By Carlos David Mogollon,
Industrial WaterWorld Managing Editor
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IWW: Mike, tell us a little bit about yourself and how you came to Basin Water, if you could, please.
Stark: Sure, then let me tell you about the vision that we have for Basin Water in the industrial world and how we plan to go to market. I used to run USFilter Service Business, which was a municipal and industrial service business. Before we were acquired by the French back in 1999, the service business was about $1.2 billion. I would say that $550 million of it was industrial and the remaining part was municipal. And then, of course, we sold a portion of our business to Siemens and helped create Siemens Water Technologies. I stayed with Veolia Water, which is what Vivendi became, and ran this business until 2005, when I retired actually. And, towards the end of 2006, I got a call from Basin Water and they asked me if I would join the company and help them become a predictable growth company. Basin Water before that was really a wellhead treatment company. They used ion exchange for the removal of inorganics from potable water supplies. It was really a tough decision for me, David, because I was playing a lot of tennis. I'd joined a health club. I was thinking to myself, "No, I don't want to. I'm having too much fun." I live in Houston and was having a good time. But what happened was I got to know Basin shortly before I retired and even considered buying it for the French company Veolia. And the reason was I thought they had a great business platform, they had good technology and a good customer base, and I thought they would be another channel to market for Veolia. But I was retiring and they were getting ready to go public and it didn't get done. Basin went public in May 2006 and, in October 2006, they asked me if I would come and join it to, as I said, help it become a predictable growth company. The things I noticed about Basin, when I got there, were several fold. No. 1 is that they're technology was mainly ion exchange and it was geared toward medium- to large-size wells for water treatment, potable water treatment wellhead treatment. They didn't have very much of an industrial plank. And I believe that we had to expand their technology within Basin Water so that we could cover more things in both the municipal and industrial markets, so I set about doing two things. It was an entrepreneurial startup. It didn't have very good business systems. I spent the first year putting good business systems into place, good pricing policies, good costing policies, good handoff procedures from sales to engineering, engineering to field services and getting our business operations in order.
IWW: Well, it was kind of a good time for that too, wasn't it? Basin had just had it's IPO, it went up, it went down and, at that point, you were in a position that you could pretty much play it as you wanted in terms of adding this new element to the business since they were looking for more sustainable results.
Stark: Yes, it was a perfect time. I mean they had no debt. They had about $50 million in cash. Did I say they had no debt? No debt covenants. It was an opportunity to really refocus the company in these other areas. We put business systems in place in 2007 and we expanded our technological capability. What we did in that regard is, from a municipal perspective -- I know you're not particularly interested in that.
IWW: Internationally, I am, but from a domestic perspective our editor at WaterWorld magazine, James Laughlin, covers that angle very well.
Stark: Well, from a municipal perspective, we gained the ability to handle small wells as well as large wells. And the reason that's important, if you look at the city I guess anywhere in the world, but for sure in the United States, I don't care if it's east Des Moines, Iowa, or Los Angeles, California, you're going to find that these cities have wells anywhere from 20 gpm gallons per minute to 3,000 gallons per minute. That's pretty much the well sizes. And the wells have no infrastructure around them and they have no footprint because the cities or communities have grown up around the well. So, if you were building a drinking water facility from surface water, you would automatically know that you needed to build a water treatment plant because if you're taking water from the Ohio River, the Missouri River or the Mississippi River, you know there are industrial discharges, you know there are municipal discharges and agricultural discharges. And there are septic tanks. So, you knew you had to treat the water. But what they used to do with wells is very interesting. As much as 15 years ago, they'd poke a hole in the ground. They'd get the well water, test it for hardness and bacteria and that would be about it. They'd put it in the distribution system. Once in a while, they'd chlorinate it just to prevent any biological growth downstream. They looked at it as white, crystal clear, groundwater -- it's fine. No hardness, no pH problems, no biological problem. Well, now the EPA has an MCL, or maximum contaminant levels, with nearly 100 contaminants. Consequently, whether you're LA or Iowa or you've got wells of 20 gallons per minute or 3,000 gallons per minute, a community grew up around it and there's no treatment process there. So, when you find a well that's been contaminated and you have to treat it, you have to deal with that small footprint. From an offensive perspective, if we're trying to do business in LA, and they bring us a 100 gallons per minute well and our technology is more geared toward 500-3,000 gallons per minute -- we're not competitive. We potentially lose an opportunity to our competitors. Likewise, from a defensive perspective, if we're dealing with CalWater Services, one of the biggest utilities in the West, and they bring us a 200 gallons per minute well and we're treating all their large nitrate wells and we can't treat it competitively -- they're going to go to one of our competitors.
