(Based on an interview with Dick Heckmann, December 1996)

Without question, U.S. Filter Corporation is today the single largest manufacturer in the water and wastewater industry in the United States and globally. After acquisition of Wheelabrator's industrial water unit, USF's run rate for revenues for 1996 is more than $2 billion. Yet, the company makes no secret of its ultimate objective: to be the biggest single-source provider in the water industry, with an appetite for acquisitions unparalleled in the industry's history.

Being a "one-stop shop" is absolutely critical to growth, according to Chairman and CEO Dick Heckmann. The strategy is founded on the fundamental need to be a local player as well as a full-service provider. "We want to be the Wal Mart of the water industry," he asserted.

Heckmann draws parallels between the solid waste and water businesses, underscoring the role that large, dominant companies play. "If WMX could be $12 billion, Browning-Ferris could be $7 billion . . . then there's room for one or two big water companies," he said. Ultimately, he said the company wants to be the IBM, the General Motors, or Alcoa of the water industry.

Heckmann believes that the one-stop shop strategy has, in fact, changed the way business is done in much of the industry, at least in the United States. "When we came into the business five years ago, Ionics (Watertown, Massachusetts) was the biggest firm, but they didn't do wastewater or filtration. There were whole segments of the business that they weren't in," said Heckmann. Customers were then forced to go to many different manufacturers or hire consulting engineers who cobbled together different systems. USF came into the picture and offered to do everything under one roof, with full warranties and effluent guarantees. Heckmann said this put pressure on everyone else in the industry. "If you look at the companies developing in the water business, they've copied our strategy to the letter. The reason is, this is a world of one-stop shopping."

More important, USF wants to be a major global player. International sales are projected at around $800 million or 40 percent of projected total revenues of $2 billion after the Wheelabrator acquisitions. Of this, the Asia-Pacific region is about $200 million, combining USF's $120 million with Wheelabrator's estimated $80 million regional sales. Revenues after the transaction come from industrial equipment, services, and parts. The company reported $473 million in fiscal 1996 (ending March 31) revenues.

Heckmann, 52, took over as chairman and CEO in 1990. A former stock brokerage executive in the Palm Springs area, Heckmann led an investor group that seized control of the then troubled U.S. Filter. His strategy has been to target companies with strong technologies and market positions in the United States and abroad. Consolidation is particularly prevalent in the water industry's fragmented market. Companies are buying other companies to acquire technology, control distribution channels, and guarantee market share.

USF has bought about 45 companies in just a little more than five years, including several this year up to the Wheelabrator acquisition. From Alcoa (Pittsburgh, Pennsylvania), it bought a number of firms in 1991-92, of which the largest was Alcoa Separations Technology. The estimated $80 million deal offered capabilities in reverse osmosis (RO) manufacturing, ion exchange, and membrane filtration. It bought $17 million Permutit (Warren, New Jersey), which provided clarification, RO, heavy metals removal systems, and others. The $34 million Liquipure Technologies (Plantville, Connecticut) added its patented electrodiaresis technologies and one of the country's largest service deionization (SDI) networks. The $55 million Ionpure (Lowell, Massachusetts), acquired in late 1993, was a key contributor to service revenues in fiscal 1995. Ionpure provides ultrapure water systems that included continuous deionization for semiconductor, pharmaceutical, power, and cogeneration markets, as well as SDI.

Last year's acquisitions took USF several notches closer to being a one-stop provider, well ahead of expectations. Key acquisitions were Polymetrics (Temecula, California) with $50 million in 1995 revenues and Arrowhead Industrial Water (Lincolnshire, Illinois) with $44 million in 1994 revenues. Arrowhead is a leader in own-and-operate, on-site, and mobile water treatment systems, making USF the largest provider worldwide of industrial water management services.

Prior to the Wheelabrator Water Technologies acquisition, USF had about 170 sales and service offices and more than fifty manufacturing and equipment overhaul plants, including a major facility in Whittier, California. Overseas, the company has been busy buying up market share. It now operates in Singapore, Egypt, Mexico, Germany, and a dozen other countries, with about 4,000 employees worldwide. In Asia, it acquired the Permutit Australia division of Thames Water and the $6 million KBS Pure Water (Singapore), a regional water treatment services provider. The company also bought a 30,000-square-foot facility in Singapore for future growth.

In August 1996 the company bought Davis Water & Waste Industries (Thomasville, Georgia), a manufacturer of water and wastewater treatment products, with estimated revenues of more than $50 million. In September, it also acquired The Utility Supply Group (Waco, Texas), a leading provider of water and wastewater equipment and services to industrial and municipal customers, with revenues at $157 million. In the same month, USF acquired the $300 million Waterpro Supplies Corporation, the largest distributor of water- and wastewater-related products and services for municipal water and sewer authorities and underground contractors. With its acquisition of Waterpro, USF announced it was the "clear leader in the water infrastructure distribution business."

