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:0:00:01} Can you provide some history to how part of Tyco became part of Thermocoax?

{audio:0:00:12} It was around 2011 when Tyco decided to clean up the portfolio and to sell the business called Tyco Flow Controls which was part of the heating business as well as the flange business to Pentair. But it was clear that Pentair was only interested in the core business. Some others were looking to the market to find patents that fit and, at the end of the day, Thermocoax was highly interested because it gave them some additional technologies to their existing business and a good market influence, especially in the Germanics. They were never strong on the Germanic markets; that was the domain of the Isopad brand and another company called Isoheat. For them, that was an interesting step to take. On the other hand, you must say, Tyco bosses were under pressure to clean up their house as soon as possible, so without giving any details, it wasn’t a nice deal for them. 

{audio:0:01:58} Do you mean Spirax overpaid?

{audio:0:02:01} No, it was Thermocoax, who bought this business from Tyco, that was underpaid. But we will come later to the point where I believe Spirax did overpay something. 

{audio:0:02:14} Can you just explain the core of Thermocoax portfolio, typically what products they have and a use case for the customer? 

{audio:0:02:32} The core technology of Thermocoax comes from Philips. It was a business unit of Philips and it was the same story in the late 80s, when Philips cleaned up their house and there was a buy-out and that was when it specialized in this heating technology. In those days, I think the majority was really for nuclear. In the French market, it was a nuclear business. They have a technology which is used from some other companies called, MI, mineral insulated cable production. That means it is an electrical cable with an outer metal sheet and they produce it for heating as well as for sensor applications. One of the core businesses was and is still nuclear business. Not only in France; they already had bits and pieces in China and some other areas as well. 

{audio:0:03:33} They went into the semi-conductor business market which is actually Gencoa and also for machinery equipment for production of all this stuff about semi-con whatever you name it. As well for production of, for example, photovoltaic cells, solar cells, where you need very precise heat everywhere and where you cannot use steam. 

{audio:0:04:02} For example, let’s take a semi-conductor customer; what does their plant look like? What does the industrial process they have inside their plant look like and how does the Thermocoax products fit in that?

{audio:0:04:14} Usually, the Thermocoax customers are the machinery equipment manufacturer who has a need, for example, for a photovoltaic cell or for the lamination process for the solar cell. They need very precise temperature maintenance. For example, on some of the laminates there is 500⁰C plus or minus 2% on each point. On the one hand, the technology is to produce the cable, but also the core capabilities they have in France – as well as in this old Tyco company – where they have an expert piece, the experience on this. From my viewpoint, you will find maybe five or six companies in the world which have the capabilities to do such a design. They will have some material maybe, but not the experience and the knowledge of how to do the design. 

{audio:0:05:09} Is it mainly OEM business then, but these are centered on applications rather than systems?

{audio:0:05:17} It’s mainly OEM and, sometimes huge one-offs for very special applications but, I would say, what Thermocoax is doing 80% is OEM. Some small standard products, but that’s more side products. 

{audio:0:05:36} Who are the major OEMs, typically?

{audio:0:05:41} The major OEMs, in the German markets, there are companies called Pharmathen; for materials, in the US and also in Asia, one of the strongest companies in this market. Then you find in Japan companies like Mitsubishi; Mitsubishi have huge companies and they have a niche market to play in the game. Kawasaki is a player in Japan. It’s also a selective market with the big players. There are small players, as well, but the big market may be 20 or 30 players in the world. 

{audio:0:06:26} How does one differentiate themselves in this game?

{audio:0:06:35} It’s the design, the quality of the product. If you’re talking about this so-called MI technology, you will find some leading manufacturers, one is still the nVent; they have a huge facility in Canada. Then you have, in Germany, a company called Isomil, with really technical expertise, and in China you find one. Chromalox is also a manufacturer but that is already the second range of the quality level. 

{audio:0:07:13} The problem is, with this production process of these cables, the insulation material is magnesium and magnesium absorbs all humidity you find in the air. To get this under control, having the really high quality you need for these applications, that’s a trick, because across the market all the manufacturers have a failure rate of 10% or more for the cable, but that is not acceptable for these OEM applications. You need less than 1%.

