Guarded Optimism Drives Pump Business Outlook for 2013

Alfredo A. Ciotola
President, Frontline Industries, Inc.

I find that 2012, although pervaded by a general tone of cautious and delayed spending, has been a relatively strong year. In the pump service area, we noticed that our commercial customers reduced their spending, especially for preventing maintenance jobs. This downtrend was more than made up for by our industrial and utility customers, particularly the power generation customers, who kept up with their preventive maintenance schedules.

For 2013, I see a stronger year since many customers held back on projects that now have become more urgent. From the service point of view, I see a potentially substantial growth for the same reason—many large projects are becoming due and will keep the service industry busy for most of 2013. The industry has become demanding, and a successful service provider must, now more than ever, be able to:

• Maintain continued and focused attention to the customers’ needs.
• Keep a sharp focus on specific problem solving with a relentless attention to details.
• Have a strong desire to offer solutions in a timely and cost-effective manner.
• Mark D’Agostino
• President and CEO, WILO USA LLC

With fewer projects and more pressures on municipal budgets, 2012 was a challenging year. However, due to our focus on value add propositions, such as energy efficiency improvements, we experienced a record year in the United States. We are preparing for a 25 percent year-over-year growth in our business for 2013 with continued focus on energy and the durability of our premium brands.

We are in the midst of a substantial upgrade to our Thomasville, Ga., manufacturing facility to accommodate for this growth. We also continue to market our new line of after sales services—including extended warranties, service contracts and proactive replacement site audits.

Sales in just about every market area, except paper, increased for seepex, which again experienced good climate growth in 2012. Water and wastewater expanded, primarily through seepex offering new controls technologies for difficult applications. The food and pharmaceutical industries expanded, as well, again because of advances that seepex has made in elastomer technologies.

The oil and gas market has been very good because of the advanced extraction methods used in shale formations, especially in the U.S. We see 2013 as an even better year, as all these industries expand and the need for customers to improve their own process efficiencies drives their capital expenditures. We expect markets that were damaged by the high relative value of the U.S. dollar—such as mining, paper and agriculture—to return to the U.S.

Variable economic conditions have less impact on niche products, such as our thermoplastic pumps, when compared to pumps intended for more mainstream applications.
Problems associated with pump corrosion or fluid contamination and purity will always need to be addressed, regardless of economic constraints.
Strong OEM relationships and the fact that we manufacture an engineered product provide a hedge against individual market downturns and accounts for our success in the international marketplace.
Exports to the Middle East, Latin America and Asia, for industrial processes, as well as water and waste treatment, continue to show significant growth as a percentage of sales.
Reinvestment in our business remains paramount to our continued success. This year, we completely renovated our pump test facility, resulting in a 100 percent digital state-of-the-art pump test lab.
We continue to enhance existing products, develop new products and are constantly looking to push the envelope for pump design utilizing thermoplastics.

2012 was a challenging year in many of Graco’s industrial markets. Overall, both North America and South America were strong, while there were headwinds in Europe and portions of Asia Pacific. In 2013, we anticipate similar results with growth potential in parts of Asia, South America and North America.

Graco continues to invest aggressively in the technology we believe our customers are looking for, with many new products launched annually.

A strong return on investment also remains a key driver for buyers of our industrial equipment. In addition to technology and ROI, other important factors to our worldwide customers are high levels of service and support.

Because of this, we continue to add sales and new distribution, especially in developing markets, which should be good sources of growth through the next several years.

Many municipalities will continue to withhold projects as budgets remain a challenge. I do not think that it will be universal. There will be opportunities. Those who may be forced to put off repairs and upgrades unfortunately risk massive failures that ultimately create larger opportunities for companies positioned to respond to emergency scenarios on short notice. In the portable pumping industry, many markets are not in a state of stagnation, such as mining and energy production. The companies that will continue to thrive will be those that offer engineered solutions across multiple platforms—essentially rendering themselves corporately immune to peaks and valleys from market to market.

Portable pump company mergers are ultimately beneficial for more flexible, privately-held companies that can quickly control emergency items—such as fleet for rental or sale, parts inventory, etc.—without corporate red tape.

We feel confident that the pumps we have sold to municipalities are built for longevity, and we support the trend to rely on them with a deep and complete parts inventory. We have implemented manufacturing processes that have increased our throughput. We are expanding our inventory, including components for building up our diesel units and finished, ready-to-rent fleet inventory. We expect to have a record year in 2013. We have been fortunate that—despite economic challenges—we have continued to profitably grow our revenue. Our core remains consistent.