IWW: And that may give the competitor an opening to push for more wells from your customers.
Stark: Absolutely. And we won't see the opportunities as early as we did before. We needed to expand our ability to handle a variety of well sizes. We also needed to expand our ability to handle organics as well as inorganics. Where we would typically remove nitrates and arsenic and iron and manganese and perchlorate and all of the inorganic compounds that you would generally find in a well and on the MCL list, we didn't do anything for MTBE, TCE, PCE, and any other organic compounds.
IWW: Which over the past decade have become major issues.
Stark: Significant issues, exactly right. And so we needed to expand our ability to handle the organic side from both perspectives, offensive and defensive. We went out and acquired a little company from Memphis, TN, called MPT, which is Mobile Process Technologies. They brought the ability to do offsite regeneration of resin. Where our technology was geared to minimizing waste streams generated onsite and minimize amount of regenerative requirement because of its design, they brought us an ability to take the resin offsite, regenerate it and bring it back, which meant now we had an offering for the smaller wells. We could put in a very economical facility, take the resin off, regenerate it, bring it back. Not very freight sensitive at all. The other thing they brought us was a foothold in the Southeast. We were basically a West Coast centered company because we got started in California. And then, the third thing they gave us was an industrial platform. They had contracts with people like DuPont, in Hickory, NC. They'd been there now 12 years. They handle a waste glycol stream, they purify the glycol and give it back to DuPont. They do catalyst recovery. They'll do things like pthallic acid and recover the cobalt and return the cobalt back to a client. In the mining industry, besides being able to economically remove ammonia, they also can help recover the metals. And when you're looking at the cost of metals today such as molybdenum, moly has gone through the roof. Copper has gone through the roof. Metals have gone through the roof, so metals recovery is very important. They also do the classical waste treatment in industrial facilities. They'll treat the slag piles at the power stations. They'll remove arsenic and selenium and vanadium, so that there's no discharge problem. So, they gave us a pretty good industrial platform to start with, and then we did an alliance with Rohm & Haas. You know Rohm & Haas? They're old friends of mine from the days at Calgon and Veolia and USFilter. When I got engaged in Basin Water, I went to my friends at Rohm & Haas and said, "Hey, how about we do a venture. You guys don't particularly like your business model for the potable water market and for some of the industrial water markets, and we would grow tremendously by having access to your technical capabilities -- so it could be good for both of us." What we decided was they spend a lot of money developing processes, and the only way they go to market is through an OEM, so they develop a process and they sell through an OEM, the OEM sells the process and what do they get. They get the initial resin sale. Then, they don't hear from anybody until they need resin again. They don't get to participate in the savings the client is gaining from this process they developed. They weren't really getting a very good return on their invested research and they wanted to get some recurring revenue and growing backlog situation for a better return. By doing business with Basin -- and there's something I should have mentioned earlier. Basin's business model is low lifecycle costs and pay-for-performance. What we demonstrate to our clients is that when we provide a system to them, it is their best choice in terms of lifecycle costs. It's the right meld of capital and operating savings to come up with the lowest project cost over the life of that project. That's how we sell everything.
