Q&A with Smith & Loveless' Rebori

In it, he discusses Smith & Loveless' history, industrial water and wastewater issues, and the economic stimulus package passed by Congress and signed by President Barack Obama in February.

What follows is the full interview, which took place March 17, 2009, in Q&A format:

Rebori: That's correct.

Rebori: That's correct.

Rebori: Actually, it was Dec. 1, 2008.

Rebori: I've worked at the company since 1999, although my involvement goes back much further than that.

Rebori: That's correct.

Rebori: That's correct.

Rebori: The University of Missouri. I have an undergrad degree in accounting and business administration from the University of Kansas.

Rebori: Law firms -- in private practice.

Rebori: No, he never really cajoled one way or the other. It was just an opportunity for personal growth here at the company and also growth with the company as well -- so personal and company growth, I would say. Being a family owned business, there were obviously opportunities for someone in the family. And it was a good opportunity for me personally.

Rebori: That's correct. We were founded in 1946.

Rebori: No, it was actually launched by Alden Smith and Compere Loveless.

Rebori: Smith & Loveless was privately held and was eventually bought by a large multinational company called TransUnion in 1959. And Trans Union had a sister company called Graver Water that was based in New Jersey. My father worked for Graver Water, where he was a vice president. And Trans Union transferred him to Smith & Loveless in 1978. And then a little bit after that, Smith & Loveless was then sold by TransUnion to the Marmon Group, which is the largest privately held industrial conglomerate, out of Chicago. It also owned the Hyatt Hotel chain. It recently broke up due to a family dispute.

Rebori: Yes, that's them. When they bought Smith & Loveless from TransUnion along with the other companies, my father did a management buyout at that time. So, it's been privately held since then.

Rebori: It would have been 1981.

Rebori: Well, we manufacture water and wastewater projects from the transfer side and the treatment side. We're in them both.

Rebori: Pumping. We're into both pumping and treatment, which makes us unusual in a sense. That's because a lot of the companies in our industry concentrate on one or the other. They don't really do both.

Rebori: Yes, well, not so much Flowserve.

Rebori: They do more pumps. They don't really do treatment to my knowledge.

Rebori: Exactly. We do package treatment plants, filtration and separation systems and grit removal on the treatment side. We're known for as leaders in the grit removal market. We're also one of the leaders right now on MBR systems.

Rebori: That's correct. We're a strong leader in that... And on the pumping side, our packaged pump stations are an industry leader as well. As opposed to say bare pumps, our niche is packaged pump stations, above grade and below grade.

Rebori: Of course, our business is both municipal and industrial -- but you're targeting the industrial publication, is that correct?

Rebori: Well, on the industrial side, we target a lot toward the oil & gas industry, but we also have a niche in the mining industry and a pretty good stronghold in the ethanol industry. And the food and beverage industry is pretty good for us as well. These are typical places where you'll see a lot of our pumps and pre-engineered treatment systems, except for the mining industry. That's not pumps. It's more of a filtration/separation product that we sell there.

Rebori: We're active in what's called the SX or solvent extraction industry. We make a product that aids with the removing of impurities from copper, so you can get a higher concentration and purity of copper. We make a process for that.

Rebori: We are, actually, in Tucson and up the road from you guys, one of those places, Phelps Dodge in Morenci. There are a lot of mines in the Southwestern U.S. and north Mexico

Rebori: Oh, did you really. That must have been something to see. The copper extraction process is quite interesting to see. When you see the copper being separated from the ore, let's say, it's actually this bluish green that's the most fluorescent color you've ever seen. It looks like this emerald green. You think, 'What the heck is that?' It's copper in an almost liquefied format. It's really quite startling to see.

Rebori: That sounds interesting.

Rebori: Okay, good. Do you touch on the ethanol industry at all?

Rebori: Right, and that's the side we're on. We're on the treatment side of that as well.

Rebori: It has. Again, it's been in kind of a holding pattern for the moment, kind of like copper or the mining industry is right now.

Rebori: Right. One area, though, that seems to continue to really be going is generation -- power. Oil & gas, too, somewhat. I'm surprised to the extent, but specifically power seems strong still. I don't know how much oil & gas is, but power plants seem to be still going.

