HEICO, Wencor, Danaher Business System, Loro Piana, Brunello, Mainfreight, Herc

Content Published Last Week

1. HEICO: Wencor Acquisition

2. Danaher Business System: Batch to One Piece Flow Manufacturing

3. Brunello Cucinelli, Loro Piana & Luxury Cashmere

4. Mainfreight: Warehouse Network Structure and Design

5. Herc, Sunbelt, United Rentals: Equipment Rental Buying & Pricing

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Visible Alpha built a platform to analyze consensus data for financial and operating metrics on over 6,400 publicly traded companies. Rather than digging through models one by one, Visible Alpha creates consensus data for every line item included in sell-side models so institutional investors can better understand expectations on metrics beyond just revenue and earnings. Try Visible Alpha for free here.

HEICO: Wencor Acquisition

HEICO has finally purchased Wencor, the largest PMA player behind HEICO itself, for $2.05bn or ~13x adjusted EBITDA. This is the largest acquisition in HEI’s history.

HEI is now hitting real scale with over ~$700m in pro-forma GAAP EBITA. And that’s without RPM’s back to 2019 levels. Scale is the enemy of those with accretive M&A as a core value driver. HEI now has to add ~$100m in annual operating income to hit its 15% bottom line growth target. It’s unclear how many other assets are out there to drive such inorganic growth. For example, Jet Parts, the third largest PMA player, seems less interesting to HEI given Wencor helps fill many of the gaps within its PMA business.

This interview with a Former HEI VP and Wencor President explores the synergies between HEI and Wencor in the PMA business:

In Wencor and Heico's case, over 30 years, they have about a 12% to 15% overlap in PMA…There are eight aircraft certification offices and six manufacturing inspection district offices in the US. Heico had access to six of those aircraft certification offices based on their company locations, while Wencor had two. One of Wencor's two is the seventh of the eight. So collectively, they now have a business located in seven of those regions, and they can move parts around based on the capability of the business unit and capacity of that particular FAA office. This could result in faster speed to market for Wencor, utilizing the Heico network. That's one weakness Wencor had that Heico solves. - Former HEI VP

The interview further explores synergies across distribution and how the combined entity can better serve airlines to save costs vs OEM’s.

We will be publishing research on our Enterprise Tier on the HEI/Wencor deal and further exploring the aftermarket value chain. Given HEI’s scale, we aim to understand the value of being vertically integrated and the organic growth opportunity in PMA and distribution post-acquisition.

Danaher Business System: Batch to One Piece Flow Manufacturing

Over the last 20 years, Danaher has evolved from an industrial conglomerate to a life sciences company. It has transitioned from acquiring tangible assets of lower margin industrial manufacturers to higher margin, intangible diagnostic and life science assets.

This has led Danaher’s Business System (DBS) to evolve; what started out as lean manufacturing has extended to leaning out sales and marketing, engineering, and leadership.

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Historically, DHR’s core thesis centered around buying high-quality industrial leaders and deploying lean to the manufacturing process to drive significant margin improvements. With companies like Jake Brake or Fluke, DHR could create 10%+ EBIT margin improvement from improving the manufacturing process alone:

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But now DHR is acquiring life science assets with more intangible than tangible assets and recurring reagent margins of 80%+, how is the value creation methodology different? How much value is actually created by lean when DHR is buying life science assets at a multiple of revenue rather than EBIT?

This interview is the first in our mission to truly understand how DHR deploys its lean methodology in industrial and life sciences and the relative margin improvement.

We first explore how DBS improved industrial assets that are now part of Fortive or due to be spun out in the EAS unit. A Former VP of Operations at DHR explores how Fluke, the testing and measurement manufacturer, shifted from batch to single-flow manufacturing to drive 10%+ improvement in EBIT margin:

The goal is to get to one-piece flow. You start by shrinking those large lots down. One of the biggest first wins we had - I remember walking with Jim Lico, the soon to become president of Fluke - was reducing the lead time to build a single multimeter from 20 days to three hours. That lead time reduction was indicative of the amount of waste that was pulled out of the process. The strategy was to merge the silos and start with the easier downstream assembled goods, then work on the larger flow soldering operations and molding operations. - Former VP, Danaher

Another insight is that manufacturers are most inefficient in managing the material supply, not necessarily product assembly:

The biggest bottleneck in most operations is material supply, and many don't recognize this. For instance, if I give you a screwdriver, an instruction manual, and enough product and screws to work on, you'll be able to make 50 of these a day as a skilled operator. The problem arises when you reach for a screw and there's none, or you reach for your next clam shell and there's none. The way information and material flow in the facility, and how I forecast what material I need for my operation, becomes the biggest bottleneck for every single operation I've been in - Former VP, Danaher

We plan to publish our DBS analysis on our Enterprise tier sharing the differences in deploying DBS across industrial vs life sciences assets in the coming months. Please reach out if you have any specific interest or questions on this topic you’d like us to explore.

