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A quick announcement ahead of theepisode, I will be co-hosting a multi-day event with David Centra inSeptember.
It's going to be a business breakdowns and founderscollaboration.
And if there's one thing that you learn from studying thesebusinesses, from studyingfounders, just existing in the businesscommunity, it's that relationships run theworld.
And this is going to be an event tailored for the investmentcommunity.
We're going to review each application to ensure it's the highest qualityaudience.
It's limited insize, so you do want to make sure that if you'reinterested, you reserve your spottoday.
And the event is structured to fosterrelationships.
It's going to be on a privatelocation.
The only people on site will be attendees of theconference.
There will be limited main stagetalks, andinstead, we're going to have a lot of smallerbreakouts,panels, and significant time for one-on-oneconversations.
All of the details can be found in the shownotes, where there will be alink, where you can go directly to join Colossus.com slashevents.
And I'll leave you withthis.
I attended David's event in March of thisyear,2024.
And justyesterday, I was looking at myphone, considering this upcomingconference.
And I noticed there were four different people that I spoke to yesterday that I had met for the first time at David'sconference.
And sincethen, we've continued totalk, continued to fosterrelationships, and who knows where these relationships might go overtime.
When you gather these groups of people in the right type ofenvironment, that's where relationshipscome, and very interesting thingsarise.
So please make sure to check out the link in the shownotes, oragain, join Colossus.com slash events for moreinformation.
We believe every business has lessons and secrets that investors and operators can learnfrom.
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Today, we are breaking down St.TossCorporation.
The company's origins trace back to the depression of the 1920s when the company'sfounder, RichardFarmer, who at the time was a circusworker, began a small business to reclaim and clean rags for local factories inCincinnati,Ohio.
Nearly a hundred yearslater, St.Toss today is set to approach $10 billion in sales at a10% 5-year cager and a20% operatemargin, putting it solidly in the high-quality bucket and trading at a multiple that's indicative ofit.
It is America's largest uniform rentalcompany.
For around $1.50 per worker perday, St.Toss willcollect,clean, and replace uniforms for organizations in industries such aslodging,hospitality,entertainment,manufacturing, healthcare, and with its business even extending to semiconductor fab bunnysuits.
It remains a family-owned business with multiple generations of the Farmer family having held leadership roles at thecompany, including CEO and today the executivechair.
To help break downSt.Toss, I am joined by DelianN.
Cheff, a portfolio manager at Aorus InvestmentManagement.
We hope you enjoy thisconversation.
Thank you for joining us to break downSt.Toss.
It's a business that I think our audience is probably at least generically familiarwith.
Everyone sees the trucks onoccasions.
Perhaps a number of people appreciate the uniform rental side of theirbusiness, but I think it's probably lost on people that this is a hundred-year-old plus family-owned and backed business with a richhistory.
Perhaps you can kind of give us the backstory of the businessitself,size, andscale, and hit us with the highlights and then we'll go deeper on each of thosepoints.
Let me start with what St.Tossdoes, who its customersare, and then I might jump into the financial overview of the business and itshistory.
St.Toss provides essential route-based services to otherbusinesses.
What I mean by route-based is that St.Toss has 21,000 delivery vans and they have drivers going around to different customer sites and providing theservice.
These are essential businessservices.
They're not core to the company'soperations.
So, forexample, a hotel business sits there to provide good hospitality services to itsclients.
But there's a lot of work behind thescenes, operationalservices.
They're involved in the day-to-day running overhotel, which can be outsourced to third-party providers likeSt.Toss.
So it's best known for its uniform rentalservices, which represent about40% of revenuetoday.
And what that means is businesses whose employees wearuniforms, that can includehotels, as Imentioned, can include hospitals where doctors and nurses wearscrubs, can include mechanics where they wearoveralls.
The business has the choice of either purchasing the uniform directly and getting the employee to launder itthemselves.
That involves an upfront capital commitment of maybe $5,600 peremployee.
There's ongoingcosts.
The business has to be responsible for repairing and replacing anyuniforms.
The employee has to make sure they're getting uniforms cleaned upproperly.
Therefore, they can rent it from St.Toss for about $52 per day per employee and St.Toss takes care of the whole proposition forthem.
They don't have to carry anyinventory.
There's no upfrontinvestment, just a low ongoingcharge.
And the benefits of the customer isfirstly, they can just focus on running their business where in the hotelbusiness, not the uniform business or the laundrybusiness.
Secondly, it ensures that their employees are presentable to a highstandard.
St.Toss will make sure the uniforms are always crisp andclean.
Andthirdly, for employees where the uniforms have a technicalpurpose, scrubs in a hospital have to be sanitized to a highstandard.
