Mr. Stephen Harris, Bodycote CEO, Interview
Stephen, in preparation for this interview I went through my notes and re-read the interview we did a few years back (this can still be found at https://themonty.com/project/stephen-harris-bodycote/). One of our favorite questions when doing an interview is to ask how each individual got involved in heat treating. With your permission I will refer back to that original interview for our answer:
“I was trained as an electrical engineer but along the way I acquired a business degree from the University of Chicago. While my job history is varied it would be best described as a general industrial background. This would include long working stints in the Chicago area and Buffalo, in several cases running the North American operations of UK companies. I was approached by Bodycote in 2008 to replace the outgoing CEO, Mr. John Hubbard with whom I have since had a long and enjoyable working relationship. I became CEO of Bodycote in January 2009 mainly because I found it such an interesting company.”
When you started in 2009 the Bodycote share price was 122 pence; November 27th 2019 the share price stood at 887 pence. Now, granted 2009 was the depth of the worst recession since the 1930s but this still represents a tremendous appreciation. To what do you attribute this?
“We have done a lot to improve the business. Our margins run at about 19% these days as an average across the business, whereas back in 2008, before the great recession, they peaked at around 13%. The improved performance is predominantly due to better productivity. Today we have about 5,700 employees with sales of £728 million compared with over 7,500 employees and sales of £551 million back then.”
“A key focus has been improving operations. We have always had great heat treaters in the business but we have made great strides in injecting operational skills. The facilities are better laid out and far safer than they used to be. We measure our customer service levels at each of the plants. Customer service is, of course, a key attribute in our industry. If customer service falls at a facility, profits soon follow.”
“In addition to hiring great people, a lot of capital investment has been required to enhance the plants. In many instances we decided replacement was a better option. Since 2009 we have closed 70 facilities and opened or acquired 52. We now have 189 facilities around the world having acquired two more this year in Scandinavia and Slovakia.”
“I think it is also fair to say that our growth in the less developed countries of Eastern Europe, Mexico, and China has also helped performance. It is very easy to lose money in unfamiliar territories and it is definitely high risk, but if you get it right the rewards are respectable.”
How does the Bodycote model differ from other commercial heat treaters?
“We call our commercial heat treatment business “Classical Heat Treatment” to distinguish it from Specialist Technologies which we can talk about later. In the Classical Heat Treatment business, we tend to approach the market somewhat differently to most commercial heat treaters. We are a large company and have a very sound financial basis. We also carry around $750 million in insurance. This means that very large companies, including many of the world’s largest OEMs and Tier 1 suppliers, are quite happy to do business with us knowing that we can stand behind our commitments. We often hear about small commercial heat treaters that venture into doing business under onerous trading terms which they are happy to sign. The problem is that when they have a quality escape, the OEM ends up owning the heat treater, which is not what anybody wanted.”
“Apart from our bias towards large customers I would say the biggest difference between us and most commercial heat treaters is our focus. We do not attempt to do business with wildly different customers from an individual plant. Our plants are segregated between those serving the aerospace industry and those serving automotive. We have learnt that these two different types of customers require a different focus. Furthermore, we segregate high volume plants from lower volume/high flexibility plants. We also operate on a local cluster basis with all the plants in a cluster working together. In this way we can limit the number of technologies in any one plant but are still able to provide all the technologies that a customer may need in any area. It is a dangerous temptation to keep adding technologies to a single plant. The extra complexity drives up costs and lowers customer service. It is not about heat treatment knowledge, it’s about production complexity. Keeping things simple is by far the best approach. Of course, it’s our size and number of facilities that allows us to achieve these economies of scale.”
While most of our questions focus mainly on heat treating we should also talk about your Hot Isostatic Pressing division. Perhaps you could share a few thoughts about the “HIP” side of things such as whether this is a growing field and whether it overlaps with heat treating.
