Calvert Street Industry Adviser, John Hubbard, Discusses Thermal Processing Strategy
The following interview between Calvert Street industry adviser, John Hubbard, and Gordon Montgomery occurred on August 16, 2016 and was originally posted on www.themonty.com.
John you have the dubious distinction of being the only individual we have ever interviewed twice for “The Monty”, the first being 10 years ago when you were CEO of Bodycote. Seeing as that was quite some time ago could you give us some brief background about your heat treating career?
"Gord, it is an honor to be interviewed by "The Monty". You have developed into a very effective and probing enquirer. Briefly I worked my way through University as a night shift heat treater in Cleveland. Upon graduation I became a Metallurgical Engineer (qualified as PE) working days while earning an MBA at night. After completing my MBA I had an opportunity to start a new company designing and building custom furnaces for the forging industry. Over the next few years my partner and I added two more companies. Interestingly all three companies are still in operation but remain "micro-companies". I was not married and working all the time, Cleveland was "burning and rioting" and I wanted to be in the Southwest. I sold my interests to partners and joined Hinderltier Industries in Tulsa becoming the GM of their heat treating department (captive / commercial). Over the next years I sprayed out the department into an independent business and bought into ownership of that division. When the oil field business was in one of it's regular crashes I got the opportunity to buy the division. I awarded key managers shares in my company, we grew and prospered then Bodycote, plc approached us to sell. After evaluating the opportunity with my independent board of directors and completing successful due diligence of Bodycote's original culture (investing in operations they acquired, promoting from the floor up) we sold (cash and tax-free stock swap). Over the next 5 years I ran the North American heat treating operations growing it dramatically (from 7 plants to 56 plants). The board of directors selected me to become CEO to follow the very successful retiring John Chesworth. Over my years as CEO of the group we grew dramatically becoming the largest thermal processing company in the world and one of the largest testing companies in the world. The year before I retired we did a strategic review of our business and decided to divest of our testing division as the synergy which initially attracted us to testing had become less than 5% of testing sales. Luck (preparation meeting opportunity) was on our side as we sold the testing divisions in the fall of 2008 as worldwide markets were crashing. This strategic achievement allowed me to retire with peace of mind leaving Bodycote, plc essentially debt free."
Since your departure from Bodycote how much involvement have you had with the industry?
"Not enough. I have consulted, pro-Bono, for friends in the industry. I missed the people."
From Facebook photos I have been following your exotic travels around the world with a great deal of envy I have to say. What possessed you to get back into the industry?
"To some degree you and my surgeon are responsible. I finally had my chronically painful hip by my surgeon (advice, if in pain get it replaced) giving me freedom of movement again. You, as an April Fools joke posted that I had come out of retirement, which I hadn't but it put the thought into my mind. The temptation has been there since retiring as I have been approached multiple times with investment groups wanting to do anything from taking Bodycote private to creating a synergistic group of thermal processing companies (they look at Bodycote and think - we can do that better or too). I have listened to all approaches but never found any that made any sense based on their history, strategy or patience. Until Calvert Street that is. When Calvert "pitched" me I looked past their sales pitch and did my own due diligence (like I did before selling to Bodycote). I spoke with numerous x-owners who had sold to Calvert Street. I spoke with current long term employees. I spoke with key several long term customers. I learned that Calvert Street has the right knowledge, strategy and patience to own a group of industrial service companies (business to business). I have drunk the cool-aid and believe we have the ability to create a synergistic group of Thermal Processing companies focused on technological excellence, customer service beyond expectations, putting our team of people at the forefront and earning an attractive return on investment. We are positioned to bring new opportunities for any company that joins us."
Please tell us about Calvert Street and what it was about them that appealed to you.
"Calvert Street, for more than 20 years, has acquired family owned businesses. They understand and value the importance of family legacies and serving as appropriate stewards of the companies. Typically they acquire family businesses that do not have a successor or need capital or expertise to help them grow. Like myself, they value people -- everything they do is based upon personal relationships. They also know they are not operators; they seek to put in place experienced, professional managers and provide them the resources and support to run the business. Speaking of investing in people Calvert Street put their money where their mouth is, they hired me, The Monty has already announced that Mike Sobieski has joined as CEO and Don Longenette has joined as our facilities, equipment and safety expert. With more team members soon to be announced. Calvert Street also seek to have highly experienced and respected outside board directors to serve as mentors to our management teams and to ensure the company is focused on the right issues strategically. Our ultimate objective: to have a better company (for all constituents) at the end of our ownership."