Overalls worn by a mechanic have to be sick cotton so they don't get burned on thejob.
And one that might surprise you is one of St.Toss's customers isIntel.
So in Intel's semi-fabs in theirfactories, they have to be held to unrelustically high standards ofcleanliness.
Even a speck of dust can compromise the quality of asemi-wafer.
So St.Toss provides theselint-free,debris-free, astronaut suits that Intel's employees wear in thesemi-fabs.
Andfinally, it can deliver this service at a much lower cost than what the customer could dothemselves.
For customers that do uniformsdirectly, it costs them about two to three times as much as what St.Tosscharges.
Because St.Toss benefits fromscale, it can negotiate with fabric suppliers and chemical suppliers to procure these suppliers at a lower cost than any individualcustomer.
Andsecondly, it's a uniformspecialist, whereas this isn't the core competency for itscustomers.
And how big is St.Toss's share of the uniform rentalmarket?
You mentioned the business is about40% ofrevenue.
What is the rest of the business looklike?
So St.Toss today has about a40% share of that outsourced uniform rental market in North America and currently about half of the businesses in North America that use uniforms still run the programsthemselves.
So there's a very long opportunity for St.Toss to keep taking share and converting those customers to outsourcedprograms.
So that's the first part of the business which it's best knownfor.
Now as St.Toss's vans are goingaround, over time itthought,well, what more can we do for customers while we'rethere?
And it's leveraged its route network and customer relationships to offer other essentialservices.
So forexample, it earns40% of its revenue from facilityservices, which is things like restocking kitchen and bathroomsupplies, papertowels, soaps anddispenses, rags and towels that might be used by mechanic or in akitchen, monthly deep cleans of carpets and upholstery in a hotel or a casino orbathrooms.
That's for sanitation compliancereasons.
And not the same as your daily clean that might be done by ajanitor.
That10% of its revenue comes from first aid andsafety.
What that means is most businesses are required to have first aidkits,cabinets, IWashstations, hand washstations, think of a hospitalparticularly.
And St.Toss comes in once a fortnight or once amonth, inspects the first aidcabinets, make sure they'recompliant, checks thedefibrillators, makes sure everything isstocked.
And this is something a customer could dothemselves, but who's really responsible forit?
Is it Zach from finance or someone inoperations?
Or if they go andleave, then who's responsible forit?
We really do this at a lower cost than what St.Toss is chargingus.
The answer isno. So it takes this operational burden off thecustomer.
Andagain, those services are about only half outsourcedtoday.
Andfinally, about10% of revenue is from fire protectionservices.
And here it's a similarservice.
They inspectcustomers' fireequipment.
So they'reextinguishes, they're firealarms, they'resprinklers, to make sure they're workingfine, they're up to code andcompliant.
And they have a small business in direct uniform sales where St.Toss sells its proprietary fabrics to customers that still operate uniformsdirectly.
And you might wonder why they'll dothis.
The answer is it establishes a customerrelationship.
And overtime, maybe St.Toss can convince them on the value proposition of outsourcing thatservice.
Overall, I think many investors still associate the business with uniform rentals and they under appreciate the breadth of itsservices.
And as yousay,Zach, if you walk any street in North America or into any business in NorthAmerica, you'd probably see St.Toss's logo on theirvans, on foreign doormats, on first eightcabinets, tags on fire extinguishes and thelike.
Andtoday, it serves about 1 million of the 16 million businesses in NorthAmerica.
Just a very brief financial overview aswell.
It's annual revenues close to $10billion.
It earns a22% operatingmargin, so about 2.2 billion in operating profit and with a bit of margin expansion and buybacks and soon.
It's grown at TPS pretty consistently by a mid to high teensrate.
So it has quite a powerful economic engine that we can talk tolater.
It seems like a really dullbusiness, but it'sgrowth, it's profitability and it's equity shareholder returns are among the highest in the S&P 500 of the last 20years, 10years, fiveyears, really any time frameymeasure.
That was an awesomesummary.
Clearly to go from a business approaching $10 billion insales, something like 21,000 delivery vans has humblebeginnings.
I think it's a really great story of the illustration of how we got from the businesses founding story in the 1920s depression to the dominant business it istoday.
I would love you to just give an introduction to how this business came to be and the evolution of it into what it isnow.
Centess has one of the most interesting founding stories of an S&P 500 company that I'veseen.
As yousay, Zach it has very humblebeginnings.
It's a literal race to richesstory.
It was actually founded by two traveling circusperformance, a husband and wifeduo.
And in the Great Depression in1929, they were like go in a weekeconomy.
