Halma, Loro Piana vs Brunello Cucinelli, Lithia & Servicing ICE vs EV, Rightmove, Align, Visma, Medpace, Equipment Rental

Published Last Week

1. Halma: 1998-2005 Case Study

2. Loro Piana: Ownership Under LVMH & Brunello Cucinelli Comparison

3. Lithia, Asbury & Franchise Auto Dealers: Servicing ICE vs Electric Vehicles

4. Align Technology: History of Clear Aligners

5. Rightmove: UK Lettings Market & Tenant Journey

6. Medpace: Culture, Org Structure & Business Development

7. Visma Software: History, Operating Philosophy, & Retail Divestment

8. EquipmentShare: T3 Platform & Branch Operations

Halma: 1998-2005 Case Study

Through our study of companies such as Lifco, Lagercrantz, and Halma, all businesses that have compounded at 20%+ for decades, one thing piqued our interest: each firm had a ~5 year period where it really struggled. Revenue and earnings declined and the stock crashed. Yet, each company managed to restructure its portfolio and compounded at record levels since.

Halma is a £8.5bn UK-listed acquirer of mission critical safety, healthcare, and environmental and analysis assets. It is one of the best performing UK stocks in the last 30 years. However, 2001-2005 was Halma's tricky period. Revenue stagnated and earnings declined. We interviewed a Former Director at Halma, who spent over 25 years at the company from the mid-90s, to explore the challenges during this period and how the company recovered.

close

Zoom InZoom OutReset

The interview also shares how the parent company structures incentives, and sets annual budgets and targets for opcos:

if you put in a budget, culturally, if you showed you were going backwards, you were in for a pretty significant investigation. You could get away with it if you could articulate what's going on and, more importantly, what's my plan to make it better. You had to have a plan. So, at Halma, the focus was very much on the quality of forecasting and the quality of the MDs and subsidiary boards to know what the plan is, either what the ambition is to grow faster or what the plan is to fix a problem when they inevitably come up. - Former Director at Halma

We also explore the specific process of the parent company approving capex projects at opcos that may significantly impact short term cash flow but maintain the long-term durability of the opco:

Additionally, for large development projects where you're going to capitalize the development, the internal processes are somewhat goofy. In the fire industry, for example, there are many third-party testing and approvals needed for a new product. Most groups would capitalize these because they know how long the approval lasts, allowing them to amortize the benefit over that period. However, in some cases, a lot of this expenditure is written off because the threshold for investment approval is quite low. Therefore, significant investments in long-term development projects, which can take years, often struggle to get approval. Consequently, you end up working on these projects stealthily, funding them incrementally through your profit and loss because it's easier. - Former Director at Halma

This interview is an interesting read for anyone interested in companies such as Lifco, Danaher, Ametek, and other industrial acquirers.

Loro Piana: Ownership Under LVMH & Brunello Cucinelli Comparison

This interview with the Former CEO of Loro Piana is a fascinating insight into working with Arnault and operating one of the leading luxury goods brand within LVMH. Loro Piana is also arguably one of the few comparables to publicly-listed Brunello Cucinelli. The Former CEO of Loro Piana, who was hired and reported directly to Arnault, describes Loro Piana's history, origins of the deal, and its positioning versus Brunello Cucinelli.

Regarding vision on the brand, obviously, Mr Arnault was a customer, so it helps, so he knew about it, obviously, and he had a sense for it. We saw this as a diamond in the rough, right. Or not so rough, because it was already very well tuned or very well shaped. But something that could blossom and shine much more in a very special place of high-end luxury and apparel. It would be very different from the rest of the portfolio components of LVMH. - Former CEO of Loro Piana, LVMH

There are many insights throughout the interview but this quote from the Loro Piana family on how to kill a luxury business stood out:

I always joked, you know, that we were in the fashion, leather goods division, which is a division of LVMH primarily for financial reporting purposes. It's not managerial. But I always joke and say, you know, you put us in fashion, leather goods; we're not fashion and we hardly do leather goods, which was one of the issues, by the way, or one of the opportunities. So it's not a fashion company. And actually, its recipe, there was an easy recipe for killing the company, which Sergio gave me, which was, if you want to kill my company, you should do three things; hire a creative director, do a fashion show, and do advertising. - Former CEO of Loro Piana, LVMH

