Putting out the Fire – Part II

We’re re-joining the conversation we began in Putting out the Fire – Part I with Sébastien Marneur today.

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Scott: Okay, so Eurofeu Asia will essentially, over time, evolve into something similar to a company selling printers, or razor blades. Those companies sell the printer or the razor for break-even or maybe even a little bit of a loss because you’re going to keep going back to that company to buy the ink cartridges and razor blades.

Sébastien: Yeah, you know in France, the companies selling fire extinguishers will provide a fire extinguisher for free. If you sign a service contract with them for ten years, they will come every six months to check the fire extinguisher. That kind of business model generates a huge profit for the French company.

Scott: Eurofeu has a healthy relationship with the Ulaanbaatar fire brigade and with Mongolia’s largest insurer, Mongol Daatgal. How did those relationships evolve, and how do you leverage them for long-term growth?

Sébastien: Obviously, a company like ours cannot function properly without good relationships with the insurers and the people involved in the fire safety business, which is the fire brigade.

We have cooperated with the fire brigade since 2002 or 2003. They needed advice on new equipment. They needed information about new technology and what is happening globally in terms of fire safety. So, we provided them with that.

We also provide them with training. It’s a good relationship, we train their guys, and in exchange, we host our outside trainings in their facility.

They have a training center east of UB. We have an arrangement with them whereby each time I train clients there, ten or fifteen guys let’s say, they give me two to five guys of theirs to be trained pro bono, at the same time. We train them how to use the equipment and how to handle inspections.

We meet regularly with various people from the fire brigade to exchange ideas. We even produced a small guidebook together reviewing standard fire safety for the general public. It is just a small book, and my contribution was as a technical advisor to the fire brigade.

Scott: It seems sensible enough that you buy firefighting equipment, install it, and leave it alone. But, there will be maintenance issues and inspections, as you discussed earlier. With mines in the South Gobi, for example, you will need to have a frequent presence on site to do maintenance, correct?

I assume this is why you have an office in Dalanzagdad. Do you have intentions of expanding to other towns to be closer to significant mining projects?

Sébastien: Yes, the policy of the mining companies is to buy first from the nearest village, then from the county, and if it’s not available there, to buy from the city – Ulaanbaatar.

In Mongolia, you are not to buy from abroad. This is why we try to be as close as possible to our customers and to participate in the development of the local communities.

In Dalanzagdad I was asked to open up a shop in the closest village. Erdenet asked me to also have a physical presence that is constant, so my next priority is to open in Erdenet then possibly in Sainshand, the new industrial hub along the existing north-south rail line and point of intersection along the planned east-west rail line.

Scott: You have the special economics zone there, correct?

Sébastien: Yes, Sainshand is a special economic zone. We are targeting opening a new shop there in 2013. We have many customers around that area. It will enable us to provide them with better and faster service and be close to their problems, when and if they arise. I think this is very important to localize the service and the inventory.

Scott: Management is important to us when investing in a business. It should be to everyone, as it plays a significant role in whether the company thrives or dies. Tell me about your team and the experience that they have.

Sébastien: My CFO was previously working in Mongolia’s Grand Bank. Ten years ago she went to Los Angeles. There she worked for Office Depot as the chief accountant. She has a very strong background in terms of accounting and finance.

My Chief Marketer has strong experience in Mongolia in marketing, logistics and transportation. I have known him for some years, and know that he has excellent capabilities. I was ready to recruit him in 2004 or 2005. Unfortunately or fortunately, he moved to Los Angeles and worked for an American company, Pacific Express as a marketing officer. He worked there six years, and he came back to Mongolia just four months ago. I’m glad to have him. He restructured the marketing department, and now has five sales managers under him divided by industry/sector.

Then we have the Chief Operations Officer. He has a very good sense of the organization. He carries himself well and exudes authority, which is important in Mongolia when you lead a team of men. He is organizing the daily operations outside of the city.

I have a Chief Administrative Officer that is also at the head of the legal department. Legal is externalized, and we have a legal services advisor with whom we work closely with.

Then, there is obviously the administrative department. So, this team is very strong. When I have to travel overseas I know that the company is run properly.

Scott: That’s very important…that the business can run without you.

Sébastien: The business can and does run without me.

Scott: You’ve worked hard, so now you can relax a little bit (both laugh). So, from previous discussions we’ve had I know that your business has been growing very rapidly. Tell me what revenues have been like from start to now.

Sébastien: In 2002 it was maybe 5,000 Euro per year. Now I think we are close to, in 2011, about $800,000 USD. Average growth has been in the neighborhood of 40% to 50% per annum.

This year, because of the way we structured the company, the revenue growth will be stagnant. However, we are preparing ourselves to become a public company, so we had to reorganize everything. We are concentrating on keeping the balance sheet strong.

When you reorganize there is a transition period. I think we will have the same basic revenue as last year; but in 2013, I believe we can double it. We already have orders from some very large companies, and work contracts that will be proceeding in the Spring. So, I am very confident about next year.

Scott: You’ve set the stage for exponential growth if you will.

Sébastien: Yes, I believe so. We are really ready to take the company public. We have the right equipment, the right people, and the right organizational structure.

Scott: What is the biggest risk you face right now in your business?

Sébastien: We have not really measured risk related to our competitors. I think the risk would be related to the fact that 70 percent of our customers are mining companies, and if they themselves face economic headwinds, obviously our revenues will suffer.

This is why today we try to diversify our customer portfolio. We developed a construction and infrastructure division for example. But this risk, I think would be kind of a temporary risk. The mines are existing, the resources are existing, so we can be a bit of bad news/ good news, and the FDI will fluctuate. But this is just kind of anecdotal in my view.

The reality is that China needs the raw materials. Mongolia has the raw materials. The mines have to, and will produce. For me, whether this mine is run by a foreign company or a Mongolian company they still need to protect against fire and comply with the law.

Scott: I’m kind of surprised you have not been approached to be bought out by a global fire services company. Or have you, and you’re not telling?

Sébastien: We have been approached at least two times by a major company interested in getting into the Mongolian market, but their offer was not matching with my idea. Actually they were more interested in our history, our connection with the local people, the fire brigade, who are the customers, and they wanted to come with their system. They were not interested in my administrative history and my license, and I did not see the need for that.

So, these guys are still not in Mongolia, and the only way for them to enter the market quickly, at least, I mean in less than five years, would be to buy a company which is already here. Soon they’ll be able to do that through the Mongolian Stock Exchange (laughs).

Scott: Indeed! Sebastian, I really appreciate your time, thank you for speaking with me today.

Sébastien: Scott, you are welcome.

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Eurofeu Asia should be making its debut on the Mongolian Stock Exchange shortly.

For those that are interested in finding out a bit more about the Company, Resource Investment Capital (Rescap) is the firm behind the reverse merger. Eric Zurrin, the firms CEO is the man to talk to in our opinion, but you should be able to buy the shares through any qualified Mongolian broker.

*In full disclosure, as of the date of this post, none of the principals or employees of Capex Ltd. owned shares in Eurofeu Asia. However, Mark, Chris and those involved in CPAN WILL be buying shares in Eurofeu Asia, pre-IPO.

– Scott

“Well, if crime fighters fight crime and fire fighters fight fire, what do freedom fighters fight? They never mention that part to us, do they?” – George Carlin

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