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:0:00:22} Matt, can you provide a short introduction to your role and responsibilities while you were at Spirax?

{audio:0:00:27} During my time at Spirax, I was a director for the national sales organization. My primary responsibilities were in leading our key account management group which called on owners in specific verticals and our OEM group.

{audio:0:00:49} Was that in steam only on the Spirax side or also in Watson-Marlow?

{audio:0:00:54} It was specifically in the steam and energy thermal solutions side of the business. Applied heat exchangers were also within my purview, but not peristaltic pumping.

{audio:0:01:13} Are Chromalox and Spirax's sales teams integrated in the US?

{audio:0:01:20} During the time I was there, the sales teams were not integrated. The acquisition occurred at the very beginning of my time there and we had started some collaboration but had not functionally integrated the sales teams before my exit.

{audio:0:01:38} Does it makes sense to integrate the teams?

{audio:0:01:42} There's more value from matrixing the organizations between the verticals where they both have a lot of reach. The oil and gas market is getting into steam tracing within plants, so there are many synergies between them. You may not have a fully integrated sales team but I would almost matrix those organizations to work together on specific accounts where they can complement each other. There are things one can do that the other cannot, that they would have access to customer bases that the other one wouldn't, depending on where their footprint is. I would look at matrixing the organization because there are some unique qualities to each of them that would dictate you want somebody with intimate knowledge of what you're doing. Crossovers are challenging because you're always going to have Spirax or Chromalox dominant in those situations, so it's better to bring two experts.

{audio:0:02:55} Is it hard to cross-sell with the same engineer?

{audio:0:03:01} Yes, because the products do the same thing, one with steam, the other electric, and if your bias is towards steam, you will have a tendency to push people to that product regardless of what their infrastructure in built for. If you're coming from the Chromalox side, you will more likely choose Chromalox solutions. It's not a full overlap which is why it's good to have both sides calling on the same customers where there is synergy between the two.

{audio:0:03:39} How is the Chromalox and Spirax sales organization structured in the US?

{audio:0:03:39} I can speak much more to the Spirax team in the way they were set up. The regional structure is responsible for working with distribution. Chromalox, similarly, had specific distribution houses who sold theirs. It's very common with the industrial side of the business that both organizations plan where you've got a tiered structure that goes into indirect sales through distribution. That is the transactional part of the organization and part of what I worked with was the missionary part of the organization that calls on direct customers who may not transact. The order may not come through them but they will work with direct customers and get the products specified, accepted and built into projects. 

{audio:0:04:50} That project may come directly from a purchase order from an owner to Spirax or Chromalox, but they may buy some specific parts through distribution. It's a tiered structure with the transactional groups at the front end and, on the umbrella side from the organization, you may have somebody calling on a key account or on some OEMs directly. They are structured similarly from my understanding and dealings I had with the Chromalox side of the organization where, I was trying to buy my counterparts that dealt with their key accounts or OEMs.

{audio:0:05:31} Spirax talk about sectorization in their sales team; would you have one guy in steam for oil and gas and another at Chromalox for electric for oil and gas by sector?

{audio:0:05:47} There may be a group oil and gas person for the US, who has both a Chromalox and Spirax oil and gas team, and you work in different parts of the region you are in. The idea behind the acquisition was to be additive to your customer base. If we were all in the same plants, there wouldn't be much value. Chromalox could lead parts of the organization where that person might bring in the Spirax oil and gas expert of that sector to support the steam operations and vice versa. There are also opportunities on the electric side where you would bring in your Chromalox person in a Spirax led plant. You can build up and leverage each other's expertise because you will not find all Chromalox opportunities without a Chromalox person who understands the solutions and how to apply them, and vice versa if somebody doesn't understand the steam side of the business in a Chromalox driven plant. You have a sector lead who says, we're going to synergize all of our oil and gas or food and beverage work. There is a challenge with integrating those sales teams under one room, so you end up matrixing them together under a group chair.

{audio:0:07:30} Did you see much cross-selling happening between the two? The numbers show that electric thermal solutions had 10% revenue growth over the past five years, but steam in the US seems to be slightly more challenging, declining in 2018 and 2020. Is there much opportunity to cross-sell and grow the steam business via Chromalox?

