture in China; we may have only distribution offices. We'll certainly close Hong Kong and expand mainland. So, there's a lot to do.
WC&P: It's kind of interesting, because you mention expanding in Asia and the Middle East. You frequently hear about Asia, but you don't normally hear about the Middle East as a growth market generally. But I would think that bringing Marwan on would add some natural strengths there.
Fleming: Oh yes, that's one of the reasons we wanted UAT. Not only Marwan, but his team are relatively strong in the Middle East, both in their U.S. people and their Middle Eastern people. And the Middle East for us is still a growth market for water equipment. There's a lot of activity, not just for desalination units for drinking water but drinking water membrane based systems, advanced filtration systems and some water recycle. It's a growth area... not to mention meters.
WC&P: It would seem also that the general trend internationally -- even with the World Bank when they go in on an infrastructure project -- generally is promoting privatization in areas where they either didn't have water services or the practice of charging, billing and paying for those was informal, abused or non-existent. The World Bank requires some contribution from the local populace, which means installing meters as well to measure how much water people are using.
Fleming: That's true. At first blush, you'd say water meters aren't very interesting or much of a market, but it is. People are really looking at what their usage is for all sorts of reasons, waste for example. In the Middle East with water scarcity, they're looking for all sorts of ways to catch that 15-20 percent that's currently wasted.
WC&P: How does reuse work? That's one market that's somewhat fuzzy for me.
Fleming: It really is new. If you're getting a building permit in Monterrey, Mexico -- if you're Procter & Gamble, General Motors or even Boeing -- you have to get a permit that has zero liquid discharge.
WC&P: So you're talking about recycling loops to maintain water in a system.
Fleming: Precisely. The more general term is reuse in that you might not use it again for process water. You may use it for irrigation or your golf courses, etc. In some way, you're recovering the water.
WC&P: I just know that for oftentimes recycling/reuse is a bad word in the context of some of the efforts in California to restrict use of softeners or ROs.
Fleming: Yes, we've followed that. Our view of reuse, though, is it's a rapidly growing market, it requires a lot of process knowledge and the value is there. Again, you're talking about dollars per thousand gallons, not pennies. But it's not trivial. People view it as a U.S. market, but it's not. The Europeans value water even more than we do, so there's a market there and in water scarce regions of Mexico or the Middle East, it's a lot of value.
WC&P: China as well?
Fleming: Potentially. There's some of that. We aren't seeing anything.
WC&P: We'll see what happens over the next several years as they prepare for the 2008 Olympics and begin to open up. That may be an issue of awareness.
Fleming: Yes. Awareness creates value and reuse requires value. You have to value water, otherwise, you wouldn't reuse it.
Join us next month when we speak with Water Quality Association past president James W. (Jamie) Wakem II, president of West Palm Beach, Fla.'s Atlantic Filter Corp.