Our level of business for 2012 was positive. Our industrial and municipal markets gained a foothold on equipment sales related to both replacement projects and new construction. A positive, but still somewhat cautious, economic vibe helped during the second and third quarters of 2012. The election diverted the entire United States’ focus from growth as we became caught up in the political dialogue. The election, however, was a “red herring” in the sense that our real focus should have been on the impending “fiscal cliff.” It is encouraging that the President and Congress are now at least addressing it in the 11th hour, but real strategic solutions should have been finalized much earlier.

The macroeconomic outlook for the U.S. economy in 2013 will depend on two questions. First, “Will Washington enact a realistic solution to the tax and spending situation?” Second, “Will the marketplace become certain with regard to how taxes may affect their businesses in 2013 and beyond?” On a micro-level, the water and wastewater pumping industry will continue to benefit from replacement projects and geographic regional growth.
As is historically the case, growth for our industry will be driven by infrastructure needs in the municipal market for both new and refurbishment equipment. The industrial and international marketplaces have pockets of expansion that companies in our industry will strategically target.

Assuming a solution is reached in Washington, the best thing that will happen in 2013 is that some level of certainty will be achieved once legislation is enacted. This will allow the marketplace to adjust to the new level of tax and spending from which the U.S. economy can then begin to build.

Smith & Loveless will continue to expand our pumping coverage and bring new improvements and innovations to our products. We are preparing for 2013 and beyond by investing heavily in R&D and marketplace expansion.

As anticipated, the expansion of natural gas supply in North America in 2011 brought a dramatic decrease in price and drilling activity in 2012 and a decrease in the pumping equipment required to service that work. A continued growth in resource extraction in Australia, Indonesia, South Africa and the BRIC countries confirmed our strategy to grow our footprint outside North America.

We continue to build our business to meet growth opportunities while moving cautiously until we see what changes occur in regulations, health care and the political climate.

The outlook for diesel pump packages is complicated by the turmoil around engine emission regulations. Limited controller availability for Tier IV engines and the end of allocations for Tier III engines puts North American package manufacturers at a disadvantage in global markets.

Demand for precious metals and coal drive ongoing mining operations. Global dewatering opportunities will continue through 2013. The need for food production will drive pump sales in irrigation and food processing. Increased activity in rental will result in the deployment of current fleet inventories, driving demand for new products in the second half of 2013. Pioneer Pump will continue to implement lean manufacturing processes to achieve greater operational excellence in 2013. We will include flex capacity so we can meet the changing demand without impacting deliveries.

Activity in the U.S. economy was stagnant through 2012, waiting for the U.S. political picture to unfold. Now that it has, positioning is taking place to accommodate the inevitable changes our industry will experience resulting from this administration’s policies.

We will see a greater reliance on innovation and technology to replace shortages of labor and operating capital to maintain production.

Growth in 2013 will be sporadic, depending on how each segment of the industry is impacted by increasing environmental regulation and overall federal funding, particularly in municipal markets. Moving forward, the U.S. government will have an unprecedented impact on the confidence of durable goods consumers, and suppliers will be required to find innovative ways to make their products appealing and affordable. New technology will begin to make a larger impact on all manufacturers as consumers deal with the necessity to maintain output with fewer resources.

Given the turmoil within the world-wide financial markets in the past few years, there are bright spots appearing, and although stressed, emerging technology, improved manufacturing processes and pent up demand will create growth.

We have taken advantage of the opportunity to improve our overall output capacity and strengthen our infrastructure while remaining focused on producing high quality, energy-efficient products.

I predict that 2013 will be another positive year for the pump industry, although up and down with challenges and issues facing the industry and our own U.S. government. In 2012, seasonal weather impacted our markets, with extreme droughts, hurricanes and tropical storms. Inventories remained low with distributors driving higher expectations on manufacturers to provide shorter lead times and faster response. After a presidential election, we enter 2013 with uncertainties but with high expectations. The U.S. government will have to deal with the “fiscal cliff” and how to create the incentives for businesses to grow, invest and hire. On a positive note, good signs exist to see the U.S. economy grow and market sectors continue with a high demand for pump products. Expectations are that, in 2013, the U.S. Department of Energy will issue standards on pumping equipment pushing for continued energy savings and efficiency improvements. The DOE continues to monitor the activities out of the E.U., which are trending about two years ahead of the U.S. market. Clear indications are that this will continue to be a major influence in 2013 and beyond. At Grundfos, we continue to grow at double digit rates and are confident that we will see those same results in 2013.

Blacoh is a growing business, but as our world is hyper-connected and in this era of economic uncertainty, we must be intentional about what we do. We must lead in our market through influence, not control. We must embrace change daily, maintain our vision and operate with resilient dynamism. Gratefully, Blacoh is having yet another banner year. In 2013, our goal is to get better at everything we do every day. We are not focused on bigger—we are focused on better. Global challenges are intertwined, so we are going further for customers than they expect. In this volatile global economy, we have to stay ahead of the curve, innovate and develop new solutions faster.