IWW: What was the relationship that was developed with Rohm & Haas?
Stark: The selling technology that we bring offers them a better return on their investment. Basin Water had a good position in the municipal market and are gaining a significant position in the industrial market -- and our model was low lifecycle costs and pay for performance, so we formed an alliance. Rohm & Haas took all of their potable selective resins -- drinking water resins -- off the market and we have those exclusively now.
IWW: Nobody else has access to them?
Stark: Nobody. They took their advanced Amber Pack design system off the market in the potable water side and gave it strictly to Basin Water. In the alliance, we jointly identified several JDPs -- which are joint development projects -- and they're really market oriented. So, one of them is for produced water in the oil & gas industry where Rohm & Haas has technology. We take that technology to market. What we're saying in the oil & gas folks like in the coal bed methane gas water, we're saying is: "We'll treat that water, we'll guarantee the life of the asset, we'll guarantee the performance of the asset and we'll guarantee the cost of the asset." So, we sign a 10-year agreement with them to treat the water on this guaranteed basis and they don't have any unbudgeted surprises over the life of the project.
IWW: Is this also exclusive with Rohm & Haas?
Stark: Exclusive with Rohm & Haas for the coal bed methane market.
IWW: How does Rohm & Haas benefit off of it?
Stark: What we do, is they put in the technology, they put in the technical support for like coal bed methane. We do all the sales, all the engineering, all the construction and all the finance. Then, we manage the operation. We both take our expenses out on a fully allocated basis and we split the margin 50/50 out of what's remaining. Rohm & Haas gets the business model with recurring revenue and a better return and we get access to technology that we can take to market together. We've got this great relationship. One example is water. Another example is Rohm & Haas has long had a product that competes favorably with activated carbon. It's much more expensive than activated carbon in terms of price per pound. It's a media that absorbs organics. If you apply it on a lifecycle basis, it adds so much more capacity. The equipment it requires to house the system is much smaller than activated carbon because of this greater capacity. It doesn't have to be regenerated by incineration or thermal regeneration. It can be regenerated by steam and recovered byproducts off of it and wind up with a very small selective waste stream. And so we've agreed to develop that together. So, now, all of a sudden, Basin Water has also an organic removal technology we can take to market where we can compete favorably against carbon for MTBE, for PCEs and TCEs, or other naturally occurring VOCs. And we can also take it to market in the industrial side to compete with activated carbon for recovery and waste treatment. Rohm & Haas and Basin are working together on that nationwide. What the alliance says is the alliance is for North America, but neither party can take any product or service that's within the alliance to a new geography without offering the other party an opportunity to go along, so there's a platform there.
IWW: You get right of first refusal on any efforts to take the technology overseas, then?
Stark: Right. We're not about to get involved at our size right now at our stage of development with exchange rates...
IWW: It's not necessarily a good time to do that.
Stark: No, let Rohm & Haas infrastructure do that. We provide the service support and get an opportunity really to go overseas with them. And that's where we think the alliance will eventually take us.
IWW: But that's further down the road...
Stark: Yes, but how far down the road, who knows? I mean if Israel called next week and said we have nitrate in contaminated wells and we need to treat them -- or we have perchlorate and we need to get rid of it. Rohm & Haas could call next week and say, "Hey, we want to do that. What do you guys think?" And we could be out there and at it next Wednesday. But we're not planning to do that. We're really focused on the JDPs that we've agreed to and developing our market.
IWW: Well, I understand you just recently signed your very first industrial contract, too. Tell me a little bit about that.
Stark: That was with MPT technology and it was for ammonia removal at a mining operation up in Canada.
IWW: What type of mining?
Stark: Geez, let me see. Hey, Richard, do you remember what kind of mine that was up in Canada?
Reese: It's a metals mine. Let me find out.
Stark: He's Richard Reese, our vice president of marketing. That was our first industrial project, but we're working on cobalt recovery, moly recovery and recovery in the chemical industry and mining industry right now. So, I think in the next few quarters, we'll have a number of fairly significant announcements to make.
