It has been a tough five years for the water industry. Prior to 2008’s financial crisis, the companies providing water technologies and services were flying high on the back of flush government funds as well as strong real-estate and other construction markets. While temporary stimulus helped to dull the pain (and some would argue it added to it), much of the growth on which these companies relied had disappeared. According to the U.S. Census Bureau, spending on water and wastewater peaked in late 2008 and subsequently fell 30 per cent, with no sign of sustained recovery evident on the municipal side. Even worse, U.S. residential construction spending fell 65 per cent and spending on non-residential buildings fell 42 per cent from peak to trough.

Remarkably, however, this experience has not crushed water companies—it has made them stronger. From the bottom, water stocks (as measured by the S-Network Global Water Index, in American dollars) are up 170 per cent and sit about 25 per cent above their 2007 peak. But why? As investors and companies increasingly focus on what it means to be resilient and sustainable, the reasons offer a glimpse into a remarkable industry.

Firstly, water companies are durable. Built on strong, long-lasting relationships, water suppliers provide a core product or service, whose sales can only decline so much until they are backstopped by the break-and-fix level of demand. Whether the product is consumed in the process or naturally succumbs to its inevitable end of life, the criticality of water both in life and in industry means the product will be replaced one way or another. And as infrastructure ages, these failures and replacements occur more often.

As an incompressible fluid, when squeezed, water flows to where there are empty spaces. The same could be said for water companies themselves, which typically supply several end markets at the same time. These range from various construction markets to a broad list of industrial markets as diverse as food and beverage to semiconductors to mining. Over the past several years, fortunately, there have been at least a couple of pockets of strength to help offset the weakness, and companies have flowed resources there to meet those needs. Companies have also changed the shape of their workforces and product portfolios through mergers and acquisitions to increase their focus on these better-available opportunities.

In addition to right-sizing organizations, water companies have embarked on transformational culture changes, such as lean manufacturing, which leads to less waste in their processes and a closer alignment with the voice of the customer. Serving customers well is a hallmark of the industry; customers require reliability, strong service, and solutions to their technological and budgetary problems. The water industry has stepped up to these challenges. An example of this is how, during this period of tight budgets, Canadian company Pure Technologies has grown by helping utilities lower their costs through identification of water leakages and predicting which large-diameter pipes will break prior to them actually breaking. It is a much cheaper approach for utilities to “assess and address” rather than “fail and fix.”

The industry has also had a role in solving other industries’ problems. For example, many of the environmental concerns associated with fracking are related to water treatment, testing, and transportation. With a wealth of expertise in these areas, water companies have stepped in to provide solutions. Companies involved in the oilsands have also relied on the water industry to provide both clean steam for steam-assisted gravity drainage and for dealing with the complex issues related to tailings ponds. As well, as food and beverage companies seek to reduce operational and reputational risks around water supply, the water industry has supplied technology to reuse their wastewater. Finally, as shipping companies prepare for ballast water treatment systems to be retrofitted on nearly 50,000 ships worldwide, who did they turn to for help? They reached out to companies already making water separation and disinfection systems, such as Trojan Technologies, a subsidiary of Danaher, based in Ontario.

Water companies are in better shape now than before the financial crisis, which should not be surprising. The industry is an old one that has been through a lot of economic environments. For perspective, in our portfolio, the average company can trace its roots back nearly 80 years—that is, right in the middle of the Great Depression. This combination of durability, flexibility, and customer orientation has made the industry resilient and sustainable.  WC

Matt Sheldon is a portfolio manager for the Kleinwort Benson Investors Water Strategy. This article appears in Water Canada’s July/August 2014 issue.


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