As we all know Bodycote is the largest commercial heat treater in the world and you of course were the CEO for a long period to time. This is going to lead to assumptions that you are looking to emulate their model. How would you respond to this?
"Tough question for me to answer without sounding critical. Let me just say that we will strive to differentiate by honoring the history of the companies joining our group, development of our people, on time delivery, consistent quality and providing value for our customers."
While your active involvement in the industry dropped with your retirement from Bodycote in 2009 you have kept up to date as we discussed. Have you seen any substantial changes in the industry since then? As an example changing technologies or geographic shifts?
"The key changes I have noted in retirement are:
- Fewer skilled people available, mostly due to retirement
- Quality standards are continuously getting tighter
The newer technologies (LPC, case hardening of S/S, Controlled Nitriding, etc) are finding niches but not disrupting traditional processes. One technology that is capable of disrupting is Additive Manufacturing."
From what you have told us you are looking at very substantial investments in the commercial heat treating industry in North America which obviously means you feel very optimistic about the future. What makes you so optimistic that commercial heat treating in North America has a bright future?
"Thermal Processing is an integral part of making metals fit for purpose. As long as there is local manufacturing there will be need for our services. The decision by a manufacturer to in-source or out-source is driven by economics, desire for control of quality, need for on-time-delivery, viable supplier base or even (gasp) corporate politics. We believe by demonstrating superior results we can win our share of the market opportunities."
This question aligns very closely with the one above and is a perennial favorite of all captive and commercial heat treaters around the world. Are commercials getting a growing share of the heat treating pie? It has long been estimated that in North America 10% is commercial and 90% captive but I have yet to see any definitive data on this. What are your thoughts?
"I have to laugh and I know you are too as you regularly see market studies yourself. Calvert Street commissioned a market study last year (prior to speaking with me) to confirm the viability of their strategy. Believe it or not the study reports that the NA heat treating market is ~$20.2B. The reason I laugh is, many - many years ago I was on a MTI task force which tried to quantify the value of the total North American (NA) heat treating market. By unconfirmed consensus we arrived at $20B. Since then every NA market I have read has parroted that guess. It is true, if you say it often enough - it becomes truth. As for the % outsourced, I believe that the NA is about 10-15% outsourced. Consider it just as accurate as the market size."
All of my questions to date have been about heat treating in North America but I would like to ask you about heat treating outside of North America. Only a handful of people in the world (and a very small handful at that) have as much experience as you at seeing the global market. In your opinion can trends in the North American market be applied to every area of the world? As an example batch furnaces and mesh belt furnace in North America keep getting larger-would it be fair to say that this is the case everywhere? Do you see commercial heat treaters in all areas of the world seeing the same consolidation as in NA?
"The commercial heat treating market in virtually every country I had the opportunity to work in exhibits, to some extent, the same drivers and trends as in NA. What varies most is the requirements for safety, environmental and quality compliance. These deviations are slowly catching up to those we find in NA. Equipment selection is driven by opportunities available in the local market. Consolidation exists in every country I know of. Founders (or their children) need to sell their company to realize their wealth so they find buyers. The sooner we realize the people in other countries have needs and desires just like us, the sooner we have a chance at world peace."
Last question John-what in your opinion would be the absolute perfect commercial heat treat? In other words if money was not an issue and you had a greenfield site what would it look like? A location offering numerous processes? A shop specializing in one process only? Completely automated or manual labor? Would a company with annual sales of $5 million be large enough or would you prefer to see a much larger operation with the resources to go in a number of different directions.
"Oh boy, I get to dream: My ideal facility would be in a non-urban market with lots of manufacturers around requiring sophisticated thermal services. I would focus on 2-4 key processes. I would Invest in state of the art, lights out equipment (how many people enjoy working the "graveyard" shift?). In order to support a truly high quality service company $5m in sales is on the low side. Since I am dreaming, I would not want just one location. That is not based on greed, it is spreading the risk and key resources. See, I am naturally a proponent of multi-plant groups. Strength in numbers.
Gord, thanks for the honor of being interviewed by you, again."