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February 2001: Volume 43, Number 2

Pentair’s Jorge Fernandez Discusses an Evolving Market, Part 2
by Carlos David Mogollon, WC&P Executive Editor

And now we continue with our interview of Pentair Water Treatment president Jorge Fernandez...

WC&P: I should point out the first WQA trade show I attended was in Albuquerque where Fleck was demonstrating models of some remote monitoring systems for commercial/industrial applications such as a hospital, where the operator can be set up in their own office and monitoring the systems at the hospital or even located across the country where they can go online and check the systems. What happened with that? Is that related?

Fernandez: I think the interest in that was intense but limited. In other words, those people that were interested in that were very interested but not necessarily many of them were interested to make it a No. 1 priority on those type of systems. So, we are putting a priority on areas like brine efficiency and salt minimization. That's where our sense of technology is drawing a lot of effort right now.

WC&P: Now, do you plan to be doing field testing on that by summer or fall?

Fernandez: I think we're going to be in the latter part of this year, 2001, where we'll be in a field test. I would expect by summer, yes, we'll have a few units done to where we'll test with some of our customers.

WC&P: Another one of my Technical Review Committee members wanted to know how diversified is Pentair in total business dedicated to water treatment in terms of percentages relative to the overall company?

Fernandez: We are relatively small. I think it would be fair to say that our water treatment operation is probably about 10 percent of the total Pentair turnover. I haven't gone back lately to check those numbers, but you can imagine between 10 and 15 percent.

WC&P: When Pentair took over Fleck Controls, there were some initial problems. The 5000 valve came out and you experienced service problems with that, unreliability issues, customer service. How has that been remedied today?

Fernandez: First of all, the issues of warranty and standing behind the product were addressed I would say in totality. We, of course, will stand behind all of our products and have done exchanges when needed to take care of our customers as soon as we could. The 5000 valve was totally reengineered. We have discontinued the mechanical version of that product and focused on the electronic version. The reengineering changes on that were so major that we decided to re-baptize the valve because it was a new product. It was probably about a yearlong process of engineering. We put a lot of resources to change the performance characteristics and durability of the product. We tested it down to everything you can imagine because we didn't want a repeat of the problems.

The new version now is probably the one we have the longest lead time in terms of delivery because our orders keep going up every month. And I think that's demonstration of the fact that if you take care of the customer and the customer believes the product is fundamentally the right product... The 5000 valve has a profile of excellence flows and excellent backwash characteristics that make it ideal for a larger home for example. And it's a market that requires a valve like the 5000 ProFlo. That's its current name, ProFlo SE. We feel the confidence coming back to the market on the back of that valve. We are seeing that how we market that product matters. It's a product for professionals so we only sell it to customers who are going to put it into a complete system. We don't sell it so that other people resell it and, in that fashion, our customer or OEM can build their own product program behind it because they know that they're not going to find that valve in just an identical system like the one he's selling. So, that whole notion of the professional program, the way it protects our OEMs, the fact it's uniquely catering to large homes where you can probably get a larger sale price to the unit and a larger margin -- makes it an ideal profit generator for most of our customers.

WC&P: Along those lines, when we spoke initially about doing this interview, I mentioned that there had been some rumors that Fleck possibly might limit its sales to smaller assemblers. Say, the guy who wanted to order 5-10 valves to put together his own systems. Where does that stand?

Fernandez: Our commercial policies have not changed dramatically over the years. They're not expected to change. We are a manufacturer who sees our role as one on whose shoulders the industry can develop a business. That means that if, in so doing, we cater to OEMS, to people that have the technical backbone in-house, to people who have the distribution and the customer service resources, to people who have the technical ability to design and support a system -- that's our fundamental condition. When you do that, the customer that buys $5,000-$10,000 a year is someone who really we don't know if we should be taking care of directly. What we do traditionally when a customer that size comes to us, we say: "You know we're not geared toward giving you the right kind of service. It is our OEM and distributor who's going to do the best job of making sure you get one or two valves and providing the services that you need."

WC&P: How does that fit in earlier with what you were saying about companies like Alamo that was bought by the Marmon group in potentially putting some people in a position of buying from a now a competitor in a sense? By that I mean the distributor is now owned by the same company that owns EcoWater and in order to keep buying from that distributor they're contributing to the profits of a competitor possibly?