They were quiteenterprising.
They were working out how they can make endsmeet.
And they worked out that all these factories in Ohio where they were based is rags in their day to dayoperations, their literal rags like old shirts and stuff that have beenrepurposed.
They use them to wipe down equipment and soon.
But once they're really dirty andoily, they can't use themanymore.
So they just throw themaway.
So they went around to all these dumpsters and industrial garbagesites, picked up the dirtyrags, took themhome, washed them by hand and sold them back to the factories as newrags.
And that was the business was called Acme Laundry BackThem.
The next evolution of thebusiness, which is worth mentioning is when the founder'sson, Doc SunHerschel, becameCEO.
This was in the1940s. And under hisleadership, Cintas became not just another supply to these customers selling back therags, it became a servicecompany.
So he realized that customers need for these rags isongoing.
So maybe we can lease it to them rather than sell themback.
And it removes the need for them to invest in theinventory.
We can take that burden off theirhands.
It creates an ongoing relationship with Cintas and ongoing revenue forCintas.
Then it was passed on to the nextgeneration.
So Herschel's sonRichard, he became CEO at the age of 25 in the1960s.
He wasCintas' longest running CEO for nearly 30years, quite instrumental in developing its corporateculture, which is one element of its secretsource, itssuccess.
What he did was he expanded the business into uniformrentals.
So the thoughtwas,well, we've got these laundry facilitiesnow.
What else can we run throughthem, apart fromrags.
So he came up with things likedormats, towels and wipes that you might use in a kitchen anduniforms.
And most businesses need auniform.
Any business that's customerfacing, any business that has technicalneeds, as Isaid, a mechanical or a hospital needs auniform.
So it's quite a broadly applicableservice.
Company went public in 1983 by then it was known asCintas.
And sincethen, the real big development for the business has been broadening the range of services itprovides, the range of end markets itserves, the range of customers itserves, and in geographies aswell.
It entered Canada in1995, that first aid in safety business in1997, some of which was through acquisition and the fire inspection business in2003.
The acquisition that's worth mentioning is in2017, it acquired the number four uniformerental company called GNK for about $2billion, nothuge, but it wassizeable, it added20% to its revenue and cemented it as the clear leader in theindustry.
And I can't understate the family's influence on thebusiness, they were instrumental to creating Cintas into the leader that it istoday.
Thefounders, greatgrandson, are still chairman of thecompany, executive chairmanactually.
The family still owns14% of the company'sstock.
There to see a situation with which a business that has this type of longevity has retained its shareholder base of family interest to a significant proportion as ithas, I think15%plus.
You did a great job giving the overview of the financial profile of thebusiness, but I'd love to dig a bit deeper into what is the true economic modelhere, why is it such a consistent and durablefranchise, presumably switching costs arehigh.
I don't know that there are significant barriers toentry, but perhaps scale being one ofthem.
I'd love to just kind of unpack the economic model that has made them such a strongbusiness.
Well, I might start with how it engages with itscustomers.
Sogenerally, it signs three to five year contracts for itsservices, the reason being that it does need to make upfront investments in the uniforms and the supplies to serve acustomer.
So it needs to realize a return on that investment over a decentperiod.
It incorporates price escalators in thosecontracts, but they're not a material driver ofgrowth.
They tend to be about 0 to2% a year and it builds customers simply as a servicesdelivered.
So the uniform rentals is a weeklyservice.
OnMonday, the van will comearound, it'll pick up the dirty laundry and drop off a first set ofuniforms.
The first aidrestocking, Ithink, tends to bemonthly.
The facility services can beweekly,fortnightly,monthly, depending on the service and the fireinspection.
All its tend to be lessregular, maybe once or twice ayear.
As yousaid,Zach, since TAS does keep its customers for a very longtime, its customer attention rate is96%, which means that onaverage, it keeps them for 25years.
The switching costs are reasonablyhigh, especially if you have a contract across thecustomers' entire operations and you're providing a standard service for a national customer like Mariette to have to displace a service provider across all your hotels as a bigask.
I think since TAS's retention is up there with the bestbusinesses,really, like the best of great softwarebusinesses, its retention is also much higher than itspeers.
So forinstance, it's largest competitor as a company calledVestis.
It used to be called Aramark Uniform Rentals and it has about85%,90% retentionrate.
So that means it has to replenish10-15% of its customers every year just to standstill.
And then what are the major growth drivershere?
It grows organically at about6.5%, quiteconsistently, which surprises some that might consider it a cyclical business that's tied to employmentgrowth, but its growth has been quiteconsistent.
About60% of its growth actually comes from companies that are outsourcing for the firsttime.
