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Anonymous

Halma, Danaher, CSU & Serial Acquirer Org Structures

Former Director at Crowcon Detection Instruments, a Halma Company

Halma, Crowcon Detection Instruments, & HLMA Process Safety Sector

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:21} Steve, can you share some history about BEA as a company?

{audio:0:00:24} BEA is a sensor manufacturer based in Liège, Belgium. They were a family-owned business before being acquired by Halma in 2005. BEA operates in three major geographies, with the European market being core to the company. I was responsible for the Americas Division which was both North and South America. They also have a BEA Asia Division and, since 2005, they have been a company within the Halma Holdings structure.

{audio:0:00:59} What products do they sell?

{audio:0:01:01} BEA’s roots are primarily in sensor technology for automatic doors. To activate an automatic door through motion detection, to protect pedestrians, objects or anything else that may be in the door's path. The technologies they use to leverage that include microwave, active infra-red and laser time-of-flight, which is state of the art and revolutionizing safety, not only on automatic doors but in many other applications. The group have a very large market share, and the challenge was where growth would come from. They have leveraged all the technologies I mentioned into other applications such as industrial doors, vehicular automated gates, security applications and even people counting with the laser technology.

{audio:0:02:04} Do they own the IP to the technology used in sensors for automatic doors?

{audio:0:02:12} Yes, and this dates back to 1965 when they started the family business.

{audio:0:02:19} Was their high market share in the original global automatic door business?

{audio:0:02:25} Does that automatic door business sell to the OEMs of the doors?

{audio:0:02:32} It is a combination of a several channels. The OEMs or the door manufacturers such as Assa Abloy, Dormakaba and Stanley Technologies, produce the automatic doors and BEA sell their sensors to package with those doors. Many of those door manufacturers also have branches across the US who service the automatic doors. There are also independent dealers, who we call distributors, but they are ultimately service companies, who service the automatic doors and may carry a variety of automatic door lines. The channel is dependent on whether it was a retro-fit project or a replacement of existing sensors or a new installation.

{audio:0:03:25} Could you sell to Assa Abloy and smaller service companies doing retro-fits?

{audio:0:03:33} Exactly, and there are some sizable ones out there, at least in the US.

{audio:0:03:37} Do BEA get recurring maintenance/service revenue or only product sales?

{audio:0:03:47} We never installed or commissioned the product; that was always done either at the factory by the OEM installing a sensor on a sliding door before it left the factory, or it was installed in the field in case of a swing door or a repair/refurbishment. There was no service-related revenue within BEA, but there may be today as they evolved into the people counting applications, which has more of a recurring revenue model. That is a recent development and I am not sure what their go to market with that is, but it allows for a recurring revenue model.

{audio:0:04:34} Have volume drivers, historically, been new door installations or retro-fits?

{audio:0:04:42} Yes, it is highly correlated to commercial construction. Due to the specification cycle and when the 2007/2008 recession hit, BEA lagged 12 to 18 months before seeing an impact from that. It is closely tied to healthcare and commercial construction of airports and retail. Healthcare remained recession-proof, whereas retail was subject to the overall economy.

{audio:0:05:24} How cyclical is the top line for BEA, historically?

{audio:0:05:28} Not too cyclical; we never had 50% of our business in the last quarter of the year. The cyclicality from one quarter to another was insignificant.

{audio:0:05:45} In the economic cycle, did it track GDP or was it stable over the recession?

{audio:0:06:01} There was some decline during the recession, and the recovery lagged because of the cycle within architectural specifications.

{audio:0:06:13} Who are the major competitors to BEA in the automatic door space?

{audio:0:06:18} It is a niche market with few competitors; Japanese ATEX Technologies was one. The biggest competitive threat BEA faced was the potential risk of an OEM door manufacturer designing, developing and manufacturing their own sensor, which was attempted a few times, fortunately for the sensor manufacturers, without success. We didn't face pressure from Chinese imports or low cost because the US is a very litigious society. If a shopper or elderly person was struck by an automatic door, everybody would get pulled into it; the sensor and door manufacturers and the establishment where the event occurred. I had a part-time paralegal to work with our insurance company to properly defend our interests. With high deductibles insurance, the insurance company would gladly throw that deductible around. If we were not at fault, we would aggressively push back in order to have no liability in that case.

