Episode Transcript
[00:00:03] Speaker A: Welcome to INA Insights, where prominent leaders and influencers shaping the industrial and industrial technology sector discuss topics that are critical for executives, boards and investors. InA Insights is brought to you by Ina AI, a firm focused on working with industrial companies to make them unrivaled. Segment of one leaders to learn more about Ina Aihdev, please visit our website at www. Dot ina dot AI.
[00:00:40] Speaker B: Good morning, folks. Welcome to our new episode of the Titanium economy podcast series hosted by Ini Insights, where, as you know, we visit with leading executives in the industrial technology industry to explore a wide array of topics. We've talked about macroeconomy, business strategy, technological and operational transformations, and as importantly, what does the future hold for all of us? I'm really excited to introduce our guest today, Mister Steve Smith. He's chairman and president CEO of Amsted Industries. Amsted is a global, diversified manufacturer of industrial components serving the railroad, automotive, commercial, vehicle and construction markets. They've been operating since 1962 and have 75 locations globally in 13 countries across six continents and very importantly, 100% employee owned.
Steve himself joined Amsterdam in 2005 as president of the Amsterdam rail division, then went on to become the general counsel in 2007 and was appointed president and CEO in 2017. So welcome, Steve, to our podcast. We are super excited to have you and are looking forward to talking to you about Amsted as well as your personal journey today.
[00:01:49] Speaker C: Glad to be here. I really admire what you have done at Fernway and with your nick and the entire team. And the titanium economy is a great book. We just had a management retreat for our top 120 people and we made them all read the titanium economy before the conference and they all got a lot out of it. So we appreciate working with you guys.
[00:02:10] Speaker B: I appreciate your input and thought, sir Steve and your time as well. So, Steve, maybe get started talking a little bit about Amsted. Could you share a little bit about the company's vision, your strategy over the next 510 years? And then as you wake up as their leader every morning, like, what are the top two or three things which come to your mind?
[00:02:28] Speaker C: First of all, I will correct you a little bit. We actually date back to 1902 gara we became, we officially took the name Amsted Industries in 1962, but we go way back further than that. And in fact, one of the original foundries in Granite City, Illinois. We still operate today for rail components, and that was part of us in 1902. So quite a history. We're unique in that. Beginning in 1985 and since then, we've been owned by our employees, initially two thirds of our employees, and then since 1998, 100% by our employees. So we are truly a private company owned by our employees, which we think is a great form of capitalism that really works as we always describe it, and it really creates a spirit of ownership throughout Amsted. And when I look at our priorities, I am a believer that culture eats strategy any day.
I think a key to our success has been this ownership culture, where people are engaged and invested, and they are sharing economically in our success, and it really affects everything we do. And I think it was really bore out during COVID too, that people were adaptive in a way that you would have never imagined, because they felt a responsibility to make it work. And at a time when the supply chain was very faulty for many, I'm proud to say that we really never failed a customer during this entire time. And we're in industries. We're a $4 billion company, which is not huge in this day and age, obviously very much middle market. But having said that, the rails wouldn't run, trucks wouldn't get built, many cars won't get built, and many buildings won't be cooled without Amsted industries. And so we really felt a burden as essential industries to prevail during COVID And I'm very proud of the way our team responded and produced good results in the midst of it, too. And so it's really that ownership culture, looking forward, we really want to build on that. And then really, there's two things that we have to do to get right. We have to get the people right, and then we have to get the allocation of capital right. You know, we have four different businesses. Being an ESOP, you do have what's called a large repurchase obligation. So our employees, when they reach a certain stage of life, they can put their shares, and that's significant cash obligation that really, we have to. We have to meet. We always say public companies, they invest in their business, and if they have anything left over, they give it to the shareholders. We're just the opposite. We invest in our shareholders, and then if we have anything left over, we invest in the business. So we have to manage cash very carefully. Cash is very important. We manage working capital very tightly, and this enables us to continue to invest in our businesses. We're primarily focused on organic growth. We see great opportunities. Our evaporative cooling business, Baltimore air coil between data centers, and green hydrogen and carbon capture. There's just huge new opportunities out there. And commercial vehicle world, we're expanding there, and we have opportunities in other parts of the world. We've built a good business in China. There as well. Automotive, obviously, is a challenge to some extent, as that market's changing quickly. But we have technologies that we think are relevant to battery electric vehicles as well. And so our strategy going forward, and also fueled by a very strong, steady rail business, which is a good cash flow generator, is to invest in our businesses judiciously, organically, with occasional tack on acquisitions, as we can further those growth patterns.