{audio:0:08:02} There was not a lot going on when I was still there and I left in 2019. The process of the two companies coming together was starting to gel as I was exiting. There is probably more opportunity for Spirax across Chromalox than vice versa. If you are already in a plant which is largely driven by electric and they have already taken this route of not being in steam, and bringing steam back in, that could be a big leap, whereas if you have already converted towards electric for tracing, it makes sense to build on that. If you have a facility that's starting to make that move, they probably didn't do it in a wholesale fashion, so there's more residual in converting more parts of a plant if you're converting it over to electric. That could be driving some of that additional infrastructure growth. 

{audio:0:09:10} If you're working through a situation where there's not much growth or investment opportunity for the sector, instead of doing big energy upgrades, they're maintaining, you could tend to stagnate, whereas on the electric side there may be opportunity to grow the infrastructure and supplant steam. That's why there are some opposing boundaries between the two that create a challenge on which do you lead with and which has more overall opportunity from a long-term customer capture standpoint.

{audio:0:09:50} Is there a risk that electric makes steam obsolete?

{audio:0:09:56} Initially, it makes sense, but if you have a good co-gen plan and an efficient steam system where you are returning condensate and trapping steam effectively, rarely flashing, steam will be more cost-effective over time, but steam has high maintenance costs. The power costs and potential surging grid costs will drive it away from going straight to electric. Switching costs are still fairly high so steam will continue to be the lower cost option overall. Electric makes sense in some scenarios but it is not a long-term threat where they both play. It will continue to chip away but it will take much longer for it to become a true threat.

{audio:0:11:09} It won't replace the core boiler but perhaps other components or tracers?

{audio:0:11:16} It will come up when it's time to do a major capital improvement in a plant. It will require some wholesale switching, but as long as you have a steam plant within, it will make sense to continue to utilize that steam plant. Having been in several refineries and mills, replacing or obsoleting that infrastructure is both a monumental task and extremely costly. Either you obsolete the whole system in place and switch over to electric, which results in a lot of unusable infrastructure. If we talk about the regulatory side, it will take mass electrification to drive the required reduction of fossil fuel consumption, and it will have to be a regulatory piece on top of cost-effectiveness, because the ROI on the switch is not enough to drive the wholesale changes. As we get into more electrification requirements across the country, it will become more challenging to not switch over, but that is a much longer-term issue.

{audio:0:12:39} Do you mean regulators have to ban using fossil fuels to power boilers?

{audio:0:12:45} Yes. I am on the HVAC side of the industry and have multiple reps in California who attend city council meetings on a weekly basis, arguing over electrification and the elimination of all natural gas boilers. There will be opportunities for industrial sites to buy credits and opt out, but electrification is imminent. When California starts energy initiatives within the US, they're always the leader in that and it will start to permeate into other areas.

{audio:0:13:42} What do you think about that?

{audio:0:13:44} They are simply moving the challenge to another place on the grid. They will have electrification challenges in California because their power grid is insufficient to cover what they have. If you move things from fossil fuel to electric, you will need more grid, so the infrastructure's age and place should be able to handle the additional electrical load required. It looks good on paper to eliminate fossil fuels, but how will you generate the extra power for the grid? Will you have enough non-renewable energy to supply that power? They currently don't and the non-renewable grid isn't robust enough to handle it either.

{audio:0:14:46} Are they using coal or gas anyway?

{audio:0:14:48} Precisely, so it looks good on paper, but it creates a different challenge. That will be a long-term challenge for some industrial plants, many of whom are co-located in places which won't be electrifying soon. Small towns in California aren't going to host a refinery, but small-town initiatives do become state and national initiatives, so it's a matter of when.

{audio:0:15:22} If Spirax's customers are forced to electrify or decarbonate, they can buy credits but that destroys the value proposition of using Spirax steam in the first place?

{audio:0:15:40} Many plants where there are major players would electrify whatever they could. Tracing would go electric first because it's the process that makes most sense. Steam will still be required so it will not become entirely obsolete. Steam is harder to maintain in commercial heating, even if it is less expensive, and people are moving toward water-based systems. On the oil and gas side, steam will never go away completely, but the future may be an electric steam generator or removing the fossil fuels from steam generation. That is another challenge altogether, but may be worth looking at on how do we overcome electrification requirements.