{audio:0:07:38} Is the regulatory side important given they could injure pedestrians?

{audio:0:07:45} Yes, and there are specific ANSI standards surrounding automatic doors, both during installation and servicing, to ensure the sensing zone pattern it should be detecting. It is very regulated and we had what was called AAADM Certified Trainers, which is the American Association of Automatic Door Manufacturers. All BEA technicians were certified to provide training and certify other technicians for our customers so they could test to ANSI standards.

{audio:0:08:36} Why did OEMs fail to launch their own sensors?

{audio:0:08:39} It is a very different animal producing an automatic door versus sensor technology and BEA is specialized in what they do with microwave and laser time-of-flight technology, which require investment. It was probably outside their wheelhouse, if I were to guess.

{audio:0:09:04} Assa Abloy are much bigger than BEA and had the capital, so is it expertise?

{audio:0:09:11} Yes, and there is also some separation between the door and the sensor, that if something does go wrong, all figures do not point at the same party.

{audio:0:09:21} Do you mean from a litigation perspective?

{audio:0:09:23} Yes, unfortunately we have to think that way in the US because it is a real factor.

{audio:0:09:30} Did you have litigation against BEA during your time and was it a big risk?

{audio:0:09:35} Yes, any time anybody would get struck by a door, if our sensor was on there, whether somebody walked into a door or something which had nothing to do with our sensor. We had cases where we simply had a stainless-steel push plate in the application which was there to activate the door and we would still get pulled in. It was very common to go for the deep pockets, and if it was a retail establishment, the retailer themselves, door manufacturer, the company who serviced the door and the sensor manufacturer, anybody who had ever touched that door or had an affiliated product would get pulled into that litigation.

{audio:0:10:17} How much of a risk is that to BEA?

{audio:0:10:19} With our product performance, it was a low occurrence relative to products sold. Once you earned the reputation of simply throwing the $50,000 deductible around, it would encourage that type of activity. We had to assert ourselves that when we were at fault we would take accountability, otherwise we would not throw nuisance value settlements around. We had to draw a line in the sand and stand behind our products.

{audio:0:11:00} Was it not a big cost item in the P&L?

{audio:0:11:05} No, especially as the technologies advanced; there would only be five cases a year.

{audio:0:11:19} How do OEMs choose a sensor provider?

{audio:0:11:28} They would not sole source, so in cases where we had 80% of the business, they would supplement the other 20% with another manufacturer. There were several factors, the more compatible we could make our sensors with their door products, the more likely they were to use it. Ease of use and time to install were also big factors. Not a lot of money is made on the sale of the automatic door, if you're selling to Walmart or a healthcare system. Often times door manufacturers and service companies compete for maintenance/service contracts. That is where they made their money because it used to take six hours to install an automatic swing door sensor system 15 years ago, whereas today it takes an hour. A five-hour difference is massive in terms of labor rate.

{audio:0:12:42} Ease of installation was important to service companies and many times they would let their technicians choose which product to use. Good technicians were hard to find and expensive, so when they were comfortable using a particular product, a lot of loyalty was gained. The flip side is, if you had a quality issue at some point, it was very hard to regain that customer's trust. Product quality was huge and BEA did a good job with it, as did their competitors, who also had good quality products.

{audio:0:13:17} Is the trust issue due to so few big OEMs in the industry making them?

{audio:0:13:24} Yes, and even with the service companies, the technicians who install it is where you had to gain the trust. The product had to work and be easy to install and they would not expect a call back a week after installation, because that meant money out of their pocket as that time would not be billable.

{audio:0:13:43} How did BEA’s products compare with that major Japanese competitor?