{audio:0:07:48} Is it patented technology or is it just really the expertise in how it’s packaged and designed?

{audio:0:07:55} It’s both. For example, Thermocoax has one patent on the connection part. Usually the standard is, you need a heating cable for example, or a sensor and you need to connect it to the control system and because one cable is hot, you need another cable and that’s called a cold lead. That’s then a different size, a different resistance and that will be soldered. Thermocoax has a technology that would use it on one way on the machines, without adding any manual work; it’s the finished cable and that part of the connection is the patent, for example. 

{audio:0:08:45} Their product portfolio is, effectively, small components and cables. Highly engineered cables and tracing systems that are within a Mitsubishi machine that’s going to be sold to a semi-conductor company or manufacturer. 

{audio:0:09:01} Yes, one of the biggest ones for example is First Solar, in the US, who are one of the biggest producers of the solar cells. Then you have all the Chinese guys and there are some in Germany and Europe. That is then the end user buying the machine from companies like Mitsubishi and others. 

{audio:0:09:24} What is the biggest risk in OEM business, in this product category?

{audio:0:09:31} In this product category, the biggest risk is, if you’re producing and the cable is a failure, usually, you don’t have just one failure, it is a serious failure. Imagine, for example, in the big production machinery and equipment for First Solar, there are around about 2,000 to 3,000. If one fails, and it’s on the same production, then you can be sure the rest will follow. 

{audio:0:09:58} I have seen, at one time in my career, around 2005, 2006, such a failure and the whole facility for solar cells was locked down for weeks. Then if you have not got insurance or finance in the background, then you are out of business. That’s the biggest risk because it is very sensitive in the production. In some areas, it’s not so important to have the right temperature and with failures you can easily replace it. But in the solar industry, it’s a long wait to replace something there and then the lockdown where they had output of thousands of solar panels, would be killing small sized companies. 

{audio:0:10:48} What is the risk of Thermocoax losing market share to these other 20 to 30 players that you mentioned?

{audio:0:10:57} I think one part is Thermocoax was, and still is, really strong on nuclear focus and already, from the German policy, it’s clear nuclear is out. France is still running nuclear, UK is still thinking about building new plants. They were strongly focused on this and I think there is still little bits of trend for semi-con and then renewable energies which are much stronger now. There was a part where we were still playing in the game in Germany. They are still playing in this game but not as a big player; they are more on the business in the Germanics not international anymore, that was in the past. The focus for new applications are missing there still. I was on the board at Thermocoax for years and that was still a focus; it was a fight maybe on the inside in terms of following new directions or staying with the old, well-known applications in the market. 

{audio:0:12:13} Because you’ve got to reinvest and innovate. 

{audio:0:12:16} The chance is now there, maybe, to inspire with the Chromalox network because this company has a market influence; they are in other markets more. 

{audio:0:12:38} What do you think about this strategy from Spirax? They’re acquiring even more companies now; what do you think about this?

{audio:0:12:47} At first, when I saw it, it reminds me of when we founded Tyco Thermal we did the same. In two years, we bought eight or nine companies, to build Tyco Thermal and the strategy. They are in the steam business and steam is very limited for the site end application. You cannot get these high temperatures up to 1000 degrees with steam, where you can with electrothermal. The requirements in all these markets – semi-con, renewable – are going up and up from 400 to 500 to 600, in terms of temperature and you are limited with steam. 

{audio:0:13:34} I think they understood this quite well. It’s a combination of being able to cover all applications, from zero to 1000 degrees, that can give the best solution. Somewhere you have steam as a waste product, then you can use it or you blow it in the air. When you need excess temperatures, you can set in motion all the technologies around electrical and they are buying different niche products and they are buying companies which are in different regions. Durex is 90% US. Chromalox is still 80% US. Thermocoax is 80% Europe. Vulcanic is more in a standard range for smaller OEM businesses, but they are also very active in Asia. They are buying things with different technologies which can be complementary and buying businesses within different regions. 

