The typical injection molding process is as follows.

1. Filling – Process starts by adding plastic polymer pellets into the resin hopper. 

2. Melting – Plastic is then introduced into the screw barrel of the machine, where it is heated and mixed into a molten state.

3. Injecting – Plastic is injected into the mold cavity where it takes form.

4. Cooling – Plastic is allowed to cool within the mold in order to produce a finished part.

5. Ejection – Once cooled, the mold opens, and the plastic part is ejected by the mold’s built-in ejector pins and shuts to repeat the process.

​

Temperature affects every step of the molding process, making it absolutely critical to properly and consistently manage. When plastic is introduced into the barrel, the temperature profile must be perfectly calibrated to ensure that the plastic is thoroughly melted and mixed, but not allowed to burn.

​

Heater bands closest to the hopper have the lowest temperature and increase along the barrel toward the check valve, with the highest temperature immediately before the mold. The actual mold is maintained at a lower temperature than the barrel to allow the plastic to cool and take the proper shape. The temperature in the actual mold is controlled by running water or oil lines through the mold or by utilizing electric cartridge heaters. This heat gradient through the temperature zone allows the plastic to gradually heat, ensuring a smooth transition from solid to liquid. Proper temperature control reduces overall unit cost, improves product quality, and ensures the aesthetic/structural uniformity of manufactured parts. 

​

Strength of the Electric Process Heating Distributor Model

​

Distributor’s occupy a critical position in the industry’s value chain.​ On the surface, the EPH distributor business model seems relatively simple. They buy heaters from companies like Watlow, Backer Marathon, Chromalox, Tempco, etc. and sell them to end users. But when you dig a little deeper into the nuances of both the plastics manufacturing and heater procurement processes, the strength of the EPH distributor business model emerges.

​

Due to the wide variety of different use cases, specifications, logistical considerations, and considerable resources required for customer service, both the heater manufacturers mentioned above and the actual OEMs of the plastics machinery (e.g., Milacron, Engel, Sumitomo) rely on distribution partners to connect end-users (plastic product manufacturers) with aftermarket heaters after the original ones installed on the equipment fail. The replacement cycle varies depending on both the manufacturing application and frankly just the level of care that the line worker has when making adjustments to the machines, but typically they are replaced every ~6 months.

​

The inevitable question arises – why don’t these companies just sell heaters directly to the end user?

 

The short answer is: some do, but a lot less than you would think. This is probably best explained by thinking about the different points of view of the various parties in the value chain:

• Plastics Machinery OEMs

• Heater Manufacturers

• The heater’s ultimate end user, plastic products manufacturers.

​

Plastics Machinery OEMs (Milacron, Engel, Sumitomo, etc.) – OEMs make hundreds of thousands of dollars selling a single large piece of machinery. Heaters on average cost a few hundred bucks. After the warranty runs out on the equipment after a year or so, the aftermarket steps in to service the heating needs of customers after the parts wear out. A good analogy would be the oligopoly aerospace industry, which is dominated by Boeing and Airbus. They both compete head to head for lucrative, multi-year contracts from the airlines, which is similar to how Milacron or Engel compete to get their machines in the large plastics manufacturing plants. Like Boeing and Airbus, they just don’t have the manufacturing resources (or talent) to effectively provide all the aftermarket parts required to keep the planes / machines maintained. So the majority of parts are outsourced to third party aerospace manufacturers like GE, Transdigm, or HEICO, or in the case of the plastics industry to heater manufacturers like Watlow, Backer Marathon, or Chromalox. Because of the logistical hassle and low dollar value of the products, plastics machinery OEMs end up only supplying ~10-15% of the heaters consumed in any given year. 

​

But why don’t the heater manufacturers just sell directly to the end user?

​

In some cases, for the largest plastics manufacturers like a Proctor and Gamble for example, they will buy directly from the heater manufacturer. Selling a bulk amount of heaters with little variation or customization makes the ordering process smoother, but for the other 99% of companies making plastic products, its just too expensive to deal with that many different customers, so heater manufacturers end up supplying ~5% of the annual heater demand. 

​

Heater Manufacturers (Watlow, Backer Marathon, Chromalox, Tempco, etc.) – Heaters are often one of thousands of products these companies produce, making it cost prohibitive for them to build out an internal salesforce just for heaters to sell direct to the end-user. Due to the level of service required, and the custom nature of each product, EPH distributors act as sort of a demand aggregator for the heater manufacturers. It’s just not worth dealing with tens of thousands of individual plant-level customers that may in any given year only spend ~$10k on heaters. It’s much easier to sell to ~100 distributor customers vs. 20,000 individual manufacturing plants, all with different requirements and extensive customer service needs.

 

Distributors are far superior when you think about it from the end-users point of view (i.e., the  procurement/maintenance/plant manager at an individual plastics plant).

 

Plastic Product Manufacturers (Berry Global, Sonoco, Toyota, Old Castle, etc.) – They want short lead times, product selection/availability, technically-inclined salespeople, and 24/7 service. Fast lead times are especially critical. Depending on a manufacturers’ scale, if a line is down even for an hour or two, it can cost hundreds of thousands of dollars in lost yield. It’s crazy to think that a product as simple as a few pieces of bent metal attached to an electrical wire can be the linchpin for an entire manufacturing plant. But the key reason they would much rather go to a distributor is simple: buying from one distributor that is focused specifically on heaters is just a lot cheaper and a lot easier. These manufacturers may have anywhere from 2-3 all the way up to 40 different machines in one plant, which are all made by different OEMs. Since each heater is individually customized for each different machine AND each specific product line that is produced, the Plant Manager would have to deal with ordering from four or five different OEMs/heater manufacturers each month just to replenish their supply of heaters. It’s a lot cheaper and less of a hassle to just go to one single-source EPH distributor that can satisfy all of your heaters for the entire plant. 