So it doesn't have to compete heads ahead with Vestis and Unifers for thosecustomers, their entirely greenfieldopportunities.
And that's veryvaluable.
It means Sintas can get goodpricing.
It means it can really pitch them on the value proposition of uniformrentals, forinstance, rather than competing competitively on price or otherelements.
It's just a bittougher.
And it's a very durable source of growth because as Imentioned, half of the market is still insourced.
And that's even after Sintas being in business for 100years.
The rest of its growth actually mostly comes from doing more for its existingcustomers, cross selling its full range ofservices.
If you go to theirwebsite, they've probably have 100 or so discrete services across those three or four areas that I mentionedearlier.
That's a really valuable source ofgrowth.
It establishes these longstanding trusted relationships with its customers 25 years onaverage.
And with thattrust, the customer can give them more of atime.
This driver's are actually salespeople indisguise.
They're the ones in front of the customer every week or everymonth.
They get to know them byname.
They're the ones walking thefacilities, taking a look for what else Sintas can do forthem.
So while we're restocking your kitchensupplies,Zach, I noticed that you have a coffeemachine, but there's no map in thefloor.
So if there's a spill and someone could slip on thefloor, that's a liability for thebusiness.
So for $2, $3 aweek, we can give you a map as well as the kitchensupplies.
It does also wincompetitively.
I don't want to give you the impression that itdoesn't, but I think winning business from its competitors is not as important as growing with its customers and growing its customerbase.
And what has the businesses growth meant for its financialperformance, particularly as it relates to itscompetition?
So reallyinterestingly, when the business IPOed in1983, it was about the same size as the number two and number threeplayers, UniFest andArama.
And today it's three times the size ofVestus, the number twoplayer, and four times the size of UniFest number threeplayer.
And it's just kept widening that competitive gap overtime.
So veryimpressive. It's also much more profitable and it'speers.
So let me give you some numbers aroundthat.
It's return on operatingassets, which is its operating profit divided by working capital plus PPNE is over50%.
So that means it earns 50 cents of annual profit for every dollar of capital in invest in itsoperations.
That's a very goodreturn.
But it's five times the return that its largest peersown, a letalone, the small moment pops that it also competes with day today.
And that's because it earns a much higher operating profit margin than itspeers, about three times themargin.
And it turns over its assets faster because it has a denser routenetwork.
But byitself, having a high return on assets is aninteresting, if you're notgrowing.
So centa's ability to keep growing at a consistently good rate and then reinvesting capital at a high rate of return to growth further as a really valuable engine of wealthcreation.
The growth in the high returns go hand in hand to drive that15% EPSgrowth.
Importantly probably reflecting its humble beginnings and its frugalculture,ownership, operatormindset.
It's always operated with a strong balance sheet around one time to net thatEBITDA.
And that'simportant. That allows it to keep investing throughdownturns.
It offers certainty towards customers that know that centa's will be there forthem.
And that's really an important differentiator versus itspeers.
So the number two companyVestus, it's levered about six times as was its parent aromark goingback.
It's been a real handbreak on that business in terms of its ability to withstand the pandemic and other externalshocks.
Today,actually, there's more debt than equity in the capital structure of thatbusiness.
And that's the number twoplayer.
So it's been a real advantage forcenta's.
It's ourlong-term, disciplined capitalstructure.
I noticed that this business is unique in that it's most significant peers are also public-belistedcompanies.
And so you have a great case study in demonstrating the strengths of the business's economic profile and size and scale and returns andprofitability.
I'd be curious how it compares and to the extent that their competitive advantage is continued todeepen.
Yeah, it's a goodobservation,Zach, although one learning from my investment career is it's very easy to focus on the publicly listed peers of abusiness.
But those top three playerscombined, I think they make up about60% of the uniform mentalmarket.
So40% of the market is still in the hands of localoperators, mostly mum andpops, maybe like centa's was in thebeginning.
Not to undermine thosecompetitors, I'm sure they do a very good job for their localclientele.
But with those businesses comes a risk of intergenerationaltransfer.
So does the son or daughter of the founder want to inherit the business and continueit?
There's an attrition rate in those mum and popshops.
They're not able to serve customers with national sophisticatedneeds.
If you're just a localplayer, you can'tserve, marry itnationally, the way that centa'scan.
So that's a real advantage versus smallplayers.
There's thisprocurement, you buy vastly more materials and chemicals than a smallplayer.
So you can be more profitable and you have more resources to invest in yourbusiness, in yourplants, in your marketing and soon.
But you ask a really goodquestion, whichis, it has two sizeable publiccompetitors.
So how is it that they went from being the same size 40 years ago to centa's making eight times as much profit as the number two players ateights?