What USF does not own, it forms alliances with. The trend of packaging everything under one roof has led to innumerable alliances in the business because "that is the way the business is going to happen," said Heckmann. With the need to recycle and reuse water, "you've got to provide a closed loop," he added. As he views it, "the change in the way the waste is being treated now is dictating a one-stop approach."

Industry consolidation is also creating a dichotomy in the industry between high-end and low-end providers. According to Heckmann, smaller providers will be providing to smaller companies. But he believes that multinationals may no longer source from smaller companies when they could buy everything from a company like USF "with a huge liability umbrella and the capability to bond any size project."

In terms of product lines, USF's growth strategy is to break into build/own/operate (BOO) contracts. In the United States, this would ride on the anticipated huge growth area among industrial water users to outsource the preparation, recycling, and disposal of water. Part and parcel of this strategy is Treated Water Outsourcing (TWO), a 50/50 joint venture with $1.4 billion water chemicals firm Nalco Chemical Corporation (Naperville, Illinois). TWO will offer BOO services in marketing industrial water treatment systems. Analyst David Manlowe of PaineWebber (New York) agrees that "TWO will be a leader in expanding this market. PaineWebber estimates the total worldwide market for "outsourced water" at $750 million to $1 billion annually, rising to $15 billion in another decade. Industry estimates project a 30 percent annual growth for the industrial outsourcing market for process and high purity water and wastewater in the United States.

Buying up WTI's industrial manufacturing lines and teaming up with WTI on the operations side indicated a realization on both sides that neither could succeed as well and grow as rapidly without the other side's piece of the puzzle. Heckmann agrees, saying that the acquisition and joint venture deals go "absolutely hand in hand." "Obviously, they (WMX) are not manufacturers of equipment and the whole culture of their company is one of service and operations. From the manufacturing standpoint, they were in some businesses that probably weren't good fits for the core of what they do. On the other hand, that is our core. And we needed many technologies that they had. To us, the purchase side of the equation was great because it gave us products, technologies, and a lot of customers that we were deficient in. On the other hand, from an operation standpoint, we really know the industrial business. We're by far the largest of the industrial outsourcing side of the water business. We understand it completely. But we don't understand the municipal side, which they do. With the acquisition of all these waterworks distributors, we also put ourselves in the position of having 100 offices out there. They're selling waterworks equipment to municipalities from coast to coast and all those municipalities will be considering privatization. Now we have the window to those customers. We can not only sell the waterworks products, but we also have all the technologies that go at both ends of the pipe. And we can take EOS in. We've got the operating experience at the municipal level. From the customers' standpoint, there is no place else on the Planet Earth they can go and get somebody who can sell them everything and be local," he explained.

Heckmann concedes that USF was weak on the wastewater treatment side. "We know that we are far stronger on the process side, not on the waste side. And we know that WTI has nothing on the process side to speak of. That's why they teamed up with Glegg and others. They have no mobile or emergency capability; we're the largest in the country. They have no reverse osmosis capability; we're the largest. They have no ion exchange capability; we're the largest. On the other hand, we have no evaporation technology, and they're the largest. We have limited wastewater technologies; they have great wastewater technologies. We were limited in Europe and in Asia with wastewater technologies, and they were strong there.

Both WTI and USF have historically stated they did not compete with each other. "We're not competitors at all," said Heckmann. "There was only one place where we competed in Memtek. But Memtek's not material to either one of us. We have been suffering for lack of evaporation technology, for lack of wastewater technology in Europe and Asia. Johnson Screens virtually all of our plants are customers of Johnson's. Whittier alone buys $300,000 a year of Johnson screens. Every single municipality screens before they treat. But Johnson is an original equipment manufacturer. Now we can take them into distribution."

The joint venture with WTI is one of the major pieces of the puzzle that USF's one-stop shop strategy needed. According to Heckmann, however, it will be one among many growth engines. "We have lots of them. The joint venture is the final step in the equation. First, you've got to get the plant, get the pipes, the infrastructure, get the customers, etc., and then, when the city's all set, they can start talking about privatization. That's the service we can offer. It will be a growth engine," he explained.

With the WTI acquisition, USF's revenue base will break down as follows: 25 percent capital equipment, 25 percent distribution, 30 percent service and 20 percent spare parts. "It's a great breakdown. Almost 75 percent is recurring. It's not the bid-and-break-your-heart business," he said.

