Stephen Harris / Bodycote

This past week we were fortunate enough to catch up with Mr. Stephen Harris, CEO of the world’s largest commercial heat treater, UK based Bodycote. Our timing was fortunate in that Stephen was in Atlanta, Georgia with the Bodycote team reviewing their very recent acquisition of Carolina Commercial. Stephen’s responses to our questions were succinct, thought provoking and in some cases not what we expected. In addition I can say that Stephen is a very competent fellow (we would have been surprised if he was not) and remarkably easy to speak with.

Good afternoon Stephen, I have to say that for quite some time I have been looking forward to meeting you. The first question I have to ask you is what is your background and how did you ever come to be involved in the heat treating industry?

“I was trained as an electrical engineer but along the way I acquired a business degree from a university in the Chicago area. 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.”

After what 4 or 5 years in the industry what is your impression of the industry and how does it differ from other industries you have been involved with?

“Fragmentation. The commercial heat treating industry is far more fragmented than virtually any I have seen with numerous players from very large to very small and this has a great deal to do with geography. In a past life I was involved with the equipment renting business which in some ways is similar -many small companies because who is going to drive more than 50 miles to rent a tool? Heat treating is in some ways similar – who wants to send their parts 200 miles to be heat treated? Other differences that come to mind are the age of the industry and the relative smallness of the bureaucracy. We have traced heat treating back to 800 BC which means nothing is new in the industry and yet on the other side of the coin it is not a particularly mature industry in that there remains a lot that can be improved upon and modernized. Another factor that strikes me is that the bureaucracy in the industry is far smaller than in most other industries.”

Under your watch Bodycote has been flourishing with revenues, profits and share prices all higher. To what do you attribute this? To phrase it another way what have you changed at the company since you became CEO?

“When I became CEO of Bodycote it was an extremely difficult time for all heat treaters. We sat down and made conscious decisions about what needed to be done and those decisions turned out to be the right ones for the company. Those decisions included hiring the best people both from in the industry and outside for the right positions, ensuring that we were extremely responsive to customers’ needs, that wherever possible we operated on a 24/7 basis in our plants and that what we were offering the customers was the right fit for both them and Bodycote. As an example we looked closely at which jobs were profitable and which weren’t and made decisions based upon this. While the general direction was set at the top level we have always believed that most decisions need to be made at the local level so our local managers have a great deal of decision making responsibility. This is a huge industry with many opportunities but it is crucial that the processes and services we are offering our customers are the best fit for both them and Bodycote. Choose the customers, choose the work.”

In the past year you have made two major acquisitions in North America, Metal Improvement and Carolina Commercial. To some extent this surprises me as my understanding is that profit margins are lower in North America than other areas such as Europe. Why this focus on the North American market?

“You are incorrect on this Gord. Profit margins in North America are very respectable when compared to the rest of the world and when you consider that it is estimated that the worldwide captive and commercial heat treating industry is worth $35 Billion USD/year and that $20 Billion of this is in the US, North America is and will remain a crucial area for us. Our recent acquisitions demonstrate that we take this seriously and that have the ability to offer heat treating services in every area of North America.”

Can we expect to see any major changes at either Metal Improvement or Carolina Commercial now that they are part of the Bodycote group?

“Both Metal Improvement and Carolina Commercial are profitable, well run companies so we do not plan on any major changes although we are making new investments in these facilities. Obviously the names will change to Bodycote. The Metal Improvement plants were divided up between our Aerospace, Defence and Energy business, run by Mr. Tracy Glende, and our Automotive and General Industrial business (North America/Asia) where Mr. Dan McCurdy is President. Carolina Commercial will be wholly under Dan McCurdy”

With these 2 large acquisitions under your belt would it be fair to say that you see the future growth of Bodycote to be mainly through acquisitions? This is a bit of a loaded question as I know that the company has always focused on taking over captive heat treating operations so to rephrase this question slightly do you believe that growth in the future will be more through acquisitions or by taking over heat treating requirements that are currently done in house by manufacturers?

“Most future growth will be “organic” as opposed to acquisitions. When it comes to captive heat treating our largest opportunity comes when a customer adds a new product or substantially changes a current one which would require a new heat treating process. Typically at this point the customer will very seriously consider outsourcing.”