{audio:0:13:50} BEA separated themselves with laser technology which became a differentiator. In fairness, the competition did a good job over the years trying to close that technology gap. BEA had perfected the microwave and active infra-red technology where there was only so much further you could take it. A technological leap was necessary which is why they shifted to laser technology. BEA have since brought that to sliding door applications as well. Some of the differentiators for BEA were their breadth of product portfolio.

{audio:0:14:36} Because of their significant market share, they employed a strategy called more dollars per door; what else could they do around that door to increase the amount of revenue on that particular installation. You often see stainless steel push plates where you press a button to activate a door with sensors on it. It is an automated door but they don't necessarily want them activated by a motion sensor. Instead, they use what is called a knowing act device, like a push plate. We expanded that into touchless technology which is a huge deal in today's world where you can simply wave in front of that push plate instead of pressing it. Any manufacturers selling touchless activation devices are enjoying good growth.

{audio:0:15:25} BEA set the industry standard when it came to same day shipping. If you placed an order before 3 PM Eastern Time, the product was shipped that day, which became an expectation in the market. That is challenging today with supply chain challenges but that differentiated them, as well as the training and support focus with their customers.

{audio:0:15:52} Do manufacturers want quick to market and ease of use because their money is in maintenance rather than in the OEM sale?

{audio:0:16:02} Yes, and we would even have consignment inventory relationships with some of our largest customers, where we would own the inventory until they took it into their system.

{audio:0:16:14} You mentioned more dollars per door; at what point did you realize you had maxed out the market share in the automatic door space?

{audio:0:16:26} The growth rate was 3% to 4% per year, as opposed to double digits today, with the amount of automation going on in the midst of the pandemic. There was also a lot of pricing compression over the years, so you had to increase volumes faster to maintain revenue. We saw opportunities which were not necessarily products we manufactured ourselves. If we found a good manufacturing partner, we may private-label a product. We added magnetic locking devices and electric strikes to our portfolio, which were always used with our products but didn't come from us.

{audio:0:17:23} What was driving the pricing compression?

{audio:0:17:25} A lot of consolidation at the OEM level. Assa Abloy and others acquired many of their competitors, so as the market consolidated, pricing pressure increased and competition got better. Ultimately, we knew our growth would have to come from other segments. Once we took the blinders off, we were much more than an automatic door sensor company; we opened it up and started to structure our organization to penetrate those other segments.

{audio:0:18:04} Going back to the Halma acquisition, what do you think Halma saw in BEA?

{audio:0:18:14} They had a business with driving growth, good profitability and strong leadership. Halma do not acquire distressed or turnaround companies; they look for companies who were good without them and will hopefully be even better with them. I believe they saw a good alignment in core values with the organization.

{audio:0:18:39} How did management in BEA change when Halma purchased the business?

{audio:0:18:45} I started two months after Halma acquired the business. The previous individual, a Van Genechten family member who started up the US business, exited the company. They brought a new president in and I was second in command in the organization, but for most in the organization, very little change was felt. Halma's model is not intrusive, but a privately held family business would have financial reporting requirements coming with the territory. Finance and HR were more impacted than other areas but aside from that, very transparent to the organization. We managed to keep the structure that had been embedded for many years.

{audio:0:19:39} Who else was in the race to purchase BEA and why did Halma win?

{audio:0:19:46} I don't know that BEA was actively on the market. Often times, Halma look at the businesses which are not actively for sale. They look at their relationships to find businesses they think would be a good fit and persuade and court them through the process. It was the responsibility of all managing directors to find businesses such as that.

{audio:0:20:12} They paid 72 million EUR, excluding earn-outs, which up to 2004 made it close to 100 million EUR, and they only had seven million EBITDA according to a Halma report, so rather than a four or five times EBITDA acquisition, it was fairly expensive?

{audio:0:20:35} Yes, and at the time, it was Halma's second largest company.