Fernandez: Well that's one of the characteristics of this industry, isn't it? We have to get used to the idea of sometimes working with a competitor and sometimes working against a competitor. Sometimes we buy from a competitor. Sometimes a competitor buys from us. And some other times we compete. I think in today's age that situation exists. All I can tell you is that to the extent that my customer is a customer, we intend to bend over backwards to support them. Now, I don't think anyone can buy a company to do anything but other than try to develop that company and grow that company. We know that's the common interest between us and them and that's the interest we seek to play on. And so I think this market is big enough for everyone to have a place and a role. We see ourselves as being supporters of our traditional distribution. We're not going to see a Fleck softener in Home Depot. We're not going to see a Structural vessel and carbon filter in Lowes. That's not what we do best. But we will support our traditional distribution in any effort that they want to take to go after nontraditional channels and nontraditional ways of selling. We'll be at their side. We're not going to do that work.

WC&P: What percentage of the Water Treatment Group's business is in residential?

Fernandez: I think today you're probably talking about let's say three-fourths of the business of what you can call residential. We follow pretty much the industry in that respect. It's hard to say exactly because you can measure it in units and you can measure it in dollars. The dollars in commercial are larger, but the units are much less. I think the 75-25 percent split is a good figure to give you.

WC&P: In Europe, I was told that at one point, Pentair is marketing also a whole system, i.e., a complete water softening system that it's marketing to consumers.

Fernandez: No, that's not the case. We don't sell complete water systems to anybody. We have a little operation that one of our customers asked us to set up because they didn't want to manufacture so we set up a little operation to do third party assembly for that one customer. The product that we introduced there has the customer's name and we accepted that situation because we didn't want to lose the customer and lose the sale of the components that go into the products. We really do it as a way to keep the business and help the customer. What happens is that -- and I'll explain a little further -- regulation and compliance is becoming a little more intense as a result of the European Community and sometimes a medium-sized customer doesn't want to invest in all the tests and certification. We offered this service to the customer so they would stay in the business and continue to flourish. That's the one customer for whom we assemble a complete system, but we don't make any complete system that we ourselves put on the general market.

WC&P: What country was that in?

Fernandez: It's in France and Germany.

WC&P: The reason I brought that up is about a year or two ago -- in talking with Sonny Cammack from Alamo -- he referred to a situation you mentioned earlier. He said with changes in the overall structure of channels to market, general consolidation in the industry and how it affected some of the players, that the squeeze was being put on the mid-level distributor, the master distributor. And in looking at some of the acquisitions, companies seem to be consolidating their supply lines. For instance, Aquion, which owns RainSoft, just acquired the valves and controls business of Erie Manufacturing, which had dwindled fairly significantly. He raised the issue of the possibility of whether a Pentair or an Osmonics would begin marketing their own name-brand system in the United States at some point. Is there pressure toward that?

Fernandez: No. There may be in other companies. We don't have any idea to sell a complete system out in the open. If a customer were to approach us and say, "You know we'd like to build a consortium to go after this market and we want to do X-Y-Z functions," we would listen. But we have no plans to come up with a water softener in competition with the ones that our customers produce. That's something we have no plans to do. Now, I think to Sonny's comments I've got to say that the wise distributors are doing very well. The distributors who also are putting their own private lines in place are also doing very well. We also help these customers in getting them proprietary valves and tanks and giving them an opportunity to give personality and identity to their product line. We will continue to do that. That's what the smart distributor is doing. In fact, together with Alamo, we brought to this country the SIATA valve product line, which Alamo has marketed with the Medallion brand name. That's one way, in general, that smart distributors are getting away from doing what the other guy does and getting into more: "Here is my product, my program, my features and how we do it." Those people that are doing that are doing very well.

WC&P: What happens to the Medallion brand name now that Alamo is part of Marmon?