[00:06:09] Speaker B: Thank you so much for your thoughts there, Steve, and a lot of themes for us to dig deeper into, I think. I love the line about culture beating strategy. I might copy it for my future users. But just pulling on one thread, Steve talked about resource allocation. If you look at Amsterdam, I mean, it's amazing how pervasive you are in terms of every facet of our life, from railroads to building products and all that we've also seen. I guess opinions come around how conglomerates work, whether they are the most effective way to deliver value to both the shareholders and the customers.
How do you manage these four divisions, which you have? Are there synergies you look for, or is it primarily resource allocation doing that across these four businesses? What is your thesis on those, those topics?
[00:06:56] Speaker C: We have some very cyclical businesses. North american railcar builds can be as high as 80,000 in the last decade, and then as low as 20,000. And to scale large manufacturing businesses to that amount of cyclicality is really, frankly, one of our core capabilities. On the other hand, having four businesses really enables us to temper some of that cyclicality. And so we find the diversification among the four businesses to be very valuable in that regard. And the key thing is looking for growth opportunities. Some of our businesses might have the tendency, hey, we produced the most cash this year. We ought to get the most capital investment. But I think we're very clear about that. That, no, that doesn't necessarily tie. Maybe that's your cycle, that's your role in life right now, to produce the cash. We have a really great growth opportunity over here in one of the other businesses, and that's where we're going to put more of our cash. So it's really important. And as far as whether a conglomerate produces more value, I'm proud to say that we just had a management conference, as I mentioned, and over the last 20 years, throughout this century now, we've outperformed every index and all of our peers. And again, that's for our employees. That's not for private equity group, it's not for some amorphous group of outside shareholders. That's the people who are doing it. For us as well, who are benefiting from that. We think the conglomerate works very well for us, even though that may not be a popular corporate strategy these days.
[00:08:29] Speaker B: Good to be a north star on that topic, Steve. So you talked about cyclical businesses. Obviously, we're entering an economic cycle where demand signals are looking weaker. We have seen at least high inflation, hopefully it's coming down, as well as interest rates being that high. How have you thought about positioning Amsterdam for this kind of environment to persist over the next few quarters? Any things you've kind of changed out of the norm as you looked about Amsterdam in the next few years?
[00:08:56] Speaker C: Or quarters, I'm glad to say, like some other industrial companies, we are not feeling it yet. We have our antenna up and we're looking for signs. But right now our markets remain strong and we just had one of our strongest quarters ever. But we are obviously aware of all the noise you're reading in the press and elsewhere that there could be a dampening coming in. It all gets down to cash. And also, as we invest in growth, obviously you have to stage that investment judiciously. And if you see a downturn coming, you have to be ready to cut back.
What's so gratifying is our people now have been through these cycles so many times that they're just pros at it. And I always feel I have to remind them, hey, we have to start being careful. And they've already taken steps, and it's just part of the DNA now that we have to be able to be profitable in every kind of market. And that means never being late to the table. It's always hard in a big downturn not to be stuck with inventories that are too high. And sure, everyone has some of that, but we've gotten very good at managing that. And our working capital performance is excellent even in a downturn.
[00:10:09] Speaker B: That's incredible to hear. See, one other piece, which I find fascinating about Amsterdam, I think you've been pretty vocal about it as well. Is your focus on organic growth driving growth through organic means, and not necessarily as much through inorganic means? Any, any point is there as to how have you been able to execute this level of sustained organic growth? And then just a commentary on, like, how do you think about M and A in your, in your space then? Like, what kind of role does it play in your overall strategy?
[00:10:38] Speaker C: So we have, you know, 17,000 employees worldwide. We've got 40 at corporate Garb. So we don't have some huge development office sitting here figuring out how we're going to grow. We really put that on the businesses and challenge them, and there's just a growth mentality that they all have inculcated in themselves. And when it comes to acquisitions, even our acquisitions generally come as ideas from the businesses.
They observe strategically what a good opportunity is in their arenas. And we've done a couple in the last couple of years now, and we think they're great opportunities to really diversify a little bit. One of them really comes with some of the same technologies that we use in our automotive business. It's a chance to take automotive and some of those core skills into another more diversified area. And another really takes advantage of some of the trends in cooling as well, too. But those both came to us from the businesses, and we then supply support and the ability to execute. A lot of that comes from us at corporate. But in general, it all falls on the businesses. We give them a lot of authority and a lot of accountability. You don't get one without the other, but it's really part of our culture, it's part of our DNA.