Reese: It's a nickel mining operation.
Stark: There you go, nickel mining.
IWW: Nickel, well that does sound like a good business to be in right now because that's also another one of those for which the price has shot up and is crucial to producing stainless steel, which has shot up as well price-wise.
Stark: And alloy prices.
IWW: Well, Industrial WaterWorld has an issue coming up in September-October that focuses on chemical processing -- and one of the technologies relied upon a lot to treat the water or wastewater is ion exchange.
Stark: And we'll provide it on a lifecycle cost and pay-for-performance basis. And since we're not talking about taking over the whole utility the way United Water talks about it or OMI talks about it or the way Veolia talks about it -- we're only talking about providing a very specific process for a very specific problem -- we're not politically challenging to folks in the industry and they would prefer not to use their capital, particularly in the industrial market.
IWW: How narrow is your market that you're talking about -- because in these areas, you've got a narrow market within the municipal markets, but in industrial markets, it's pretty much wide open, right?
Stark: It's a broad market, but our municipal market is pretty broad too now. I'll get to Purifics pretty soon, this other technology -- but before where we were just wellhead treatment, we can now do aquifer reinjection, gray water; we can do surface water; we have an agreement with Purifics to market photocatalysis here in North America.
IWW: Tell me about that and how that got started.
Stark: We were looking for ways to remove organics from water and we were looking in advanced oxidation systems. We found this system called photocatalysis which was used mainly for remediation at Superfund sites. It had never been applied to potable water. We became very enamored of it because the technology they use is UV and titanium dioxide as the catalyst to destroy organics and then it has a ceramic membrane that catches the catalyst; then you put the catalyst back in the system so you don't lose the catalysts.
IWW: So, it's a metals recovery type operation?
Stark: It's not metals recovery. It's organic destruction. So, it'll work on things like, well, you know the big issue that's come up lately on endocrine disrupters and pharmaceuticals in drinking water. This technology destroys it, the endocrine disrupters. It destroys the pharmaceuticals in drinking water. It'll compete with the Rohm & Haas media for things like MTBE.
IWW: They have some selective resins that go after a lot of those things.
Stark: Right, this competes with them. And we had this agreement where we had that made part of the joint development project and then what we want to provide to the customer is the best solution. Rohm & Haas doesn't want this to be an ion exchange only alliance. They want it to be a market alliance. And we don't want it to be an ion exchange alliance; we want it to be a market alliance. So, it fits us both. Whenever a technology competes with something in the Rohm & Haas quiver, we just make it part of the JDA and we go do it together.
IWW: Okay.
Stark: Where you find, for instance, an MTBE or where this media may be more effective is if you have a process or waste stream with a low level of MTBE or other organic in it, this media that Rohm & Haas has will absorb it very economically. Take that same stream and double the organic content, and you've basically doubled the cost of using the adsorptive capacity of the media. But with Purifics you're using UV and TiO2 and it doesn't care what the concentration of the organics is -- it gets it all -- it cares about the hydraulics.
IWW: Right, slow it down or speed it up.
Stark: Right, so like any other product in the marketplace, nothing is a panacea. Everything has its niche. We've found that these are two complementary technologies. As a matter of fact, we have one application we're working on where we're going to use this media to take down the gross organics then we're going to regenerate the media using steam and produce a very small residual stream, lightly loaded with organics. We're going to run that through the Purifics to destroy the organics and we basically won't have any waste stream. And we potentially have a very economical process.
IWW: That eliminates a lot of expenses just in terms of disposal, etc.
Stark: Capital costs for the Purifics system.
IWW: And all of the regulatory hazardous materials reporting...
Stark: Exactly, so it's really sort of complementary even though they compete in certain areas.
IWW: Well, they also cross over in terms of municipal and industrial markets as well.