It's areally, really widegap.
So I think part of that is also scale centa's because it had a good balance sheet and a long termmindset.
It was early to consolidate the industry in its first sort of30, 40 years in uniformrentals.
And it was able to build local and national density faster than itspeers.
And that wasimportant.
Scale is a massive advantage for centa's on the customer facing side for any route based business like centa's where the van's going around delivering theservice, local densitiescrucial.
Sobasically, how many customers stop sea making each day that the driver goes around and also how many services are you delivering every time you stop at acustomer?
The higher the answer is to thosequestions, the more profitable you canbe.
The van's and the drivers are a fixedcost.
So forexample, in the most recentquarter, even though centa's revenue grew9%organically, a really strongresult, the number of routes that it serves only grew by1%.
So it's revenue per route grewsubstantially.
And not only are they cost benefits tothis, but it also allows centa's to spend more time with its customers and build more loyalrelationships.
And you can see that in its ebitmargin, the costbenefit.
So it's operating profit margin is expanded from14% 10 years ago to23%today.
And that's three times what it's publicly said peersown.
So it can really serve those reallylarge, complex needs better than itspeers.
It has more laundryfacilities, more distributionfacilities.
So I can deliver a betterservice.
And then at the backend, I think it's really underappreciated how complex a laundering or rental operationis.
So centa's actually has over 400 branches across NorthAmerica, which is where it's stores itsproduct, where it launders theproduct, where it repairs theuniforms.
So quite a densenetwork.
And as itgrows, it can improve the utilization and efficiency of thoseplants, being larger means it can spread itstechnology, training investments over a larger base ofrevenue.
And it has purchasing scale in itssupplies.
Andfinally, the other scaleadvantages, centa's has a much larger sales force than itspeers.
Again, three times asize.
And it's large enough for centa's to have specialist salespeople in each industry that itserves.
Hospitals have very different needs to semi-fabs or tomechanics.
So it can really serve those customers in a way that makes sense tothem.
So it's a great growthlevel.
It can grow at a higher rate than itspeers, at a better margin than itspeers, and reinvest that cash flow to drive furthergrowth.
It can continue itssuccess.
Yeah, that's a tough combination to competewith.
Have you pointed any other advantages beyond scale or what is the dominantone?
The second thing which differentiates centa's from itspeers, on the face ofit, laundering uniforms and restockingsupplies, it sounds verysimple.
But as Isaid,operationally, it's verychallenging.
So using uniforms as anexample, the way it works is the uniforms get assigned to a particularemployee,usually.
So Zach gets 11 uniforms assigned tohim.
There's the one that he's wearing rightnow.
There's the five that are being laundered at themoment, that aredirty.
And there's the five that are waiting in the closet for him to wear for the rest of theweek.
Most of the uniforms even have the employees branding on them or the employees name onthem.
They're tailored to the needs of thecustomer, whether it'sfabric,materials, sanitationrequirements, soon.
So centa's has to make sure that after aweek, it picks up all these thousands of uniforms together and they go through its massive laundryfacilities.
It has to make sure that they cleaned with the correct process that they're inspectedproperly.
And that somehow they get the clean uniform back to the right employee at the righttime.
It's actually a massive logistic one totaking.
And the way centa's achieves this is it tags every garment with a uniquebarcode.
So it contract those threads facilities and they're highly automated to minimize the error in that getting back to where it needs to getto.
Because we've heard that even its large appears have quite manualoperations.
You have people literally sorting these uniforms and reading the tag and trying to work out where it's got to get to naturally that comes with highererror.
So centa's actually developed all of its garment tracking and all of its routing technology that tells drivers what optimal route they need to do for theday.
It's developed at allinternally.
And thenfinally, last but notleast, I think this is a really importantpoint.
I think centa's isn't special so much for what it does as how it doesit.
Customers can choosefrom, I'msure, dozens of uniform rental companies and dozens of facility service providers in any postcode in theUS.
But why do they choosecenta's?
I think it mostly comes down to people andculture.
It's what the company will tell youthemselves.
And it's soimportant. They have this book called The Spirit is theDifference.
It was written by the foundersgrandson, RichardFarmer, who was the CEO for 30years.
If you go and meet with management at the headquarters inCincinnati, as soon as they shake yourhand, they give you a copy of this book and theysay,look, this is really important tous.
If you really want to understand ourbusiness, read thisbook.
It's quiteshort. It's about 30pages.
Andbasically, it outlines why is centa's inbusiness, apart from just makingmoney.
What role does it play forcustomers?
What is it expect of its employees and how they should treatcustomers?