[00:12:03] Speaker B: So, Steve, you talked about technology. So one thesis we had as we were writing the book titanium economy, it was that in many ways, it'll be inevitable for industrial companies to adopt technology very proactively, whether it's improving their own operations, whether it's making the products better for customers. We'd love to just get your thoughts on how you view the role of technology in Amsterdam's growth in the future. Are you doing anything different? Are you doing anything at an accelerated pace, given all what we're seeing happening around us with AI chat GPT how have you thought about technology in your portfolio?
[00:12:36] Speaker C: Absolutely. I mean, that's been a major change over the last ten years. It really began with just a focus on innovation, and innovation as our culture, and that's really spread nicely over the last ten years. And then we began focusing on specific technologies that are applicable to manufacturing, be it additive manufacturing, be it vision systems, be it the Internet of things, as we've called it. Our digital opportunities and the factory floors continue to be changed by automation, by new mes systems, and they make us more efficient. And particularly in this inflationary time, we are continually improving our operations, adding more technology, and, you know, even in the case of vision systems, using AI, obviously as a key part of that process. So on the manufacturing side, it's crucial to our survival and being able to maintain high margin businesses to be improving our operations, making them more efficient through technology. One thing we've done, which we really hadn't done until about five years ago is we had operated in silos to some extent, but we've created councils across our four businesses now on key technologies, bringing the key technologists all together from those businesses. And they love it, first of all. I mean, they just love getting to interact with similarly inclined people across all the businesses. But the learning they share is just outstanding. And we're not reinventing the wheel then on some of these things from one business to the other. And they germinate in one of the businesses, but they spread like wildfire to the other businesses now. And that's the way we've been able to capitalize on what's a decentralized structure, but still get the power of technology sharing. I say the area that's been more difficult, Gaurav, is product tangents and adjacencies and taking. We have businesses with very strong market shares in certain markets, and there would seem to be digital opportunities in some of those markets that frankly relate to the geography we have on a train or a truck or in a car and in a cooling system. And we've invested quite a bit in pursuing some of those opportunities. We're still very hopeful, but I'll be honest, they don't come as quickly as you'd like.
When we make an investment in a new factory, we already have the business book. We can look at the IRR. We know we're going to get payback within two years and what the return is going to be when you're going into an adjacencies and a new technology, and it's a little more like a venture capital play to some extent, where the development cycle is longer, that we're still feeling our way there, of how fast to push and whether we're starting too early, whether we're starting too late in some of these areas. But we do think there's big opportunity there and down the road they will pay off.
[00:15:33] Speaker B: Yeah, it's interesting to see the dichotomy as you put it together. Some are more easier to see returns from and others are taking time. And I think it kind of dovetails a little bit with one of the topics I think you talked about the culture and talent at Amsterdam and how folks are more motivated, or as motivated as you need them to be to deliver these results. So obviously Amsterdam is 100% employee on Steve, so would love to just get your thoughts on. I mean, we've seen the positive side of that in there, in the culture you kind of built up in the level of ownership and accountability. Everybody shows on the balance are there things which are a little bit more different or difficult being 100% employee owned company, which may come to your mind? And. And how do you think about recruiting into the base then? How do you think about attracting the talent? Because my assumption is retaining them is easier, but how are you figuring out who is the right fit for the culture you're going to build at Amsterdam?
[00:16:28] Speaker C: Right.
Those are great questions. And I will say that as a recruiting tool, the ESOP is not as powerful as it is as a retention tool. If we get someone for five years and they look at that balance sheet when they're fully vested, and they realize, particularly with the stock appreciation we've had, they look at it and say, wow, this is real, you know, and I'm not going anywhere. I mean, during the great resignation, we really didn't have any issue at all. We kept all our key people issue on the plant floor sometimes, because that's a whole different discussion of labor in America right now. But certainly among our key people, we didn't have any great resignation at all. But recruiting there is a little bit of the ESG, the G part, and it sounds nice even on a recruiting basis. People like the idea that they're going to be owners and that it's cooperative. And so it does have some value. And we emphasize that more and more.