“Our HIP business sits in our Specialist Technologies division, which I referred to earlier. The other businesses in the division are Surface Technology (plasma, HVOF and thermochemical coatings), S3P (Specialty Stainless Steel Processes) and Powdermet® (contract manufacturing of products from powder using HIP and 3D printing technologies). We also have two other specialist technologies which are heat treatment types of processes. These are Low Pressure Carburising and Corr-I-Dur® (these last two operate within the Classical Heat Treatment facilities). In the Specialist Technologies division, each technology has its own dedicated facilities which are quite separate from the heat treatment business. They also have their own management and sales forces. So, as you can see, we do not believe there is any real overlap between HIP and heat treatment.”
“We are aware of a number of heat treaters going into the HIP business. History suggests that this is a very risky move. It is an expensive business to get into and the maintenance costs are astronomic, which is not something the suppliers tend to advertise. Replacement of a molybdenum furnace will cost you well over $1 million for a large HIP and, unfortunately, unlike vacuum furnaces they fail quite regularly. Bodycote has acquired quite a number of HIP vessels over the years from companies both small and large that have attempted to enter the HIP industry and failed quite spectacularly. Most of the new entrants are going in at the small end, targeting additive manufacturing. I think this is sensible as the risks are lower and that market is growing at a reasonable rate.”
When we spoke all those years ago one of the main topics concerned two acquisitions you had recently made, Metal Improvement and Carolina Commercial. The Carolina Commercial acquisition raised a few eyebrows at the time due to the relatively high sale price. In retrospect was this a good decision?
“A good question. I would say the results of that acquisition were mixed. The Metal Improvement acquisition was much better. The fact that Carolina Commercial had been held by a Private Equity firm for a number of years was clearly a problem. Many PE firms do not have a great knowledge of running businesses themselves and they tend to underinvest. This was the case with Carolina Commercial. Of course, it didn’t help that shortly after acquisition there was a fire that destroyed one of the facilities. Given the opportunity again I would have still tried to acquire Carolina Commercial, but we would have approached it differently, paying less and going into turnaround mode straight away.”
My understanding is that Bodycote is considering all heat treating technologies currently available and amongst the criteria for new equipment is the degree to which it is environmentally friendly. Would you care to comment on this? Perhaps comparing vacuum carburizing systems to batch IQ furnaces?
“Well, Gord, I wouldn’t quite state it like that. We avoid some technologies. We do not like salt both for environmental reasons and because of poor production flexibility. We avoid continuous processes such as mesh belts and pushers, once again due to limited flexibility and poor carbon footprint. When times are tough these types of technology tend to lose money. Obviously continuous processes with salt quenching are highly unattractive to us!”
“We do like vacuum carburizing. This is primarily because of the better results you get for specific applications. Unfortunately, there is not a great deal of demand for vacuum carburizing today outside of the automotive OEMs and the equipment cost is very high.”
Nobody in the heat treating industry will argue with me when I say that Bodycote is the only truly global commercial heat treater. That being said, which geographic areas of the world do you see as offering the largest growth potential to your company?
“We spoke earlier about the lower developed countries in Eastern Europe, Mexico and China which clearly offer good growth, albeit at high risk. I still see the largest growth potential as being the United States. Aside from the natural growth rate of the US economy itself, the amount of work available that today is being done quite inefficiently by many manufacturers in their captives is very large.”
A good friend of ours and a very respected individual in the heat treating industry, Mr. Dan McCurdy, recently retired as President, Bodycote Automotive and General Industrial Heat Treatment, North America and Asia. There has been a lot of discussionabout who is replacing Dan (and we confess we have fueled some of this speculation). Could you please explain to us how you are filling this position?
“We will miss Dan tremendously. He has been a key member of the team for many years. Replacing Dan was always going to be very difficult. So we didn’t really replace him. Instead, we reorganised the company. Dan’s North American Automotive and General Industrial (AGI) business now reports to Tom Gibbons. Tom also runs the North American Aerospace, Defense and Energy (ADE) business. Tom has five Vice Presidents of Operations reporting to him that run the sub-divisions of: Automotive, General Industrial, East, Central and West.”