Stark: Right. You can use both of them in either market.
IWW: When did the Purifics thing come about?
Stark: We did both of them in November 2007.
IWW: And when did the Rohm & Haas agreement start.
Stark: In November of 2007. So, what we've done with Basin Water over the last year is give it an industrial platform. We've given it an ability to deal with organics and inorganics. We've created a much bigger pie that we can go after. And the one thing that it all has in common is our business model, which is low lifecycle cost and pay-for-performance. And that's how we go to market. I'm very excited about the business.
IWW: I have a couple of questions and one would be how did the financial agreement with Basin Water and Rohm & Haas and maybe even Purifics come into play on this? Bear in mind that I'd like you to go back to before even you were involved. When Basin Water came out, it had the IPO, made a big splash and a lot of cash from speculators coming in on Basin Water. Then it seemed to come apart and, at that point, I recall it was said, "Hey, you don't want to follow the Basin Water model; look what happened to it." Take me from there to where you came into the picture because that's also another interesting story.
Stark: Well, first of all, you've got to look at the water industry. It's such a [darn] interesting industry. You've got all this investor money trying to find a home in the water market, bouncing around. You read about contaminated water and shifting population and you know water prices have to go up. So, there's all this private sector money that wants to go with all these funds. Everybody's got a billion dollar fund for infrastructure. There's all this money that wants to be channeled into this market, but there really isn't a whole lot of places for this money to go. A lot of the big companies have bought up the little companies. So when you look at this space, what you find is the little companies create value and the big companies buy them at these huge multiples -- 15 times annual revenue. Look what GE did. Look what Siemens did. They buy at these large multiples and then they fight to sustain value because they paid such high multiples.
IWW: Your predecessor at USFilter and Vivendi did the same thing you'll recall.
Stark: Absolutely, and we made good money when they did it. Thank you very much. As a shareholder, I was thrilled to death.
IWW: When times were good, times were good is what you mean.
Stark: Yes, there's been a lot of consolidation in the market. And so, when a company like Basin comes out there's a lot of clamor for the stock, right.
IWW: Yes.
Stark: It sort of drives the expectation of beyond what's reasonable because there's this fight. Look at this paradox where there's this fight for money to get into the market. The other side of the paradox is that the municipalities need the money. The industrial facilities need the money because they'd rather spend their money on production than they would water, wastewater or utility infrastructure because they get a margin on the production. So, whenever it comes time to do something on the utility side that would save money vs. doing something on the production side, production wins. Thus, you have a huge inefficiency really on the utility side in industry. There's this fight for money on both sides and no way to get it there. Municipalities don't get federal money anymore. They don't get revenue sharing anymore. The states don't have the money to share. The money's not there, so they (the cities) have to generate the money off of their own revenues now to do water treatment. And the only way you can provide money to a municipality is either through private activity bonds or municipal bonds. Not very good liquidity and not very good return, so you've this dichotomy of investors trying to get into the water treatment market and no way for them to get into either the industrial or municipal sector. Then, the municipalities compound that by doing such a poor job on the PR for their product. I mean you pick up a bottle of water like this and you pay $1.50 for it and you drink it. And, if you'd have drunk a gallon of it, you'd have spent $9 for a gallon of water. And yet a municipality will deliver water to you at $1.30 for a thousand gallons under pressure to your tap. And, if they try to raise it to $1.50 a thousand gallons, everybody goes bonkers. Everybody's against water rate increases, water's an inalienable right. But still they'll pay $9 for bottled water...
IWW: True, but at the same time as Basin is going through this process, I used to be the PennWell Water Group digital media editor in charge of daily news postings and all of our e-newsletters, and there was a period there that you would see day after day these proposals for 10, 20, 30, 60% increases in water rates. So, it's also somewhat a perception issue in that the more times people see these figures, they still may not realize you're talking about this percent amounting to 10, 12 or 15 cents.