The challenges are a couple, because cash is so important and we have businesses that demand capital investment. You really have to manage cash well. And does it conceivably slow our growth in some cases? Can we pursue as many opportunities as we think are out there? We have to temper that sometimes. Now, part of me says that keeps you from making stupid investments, too. So there may be some benefit in that as well. But it probably, we like to have steady growth, but not go to the moon rocket type of growth really works in our system. So that's one tempering fact. The other thing I say as we become international, the ESOP is a us structure statutorily. And to replicate that spirit of ownership around the world, we've had to work out ways to do that. And we found other ways to give equity alignment with our leaders around the world as well. But getting that whole balance right where it's sort of a us construct, as you become an international company, it's something we've had to work hard at balancing. We think we've got it pretty well. I go into our plants in Mexico and China, and I feel that same spirit of ownership, but we do have to work at that.
[00:18:41] Speaker B: That's great to hear that. You're able to replicate it even beyond at least 100% ESOP mode here in the US. So kudos to you and the team. Steve, on one more question on just Amsterdam and your strategy. You mentioned the ESG element. How much is that coming into as you think about Amsterdam? But you are up to, your teams are up to how much of that really impacts your decision making at a day to day level? And is it like a. You view that as a positive or a challenge? What would be your perspective on ESG?
[00:19:14] Speaker C: The answer is probably yes to that. But as far as ge, as I said, I think from a governance standpoint, and I spend quite a bit time on Capitol Hill supporting esops. And I say to members of Congress, this is something you've done that really works, you know, and people have skin in the game. They're benefiting not only from the fruits of their labor, but from the fruits of the capital as well. To the Democrats, I say this is almost socialism. To the Republicans, I say this is the ownership society. You know, I think the G part, we are an exceptional story in that regard. The e part, it's both a challenge and an opportunity. There's absolutely no doubt about it. You know, so much of our ability to reduce our CO2 emissions is dependent on our sources of energy. And right now we don't have that much control over that. We can try to do a lot on minimization.
We've done solar roofs on a couple of our facilities, for example, but that's a small dent. And really, you have to look at where you get your electricity from in many cases, and that's going to determine the degree of reduction. So we're working hard. We're very conscious of it. As a private company, we don't have some of the same pressures that a public company does in that regard. But it really doesn't matter because our customers do. Our customers want to know what we're doing upstream. And our employees care. A lot of our employees care, too. So we're very conscious of it. We probably don't have quite the pressure of a public company, but we want to continue improving. We're measuring in a way we never measured before. And in some of our businesses, I mean, rail, I have to say, almost everything we produce is recycled steel to begin with. And then you're talking about the most energy efficient motor transportation in the world, probably, and that is rail as well. So there's a real green imprimatur there. We're doing a lot with technology on the truck side, on the commercial vehicle side, where we think we can eliminate the need for diesel engines on refrigerated trailers. And so, you know, we think there's a real market opportunity for us there. We're taking our technology on the automotive side into battery electric vehicles. We're on the Rivian, for example, and so there's an opportunity to contribute there. And then cooling, you know, it used to be we advertise evaporative cooling as a way to reduce energy. Now people want to reduce water usage too, and we're coming up with new technologies that use less water, less energy and produce CO2 on the cooling side as well. So there's an opportunity there and there's a challenge there.
[00:21:50] Speaker B: I'd say very helpful for that candid answer, I think. Also great to see the opportunities come to life and the various examples you gave, which is incredible. So, Steve, last question. On the more industry side, I think one of the thesis, as we wrote the book, was that industrial companies by itself, I think Amsterdam is a great example, fantastic financial record, also driving great innovation. But if you take a step back, they do tend to be a little underappreciated, misunderstood, undervalued, I guess, more in popular culture. What is your take on a thesis like that? Do you feel that? Do you believe that? And then also from just an element of not purely the financial aspect, but the social aspect, like a healthy industrial ecosystem, what does that enable for us, for the economy at least? We argued in the book that this is in many ways a sector we cannot afford to lose in for variety of reasons. Innovation being one, financial performance being one, but also the social aspect as well. So we'd love to get your thoughts on how you view that thesis and what parts of it make sense to you, what parts of it you don't.