Rebori: Right. And a lot of projects were on paper and now they've been given the go. These projects are so large. Once you go, it's hard to turn off the spigot. You are right. They are weathering the industry downturn.

Rebori: Just like a lot of people hoping that it would be the first quarter of '09 to really see the trickle start to run.

Rebori: It has. On the municipal side, particularly. On the industrial side, it's again whether or not there's stimulus money or it's just tied onto the backside of it. But as far as how I feel about a prediction, , I'd like to say the second quarter of '09, which we're about to start.

Rebori: Right. It could be the third. I don't know. I'm fearful that it may go into '10, but I don't think so. If it does, a company like Smith & Loveless is well-suited to ride that out. One of the things about this economy is it brings out the best of the best and might show some difficulties for the not so best. That's a polite way of saying it. That's one of the things that Smith & Loveless is very optimistic about being a privately held company. Along those lines, we've been well-suited to kind of go with the ebbs and flows. We don't get too caught up into trends or things like that which some of the larger conglomerates may have to worry about from a quarter-to-quarter to month-to-month basis, you know, whenever they have to publish their 10-Ks and things like that (with the SEC).

Rebori: We are. We have a pretty relatively short lead time for the industry on our projects. Nothing in our industry, of course, is pretty quick, as you can imagine when you're talking about industrial products like pumps and treatment plants. But relatively speaking, though, we are pretty quick on that. We can respond well.

Rebori: Right.

Rebori: You know, it's amazing how quickly things can change. You'd have to help my recollection on what month that article ran...

Rebori: Right. So, it probably was researched and written more like July and August. That's when commodity prices were just going crazy and it was so hard to be able to predict for pricing purposes what we expect the costs for equipment to be. And, in our industry, there's a relatively long lead time between closing an order and fabrication and delivery.

Rebori: Exactly. And that's why the certainty of what it's going to cost us to build something, you know, four to six months after the inquiry has closed is quite critical. A lot of the end-users in our industry, let's say the municipalities, don't quite appreciate that fact. They like everybody else are worried about budgets and they want certainty as well. But, again, because of this industry where it's not something that you're going to buy off the shelf like, let's say, a car, that they know for certain when someone goes to that dealership how much those pickup trucks might be or some type of heavy equipment. They have a pretty firm quote. When you're talking about industrial or municipal projects where there's a design phase, a manufacturing phase, an installation phase and a startup phase each of which can extend from up to 12 to 24 months. And when you couple that long lead time with a crazy escalation period of time where prices were going up 10, 25, 35 or as much as 50% in not even a six- to 12-month period, whew...

Rebori: That's right. We're talking about prices escalating so quickly within 30-60 days. And you even had no-quotes from some vendors. The vendors would say, "We'll quote you the price on the day of shipment. Well, how the heck can we provide quotes of our own like that. And so the end result of all that is it forces a manufacturer like us and everybody else in the industry just to bid up the prices because you have to cover for that risk -- that uncertainty.

Rebori: Right, everybody has better certainty and kind of everyone's engaging the risk together.

Rebori: Yes. And, actually, that's exactly what happens. At the time I wrote that piece, it wasn't even September. That was the peak. it was the peak of prices. And then in October things started to drop and they dropped in November and December...

Rebori: That's right. And then it started dropping and when the oil started dropping, the raw material prices, like say for carbon steel and casted products -- because use scrap material related to the commodity markets -- all of that stuff took about 30, 60, 90 days before you saw it. There was a lag period of time and then it really started falling around December. Really you saw some pretty good decline in prices in December and January of this year. So, if those municipalities had escalation clauses, you know -- which at the time were not favorable and still aren't, quite frankly -- they may in fact have been able to have lower priced projects. At the end of the day, there may have been a lot of projects that went forward. Let's say the city went ahead and agreed to the higher price, well, there's some manufacturers and some construction firms that probably made some serious hay because they quoted their jobs say back in June, July or August of 2008 at these high inflated prices to cover the risk. But, again, because it's such a long lead-time in our industry -- September, October, November, December -- let's say it's January, February and March when they're actually stating to cut earth. Well, when they go to buy those raw materials -- be it rebar, steel or equipment from manufacturers like that -- the actual cost to produce those products has probably dropped 25 if not 30-40% from when they quoted it in June or July. So, I'm guessing that they didn't give the city back the money. I wouldn't expect that they did. It's just the nature of it. But the point of the story is, if the city had been more open to escalation clauses and those being tied to producer price indexes -- the PPI indexes for raw materials -- things may have been different.