Lithia, Asbury & Franchise Auto Dealers: Servicing ICE vs Electric Vehicles

The servicing department of a franchise auto dealership is critical to driving gross profit per dealership:

The service department is actually what gains the majority of the profitability of a dealership, not the new car sales. So that is why, in most cases, if it's a well run service department, it can absorb about 80% to 90% of the overall dealership expenses, it's called fixed absorption. That's why they want their service department, because that labor piece of it, that labor piece is such a massive absorber of expense for dealership operations - Former Service Director at Asbury Automotive Group

While the process to inspect EVs are similar to ICE vehicles, the repair frequency and overall costs to service EVs seem to be much lower. However, the loss frequency and accident severity of EVs is higher than ICE. This interview with a Former Service Director at Asbury Automotive Group explores such topics in greater detail:

Overall, the cost of ownership in terms of maintenance will be lower for electric vehicles. However, costs may increase in areas like tire and brake wear, which tend to be higher in electric vehicles due to the heavier weight from the battery packs and the frequent use of braking systems that wear out the brakes quicker. These are the only two areas where repair costs might be more frequent. - Former Service Director at Asbury Automotive Group

Rightmove: UK Lettings Market & Tenant Journey

Rightmove recently launched its first integrated tenancy management platform for agents managing lettings. It organises and manages rental enquiries from Rightmove, integrates with tenant referencing third-party firms, and provides a platform manage tenant contracts and relationships. This is all part of RMVs plan to move down the transaction and add more value to agents.

close

Zoom InZoom OutReset

There are ~1.1m UK rental transactions per year and ~1.5 references per transaction. By 2028, RMV believes it can capture ~30% of the tenancy referencing market and over £25m of incremental rental revenue at ~70% margins.

close

Zoom InZoom OutReset

We interviewed a Lettings Manager of a leading independent real estate agency to walk through the tenancy journey from requesting rental interest on Rightmove to signing a tenancy agreement. We discuss fundamentals of the UK rental market:

I think this is where we return to the issue of mortgages. As rates have increased over the last year, it really matters when it comes to your overall tax return. For example, you can claim management fees off your overall tax bill. So, if you're paying a 10% management fee, it could effectively be reduced to about 8% after your tax return because you can deduct some of it. However, things like interest cannot be deducted. We have been to a couple of appraisals recently. At one, the client asked us what we thought it was worth. We estimated the rent at about £1,200. He mentioned his mortgage was £1,300, putting him in a difficult position. This is something to consider as rates climb. Landlords who are succeeding currently are those with substantial equity and sustainability. If the government makes changes to the Section 24 Finance Act or stamp duty, there might be incentives for landlords to invest in the market. These changes aren't here yet, but if you're in a position to buy now, you might overcome these issues. If you can endure this period, it will be worthwhile in the long run if rates change again or your equity improves. - Lettings Manager at Large Independent Estate Agency

And how Rightmove is positioned versus Zoopla and OnTheMarket in lettings:

we are getting leads from OnTheMarket. At the moment, I haven't fully pinpointed the demographic. One thing I find very beneficial about OnTheMarket is the reports for landlords. They partner with a company called Sprift. If you type in a postcode and a full address of a property, Sprift pulls together a report on the land registry boundary, flood risk, council tax band, the EPC certificate, and any other relevant data. OnTheMarket has a link-up with them and also with Hometrack, which provides nationwide house price data. That is for the valuation. They can create what's called a Sprift report with all that data just by typing in the postcode, which is excellent for us to present to our landlords. The way OnTheMarket compiles this information is extremely useful. - Lettings Manager at Large Independent Estate Agency

Align Technology: History of Clear Aligners

Align Technology is a $20B leading manufacturer of clear aligners to the dental industry. Whilst the company has gained a leading position through its patent portfolio, competition is on the horizon with the growth of Ormco, Angel Aligners & Straumann. In an interview with one of Align's first sales executives, we explore the history of clear aligners.

This is probably one of the most extreme cases of training you will come across. We ended up training at least half of the orthodontists within the first three years through mass trainings. Our sales representatives would organize these in a city, usually in a hotel meeting place. At that time, it was challenging because we didn't have Zoom or similar technologies. We used closed-circuit TV in our early sessions and filled up rooms with orthodontists who were curious. They had seen some of the advertising and knew something different was coming, so they wanted to be able to offer it. Yes, we had training sessions constantly all over the country, locally organized by my reps. - Former Sales Executive at Align Technology

Much like another category-defining medical device company, Intuitive Surgical, Align invested significant resources in clinician training in the early days. The interview further explores the competitive landscape and what drives clear aligner case starts. We've previously explored how Intuitive has historically trained surgeons in a separate interview. The training and distribution moats of both ALGN and ISRG is an area of focus for us this year.