[00:22:51] Speaker C: Necessarily agree with, you know, not being publicly traded. Garv, we don't have some of the same pressures about making sure we're properly appreciated in the public market. In fact, in the ESOP structure, overly high multiples, and we're valued quarterly based on comparables that are in the public market. They actually put a little extra strain on the cash management to some extent, actually. So, you know, we can live with a seven multiple, actually. And our. The balance of the whole structure works beautifully for us. So by having said that, I think indeed your premise is exactly right. We need to have greater awareness and valuation of the entire industrial sector in this country. And I think it's very dangerous what we've let happen in that regard. And it really gets down to the employee and the talent base, too. I mean, we need to be challenging people into our very challenging industrial environments. Now, manufacturing is not what it was 30, 40 years ago. You need skills coming in. And yet, you know, we sort of had the lesson in our society that everyone has to go to college. College is for everyone. And I think that's a mistake. I think there's many people who could come out of high school or technical schools and find very good careers. We have a crisis with the trades in our country right now. People who can be electricians and plumbers and tool makers, and there's tremendous opportunities for those people. And our whole educational system and ethos has to really start making people aware of those opportunities and bringing them into businesses like ours. You know, with all the money flowing around now, with IRa and infrastructure bills, there's a great opportunity to take advantage of that. But I, you know, we have to have the people to also fill those facilities as well. And those people have to have basic math and computer and other skills too, as well. So it really runs down through our whole society. And so I think the premise of the titanium economy is exactly right. We need a societal focus on how important these manufacturing industries are for our country and for the future.
[00:25:02] Speaker B: Thanks, Stephen. I appreciate your thoughts on that. Maybe not. As we come to the end of our discussion, just a couple of personal reflections from you. I think you're one of the rare corporate leaders which probably grew up in the legal profession as well as the corporate ladder. Would love to understand what are the two or three core tenets of your leadership style? What were the big experiences or the beliefs you have which have translated in your own leadership? And then obviously with the culture and.
[00:25:25] Speaker C: The results at Amsterdam, I often say you can lead a lot by questioning. And one thing a lawyer does grow up doing is learning how to question. Right. And as I said, we give a lot of authority to our businesses, but I'm with them every month and just spending time and not berating them, but challenging them with questions, making sure they've thought through strategically what they're doing, and any conclusion they come to is a much better one than one I drive them to. On the other hand, do I want to be part of an active dialogue with them, exploring everything they're doing, thinking it through, helping them think it through, helping them think on the future. And so to some extent, it's leading by questioning. And one of my theories is you learn a lot more by listening than you do by talking. And if you listen to your leaders and you listen to your people, you can learn a lot, and then you can interact with them meaningfully. And the other thing, people want to feel like they're part of something special. You know, I go back to my days coaching youth softball and baseball. You know, you have to learn to meet people where they're at, and then you also have to make them feel they're part of something special and they're aligned. I don't ever want people to be doing things because they feel they have to. I want them to be doing things because they own the company. They want to be doing it. They're proud to be part of it. And they know how we think as a company. They know what our premises are. And so it's really, I said at the close of our leadership summit, I said, hey, two things. If we get the people right, and then if we get the investments right, if we do those two things, get the people, allocate capital appropriately, we're going to win. I have absolutely no doubt about that. And I just want to make sure that we've always got people who are aligned, who are enthused, who feel they're part of something special, and then that they're making smart decisions, smart investment decisions. And to the extent, in my little way, by being a good questioner, I can promote them towards those smart decisions. That's great. So, fairly simple. I don't like to pretend I can do more than they can. I just want to be their assistant along the way to make them all better.
[00:27:46] Speaker B: That was incredibly insightful, Steve. I really appreciate you sharing that. I think leading by questioning is an incredible, I think, really powerful move. So appreciate you sharing that. So, Steve, as we come close, at the close of this conversation, I want to just ask you, any closing thoughts or takeaways as you think about value creation and capturing value in industrial sectors today? Anything you'd like to share with our peers or our listeners?
[00:28:09] Speaker C: It goes back to what you guys have said. I think it's a challenging, dynamic time for industry in America. I think there's going to be opportunities like we can't imagine, and we just have to have a societal attack on it. It goes to our education system, too, and it goes to the fact that we have probably millions of people who aren't productive right now because they're not educated. What an opportunity. You know, I've even, I've even thought if we were teaching trades in our prisons more, for example, could we have second chance citizens who could become productive members of the industrial society as well? So I think there is hope, because I think there is more focus on manufacturing and industry now. But we have a long way to go. And all I can say, it's exciting to be part of a company that makes stuff still, and I think our people all enjoy it. They love it. And if you can make it work, it's very gratifying to be part of an industrial company that's keeping the world going.
[00:29:05] Speaker B: So, no, appreciate your thoughts there. Stephen. I must say, I think I'm honored to be part of this enthusiastic and infectious conversation we just had with you. So thank you so much for your time and your insightful comments. We really appreciate you sharing that with our listeners. Thank you. Steve.
[00:29:19] Speaker C: Thank you. Garo.
[00:29:26] Speaker A: Thanks for listening to Ina Insights. Please visit Ina AI for more podcasts, publications, and events on developments shaping the industrial and industrial technology sector.