I actually read you a brief passage in thebook, which I've got in front ofme.
This book is about the most important aspect of a centa'scareer.
It is about something more important than ourproduct, ourservice, and even more important than sales andprofits.
It's about what separates great companies like Centa's from mediocre and unsuccessfulorganizations.
It's all about our corporateculture.
This is what separates the winners from thelosers.
Chancesare, two of every five companies on the Fortune 500 list today will not be on the list 10 years fromnow.
What separates those who stay and those who go and don't remain relevant is theircultures.
It's really important to thecompany.
We've actually heard that when they interviewpeople, they also give this to every new employee atCenta's.
Before the end of the interviewprocess, they give you thebook.
Theysay, gohome, take this bookhome, read throughit.
This doesn't resonate withyou.
This might not be the right place for you towork.
It's veryself-selecting.
I feel like we've spent a lot of time highlighting the strengths of thebusiness, the competitive advantages that it continues tosupport.
Presumably, there are mistakes made along theway.
I'd be curious to hear some of the pitfalls of their strategy and the trials and tribulations of growing from a company that collects rags and resells them to one that's sporting a $10 billion top line and an enterprise value exceeding $75billion.
It's a great question because even the best of businesses we can't expect perfection fromthem.
Management teams are onlyhuman.
They'll makemistakes.
But it's very telling how they respond to those mistakes and learn from thosemistakes.
It's certainly been the case forCenta's.
One example is that in the late1990s, early2000s, they're always thinking about what more can we provide tocustomers, what other services can we add to ourtoolkit?
They try to expand into documentmanagement.
I'm not sure if it's a service that you've usedbefore, but we have in ouroffice, they bring out this sort of paper recyclingbin.
So you put all your paper inthere.
They pick up the bin on a Friday and they drop off an empty new bin and then they either store depending on what you want to do or they shred the document securely foryou.
So the likes of Iron Mountain might deliver that service in the UStoday.
They thought it was a route-basedbusiness.
It's a regularservice.
It's just something that could be interesting to ourcustomers.
And they made a few small acquisitions to expand in thespace.
But at the end of theday, they found thatfirstly, it's a less value-added service and they thought the guy just literally drops off thebin, picks up a newone.
The service takes about five seconds todeliver, you don't get time to leave chat with the customer and there's not much you can do to expand the scope of thatservice.
Andsecondly, I suspect that with declining paper usage inbusinesses, there were some structural headwinds against thatservice.
It triedsomething, didn'twork, and in themid-2010s, they saw it off thatbusiness.
I think they actually made a small capital profit on thatinvestment.
But the key is what they didn't do is they didn't go and make some large debt-funded acquisition that might have put the company at risk of long-term damage if it didn't workout.
They took a long-term patient approach and building out thatbusiness.
They were willing to recognize they werewrong, and that's reallyvaluable.
And through that wholeprocess, they were incredibly transparent withus, withinvestors, about how that business was progressing and how it wasn't many expectations and that it's something that they'll have torevisit.
So that was a really good experience with thebusiness.
And I think the way they communicated transparently and humbly through that period would have given us confidence to stay the course and hold the business even though the financial picture maybe wasn't what theyhoped.
Another example is there was an instance about 10 years ago where in the fire inspectionbusiness, in the first stages of growing thatbusiness, syntax relied on third-party contractors to deliver theservice.
And the reason is that every local region has different codes andregulations, everymunicipality, and given it didn't have experience in theservice, it thought it would rely on experiencedcontractors.
But the problem is they're not your ownemployees.
If they haven't read this culture book that's so important toyou, they might not deliver the same quality ofservice.
And they had a few issueswhere, since it'santicipated,buildings, court andfire, and it turns out the service wasn't delivered to a goodstandard.
They coursecorrected, theysaid,look, we'll make the investment needed to build out our own fleet ofpeople, ofcontractors, we'll train theminternally, we'll train them on our culture and how we dobusiness.
And it might require some upfrontinvestment, could be a headwind to our profit margin for a fewyears, but it's what's needed to deliver better service to customers and to preserve the quality proposition of ourbrand.
I think it's important not to hold businesses to a standard ofperfection.
And I'm sure that through our ownership period in syntax the next fiveyears, 10years, there'll be other challenges itexperiences.
But how it responds to those challenges is verytelling.
Another example is in the high inflation of the last fewyears, we can imagine that all these chemicals that syntax users to launder the uniforms or to provide cleaningsupplies, all these fabrics that go into the materials and therags, and there was meaningful inflation in thosecosts.
The same goes forlabor, which is a large cost item forsyntax, it's probably over half the cost base islabor.