{audio:0:17:10} What is the tracer you mentioned that is first to move to electric?

{audio:0:17:13} Tracing refers to the lines which wrap around process pipes within an oil refinery. To keep the process fluid moving, it has to be at a certain temperature. Chromalox use an electric line which traces around that pipe to heat it up, whereas Spirax use a steam line. If you visit a refinery in the Northern part of the US, the trap population is enormous because you have to trap out all those tracer lines with manifolds. When you go to electric, you eliminate all those manifolds and returns. They go through for trapping and condensate return, but many places haven't moved to electric tracing due to the switching costs. 

{audio:0:18:11} I called on a steel mill not long ago where we were looking at the amount of energy they consumed. We were looking at a very small part of their energy consumption on the site, and we said what if we can get you a 20% reduction and their thought was, any time we can talk about how we're reducing, it's important because of how much energy we must consume for what we do. Switching to electric tracing is a simpler switch over, and when you look at the miles and miles of piping on a site, tracing represents a huge amount of steam and trap volume population in a refinery.

{audio:0:19:06} I guess this was the rationale for Spirax purchasing Chromalox; what part of the whole steam system does Chromalox not cover, that if we do see a switch from steam to electric, Spirax will lose a big chunk of business?

{audio:0:19:22} Very little because they use steam for jacketing in vessels and keeping areas warm. You would lose more in the food and beverage process where steam is an ingredient. There is a hedge against electrification gaining steam, because the majority of what's done on those sites is in tracing, it uses steam as a medium to heat other areas, not as an injectable. Theoretically, you could do more but tracing requires the smallest load and is a more evenly distributed load across a long area as opposed to a massive heat load within it.

{audio:0:20:50} What percentage of the market is switching tracing from steam to electric?

{audio:0:20:57} Less than 15% have made the switch, but regulation would probably flip that over.

{audio:0:21:11} Is there a regulatory risk?

{audio:0:21:13} Yes, that's the biggest risk because switching costs are considerable. Do you have the power available on site to switch over and is there a definitive ROI on the electric on the maintenance side? It is a much more maintainable system without all the manifolds and traps, but if you were building new you would probably go with electric. The power cost would have to be considerably low for it to generate the ROI they would want to do that. If you were looking for an ROI under three years, you would have a hard time justifying it based on energy. 

{audio:0:22:15} When you do switch over to electric, is it hard to calculate that ROI?

{audio:0:22:23} Correct, because you have to understand when you will be paying higher rates. Many plants run after hours and run their primary electrical processes to get off peak benefits, but a refinery runs 24 hours a day so you would have to end up in peak at some point.

{audio:0:23:03} What is the biggest risk for Spirax?

{audio:0:23:08} The biggest risk for Spirax is the erosion in the trade who understand how to manipulate, operate and maintain steam systems. More systems are converting to hot water because they are less complex to manage and less expensive than a steam system. Healthcare and food and beverage processes require steam so they have operators who will continue to maintain and operate those systems, but if there's a choice, people will move away from it. If something doesn't go your way on the regulatory side, it creates an even bigger challenge, so you operate in fewer areas and are still very susceptible to the ebbs and flows of the oil and gas and food and beverage industry. Healthcare has a lot less volatility and is a good example of where they're moving towards hot water and away from steam.

{audio:0:24:47} What is the difference between hot water and steam systems?

{audio:0:24:50} Steam is a more efficient medium but it's also more dangerous. Maintaining that steam system is more challenging than a hot water system. A small hot water heater in your house isn't that different, so as you move up the commercial side, there's a higher comfort level on the trades with water. While steam is a more efficient medium, it's more delicate. You have super heating and saturated qualities, and not all steam is created equal. 180° water out of the boiler is 180° water, whereas 227° steam out of a boiler isn't necessarily the same, because it depends on the pressure and saturation points, so it's a more complicated piece. Trades people who know steam are retiring faster than they are being replaced.

{audio:0:26:17} Is that an advantage for Spirax who can provide that advice and knowledge?