Rebori: That's correct. There probably was always going to be a floor to everything and a cap if they agree to an escalation clause. It's not entirely unheard of. We have had one or two municipalities that have been open to it and they agreed to a floor and they agreed to a cap to kind of take into account the spread in between. But, again, there would have been a savings presumably on behalf of those municipalities. Industrial customers can see that a little bit more because, you know, they're used to running those numbers.

Rebori: Well, it's slowed up a bit, except for power plants. You know there're some opportunities for pumps and treatment business on power plants, again, as projects that were kind of on the back burner or on the drawing board. Once they've been released, it's hard to slow them up. Demand has slowed a little bit on that. If you want to talk just about ethanol projects in terms of, let's say, fuel in general or power in general, that, of course, has kind of slowed down. Although, I should say, we do have a couple projects ongoing right now that interestingly enough are not on hold. In fact, if anything, they're anxious to keep them going, which is positive for us.

Rebori: The dialogue has kind of died off, of course, because with the drop in oil prices, people have moved back to petroleum products. And ethanol's not so much in the forefront right now. But I imagine that if when it swings back -- and it will swing back up again -- that those conversations will begin again. But there were conversations that the overall price to produce a gallon of ethanol vs. oil. Water consumption, extra fertilizer and all that went into it, but at the end of the day, though, ethanol is a viable product and a good solution for alternative fuels. It is a regenerative fuel being made from corn, too. A lot was made about it taking corn from the people of the world.

Rebori: Right. But, in reality, the amount of corn that was diverted for ethanol purposes was miniscule or not even worth mentioning in the global span of the prices of corn. I mean the demand for corn worldwide and domestically. So, that was kind of made to be more than it was. If anything was driving up corn prices, it was the price to cut it due to diesel prices.

Rebori: Exactly. Of course, the combines in the field, they run on diesel. The raw gas prices may have had a big effect -- in fact, not might -- they did have a big effect on corn prices just as much as allegedly did the demand being diverted for ethanol.

Rebori: We're pretty active on the beverage side, distilleries and things like that, internationally and domestically. We have some processes there, again, on the treatment side that we're active in. We have a pretty good niche in some of those markets. That's a good market for us.

Rebori: We're, like I said, in distilleries, the wine industry, what else? In the canning industry, we've done some stuff like that as well. And the bottling industry too. Things like that.

Rebori: Domestically, we're in the largest part of our market. But that is a growth opportunity for us that we see. What percentages? Let's say as much as 25-30%.

Rebori: As far as country or industry specific?

Rebori: Well, again, the mining industry we see some positive things in that. Things are kind of on hold right now. There will be a demand again for commodities again. Whether or not it will be '10 or the latter part of '09, who knows, but commodities will come back. And that will be a good benefit for that. As far as markets, though, I see South America as a growing market. China, you know, has been talked about ad infinitum. But there's opportunity in South America, Central America, China and the same places everybody else sees opportunities.

Rebori: India, of course, has a lot of opportunities.

Rebori: Is that the same time as WEFTEC?

Rebori: Yes, I met him. You're talking about one of the two guys from Mexico that were presenters in Tucson.

Rebori: Right.

Rebori: Industrial or municipal?

Rebori: As I've said, the food & beverage industry we think will be a good industry. Again, things are on hold for the moment, but we expect that to improve soon.

Rebori: Just because there's always growth. You know, the beverage industry there's some good growth to have there in processes. I mean good growth in the sense that there may not be growth in overall beverage consumption numbers; but where there is growth is in the fact that municipalities, who may be taking the raw sewage from industrial manufacturers -- the beverage manufacturers, are tightening up restrictions. They themselves are running into increased costs and increased processing, so they're doing a bit of pushback to a lot of industrial customers or people who contribute to those municipal plants. Thus, there's growth on for the treatment product side in that avenue for us as well.