The approach it appears tous, the first investors was customers know that there's inflation and if we put through priceincreases, they'll copyit.
So they were puttingthrough, blow double digit priceincreases, call it10%, to try and preserve themargins.
Where a syntax took avery, very different approach and the approach was before we go cap in hand tocustomers, what can we be doingbetter?
How can we be operating more efficiently internally to try and preserve our margin and be offset some of this inflation internally before we have to increase ourprices?
In 2022 and2023, when its peers are putting through10% priceincreases, syntax was raising prices by4%, which was less than the rate ofinflation, which isincredible.
And it actually managed to preserve its margins through that period aswell, which is a good sign of its culture and the willingness of its people to just get thingsdone.
So there's a few pretty interesting difficult circumstances that were telling in how the companyresponded.
And I guess on the back ofthat, as you kind of look towards the nextthree,five,10, 20 years ofsyntax, what do you see as the risks involved in theirbusiness, but also the opportunities that are ahead given the lack of overall penetration into the uniform rental and services businesses domestically andabroad?
The two things that come to mind forme, the culture is the magic of thebusiness.
So if there's a managementchange, which tends to be a catalyst for cultural change that we don't agreewith, if the management acting communicatechanges, that's something we're really sensitiveto.
Now I think it's a low risk because as Imentioned, this culture has been deeply embedded through the business by the foundingfamily.
We still preside over thebusiness.
It's been a very important element ofsuccess.
The company management clearly recognized that it takes an active effort to sustain goodculture.
Some quite confident in thestewardship, it is a risk for thebusiness.
We've had other instances in our portfolio where there's a change in management that results in undermining a previously goodculture.
Secondly, if syntax loses focus and the way management approach growthis, we've got a really big opportunity in front of us in NorthAmerica.
We only serve one million of the 16 million businesses in NorthAmerica.
We don't do anywhere near as much for each of those customers as we could bedoing.
We've got avery, very broad offering ofservices.
So there's avery, very long runway to keep growing in North Americaalone.
Whereas, in the firstinstance, they acquired a few businesses inEurope, elsewhere in theworld, it's verydifferent.
Customers have different needs all over theworld.
The US is a uniquelyhomogenous, large singlemarket.
Whereas, inEurope, every country has differentregulations, differentneeds, different ways of doingbusiness.
So I'd be very cautious if syntax started to commit significant capital in expandingoverseas, especially since it's told us that there's a very large long runway of growth in theUS.
So one exampleis, in the last 10 years orso, it's been building a business inChina, which has raised some questions forus.
So we'd like to watch and make sure that they haven'tyet, but they don't commit a large acquisition or large capital to that business without proving out theproposition.
Probably the last one that the company's often askedabout, which I don't personally see as a material risk iscyclicality.
There's no problem with cyclicality perse.
The problem is if management act in a way during a down cycle that compromises the long-term value of thebusiness, I don't think there's any evidence ofthat.
It's in tous. The other risk is that it results in us over valuing thebusiness, if we're valuing the business based on cyclical high earnings that may not besustainable.
One thing that centauses often associated with is employmentgrowth.
Every uniform is tagged to anemployee.
So if there's high unemployment in theUS, investors get concerned that centauses growth mightslow.
There's also an offset to this that downturns can be a catalyst for companies to outsourcemore.
They're underdistress.
They want to improve theirprofitability.
And outsourcing is actually a means tothat.
It's also become amuch, much broader business overtime.
If you looked at centauses website 20 years ago and what it can do for customerstoday, it offers a much broader range ofservices.
So there's a much broader range ofcustomers, including more defensive industries like government andhealthcare.
So I think it'd be much less cyclical than it was in theGFC, where to be fair earnings did fall by about a third over that whole period over a fewyears.
Butincredibly, over the last 55 years since it's beenlisted, its operating profit has only declined in a single instance in theGFC.
I think it was an unusual period for a lot ofbusinesses.
It was an unusually stressedperiod.
I'm sure centauses learned from that aswell.
With success in scale comes pretty material free cashflow.
I think the business does something like more than a half billion dollars plus of cash flow from operations and minimal capex.
What is it that they do from a capital allocation perspective to redeploy thatcash?
Itcurrently, centauses pays out about a third of its earnings as adividend.
I think it's about30%. It's now increased its dividend for 41 consecutiveyears.
And we'd expect that progressive dividend policy tocontinue.
It's also been a steady repurchase of itsshares.
Its share counts decline by one-third over the last 15 yearsalone.
It's quiteimpressive.
So we'd expect that to continue if the share account keeps shrinking by a few percent ayear.
It does spend a modest amount of capital andM&A.