{audio:0:26:24} It is and that's exactly how they should position it. We were working a project in New York City which was steam to steam but it was one of Spirax's more complex water heaters and one of their simpler ones. The complex ones had a million different good reasons to buy based on efficiencies, better for the environment and more effective delivery, but they bought the cheap one because they need somebody who can simply turn a valve and it works. Spirax can offer the sales, design and aftermarket support, but if there's not a confidence level in the person running that plant, they will move away from it.

{audio:0:27:39} Do Spirax also offer hot water solutions?

{audio:0:27:42} They offer steam to water but not water to water. They were not offering water to water during my time and I don't believe they've gone that direction. Their core is the steam business and US university campuses are doing wholesale switch overs from steam to hot water. The systems are aging and they have capital projects to upgrade steam systems. I'm on the water side of the business now which is easier and makes more sense. You will gain efficiencies and it's much more maintainable and that's happening more with hospitals and universities than elsewhere. Pharmaceutical and food and beverage have different levels of clean requirement, and steam has a bigger advantage because it is cleaner than water. Steam keeps the system clean and operating and you get higher temperatures needed for processes. In a commercial environment, you don't need the same steam temperatures and purity that you need in pharmaceutical or food and beverage.

{audio:0:29:34} What percentage of Spirax revenue is at risk from water?

{audio:0:29:39} 40% or less, and it's the reason we had a key account team and an OEM team. You have to secure your position within the food and beverage or pharmaceutical markets, and ensure you are the preferred person in the places you want to keep a foothold in. We didn't have a vertical that called on universities or healthcare. Our healthcare vertical was more focused on the OEM side of the business where we sell autoclaves to hospitals to clean surgical instruments. They need very clean and pure steam for that, so a lot of those got pulled from a hospital steam system because of purity and they are pre-packaged systems. You sell the gear Spirax makes into those and protect yourself that way. 40% is a high estimate when you look at what's been done to protect everything else and increase revenues in areas where steam will remain.

{audio:0:31:34} Is it too risky for food and beverage and pharmaceutical clients to move to hot water?

{audio:0:31:41} Risk is a part of it from a purity standpoint but if you're using steam for a fryer in a food and beverage process, you need 250° to 300° steam which you cannot do with water. The whole purpose of the key account group was to ensure that those who don't have a choice but to stick with steam, will choose us.

{audio:0:32:18} What were some of the reasons people switch in that key account team?

{audio:0:32:24} The key accounts were focused on the verticals that steam was going to maintain as the primary heating medium regardless.

{audio:0:32:42} Did you ever lose any of those key accounts?

{audio:0:32:44} The effort on preventing the switches to hot water at a hospital or university level were more ad hoc working with a distributor who had existing relationships there. If we knew they were switching, we would send a team to work on not converting it. All we were doing was defending, so there was not a lot of growth opportunity there. Virginia Polytechnic University is an example of a place where we were aware of it, and we successfully put together a steam program for them and they upgraded. There was not a clear path to how to repeat that. The focus in time and effort wasn't put in to building up that side of the network, it was on going into the pharmaceutical industry where we have a specific steam trap, from an FDA standpoint, we can sell as a value add to their plant and upgrade their trap population. 

{audio:0:34:20} There are clean steam generator opportunities within those that are growth opportunities. When you get into places who are using superheated steam or have a tight range of purity, now we can get into the applied solutions Spirax brings to the table beyond simple traps. We are getting into heat exchangers and superheaters which drive higher sales and margins. Now we're using our expertise to differentiate, which was where that opportunity was. Those were the places we wanted to get the experts, and the oil and gas industry also falls into that arena.

{audio:0:35:23} What are the differences in the US, European and Asian steam markets?

{audio:0:35:35} Having a direct sales force in the US is more challenging than smaller geographies. Deployment becomes a major issue in setting up enough sales people. One of the things we discussed at Spirax when I was there was how many people would it take to have a truly direct sales team with no distribution, and it was a significant investment in people. The next question was, how much revenue can those people be responsible for and how to ramp it up. The fundamental difference starts with geography and then after sales support. Without a large enough service team to cover the entire country, you need partners. The only real value to being a service partner with a manufacturing organization is if I also sell their equipment. That drives you into a sales model where you have to use third-party distribution to support the disparate area you're trying to support from an aftermarket standpoint. 