{audio:0:14:39} It’s mainly all OEM business?

{audio:0:14:42} I would say 90% will be OEM and some also do some one-offs, some very tricky things, and Vulcanic has a bigger standard range but also these products often go into in OEM applications, at the end of the day, with small modifications, and not really a new design. The package is not bad but they are following others. NIBE from Sweden has been doing this for the last 10 years; buying companies around the world and putting them together.

{audio:0:15:13} Spirax seems to be keeping them separate. It's not really that you're buying them, integrating, cutting out costs. How does the integration process work, in your experience?

{audio:0:15:30} I think, from what I have heard and seen, there's not much integration there yet. You saw the bigger problems earlier this year in France, in the first facility there – this old sugar factory from 1800, 1900 something – and now they are involved in negotiations with unions and whatever because it was a loss-making facility.

{audio:0:15:58} I do not think they think a lot about really merging the companies at the technology transfer level and we saw this a little bit. They tried on some applications but, from what I’ve seen, it's not yet huge. I have still some contacts in the business and they tried to do something for Europe, what they have done in the US with Chromalox. They tried to manufacture this in Europe, so there are some first steps but Chromalox has been with Spirax for four years now and more than two years with Thermocoax and not a lot of have things happened there.

{audio:0:16:42} Yes, it's not growing very quickly at all.

{audio:0:16:45} Not, it's not really. Thermocoax would have seen the numbers top down, and Chromalox has already some restructuring behind them. In China, they fired 25 people in on day and so on, so it looks like they are going on with restructuring.

{audio:0:17:03} Why do you think that segment is not growing for Spirax?

{audio:0:17:12} I think, from my viewpoint, they are not really using the potential synergies, I mean not cost-saving and more synergies in the light of transferring technology know-how from one to the other region and using the local manufacturing and moving manufacturing to the other place, and sharing knowledge. That's a huge problem when you put such companies together. We have seen it with Tyco; the biggest problem was when the people share the knowledge, they defend it and try to say, it’s mine. That understanding that you are now in a big group and, if you work together, you build something great. That's the thing that I think is the biggest problem. Bringing people together was the other biggest problem a few years ago with Tyco; let's understand we are one company. If you work with the guys in Asia and the rest of them together, that's for the whole company and we bring them more business here and there and we move technologies and everything. That's the biggest challenge from my viewpoint, putting all these companies together under one roof.

{audio:0:18:13} But are there really any revenue synergies between Vulcanic, Durex, Chromalox, Thermocoax and can the same sales guy sell all four products to all end markets? Is that possible?

{audio:0:18:29} I think from the pricing, it's no problem. They are more or less a global business, and if they use it right, I think Chromalox is doing some stuff with their limited products they have. They provide some solutions where maybe you should use the Thermocoax technology, then you have a much better solution for the customer. There's the issue. You will see the same story with Vulcanic. Durex is highly specialized in some applications, but they do 90% in the US. Using it right for the people in Europe, the market is here for these products. There are a lot of players here but a lot of mid-sized companies, family-owned still exist. A company with such power should be able to jump into the market.

{audio:0:19:26} They could actually launch product lines in Europe and have a good shot?

{audio:0:19:35} Of course, but they need trained people. It's an end user business; you must have technical sales, it's not commercial sales.

{audio:0:19:45} You have to train the sales team to understand the different product portfolio across the companies?

{audio:0:19:50} Yes, and you maybe also need some local technical back office in Europe, not only in the US. As I said, they had problems when they did the acquisitions, buying US companies, jumping into Europe and having the back office in the States.

{audio:0:20:06} How did you do that at Tyco, encouraging people to share knowledge but also to drive revenue synergies between the different companies?