Generally small bolt-on acquisitions and then the occasional mid-sized acquisition like GNK in2017, which was a two billion dollardeal.
But nothing in the way of large transformative M&A that can really introduce a lot of integration risk and distractionrisk.
We expect it to continue making small bolt-ons overtime, maybe less so than in thepast, given it's already achieved a lot of scale in itsservices.
But I'm sure there's small local moment pops that it can acquire in markets where it's not as strong as it keeps building out its servicelines.
I expect it to make acquisitions to build out itsoffering, build out scale in each of thoseservices.
So one example that the management have talked about recently is water coolerservices, which again sounds like the most mundanething.
Water isessential. Every business needs some form of delivering water to itsemployees, whether it's a standalone cooler or one of those desktoptaps.
It's a very fragmentedmarket.
It's a route-basedbusiness.
They can drop off the fullcanisters, pick up the emptyones.
It's a serviceproposition.
You can have different features of thewater, different features of the machine and how it dispenseswater.
Sooverall, I think that will drive about a mid-teens EPSgrowth.
If you add up six and a half percent organicgrowth, a bit of marginexpansion, a bit of share countreduction, and then a few percent of growth fromM&A.
And I think you would mention at the onset that Marion is obviously an emblematiccustomer.
But I'm surprised that a company like Intel would employ theirservices, just given how sensitive their processesare.
I'd love to learn a little bit more about the nature of thatrelationship.
Interestingly, synthats don't often talk about individualcustomers.
And one reason is they serve a millioncustomers.
There's just a lot ofthem.
And no singlecustomers, more than one percent ofrevenue.
Even what it does forIntel, which I'm sure is a largecustomer, is a very small proportion of the overalloffering.
But it does for Intelis, as Imentioned, Intel has these semi-fabs that have to be unrelisticallyclean.
Even a speck of dust can compromise the quality ofsemi-wafer.
So it's staff in those fabs addressed in these astronaut suits that are hematically sealed and don't have any dust or lint onthem.
synthats has to provideuniforms, which I presume are through a specialized launderingprocess, probably even a specialized route andvan.
It's hematically sealed to give those uniforms to Intel'sfabs.
It's probably a service that very few other companies could deliver to the standard that Intelrequires.
So I'm not surprised that in synthats that's serving thatcontract, not its other public lucidpeers.
And to wrap thingsup, our customary question is lessons learned both from your evaluation studies of synthats as a business that can be applied towards other investments and conversely operators and business management and public companies who can borrow from the lessons learned from synthats and apply them to theirbusinesses.
It's been a real case study for me on the importance of corporate culture as a source of competitiveadvantage.
I think asinvestors, it's very easy to get seduced by the numbers when you're assessing abusiness.
But that tells us nothing about how the business achieved that success to begin with and whether the success canpersist.
In ourexperience, it's really culture that separates the bestbusinesses, those that can continue growing share and be more relevant to customers from the rest from those that fade and don't look as relevant in tenyears'time.
I knowculture, it sounds a bitairy,fairy, it's veryintangible, can easily beoverlooked.
You can't get the answer from your Bloomberg terminal the way that you can for the financialmetrics.
It's a quality that you have to appreciate over time as you better understand how the businessoperates, how its people areincentivized, the quality of its managementteam, a bit like making afriend, maybe the first few times you meetthem, you can see that you click and then overtime, the more you get to knowthem, they start to appreciate theirqualities, getting to know a business in its culture is a bit thesame.
So this has been a really valuable experience forus.
Another learning is that on the face ofit, synthats might sound verymundane.
It delivers a seemingly boring but essentialservice.
It doesn't really capture the attention of investors the way that a high-flying tech companymight, but companies that deliver essential services to other businesses can make really greatinvestments.
Businesscustomers, they tend to beloyal, they stick around for a long time unless you mess up something with yourservice.
You can sell business customers on a measurable valueproposition.
It's a really powerful pitch that if you join ourservice, we can do it two to three times cheaper than you canyourselves.
On the otherhand, businesses at faceconsumers, they tend to be the ones that capture the media'sattention.
But consumers like trying newthings, then notoriouslyfickle, there are differentpreferences.
So we have a preference for these B2Bcompanies, which fly under theradar.
Well, there's a great Jeff Bezos anecdote about investing in the things that you know are not going tochange, which when it comes to the necessity of uniforms and the strength of a route-based business like this one seems quitelikely.
Ofcourse, to someextent, it's reflected in the valuation of a business likethis, but to yourpoint, the durability and the strength of their continued growth and earnings certainly comethrough.
We appreciate you spending this time withus,Delyan.
This is fascinatingstory.
Nothing's talkingmusic.
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