Fernandez: We are going to support Marmon in every way we can to help them sell more. The more they sell the happier they are going to be and the happier we are going to be. By the way, that product line is also available to other customers who want to sell it in a proprietary way. Usually, what we do is make these product lines available for customers who want to put a marketing spin behind their activities so now they've got a product line. Sometimes we work together on marketing programs jointly. I know of some people who are doing extremely well in this type of direction. They've been able to withstand the competition of home retailers, or mass retailers, I should say. It's phenomenal to see some of them growing the way they are growing. It's just great.

WC&P: Again referring to Aquion buying Erie's valve business and Clack Corp. recently introducing a valve exclusively for private label -- when you look at that from a competitive perspective, how do you approach that and what you foresee in the industry in the next few years?

Fernandez: I think that's good because, first of all, the more activity you have and the more you get people talking about our products and our industry, it's traditionally been translated into higher sales for everyone. In a way, the arrival of GE is a very good event because it puts more advertising dollars and more awareness into our products and that's how you build the industry. At the same time, I would say that I would love to see Culligan becoming a more stronger advocate of water products because they are the symbol for water products in this country. Those kinds of things are the ones that create awareness among the public. The awareness creates interest. They check the products. They make a purchase. Aquion is a customer of ours and, like I said before, they have a terrific organization. They'll do a very good job. Overall, I think all of us are going to see our sales going up. I think what we lack actually is more activity, more advertising, more dissemination of water issues and more education to the public. I would like to see more people get interested in opening dealerships and retail stores. Just yesterday, I was meeting with a consultant and he was telling me that when you look at it all together from every angle, industries that do something on water represent about a third of the volume size of the oil industry. Water is a huge industry and yet somehow we don't get the play. So anything that gets us excited, promoting the products, selling more and engaging more people in the process is going to be terrific.

WC&P: Not to get political, but we've just had an election where the Republican Party will be taking over the executive branch of government and controls the legislative branch as well. Traditionally, this is an industry driven by environmental regulation. How does that bode for keeping the environment in the news, keeping water quality issues in the news. What are your thoughts on that?

Fernandez: By the end of the day, what trickles down from a new administration as far as impact, I think is going to be fairly minimal. I don't want to discount it.

WC&P: I bring it up only because the USEPA has been fairly active in recent years with respect to water quality regulations, whether it was the Everglades, reports on rivers and lakes or tougher drinking water rules. That is historically not so much the case under Republican administrations. What do you foresee?

Fernandez: I see some diminishing of that. But, since most of these issues are worked through the state level... Yes, there's a federal mandate but there's also one at the state level. When California EPA does something, Wisconsin EPA follows, Minnesota EPA takes the example... The federal government may definitely be a force, but we're not seeing a change from a Democratic administration to a Republican administration that cuts across every government level. I would like to see some of the California -- call it - - mania or exacerbated zeal diminished. But, at the end of the day, is it going to change a lot of our business? I don't think so, not in the short run. It may change other industries. But here again, it's hard to predict and I may be totally wrong. I don't foresee a major change overall. Keep in mind, these government structures take a little time to change and, by the time they start shifting in another direction, four years are over. Who knows what happens then?

WC&P: I've got just a couple more questions, one of which has to do with personnel. In the four years I've been associated with this industry, there've been a lot of faces that have changed. One of our Technical Review Committee members noted that, of the Fleck Controls they knew five years ago when they call up now, the people are all different. For instance, he mentioned the international director recently left.

Fernandez: We didn't have an international director.

WC&P: Ernesto Castro.

Fernandez: He was in technical support. Yes, at some point, he was working in international. But he's leaving to take on a new phase in his career. The fact is that this has been an economy with incredible opportunities for a lot of people. And, obviously, a lot of good people leave because they find they want to do something else or they want to do what they traditionally do in some other organization.

WC&P: We also have the more tragic departures such as Bill Pelletier, who passed away.