“The European ADE business now reports to the two European Classical Heat Treatment Presidents, one for Northern and Eastern Europe and one for Western and Southern Europe. These are run by Paul Clough and Eric Denisse respectively. Paul is also responsible for Asia.”
“We then have the Specialist Technologies division run by Thomas Oury.”
“The accounting and other central functions, such as HR, are then taken care of outside of the divisions in shared service centers. In the US this is in Dallas.”
This question ties in with the previous one: how much autonomy does each general manager have? For instance, if the GM of plant XYZ wants a new furnace how long a process would it take to put this in motion?
“Our operating philosophy is to not try to centralize or tell the GM’s how to run their businesses from headquarters. We give them guidance as to our corporate strategy and general direction, our expectations for customer service, safety, and financial returns. There are specialists that can help them with specific issues if they need it. It a tough job but the rewards can be high. It is a job that carries a great deal of satisfaction if performed well. There is a great deal of recognition. If a plant does well it is down to the GM. In large part, how the GMs succeed is up to them, but we do have a number of rules that have to be followed. Foremost of these is that they cannot buy businesses or properties. This is done by our M&A team, which includes Mario Ciampini who many of your readers know well.”
“Investing in a furnace comes under our capital investment rules. We require a specific rate of return that depends on the risk. A GM can submit a request as long as it justifies the required return. The first thing we do is then look for unused or underutilised furnaces already in our network. With over one thousand primary furnaces and many more temperers in operation, and more in storage, we can sometimes fill the need straight away. The majority of the time taken in getting a capital item approved is taken up with the GM and the divisional team doing their homework. We do not buy equipment on a whim. Once a case has been developed and submitted it can take a few weeks to get approved if it fits with the strategic vision for the Group. If it doesn’t it can take a very long time. Requests for large mesh belts with salt quench somehow never seem to get answered!”
Bodycote is of course headquartered in the UK but there have been some rumors suggesting that the company might move the headquarters to another country in Europe. Is this something you can comment on?
“Bodycote is a UK registered company and is listed on the London Stock Exchange. The registered office remains in Macclesfield, UK. A new management office has been opened just outside of Geneva where a number of senior managers are based, though we have regional headquarters in Dusseldorf, Germany; St Priest, France; Prague, Czech Republic and Dallas, Texas.”
When we spoke a few years back you estimated that captive heat treating represented 80% of the total market and commercial heat treating the remainder. Is this still the case? Part II of this question would be: is the company still interested in taking over the heat treating requirements of some of these captives? If my memory is correct I believe I saw a press release from Bodycote a little while ago mentioning that you had signed a long-term contract with Rolls-Royce which would indicate that the answer is ‘yes’.
“This is a statistic that is almost impossible to measure accurately. While we have seen a general slow trend for companies to outsource their heat treatment this is offset by very high growth in countries such as China and India, where the high-quality heat treatment is overwhelmingly done in-house. My guess is that if you could measure it accurately you would find that there is now more done in-house than there was ten years ago due to this effect.”
“Bodycote is always looking actively to take over captives. We are often approached to do this, however we are not interested in high volume operations where the only motivation is for the customer to swap their balance sheet for ours. In fact, it is quite rare for us to take over a captive. When we do buy a captive we more often than not scrap the equipment and invest in more flexible, fit for purpose equipment. At the end of the day, we are an aggregator and we need equipment that allows us to do this. In many instances we do not take work that is already being done in-house. Instead, we will be working with the OEMs, such as Rolls-Royce, and will take the products before they have ever been treated in-house.”
Stephen, what can we expect to see from Bodycote over the course of the next year? Are there any exciting new developments you could share with us?
“Gord, we expect to see several very exciting new things happening in the next twelve months in both our Classical Heat Treatment business and our Specialist Technologies. Unfortunately, there aren’t any that I am allowed to share with you at this time.”
Thanks for taking the time to talk with me. Stephen as always I appreciate your time and candid, open answers. Gord