Rebori: That's correct. There's also growth in the fact that water reuse is big in industrial. Now, they're looking at water not just as a cloud hanging over the local municipality that the EPA hangs over their head. Now, they're looking at the water as a resource. Instead of throwing it down the sewer or channeling it out to a river, maybe we do want to recycle it and use it as washdown water or process water, cooling water -- that kind of general use that lowers both their raw water and wastewater discharge expenses.

Rebori: Wow, I did not see that.

Rebori: Yes. It's an issue in California, Arizona, Colorado, that's for sure. I guess eventually, someday it will be everywhere. When I was down in Tucson, I thought it was quite interesting. There were a lot of articles in the paper. That was the first time I'd been down in that neck of the woods, frankly. I was intrigued by the water issues down there. And somebody from the state spoke. It wasn't the governor.

Rebori: She was quite informative, I thought. Her views on water reuse and all that.

Rebori: Now, you guys were talking about that. You actually have now three pipes. In addition to just blue and traditional red, there are also the pink pipes I think you called them.

Rebori: One of the things we do see as a challenge, though, is once the bottle is uncorked, let's say, and all these projects that might be on hold come to fruition -- which is what we want -- one of the things that kind of concerns us as a manufacturer is that pent up demand and a sudden rush for delivery or installations. A lot of these projects feed -- we're on the manufacturing side -- but there's also the contractors and consulting engineers, so everybody is in a little bit of a holding pattern, except for of course niche markets, once there is a trickle, I'm afraid there's going to be this perspective of "hurry up and deliver, hurry up and deliver" because maybe they're afraid that the spigot might turn off again.

Rebori: Exactly, exactly, which is something that Smith & Loveless is well-suited for because again our niche market is –packaged systems - our package pump stations and package treatment plants -- so factory built and field assembled. We actually have a very short lead time from factory manufacture to installation. Again, that's our niche. In fact, we've kind of promoted it. There was some talk on the stimulus package about projects with 120 day lead time, so we've focused on that and we're ready to meet that at any time. Actually, we can -- depending on what type you're talking about -- build an complete package pump station in as little as 45 days. Or we can build a package treatment plant in as little as 60 to 90 days. And, depending upon how complicated the quote is, that could be from inquiry to delivery.

Rebori: Right, we let our rep force and sales force both internally and externally, promoting that heavily. We get that out there. We've also done some pieces where we promote that to the consulting engineers directly.

Rebori: Well, the mining industry is popular for us. And, again, water and wastewater desires. Something that hasn't really been at the forefront, unfortunately, for a lot of these countries, they're now starting to recognize the need for action. Mexico, in particular, is really doing quite a good job at trying to address its water needs, as the president of Mexico himself has expressed. And the two gentlemen that spoke at that spoke at the WWEMA event underscored that. There's a lot of opportunity there for water and wastewater. I think they want to increase their standards of living, so there's growth for us there. The other area for growth, and again one we're well suited for, is the whole life cycle cost analysis that's going on right now. Again, everybody is starting to look at that dollar and where it's going, not just for the immediate capital expenditure in year one but also the value they're getting for the whole life of the product. And that's been a benefit for us, again. Our products being package oriented are also highly efficient. Our treatment products and our transfer products have some of the highest efficiencies in the industry, and that kind of helps us out as well. When clients ask, "Okay, what's this going to cost me five, 10, 12 or more years out?" -- we're well-suited to answer that.

Rebori: That's right. There was a period of time in the mid-'70s and '80s and, in fact, really up to the '90s, where life cycle cost wasn't really such a big thing. They were looking at what's the cost today and let's put it in the ground and let's forget about it. Well, that comes back to bite you 10 or 12 years down the road, sometimes before that -- in five years -- when you have to expensive upgrades and repairs. Again, we've borne it out on cities that have used our equipment in the '50s and '60s and got away from us but are now coming back due to the longer life cycle cost benefits of our equipment and the robustness of it and the overall lower operating costs.

Rebori: We'll have to take a look at that.

Rebori: Thank you.

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CONTACT:

Frank J. Rebori,

President

Smith & Loveless

14040 Santa Fe Trail Drive

Lenexa, KS 66215-1284 USA

Tel: 913-888-5201

Fax: 913-894-0488

Email: [email protected]

Web: www.smithandloveless.com

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