Fernandez: Yes and those are very sad. I think overall what happens is one should not be amazed of this. In Fleck and Structural, we can't help but see that it's a one-way road. We can't take, for example, the employees of our customers. We struggle with that notion and, when we need a good, qualified candidate, we spend a lot of time finding them. It's very hard to select. After all, it's a small industry and it's hard to recruit from within. So, our customers do recruit from us and, in the interest of keeping customers happy, we sometimes say, "Well, OK, that happened. Let's move on." I don't think you're going to see a major dramatic change in that situation. We are an employer that has a lot of opportunities internally for candidates to grow their careers, but nobody can stop them from looking on the outside. And, honestly, some of the opportunities on the outside have been pretty good and we couldn't match them. So, they're better off with a customer, which isn't bad for us because when they go to work for a customer they tend to favor our product. There's no question that some of the faces aren't as well known. We have a program where we continually bring customers to our house and welcome them in an attempt to make them familiar with the new faces. We obviously use venues such as WQA, maybe not as much as we should. We plan to increase our participation and involvement in WQA as one way of having exposure to the issues and the people. Unquestionably, there's more that we can do.

WC&P: That leads into my next question, which is what's your perspective on the WQA, how it's been changing and how Pentair fits into that equation?

Fernandez: I think we've had very little participation. It's probably no fault of anybody. We have been very busy integrating the acquisition of Structural, working on some internal issues... That has kept us from working with WQA to the degree that I would have liked. I think you're going to see that participation increasing quite dramatically in 2001. I think WQA is the viable vehicle to represent the industry. And I hope we can be another gear in that motor to make our industry grow bigger and better.

WC&P: What do you think about some of the changes at WQA itself, i.e., there have been several changes in recent years at the association that mirror shifts in the industry?

Fernandez: WQA I think should shift directions according to where the market is going and what's happening on the outside world. I must confess I'm not very familiar with what has been going on in the organization itself. But I'm not amazed that many changes have occurred, being from a large organization.

WC&P: Just to summarize, three years ago, WQA shifted from being split into two sections for manufacturers and retail dealers to four, adding a commercial/industrial section and a consumer products section, which brought into the fold companies such as Brita, Recovery Engineering, NRG, Water Pik, etc. A couple of years ago, the idea was proposed to launch a Water Quality Society to bring in the end-user operators that may be looking for water treatment training and education and more professional affiliations. They also have proposed more recently doing more with commercial/industrial, including possibly developing good design practices or even standards.

Fernandez: I have to be honest and say I don't have the intimate knowledge to comment on that.

WC&P: OK. In wrapping this up, give me your look at -- from the perspective of the end-of- the-line dealers -- how you see Pentair and the industry evolving from a longer term perspective, say several years?

Fernandez: The industry is poised for growth. Pentair wants to play a major role in being a factor for growth. I think this growth is going to bring challenges of professionalization and more intimacy with customers that all of us -- and certainly, I include Pentair Water Treatment -- will need to undertake. We're going to have to be more knowledgeable of the market and the needs of customers. We're going to have to be much more agile with product development because the market is asking for product that we don't have today. I think the awareness will continue to increase. You look at the bottled water segment of the market and it continues to grow rapidly. We've just got to come up with innovative ways to meet that demand. Whether it's in the home or services, point-of-use or point-of-entry, we've just got to get more smart when it comes to new product activity. I think there's going to be increased opportunity in global perspectives. The fact is that no longer is water simply a North American issue for the North American consumer is pretty much everywhere. It's an overriding issue and will continue to be ever more in the next 10 years. Pentair will be looking for working associations. We have done a lot of work through acquisitions, but nobody can acquire everything and everything you acquire takes time to integrate and make to operate together in a coherent way. We're looking now for entering a phase where we can associate with technology companies, distribution companies and our established customers. Whether it's joint ventures or associations or other ways, we just have to gather mass around these efforts. The players are getting much bigger and without that mass, the smaller players are going to have a difficult time. We love the smaller players because this is the tradition of Fleck and Structural, so we're going to lend our customer base every hand we can. At the same time, it's got to be in everybody's mind: "How do I change and adapt to the new circumstances." I tell you, we're going to need to adapt our selves and get better and stand up to that challenge. I think everybody will have to. To me, new product development and ideas and closeness to the customer and end-user are going to be key -- how we understand those mechanics.

###

Next month, we'll interview Leigh DeGrave, president of Tucson, Arizona's Water Tec International Inc., which has been enjoying triple-digit growth since expanding in Mexico with a warehouse in Guadalajara in 1998. Last fall, it moved into a new building in Tucson -- combining its manufacturing and dealership under one roof -- and, this spring, it opens an office in Mexico City.