{audio:0:20:16} For example, if you look at the part which sold to Thermocoax, which was four times revenue than what it is now and you find these cluster areas for semi-con in Taiwan or in Germany. In Japan, for example, we trained two people locally, one as a sales person and one in the technical back office. We didn’t want them to come back to Germany to ask technical questions, because then you're losing time against the local competition, and you must be fast in this business. You can’t tell them wait a week. Once you are in, it's difficult to kick somebody out. We did also move some production in different regions where there was a main customer area. We had these facilities in Europe, Asia and the Americas, where was also moved some know-how and technology between them.  

{audio:0:21:33} How recurring is the OEM revenue at Thermocoax? Year on year, do you retain 90%, 50%, 100% of the revenue typically?

{audio:0:21:46} I would say 90% of the business.

{audio:0:21:49} What's the retention of the revenue? For example, if I have $100 million on average, typically one year, do I retain all of that the next year because it's very sticky, or is there still a risk of me losing some of that revenue?

{audio:0:22:07} You can see it in the official numbers. In my view, the EBITDA at Thermocoax is still struggling around €35 million, €45 million. There have been no huge closes in the last few years. I remember, for example, huge shipments to China nuclear business, and then it needs some time to come back with the next OEM application. It's plus minus 10% I would say is usual. It's not unusual for this kind of business.

{audio:0:22:59} What do you think about the prices that Spirax is paying for Vulcanic, Durex?

{audio:0:23:07} If you look at what they have for Thermocoax, for example, they paid nearby €160 million and the revenue was around 40, 45 million. 

{audio:0:23:33} They're at $12 million a year EBITDA now.

{audio:0:23:38} Yes, and more than 10 times EBIT for an acquisition. Even in our craziest day in Tyco we didn’t pay that much, more than double the revenue or four times revenue. You have seen it with Durex; 75 million revenue and $340 million, I'm not sure how they calculate such prices. They create huge good will. I think in Thermocoax you could see it in the financial report for last year or the year before; I think I've seen huge good will there.

{audio:0:24:18} I mentioned NIBE, who are also buying a lot of companies. They have a clear policy; five times EBIT is the absolute maximum they pay.

{audio:0:24:28} Is the quality of the assets the same though? Are NIBE buying similar quality assets as Durex and Vulcanic?

{audio:0:24:36} NIBE bought BriskHeat which was highly profitable already in this space, and they managed to bring up BriskHeat from around about 40 million US when they bought it in 2018, so four years ago, and BriskHeat announced last year a new record of $100 million revenue. They didn’t pay as much as Spirax so that's why I'm really struggling a bit when I see these press releases about what they pay out for these companies. I've seen a few mergers and acquisitions, and I've never seen these high prices for such businesses.

{audio:0:25:25} Why do you think they are paying so much?

{audio:0:25:27} I think they want to jump in, in these markets. In this market, you have some big players but you also find so many mid-sized companies everywhere, in Europe and the US. If you put all this stuff together, you will be the market leader and then you can push this business much more. Remember Tyco; when they put this company together, we were 80 million. 10 years later we were 800 million, because we used the synergies to be the market leader worldwide, putting it into the market. Maybe that's the strategy.

{audio:0:26:18} Do you mean sharing knowledge, training people on product portfolios?

{audio:0:26:27} And buying some of these niche manufacturers. You can find a lot who are really excellent in technology. For example, in the Germanics, doing their business in the German-speaking countries, not interested in expanding the family business; they have a good life, why should they do it. But if you come in the right environment and the right group, then you can bring it across Europe and in other areas, and you can be successful there.

{audio:0:26:54} They really want to go and buy French, German, European businesses and US, and then take the product portfolios to Europe or US and vice versa, to expand their revenue?

{audio:0:27:10} Yes, using the local presence already from a sales team, and putting more technology in, so you can have a broader client area and also industrial area to sell in.

{audio:0:27:21} Really what you've got here, in Thermocoax, is just tens of individual niche manufacturing companies and products, effectively?

{audio:0:27:36} Yes, that's what you have now. You see it and there are a lot of others, and maybe they're also now going ahead with the next acquisitions, where they are maybe using Thermocoax as a hub, where they built a nice new facility in the north of France, there's space enough, using that as a hub for Europe for more technology to bring in the market.