{audio:0:20:40} I think it remains their second biggest. They do €100 million revenue today compared to €42 million in 2002, so it has been a huge success, even at that price.

{audio:0:21:02} How was BEA organized within Halma in those early days?

{audio:0:21:06} It shifted several times over the years. When BEA was first acquired, we were part of the elevator division. They had a significant presence in that market, then they created the infrastructure safety division, which was the division we were part of when I left in 2015. Today it is simply called the safety division. There were four sectors when I left, and now there are three so they have changed that structure. For the day-to-day operation of the business, not much had changed despite restructuring at that level over the years.

{audio:0:21:43} When they changed to the sector-based structure, what was your role?

{audio:0:21:50} In 2005 I joined in a financial director role, and was promoted to vice president in 2007, to president managing director in 2010, and remained in that role until 2015.

{audio:0:22:09} Was that for the US division of BEA?

{audio:0:22:11} That was the Americas, which included Canada and South America.

{audio:0:22:15} Did you effectively report to the CEO of BEA?

{audio:0:22:23} Which was based in Belgium?

{audio:0:22:25} I assume you had P&L responsibility for the Americas and would report into the BEA CEO who would report into a division CEO at that time, pre sector changes?

{audio:0:22:37} The divisional chief executive structure, then they went to the sector structure which had sector CEOs, which they called sector vice presidents in the group. Company managing directors and presidents would report into the sector vice presidents. They would have four to five business units reporting to them. BEA was a unique structure within Halma with that extra layer of the BEA group CEO compared to similar roles like mine which would report directly to a Halma sector VP. Because of the size of our business, we had that extra layer in there. Myself, the managing directors in Asia and Europe and the BEA group CEO and CFO, all sat on the BEA Global board and would meet monthly.

{audio:0:23:30} The regional presidents or managing directors of BEA in the US, Asia and Europe would all report into the BEA CEO based in Belgium, who report into the infrastructure safety VP, who would report into the divisional or sector CEO. Halma now call the sector VP the divisional CEO; how did that change the incentive structure and the feeling in the business in 2014?

{audio:0:24:13} We felt no changes from that, apart from having someone different to interact with. In all the board meetings, the sector CEO would be present and active, but not intrusive. They would play a supporting role in helping stimulate ideas with learnings from other businesses they were responsible for. Halma had many talented people in the group to learn from, and they did a lot to cultivate that over the years.

{audio:0:24:49} What did they do to cultivate that?

{audio:0:24:51} They constructed executive leadership and middle management development programs and, eventually, a Halma Graduate Program, which I helped get off the ground. The Halma Executive Development Program or HEDP, brought together senior leaders from eight to 12 companies for three separate weeks offsite, two at Henley University in the UK and the third somewhere remote, where a Halma entity operated and that we could tour. The sharing of ideas, collaboration and business opportunities Halma was very careful with. They didn't force it on us but they certainly created an environment where that was fostered.

{audio:0:25:46} They also ran an internal trade show every second year with only Halma companies, either in the US or Europe. All Halma companies would exhibit their technologies and they even had investors touring. It was an opportunity where they created the environment to stimulate collaboration, without a particular expectation coming out of that. They helped create that environment to bring those attributes out.

{audio:0:26:20} How helpful was that to the subsidiaries of the businesses?

{audio:0:26:24} It was very helpful because you were often working on similar technologies and doing things that were redundant. Maybe there was something from the supply chain that somebody else may have been able to solve. They would give you a warm introduction to their supplier, so it was simply everybody willing to help one another, and was probably one of the most enjoyable things about working there. When you were in those leadership sessions, you were exposed to a lot of self-reflection and everybody was getting out of their comfort zones, and being slightly uncomfortable effectively develops camaraderie.

{audio:0:27:14} Some divisions are almost competing businesses in certain markets. I don't think BEA has a specific competitor within Halma so maybe it was different for them, but did you see companies in the group change from competing to collaboration?