As a development company with a significant potential for growth, both sides wax ecstatic about the formation of the "premier water company of the world." Heckmann believes where the joint venture will be infinitely stronger than other large domestic and foreign-based competitors is in its ability to leverage the capabilities of the two largest U.S. water industry players. "You know who our two big competitors are in the outsourcing business: they're French and British. They are not local. But they do not manufacture equipment, they do not supply the parts, they do not supply the infrastructure, all they have is a financing and operations capability," Heckmann said. He believes the same applies to other operations and maintenance players such as CH2M Hill's OMI (Operations Management International) and Professional Services Group (PSG, owned by Compagnie Gen�rale des Eaux). With the onset of privatization schemes and because contract operations in the water and wastewater industry in the United States are also becoming larger-sized contracts, it's not only size and financial clout that are important. "None of these companies have the capability to turnkey it internally," he added.

Heckmann foresees some fairly significant trends in the industry. One is in "just-in-time delivery" (JIT). "Give me a little credit for having seen some of these trends in the business. Let me tell you where I think the next trend is going to come from. In our business, all our thirty-nine plants are all on JIT. Basically, all our big suppliers will put a warehouse within a mile or two of the plant and house what we will need, and we can have the stuff brought in 24 hours, while we use it. It keeps our manufacturing space open for production instead of inventory. And it cuts dramatically the costs of inventory."

"What about the water business? Now you've got every municipality out there. Let's take San Diego. Every day, they've got to replace pumps, pipes, and filters that are broken. Every day, they're dealing with capacity of their water and wastewater plants. What about the fact that now USF can come in and we make all these [kinds of] equipment and have full control over operation and it's all computerized. We can go to San Diego and say, 'If you sign this contract, we will, in our yard, inventory all the parts you'll need to keep your systems running. We can put a computer on your desk where you don't even have to call us. All you need to do is punch in what you need and we guarantee you 24-hour delivery.' Who else can do that? The reason we can do that is, first of all, we make all this stuff," he noted.

The critical mass will come from its partnership with Wheelabrator and WMX. As Heckmann sees it, "WMX has 2,800 operating contracts with cities. What a great source of leads. We can go in and we're local too. We'll say, 'You've already contracted out your garbage pickup and landfill services. We're local, we'll cut dramatically your costs for delivering water. And by doing that and operating it through a ten-year contract, with cost-of-living escalators, as you're now trying to attract new industry, you can go out in negotiations with industry and be able to guarantee water costs for ten years.'"

Heckmann also believes that the acquisition gives USF tremendous pricing power. In the water industry, he said, this has not been seen in five years. To wit: "The way you get competitive here . . . is to drive the costs down. You can't raise prices. At our size . . . we've got great economies. We're the largest manufacturers of pipes, pumps, valves, resins, carbons, and membranes. We're the largest manufacturer of everything."

Where does he see the joint venture going? Heckmann said the joint venture wants to own and operate if it can. "We will certainly operate, but we want to own, build, and operate. We want to turnkey. We want to be the Wal Mart of the water industry in every town with a big store, so you can get everything you want and get the low cost."

As a joint venture, the yet unnamed entity will have $100 million in start-up revenues from selling 750 million gallons per day in 230 facilities primarily in the United States. (These are facilities where the two companies either own or operate and sell the water by the gallon per day.) Heckmann believes the joint venture "should double every year."

In the Asia-Pacific region, USF as a company will have an unrivaled position in terms of an American presence competing with dominant Japanese suppliers such as Kurita Water Industries (Tokyo). "It certainly makes them very strong in the region," said Wheelabrator's John Goody.

Details of the regional strategy are yet to be worked out under the new joint venture structure. For now, Heckmann said the focus for the joint venture stays the same. "It just gets a lot bigger. . . . The strategy is exactly the same, focusing on industrial plus municipal projects, although these tend to be larger, longer concession-type projects. That's what Waste Management brings in. They're our partners in that area. We won't focus on those areas with the same intensity, but we are going to focus on municipal projects. The intensity will definitely stay with industrial projects." Heckmann said that the Asia-Pacific business will keep growing, but not double. The company is very large in SDI over there. "The more services and parts the better, but it's hard to say. We'll take what we could get out there," said Heckmann.

Where does USF go from here? Heckmann thinks there are many more missing pieces. "This company is just beginning to go. I would just say, if water goes through it, we want it. I want to have something to do with every drop of water that flows in this country. . . . We're not in the retail business . . . yet. We're not in the bottled water business yet. We're not on the home side of the business, not in the commercial side of the business, in the high tech, biotechnology side of the business . . . yet. This company at $20 billion may start to have trouble finding ways to grow at 20 percent, but not till then."