{audio:0:37:22} The other piece is that so much of buying in the US is done locally, particularly in some of these industrial plants who have existing relationships with distributors. If you walked in with your manufacturer name tag that says Matt from Spirax Sarco, they might say, I get all my steam gear from MRC, go talk to them and you need to sell it to me through them; I don't buy from a manufacturer because I don't get the support I'm looking for from them. Other countries don't have that same philosophy because the distributor network isn't built up the same way in their locale. 

{audio:0:38:22} Many manufacturers already go direct because that is the accepted model. The US saw explosive manufacturing growth in the middle of the 20th century and distributor houses built up as local suppliers who worked with manufacturers. The network underpinning got built and that became the norm. It's not impossible to go direct and many companies want to. I had direct relationships where we were going to sell direct to the owner, and when the contract went to construction, suddenly the contractor buys it or else he won't install the equipment.

{audio:0:39:21} Can we work through a typical transaction in the indirect model. If I'm a customer who wants to purchase steam products from Spirax, what is the flow of selling and servicing that product for a distributor?

{audio:0:39:40} I'll give you an example of how some of the key account projects we set up went. Our sales account manager would call on a food and beverage company and work with the plant manager to set up a project. They will develop all the collateral that needs to be done such as what are the energy requirements and ROI.

{audio:0:40:11} Is that a direct relationship between Spirax and the customer?

{audio:0:40:13} You have to separate direct relationship and direct transaction. The key account had the direct relationship but the transaction would often be routed through the distributor. In some situations, the distributor also had relationships with a plant. We would develop the project knowing a distributor partner was involved. If we were doing any service side or turn key labor, that labor PO would come directly to Spirax, and a separate material PO went to the distributor. That was one way of doing it but we could also take the whole turn key project which would involve Spirax providing labor without a distributor involved. As a key account director, that was my preference. If we went and set up a sale, I wanted it to come part and parcel through the key account group.

{audio:0:41:20} Was that a higher margin?

{audio:0:41:21} Yes, it was higher margin because, in those situations, you're simply handing margin to your distribution partners. You may have a distribution partner who has a relationship with that plant and they opened the door to get the Spirax person in that plant. Even though your key account manager may call on a company with 20 plants, all those plants have a local person running them who has a local relationship. It's difficult to only have your key account manager touch that, because the local plant manager is the decision maker. You may have a deal at corporate which says we're going to buy from you directly, but a plant manager may want to buy from a distributor, so you have to balance that out.

{audio:0:42:23} Do distributors also work with Spirax's competitors? 

{audio:0:42:29} The ones we would work with on a deal like that would not be selling other gear. 

{audio:0:42:40} How important is that direct relationship to build the brand and reputation and eventually win the sale?

{audio:0:42:46} It's extremely important from the standpoint of putting in the differentiated product that brings the margins Spirax is looking for. The person that has the local relationship maybe with a distributor, they're going to sell the easy stuff all day long, but they're never going to go develop an energy project or sell a thermal compressor because they may not understand how it works or how to position it. They don't know how to walk the plant and see what's there. They're good for that transactional piece, but the direct relationship in developing an energy project can take a $70,000 a year plant that brings us business through a distributor, and create a $700,000 project in one swing.

{audio:0:43:48} Spirax segment their revenue by maintenance and repair, with MRO being 1k to 2k invoices, as well as smaller and larger project sales. Out of those three segments which are direct and indirect?

{audio:0:44:06} The larger the project, the more likely it is to have a direct involvement or sale. My sales team running key accounts never touched a single MRO sale. They set up the programs that drive that MRO sale but they should be developing the larger projects. The bigger the project, the more likely it is to have a direct sales person. Those projects get big on the turn key labor and the actual execution part of that project, not just the selling of equipment.

{audio:0:44:49} What percentage of larger project sales were invoiced directly to Spirax?

{audio:0:45:01} Can you bypass the distributor in those sales? 

{audio:0:45:02} You can but it depends who the distributor is. The bigger they are, the more likely they already have touch into that plant and you may have to do a direct sale and commission them on it. You cannot send turn key labor through the distributor.