{audio:0:27:45} BEA had no exposure to that because they had no competitors in the market, aside from the technology which may have been leveraged in the elevator market, for example. If we were to pursue that, it was expected we would pursue that naturally through one of the elevator companies, not direct, and to create a competitive environment. There were rules of engagement of working together rather than in opposition.

{audio:0:28:19} Did the way you were incentivized change post the restructuring to sectors?

{audio:0:28:28} Compensation was based on group company results and some personal objectives, but my local team was strictly incented on the performance of the US team.

{audio:0:28:49} While the structure at the top may have changed slightly, for us, at BEA, we did not feel many other changes coming down which threw a wrench in our business.

{audio:0:29:06} The board of BEA would consist of all regional CEOs or presidents, the CEO of BEA and the sector VP and CEO?

{audio:0:29:20} One or the other would be there and we also had the global CFO for BEA, the chief technology officer and the chief marketing officer. It was a fairly sizable board.

{audio:0:29:35} How much influence did central management have on BEA strategy?

{audio:0:29:42} It was a very collaborative effort. The managing directors of individual business units were responsible for that strategy. We would bring that to the board and it was a great opportunity to challenge the strategy and look at different perspectives. What may have worked in Europe could work in the US or vice versa, but ultimately, we were responsible for our individual business units, but with a lot of collaboration from our global customers. Assa Abloy and Dormakaba were customers of the group, and they were not only a European or a North American customer, so as those organizations thought more globally, we had to adapt.

{audio:0:30:27} Halma has many products and touch points with Assa Abloy; how does the customer relationship management work between central management and BEA?

{audio:0:30:41} It was a unique challenge because we had to manage it centrally and locally to ensure there was no misalignment or miscommunication. We had to be consistent with our local customers to align with what we were communicating globally. It was a very well concerted effort to manage both aspects of that.

{audio:0:31:02} Does that give Halma any advantage in terms of bargaining power or pricing in the long run as they begin to sell more products into these OEMs?

{audio:0:31:13} Yes and no. Sometimes it worked the other way, where we pay this price in Europe then we pay this price in the US and we're just going to take the lowest and that's the price we want to pay, and not all things are equal. A product produced in Europe has a cost structure. We have to bring it to the US and may need to adapt it, so it wasn't always one for one, and it made for some unpleasant discussions. The more roots we had in a customer organization the better, where if we ran into a challenge, we were viewed as an important supplier partner. We disliked being called a vendor and always wanted to be viewed as a partner.

{audio:0:31:59} If Halma has five businesses which sell to Assa Abloy and they are looking for a price reduction on a BEA sensor, if BEA were unhappy would you negotiate that or would group management strategically negotiate pricing as they scale?

{audio:0:32:36} At the time, Halma had no other companies selling to the same customer base. We never had a situation where we had to escalate it to the Halma level; it was always handled at the BEA level. Halma Central was 15 to 20 people, not a big conglomerate.

{audio:0:33:07} There could have been a situation where that might be necessary if we simply cut and dry a resolution on our own. Typically, we would negotiate in the US, then take it to the BEA global level to look at the relationship as a whole. That would be a more likely scenario.

{audio:0:33:28} How involved was the sector CEO?

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Halma PLC

Halma is a UK-listed serial acquirer of niche highly engineered industrial or medical products that dominate their respective small markets.The company was founded by David Barber who pioneered the model of rolling up and integrating industrial businesses that have strong market power and durable earnings. Barber’s philosophy, which still underpins Halma’s culture today, is best explained in this short speech.

Today, Halma is structured into three sectors with 50 operating companies: Safety, Medical, and Environmental and Analysis. Each sector has ~20%+ net margin and the group aims for 16% growth in profit before tax every year, half from organic growth and half driven by acquisitions. Halma aims to acquire 15-20 profitable, high quality companies each year and between 2003-13 the company paid on average ~8x EBIT.

The 20-year FCF CAGR is 15% and the 33-year dividend per share CAGR is 5%. This has led Halma to become one of the top performing UK businesses over the last 40 years.