EquipmentShare: T3 Platform & Branch Operations

EquipmentShare is a relatively new entrant into the US equipment rental market and has acquired ~$4bn of new fleet to compete with AHT and URI. A major selling point is EquipmentShare’s T3 telematics platform which includes a keypad entry system, trackers, and cameras.

close

Zoom InZoom OutReset

EquipmentShare’s rationale for heavily investing in its own telematics system is that the average fleet utilization for customers is ~30%. Under-utilized fleet is arguably the largest cost for customers and provides the largest opportunity for cost savings. However, not many of EquipmentShare’s customers seem to be using T3 properly:

Every customer uses the keypad. Most customers, like for T3, could log into their T3 account, call off equipment, or order new equipment. However, most didn't do that. They would call the sales rep, order the equipment, and the sales reps would deliver it. When they were done, they would call the sales rep to pick up the equipment. They weren't using the technology to manage their fleet. They weren't analyzing things like, 'This skid steer has a utilization of 36%. I should get rid of it.' Most customers weren't looking at it that in-depth. - Former Branch Manager at EquipmentShare

This interview with a Former Branch Manager at EquipmentShare company explores how its branches are organized, T3 vs OEM and Sunbelt / United telematics systems, and how the company is differentiated vs incumbents.

Visma Software: History, Operating Philosophy, & Retail Divestment

Visma is a ~$2.5bn revenue vertical market software acquirer based in the Nordics. The company was founded in 1996 and has made nearly 200 acquisitions focused mainly on faster growing niche SME SaaS companies.

Visma completed 32 acquisitions in 2023 and over 40 in 2022. The business has a very different operating philosophy compared to Constellation Software. It buys different assets and deploys a very different operational strategy post-acquisition.

close

Zoom InZoom OutReset

This interview with a Former Director and Board Member of Visma explores how the company has scaled, how and where it centralizes resources, and the M&A policy. There are interesting parallels to draw compared to CSU. For example, Visma has experimented with internal consulting businesses and now an AI development team that aims to serve portfolio companies. Decentralisation lives on a spectrum. Almost all acquirers centralise some services. How and when services are centralised is a topic of exploration for us across the top acquirers this quarter.

Medpace: Culture, Org Structure & Business Development

Medpace is a $12.5B CRO to mid and small-sized pharma & biotech companies and has compounded revenue and earnings at over 20% a year in the last decade. A former Medpace Medical Director who has also worked with Medpace as a sponsor describes why the company has done so well.

But BD did most of the new client effort and they were pretty good. Once the client was engaged and came to Cincinnati or for a high priority, when we put our team A, depending on the priority they had, ABC, our success rate was very high. It was 75% and up. Remember, the clients always call about three CROs, so your success is probably going to be one-third. But ours was more than two-thirds. So they had very good results. When the client showed up at the Cincinnati office and they looked at everything, they would be extremely pleased. Most of the time, we would get the business. - A Former Medpace Medical Director

According to the executive, a key reason for this high win-rate is Medpace's tenured senior personnel who have unique expertise.

Because of such individuals, they immediately knew if there was any change in regulations or any new information that wouldn't be readily available unless you have that type of senior executive, who are paid millions in salary and stock. But that helps because they knew and already had a plan. (...) This depth of understanding is critical. That was the key piece of information that led us to choose them. We thought, 'These guys already know; they're ahead of us.' This is exactly what a CRO should be doing. It's telling us this new operational stuff and providing us solutions. Even if they're expensive, we don't want to wait six more months to validate an assay and do all the kits with CE marking. We will rather spend a million more and recruit our trial six months in advance.This depth of understanding is critical. That was the key piece of information that led us to choose them. We thought, 'These guys already know; they're ahead of us.' This is exactly what a CRO should be doing. It's telling us this new operational stuff and providing us solutions. Even if they're expensive, we don't want to wait six more months to validate an assay and do all the kits with CE marking. - A Former Medpace Medical Director