{audio:0:45:29} What margin does the distributor get on a simple $1,000 MRO transaction?

{audio:0:45:37} They will probably pull 20% to 30% gross.

{audio:0:45:48} Is that a much lower margin for Spirax compared to going direct?

{audio:0:45:51} Absolutely, but value is brought to the table in inventory planning and stocking. It is challenging to disaggregate a partner on those MRO deals because often times they are the ones driving that regular business, so it's a tough balance.

{audio:0:46:24} Do they have the inventory on their balance sheet?

{audio:0:46:28} Generally speaking, yes; a distributor should be a stocking distributor.

{audio:0:46:34} Who services the system when something goes wrong?

{audio:0:46:48} Most plants have their own on-site maintenance team who would service it, which is why those distributor relationships are so important. The on-site team develops a relationship with somebody locally who is their go-to person when they have a problem. The maintenance or engineering manager might have a relationship with the local guy and when they have a steam problem, they call Apex Supply who invites the Spirax guy to go to the plant together and develop the solution. That starts with the plant maintenance manager who called the Spirax or Armstrong guy, or do you call TLV. Who is his relationship with?

{audio:0:47:56} Does he call a Spirax or Armstrong or a distributor?

{audio:0:48:03} Most call a distributor because they cover far more than steam in their plant. They prefer dealing with fewer people so that guy will have a line card with 30 different plant items.

{audio:0:48:23} Instead of calling Spirax who are the best in this space, does he simply call his distributor to do it?

{audio:0:48:32} That's exactly what many of them do. The more experienced guys will know what they have a preference for. A good distributor will convert them to being that preference, but that's why it is vital to have the touch at a corporate level through key account management. That is how you influence the projects because those guys will influence the MRO. With capital projects, other people beyond them are involved, where their preference to liking that distributor may not hold nearly as much swing. On the MRO side, they call the person who takes care of their account the best.

{audio:0:49:13} What was the biggest challenge in driving direct sales in the US?

{audio:0:49:17} The distributor relationships and keeping them happy. If a direct sales person arrives on a site with an existing relationship, I usually get a phone call and have projects diverted to the distributor to ensure we keep them happy. That was the functional challenge for the team but, beyond that, we didn't necessarily have the local relationship. I had one customer who we had a great corporate relationship with but he wasn't allowed on four sites because he had issues with those plant managers, so he wasn't our in at every site. There is an independence at the plant general manager level where corporate influence may not be enough, and in some situations your corporate influence is a detriment. Our biggest challenge was getting onto a site with a local relationship and having the sponsorship there. It's a catch-22 with distributors because while I may have the keys to corporate, he has keys to the plant.

{audio:0:50:46} How do you keep the distributors happy?

{audio:0:50:53} The good ones understood that if they did a big Spirax project at a site, there would be residual income for them. Spirax takes the big capital sale piece and all the residual that comes from that install goes to them. I don't want the MRO sale but if I install a system that you support as the OEM aftermarket person within that market, you get all the residual.

{audio:0:51:34} How is Armstrong set up in the US?

{audio:0:51:38} They're similar but the difference is between a distributor and manufacturer's rep. Armstrong has more of a hybridized manufacturer's rep model. This is unique to the US and I had had to explain this model to people from Europe and Asia Pacific of how we go to market. In my current position, I run a manufacturer's reps who represent and have responsibility for your product in a geography. They get some territory rights but have to be exclusive to you. We may have a distributor who can sell TLV, Watson McDaniel and our stuff. We want to be first on their list but they can sell it all because they're a distributor, not a manufacturer's rep.

Spirax Sarco: US Steam Positioning & Distribution

Former National Sales Director at Spirax Sarco USA

inpractise.com/articles/spirax-sarco-us-strategic-positioning-and-distribution

Executive Bio

Matthew Berrell

Former National Sales Director at Spirax Sarco USA

Interview Transcript

If Spirax's customers are forced to electrify or decarbonate, they can buy credits but that destroys the value proposition of using Spirax steam in the first place?

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Audio

Spirax Sarco: US Steam Positioning & Distribution(June 23, 2022)

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