After your recent acquisition of Carolina Commercial I made the statement that Bodycote is both the only truly international commercial heat treater and the only commercial heat treater with the resources to make such acquisitions. Fair statement in your opinion?

“Fair Statement.”

I have worked with Bodycote for many years now and have a very high opinion of the company, in resources and global reach no other companies in the industry come close in my opinion. However (and there is always a however) I have heard many times over the years that the company is so large that it makes it difficult to compete with smaller more nimble heat treaters. Would you regard this as unwarranted criticism?

“I do not agree with this statement! Bodycote invests $100 million USD in new equipment and technologies every year which is something none of our competitors can say and this is done in a very timely fashion while keeping in mind that as a company we are always looking down the road 20-30 years. As a matter of fact I would say that we are extremely nimble and quick to make decisions especially on relatively small investments under $200,000. We give our plants a great deal of autonomy and when an opportunity presents itself to our local managers we will always consider it.”

The Bodycote name is most closely associated with heat treating but I know that your Hot Isostatic Pressing Division is very successful. Care to give us a bit of background about this portion of the business and how it compares to heat treating in terms of revenue?

“Our “HIP” business is roughly $100 million USD/year and actually consists of two parts; HIP Services which is strengthening castings and HIP Product Fabrication which is a manufacturing process as opposed to a heat treatment process. Our HIP business is the largest in the world.”

I can’t imagine that there is a single heat treating process in the world that Bodycote does not offer. I am not sure whether you care to answer this question but which is the most profitable for the company and which is of most interest to you personally?

“You cannot say that one particular process is more profitable than another as there are a number of different factors that come in to play such as local demand. For instance heat treating of fasteners can be very profitable if there is a very strong demand for fasteners in a given area however as this demand goes up or down it affects our profitability. Some heat treatment plants can be very successful by offering NADCAP accredited heat treating of aerospace parts but this model obviously will not be successful for plant “B” if there is little aerospace work in the area. So again it comes down to having the right process for the customer. We do not set out to pick a particular process, rather we listen to what our customers need and invest based upon this. Vacuum Carburizing, Vacuum, Induction, Batch IQ – driven by the customer needs. Some heat treating companies are very successful by stressing a particular process but at Bodycote we are open to consider any process as long as it is the best fit for the customer.”

This question ties in closely with the previous one; is there any particular type of heat treating that you see growing substantially in the near or medium term?

“None in particular. Again it is crucial that we match the correct process to the customers’ needs which means we are at the mercy of the customer.”

Bouncing back a little I mentioned how it would appear that you are paying particular attention to the North American market which might or might not be a reasonable statement. What other geographic areas do you see as particularly of interest to you?

“Eastern Europe and Asia are two markets that we are paying close attention to. While Eastern Europe is still a small market and has little in the way of commercial heat treating it is growing which represents an opportunity for us. Our large investments in China and India demonstrate how seriously we take these areas. While we have substantial assets in Brazil this is a country where the ups and downs of the economy make it difficult to know what is going to happen.”

You have some really top notch people in the company, some of whom I have known for years and would consider personal friends-are there any that you would like to single out for a mention?

“I am tremendously proud of all of our people but if pushed I would suggest our two “Elder Statesmen”. Mr. Jan Elwart in Germany and Mr. Guy Prunel in France.”

I have asked many very experienced people in the industry what they see in the future for heat treating. I have to say that I have never received any real sort of consensus. I have heard everything from more commercial heat treating and less captive heat treating, to Vacuum Carburizing taking over the industry, to most heat treating following manufacturing out of North America to areas such as India and China (which I personally don’t believe by the way) all the way to heat treating becoming a smaller industry down the road. This long winded question all leads up to this; what do you see in the future?

“We would estimate that 80% of heat treating in the world is captive and we don’t see this number dramatically changing. Your question about manufacturing and heat treating moving to areas such as India and China is a good one and we see it as a good thing. For instance when a foreign manufacturer sets up a facility in Asia it is generally for the local market and usually includes an in-house heat treating department. A large investment in Asia means less investment for plants in the US (and new heat equipment is a large investment) which translates into more outsourcing in North America which is of course a good thing for us.”

And what do you see in the future for Mr. Stephen Harris? Most people that get involved with heat treating tend to stay in the industry for their entire working careers, have you been bitten by the heat treating bug yet?

“It’s been a blast!”

Thank you for your time.