Stark: Yes, like right now, $2.50 cent a gallon gas sounds pretty good. As opposed to $4 a gallon and more. Of course, some of us remember 39 cents a gallon.
IWW: Recall too that before 9/11, people were having fits when gas spiked 10-15 cents up to $1.25 a gallon. I also remember having a lawn mowing service when I was about 10 years old that my overhead doubled along with the price of gas during the first OPEC oil embargo. My brother and I went from charging $2-3 to charging $5-6 per lawn.
Stark: So, go back to your question, what happened to Basin Water. What happened was it was an entrepreneurial business, the entrepreneur or visionary if you will, had a technology he believed that his job was to get that technology accepted into the marketplace, put systems in that would perform and prove that he could sell his business model. So, he went out -- between 2002 when they got that first permit and 2006 when they went public -- and put in 50 systems on the marketplace to remove nitrate and arsenic and chrome. And they did it all with ion exchange technology, which has good IP and does have good competitive advantage for wells of a certain size. They did that and every one of those systems they put in worked, which is amazing for a little company. The problem was that it was a startup company and he was an entrepreneurial guy. He didn't know anything about business systems. He didn't know how to price them.
IWW: He didn't understand the scale-up and economies of scale -- or of change in that scale-up as fast as the company was growing.
Stark: Exactly, he didn't understand inventory, long term contracts and pass-throughs. I mean we can guarantee the amount of salt it will take to regenerate a bed. And we can guarantee the amount of waste it will generate. But we can't guarantee what the cost of that salt will be per pound, just the amount you'll use. We can't guarantee what it will cost you to dispose of that waste, but we can guarantee the amount of waste you'll have to dispose of. We can't guarantee what it will cost you to haul it, but we can guarantee the amount you'll have to haul. So, he didn't understand that in a service contract, anybody in the service business knows there have to be certain pass-throughs on things we don't control and they don't control. If there's a change in the water chemistry, you can't build a plant to handle everything. If you're removing nitrate and all of a sudden there's dimethyl-gabif -- whatever -- in the water, you know, that system is not going to remove dimethyl-gabif so you can't obligate yourself without a spec on the water regardless of what the input is. It has to be based on the input. Theye didn't understand any of that so, consequently, every one of their systems worked -- but they were terribly priced and terribly contracted. And we had to put the business systems in place to fix that when I got here.
IWW: But he recognized that and that's why he&
Stark: Pretty quickly, which is why he called me.
IWW: Well, he was smart enough at least to know when to give you a call, right?
Stark: Right. He said, "Mike, look. I'm an entrepreneur. I like doing new things. Running a public company is not my cup of tea. Would you please? It's not what I do and I don't think I want to learn." So, that's why I came in. They wanted to go out at 8, by the time they got ready to go out, the market price was 12. They went out at 12, and it was fully subscripted. It was bought out in no time. They went out at 12 and the next day they were at 17. That's just the clamor in the water space.
IWW: It's also the lack of competing IPOs coming in the water space in general. If anything came in, it was automatically bid up outrageously. What was it Greenspan called it -- irrational exuberance.
Stark: Irrational exuberance is right. And that still exists in the water industry. There's still only a few companies that are pure-plays in the market.
IWW: Well, Debra Coy and Steve Maxwell and Neil Berlant -- all these people that right up our "Investor Index" column would agree. I just ran into Debra yesterday here at AWWA...
Stark: I saw her, too. I was over visiting with Andy Seidel, of Underground Solutions, who used to be my boss at USFilter.
IWW: I know.
Stark: And Andy and I were chatting and Debra walked up, so it was like old school days. She's a great analyst. So, what happened to Basin water was it was started by an entrepreneur and it was a freaking disaster. It took us a year to square it away. The good news was, hey, he raised $50 million in the open market. He paid off his debt. He gave us enough cash so that we're not worried about cash. We have enough cash on our balance sheet so that we can get through this growth that we're going through. We're not going to have to do a second offering in the foreseeable future. There are people who are very critical about Peter and say he couldn't run a barber shop, but my answer is that that's not fair. He did what he knew how to do, which was create an idea and create a business and create a business model. My job is to make it a predictable growth company. And it's only because he did what he did that I'm allowed to do what I know how to do.