 

Custom-nature of the product increases the stickiness of the customer relationship.​ Every heater that EPH distributors sell is somewhat of a “custom heater.” There’s really no such thing as a “standard” heater. Each injection molding or other type of machine is designed for certain functions and with that comes heaters that are uniquely tailored to a customer’s needs. 

 

An example: Say you are a company that makes single-use plastic cups that you sell to school cafeterias. A large public school system comes to you. They want a slightly larger version of the cup you typically sell to other schools. Now this is a big potential customer win that could be a multi million dollar order, so you say “of course we can do that.” So you go buy a new mold to start making these new slightly larger cups. But now, since you’re making a slightly larger cup, you need more heat in order to get the same result as before. The old heater you were using doesn’t do the job, you need a new one with slightly more power. So you call up your EPH distributor, get the new heater, everything is great, customer is happy, you’re making money. Three months go by and the maintenance manager keeps complaining that he’s sick of having to splice extra wire back to the power supply to get extra power into the machine. So… he calls up the EPH distributor again and asks if he can add a few extra inches of lead wires to that same higher wattage heater we were just talking about. Now we’re up to two changes to the original heater. This type of thing can go on and on over time. Heater’s lockup (how it attaches to the barrel) also change a lot. The customization is infinite.

​

As mentioned, any changes require an entirely new heater to be built, and thus a new part number to be created. This is just one manufacturing line at one single plant. Multiply that by 10,000 and you can see how much of a hassle this would be to keep track of if you were a heater manufacturer trying to service all these customers across the country. This “administrative hassle” is where distributors shine, and is the main reason they earn outsized margins (~15%+ EBITDA margins vs. the typical industrial distributor’s 10% margins) and why they rarely lose a customer once they have all the heaters spec’ed into a customer’s facility. It’s just too big of a hassle to switch distributors because the risk of potential downtime while a new provider gets up to speed is just not worth saving 10-20% on a thousand dollar order. 

 

Highly recurring, maintenance-driven demand from operating, not capital budgets.​ EPH distributor customers typically operate in “harsh environments,” with predictable and frequent heater replacement cycles. Heaters are prone to wear-and-tear and operator misuse. If you look at the diagram above you can see why they get beat up so often. They’re constantly in contact with extremely hot molten plastic, causing them to break or wear out every few months. Accurate plastic heating is an absolute necessity and customers are required to purchase regularly to keep their manufacturing lines operating. On average, customers will place orders on a monthly cadence. The combination of being both highly mission-critical and consumable leads to really sticky customer relationships and high levels of low-dollar, recurring orders. 

​

Sales are thus derived from recurring end-user maintenance activities, not episodic capital purchases that typically require approval from the higher ups in purchasing at the corporate level. Due to the low median order size (typically less than $1,000), heaters are purchased at the plant level out of an annual maintenance budget rather than the corporate level out of a capital expenditure budget.

​

Combination of low ticket price and the significant cost of plant downtime results in lots of pricing power.​ EPH distributors provide product solutions for plastic processing operations with a very high cost of non-performance. This value spread between the cost of the actual part and the relative importance it holds in the overall manufacturing process leads to significant pricing power and higher, sustainable margins. EPH distributors are viewed more as a “solutions-provider,” rather than a traditional order-taking distributor. 

​

Plant-level nature of the sale also reduces customer concentration risk.​ Because EPH distributors typically are selling to individual manufacturing plants, there is inherently less risk from a customer concentration perspective. Most large plastics manufacturers have decentralized purchasing organizations which means EPH distributors have established, long-term relationships with each individual plant or maintenance manager instead of one centralized corporate purchasing agent. This reduces the overall risk of losing any one customer, which rarely happens anyway given the customization I mentioned earlier. For a typical EPH distributor, 90%+ of their annual sales come from long-time, repeat customers.  

​

Less-cyclical, GDP-like growth within plastics.​ While it can vary from company to company, because of the general make-up of the plastics industry, EPH distributors in general are over-indexed to more non-discretionary end markets when compared to a typical industrial distributor. 

​

Segments like food & beverage packaging, tissue and personal hygiene, and healthcare markets are stable, GDP-like growers that are largely unaffected by economic cycles. Plastics manufacturing as a whole is one of the largest and most important sectors in the overall U.S. economy. The U.S. plastics industry is growing low single digits on a unit basis, and strong demand for plastics is expected to continue for the foreseeable future. U.S. consumption growth rates computed by the Plastics Industry Association (“PIA”) suggest that underlying plastics demand remains strong and is expected to outpace current production capacity.

 

Outlook for the Plastics Industry

​

Plastics manufacturing in the U.S. over the next decade will be driven be a few key trends.

 

Government Policy Support for Domestic Manufacturing. The Infrastructure Investment & Jobs Act (“IIJA”) has earmarked over $1.2 trillion dollars to be spent over the next five years, including $550B in incremental funding for enhancing core infrastructure. The IIJA expands “Buy America” coverage to other infrastructure projects funded by federal grants. Buy America coverage now includes transmission facilities, electric utility equipment, broadband infrastructure, and buildings, which are all initiatives that utilize large amounts of plastic products.