{audio:0:27:56} Who are the other major players that follow in this manner? Obviously, Tyco have done it years ago, NIBE are doing it now; who else is doing something like this?

{audio:0:28:08} Emerson is also playing a role in that, and I think that's big, in this more specialized area. The others, like the former Tyco, nVent, and this company, Bartec, they are looking more at the heat tracing world; they are not interested in these niche markets. They are doing the big projects, one project $100 million, and that's what they are looking for. And they are maybe looking to try to do acquisitions at a production level, getting production sites, so businesses that dominate already. 

{audio:0:28:50} But in this niche market, you have Thermowatt in Italy, they are also quite a huge company. It was family-owned, the whole group has a revenue of 1.7 or 1.8 billion, and they just did a big acquisition in the boiler heater market in Germany, a huge one, and they're looking also around, so there is some stuff also going as a group – investment group in the States – and they are thinking about setting up something like the electric thermal division worldwide, because it is seen as there's still enough space there with the small players. Zoppas is also still in Italy, who also does these niche areas.

{audio:0:29:42} What are the prices everyone else is paying for these assets then? Five or six times EBIT?

{audio:0:29:48} What I've seen with NIBE was every time in this range, five EBIT or maybe on the level of revenue, something like that, but never they paid double revenue, or 10 times EBIT. I only have seen Spirax make this.

{audio:0:30:08} Yes, they're paying three times revenue right, like 15 times EBITDA. Durex was 15 times EBIT.

{audio:0:30:23} Yes, that's five times revenue. Vulcanic was 2.5 times revenue and 15 times EBIT.

{audio:0:30:40} Yes, and Spirax trades at a very high multiple in the public markets, but they're paying all cash for these assets typically, so it seems quite a, it definitely seems more expensive than typical private market transactions.

{audio:0:31:02} Yes, that's what I've seen; they more or less pay cash for them.

{audio:0:31:05} Broadly, why is this market so interesting, in your opinion?

{audio:0:31:12} Because there are still no really big players. It's still diverse, with a huge number of small mid-sized players, like I said, regionally active or Continental, but not worldwide. I think there's some people sitting there and thinking that can be a huge opportunity if we bring all this small stuff together, using real synergies on the technology level and on the market entrants. Looking at what they have in the different regions, then you can grow it, like I've said before, in 10 years, 10 times with Tyco from what we had, and with this style in the market.

{audio:0:31:59} What were you paying for assets at Tyco? Multiples?

{audio:0:32:04} Yes, I think in the extreme, from a revenue level it was maybe 1, 1.2 times revenue. It was a mixture. 

{audio:0:32:29} What's the EBITDA multiple?

{audio:0:32:32} Maybe it was then a mixture between that, but like I said, 1 or 1.5 was the highest when you look only on revenue. EBIT was quite diverse because we did a lot of work looking into the opportunities, what we think we can do in the next few years with the business, not really looking on the actual EBIT; we were looking at the level we could take it to.

{audio:0:32:56} Proforma EBIT, and so looking at the structural trends in the market. I understand you mentioned it's a very fragmented marketplace, lots of family-owned businesses, attracted to roll-up and acquire these businesses, but what about the overall growth of the industry, what is driving the growth?

{audio:0:33:21} If you look in the different industries, at least in each industry you somehow find where they need heat for the process, and the trend in all industries is you need to be more aggressive when you need heat; you need higher temperatures and it's getting more specialized. There are also more applications where, maybe 10 or 20 years ago, they did not use or need really heat for the production process. They have identified they can now be faster and, at the end of the day, cheaper, if they use heat in some areas to at least speed up the production process.

{audio:0:34:09} If you look at all these white papers flying around, the outlook of all of this – it depends which white paper you use – for the next five or six years, they have all quotes of more than 10% growth, every year, and if you look in these papers, so many companies are named there. Two years ago, there was one white paper and the competitive landscape was two pages full with Swedish company names. They called all the major players in the world, companies that are 10 million, 12 million, 50 million revenue, then that shows a little bit that this market is still quite spread and there will be a clean up coming in this market.