IWW: Yes, but understanding your strengths and weaknesses is part of being a leader. You adjust by bringing on people who fill out the skill sets needed by your organization for whatever transition it needs to make. A lot of times, entrepreneurs still can't let go at that point and the thing sinks.
Stark: Right. And Peter let go. When he and I first talked about this, I said, "Peter, you know there can't be two roosters in this henhouse. I'm used to running pretty big businesses. This is a pretty small business. That's going to be enough of a challenge for me. I can't have you walking around doing what you do. There's got to be one person." He says, "Mike, I don't want to do it. It's yours." And when he became CEO and made me COO, until the day he resigned as CEO and I became CEO, he never ever argued with me about anything in the market or anything about operations.
IWW: When did he retire?
Stark: He retired this February. That's when I became the CEO. So, I don't even look at the stock on a day-to-day basis, because my view is it's still emotional. My view is we now have to get transparency into our pipeline, visibility into our pipeline. We have a great pipeline of prospects both on the municipal and industrial side. But we just went from three sales people to 13 over the last six months. We were at eight when I got here and I fired five of them. We went down to three guys who knew how to sell service instead of just capital goods and three guys who really knew the water business. We kept it there while we fixed the rest of the business and got ready to do things on a profitable basis.
IWW: Well, you don't want to be overselling things you can't fulfill the promise for.
Stark: Yes, you're going to lose money for 10 years on a long term contract. Pretty problem. So, we waited. Now, we've just grew our business back up to 13 sales folks. And the biggest problem we have right now is we've got a great pipeline of prospects on both the municipal and industrial side. But we don't have good visibility into the pipeline in terms of sales cycle and what I mean by that is, you know, if you're a municipality and you've got one well and it's coming up with nitrate and you've got nobody you can buy water from economically, you're going to treat. It's a 30-day decision. You know you're going to have to go out and buy treatment. It's a 30-day sales cycle. But if you're a municipality or an industrial facility and you're doing long term planning about which wells are you going to keep online and what are you going to do with this process stream...
IWW: Forward planning to know what's coming downstream.
Stark: Right. And, on the industrial side, if you're going to change your product line and it's going to change your mix in the process water, how are you going to handle that. It could be an 18-month kind of thing. So, we have this great pipeline of qualified leads, not just people who have water, but people we've identified who have a problem that we can help with. It's a great pipeline, but what we don't have is visibility into the pipeline to be able to tell you -- because the sales force is so new -- how many of these are six months out, how many three months and how many 30 days out.
IWW: Well, it sounds like what you bring to the mix is that organizational perspective so that when they're approaching a contract -- whereas before they might not have asked certain questions -- you can give them the leading questions to be able to get you the information you need for that.
Stark: Exactly, this sales force will take several to be able to get visibility into the pipeline to be able to say here are my top 15 prospects. Here's what I've got to do with these . Here are my five best and I'm going to close one a quarter for the next whatever. We're not there yet with the prospects in the pipeline. It will take us two quarters to get there. Then, we can be more predictive about our growth. But the rest of the business is now put together and ready to flow. Again, it's just visibility into the pipeline and the beginning of those sales actually coming down and dropping in on a continuous basis.
IWW: Tell me this, if you could. What's your current mix between say municipal and industrial and what do you foresee or are you targeting over say the next year, two or three?
Stark: I'd say that we're currently 80% municipal and 20% industrial or thereabouts. I think by the end of this year our industrial business will grow to represent 30% of our business. And eventually, I think it will be 60-40 or 50-50. I mean we have as big an opportunity on the industrial side as we do on the municipal side.