{audio:0:35:00} When you mean that there's a trend for customers in the way they're using heat to create energy, can you explain if you're a semiconductor business manufacturing semiconductors, what is the pressure you are under as a company for the decarbonization trend? How does that impact what energy source you use and therefore electric thermal heating solutions? 

{audio:0:35:31} From the energy source, you mean electrical or steam or whatever?

{audio:0:35:37} Exactly. From the electrical source, how is that changing and how does that change the whole industrial process that impacts all these suppliers? 

{audio:0:35:46} One part is, of course, you need the electricity as your energy source for this production process. The design is much more precise. When I started in this business 30 years ago, they were used maybe for the same applications and today at least four or five times the power is needed because they were able to design it much more detail. All of these bigger players look to save energy with their R&D activities. They have their own solar cells on the roof to create the electricity for the production process, like First Solar is putting on all the facilities the solar cells and they produce their own electricity for the production of the products.

{audio:0:36:42} Yes. For this process you cannot use steam because you need 400, 500°C and that’s an upcoming trend: applications where you had, in the past, to use 150°C heat transfer which you could use with steam, now you need 400-500°C and that's maybe also one of the reasons that Spirax identified where steam is not the future. It's electrical, thermal, which from a maintenance viewpoint, might be the better solution for their long term and so they start to shift from steam as not high-end technology to high-end technologies. 

{audio:0:37:35} If they wanted to generate the electricity, if they weren't using the solar cells, they would use a big electrical system to create the energy?

{audio:0:37:45} Yes. Maybe also when we look on the solar industry they realized in the R&D process you get much higher output of all these photovoltaic solar cells if they really use higher temperature to laminate the products and then you're getting a higher output. It doubles the output of the solar cell in 10 years which is new technology in the production process. That makes it also more competitive against the rest of the energy that we see now. Companies like Isoheat in Germany, they have a full order book for the next two years. The main business supply is machinable equipment for solar. With the higher energy prices now, renewable energy is state of the art. 

{audio:0:38:39} Who are the big players providing the bigger electrical heating systems to provide the source of energy in these big plants? 

{audio:0:38:51} In this region, the big players, partly it depends on the big plants. BriskHeat is already a big player, I'm pretty sure, on some of the applications. Chromalox is also doing a pretty good job more in the States and in Europe. You find some in the Asian markets, especially the big players; for this area it is Applied Materials with a few suppliers. They're not fixed on one supplier, but this market is in Asia – Taiwan – and also in the States, is dominated by Applied Materials and they're using Isoheat, Thermocoax. I think that's a price fight. 

{audio:0:39:45} How do companies like Bartec and Furman play in this space? 

{audio:0:39:51} Not in this really niche market. Bartec is specialized on the safety technologies, like for hazardous area explosion proofing. They're still in the big market of the traditional heat waves in pipe placement business. This special niche market is not of interest for them. They don’t have the capabilities and, at the end of the day, you have the facilities for the high heating cables. Furman is still strong more on oil and gas and not that strong in these niche areas. That's not their focused area. There are some others, like Elsam in Germany, that do some things in these areas and that have a 200 to 300 million revenue. 

{audio:0:40:46} Can we go back to the question on steam, from Spirax’s position, because Nick Anderson does talk a lot about the ETS division providing some diversification away from steam. What's your outlook on steam over the next 10 years and Spirax’s core business? 

{audio:0:41:09} I believe steam will not have a huge growth rate. There are still applications which will never change. There are oil and gas and other production processes where you can use steam. You have a temperature at 100, whatever, you must not have this accuracy of +/- two degrees. It's okay, if you have 90 or 110. In chemical industry they also have a lot of steam as a waste product and then this combination will stay. 

Spirax Sarco: Thermocoax & Thermal Heating Solutions

Former Managing Director at Thermocoax

inpractise.com/articles/spirax-sarco-thermocoax-and-thermal-heating-solutions

Executive Bio

German Schild

Former Managing Director at Thermocoax

Interview Transcript

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