IWW: What's your take on how the current economy is affecting that and I would imagine that the value of the dollar factors into that as well?
Stark: Well, what factors into our near term sales more than the ultimate value of the dollars on the municipal side is really the housing market. You know, before, if a developer wanted to develop a tract of land in Arizona or California or New Mexico or Texas, he had to bring the water source with him.
IWW: Guarantee a 100-year water supply.
Stark: Right. A reliable water supply. As a matter of fact, a judge in California ruled on that. One of the developers in the state contracted with the state water project for the supply of water for the development. The judge ruled it wasn't a reliable supply because 8 out of 10 years it may have been a reliable supply, but two out of 10 years there was a drought where it couldn't be guaranteed. He had to go develop a groundwater supply. So what's happened that's hurt us in the short term really is the housing market has dropped off so there isn't this demand for new water supplies and the population isn't continuing to shift the way it did before. But the market is so big and we're so small in the market that I don't really think that's going to have a negative impact on our sales in the near term because there's such a large cadre of opportunities that once we start having some visibility into that pipeline& If we were $500 million or $600 million in size and there was a housing crisis, I'd say, "Boy, that's going to affect our sales by X percent." But at our size& it shouldn't impact us really at all.
IWW: Well, people have been discussing recession recently, but I haven't seen much slowdown on the industrial side. That might be the issue of the value of the dollar in the sense that on the municipal side you can go for market share as a matter of it not necessarily affecting you particularly -- Basin Water that is. But on the industrial side, I would imagine you might actually see greater growth since that's not slowing as much if at all, depending on the niche we're talking about.
Stark: Not only that, but the industrial market today is even more strapped for capital than it was before. There's greater competition for capital. They don't want to spend the money on the utility side. So, we have the opportunity to come in and do these money saving projects.
IWW: But also offer them value-added services in terms of metals recovery, etc.
Stark: Exactly. No business is recession proof. But there are certain businesses that tend to be recession resistant. And I think because of our business model, where we put the system in and do it on a pay-for-performance basis, that we tend to be more recession resistant than somebody that's just out to sell capital equipment. It's just an exciting place to be. You know if you'd asked me, "Well, Mike, finding what you found at Basin Water would you have come out of retirement and done this anyhow?" My answer is that it's been a lot more work than I t it expected it to be and it was a bigger mess than I thought it was going to be. It's a longer haul. But we've got a business and business model as well as a customer base that for years is going to generate a big commercial water treatment return. We're going to be it. It's exciting. It is exciting. I wish we weren't public. I wish we were still private. And the reason I say that is because it costs you so much money to be public with Sarbanes-Oxley and dealing with investors and having to do the audits the way you have to do it.
IWW: You also may get a change of party possibly and that may benefit the water industry, I'm told, because some regulations and enforcement weren't happening over the past several years. An uptick in that might be better for the market as well as business -- let alone the environment.
Stark: Exactly right. I mean I don't think a change in politics is going to impact us. I think there will be equal changes in enforcement and emphasis which will help us. I just think it's a matter of us now growing into the business processes we've put in place and the broader technology offerings that we've put into place.
IWW: Another thing on the political side is there's more of a bipartisan consensus even over the last few years about the need to increase funding for infrastructure rehabilitation which is going to create opportunities more in the near term too. In that sense, it's kind of a win-win situation really regardless of what happens.
Stark: I think you'll see increased funding made available, but I don't think you'll see a lot of federal grants because they don't have it.
IWW: That's possible. And it also will be a very high match in terms of matching funds requirements. You know I think we've pretty much talked about everything there is to discuss.
Stark: Well, it's been fun to talk.
CONTACT:
Basin Water Inc.
9302 Pittsburgh Ave., Ste. 210
Rancho Cucamonga, CA 91730
Tel: 909-381-6800
Fax: 909-481-6801
Email: [email protected]
Web: www.basinwater.com
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