Brunello Cucinelli, Loro Piana & Luxury Cashmere

This interview with a Former Loro Piana executive explores Brunello Cucinelli’s brand identity and why vertically integrating back into the supply chain is so important for luxury cashmere players.

Decoupling Brunello Cucinelli the person from Brunello Cucinelli the brand is a longer-term challenge for the company:

I think they need to prepare for what's next, as the founder won't live forever. There's a strong connection between the brand and the person, who is 70 years old. This may not be appealing to a younger generation. The story he's telling could be appealing, but it needs to be simplified. It's getting too complicated and serious, missing some joy that is part of the brand's culture and the founder. He took the route of, I talk about Plato and Socrates, but that doesn't necessarily resonate with a 25 year old from Shanghai. - Former Loro Piana Executive

Alongside Chanel, Brunello recently acquired a stake in its cashmere supplier. One insight from the interview is that its not only access to the fine cashmere fibers that is crucial, but there is a moat in the engineering capabilities to turn thin fibers into soft garments:

Sourcing the raw materials is crucial, but it's also important to have the artisanal skill and engineering capabilities to work with these materials. Other brands may source vicuña, but only a few can actually work with it. Loro Piana has a B2B business, selling fabrics to competitors like Brunello Cucinelli, Vuitton, Chanel, and Hermès, because weaving and working with these materials is a complex process. - Former Loro Piana Executive

The interview explores further how top luxury companies vertically integrate and also discussed the eyewear licensing deal Brunello Cuccinelli recently struck with Luxottica.

Mainfreight: Warehouse Network Structure and Design

As part of our series on Mainfreight, the NZ-based 3PL, we interviewed a Former Operations Executive to understand how the network is designed.

We also explore how it prices freight in the logistics side of the business to target ~5% net margin per warehouse:

Storage was based on the client and the rent we were paying for the building. In the warehouses I was in, I knew our cost per pallet space. Generally, in Auckland, since rent is higher than other parts of the country, we hoped most of our overhead costs, such as rent and racking, were covered by the storage cost, which might be $2.50, or $3 a pallet. We would generate our profit from activity, like goods coming in and out of the warehouse. On inbound, there would be a charge for unloading a container or truck and a charge per pallet to put the product into the racking. On outbound, it varied by customer. For example, a food and beverage customer would have different rates for picking a single carton, a layer of product, and a full pallet of product. These rates varied significantly between clients, depending on the amount going out. If you are picking 10,000 very small boxes, that is relatively easy; if you are picking 10,000 pallets, it is not. Our profit pledge, or budget, as you would call it outside of Mainfreight, was about 5% net profit before tax. - Former Operations Manager at MFT

MFT also seems to have the right incentives in place with 10% of all profits generated at the branch level are split equally between team members:

From my experience, the main difference is the quality of the team. Mainfreight has a reasonably high starting salary for team members, increases pay rates regularly, and provides avenues for progression and improvement. There's also the profit-sharing system. Generally, Mainfreight warehouses tend to be cleaner, have less damage, and the team is neater. It's an excellent sales tool, as the warehouses look good and the team works hard. The team is what sets it apart, driving quality and cleanliness. - Former Operations Manager at MFT

We will continue to cover MFT to understand what drives its competitive advantage at home and how it can be replicated in US / EU.

Herc, Sunbelt, United Rentals: Equipment Rental Buying & Pricing

This interview with a National Accounts Manager at Volvo construction equipment explores the relationship between Volvo and equipment rental vendors:

Being a large customer doesn't necessarily drive the discounts; it depends more on the volumes they're looking at with us. In the range, I would say between Herc, who we do the most business with today, they get probably the best discount. Then there's maybe a 3% to 4% gap between Sunbelt and Sunstate type businesses that we don't do as much with today but hope to grow. We're just starting to develop those categories with these customers. United isn't quite on our map because of the sheer discounts they want on some of their products and the capacity we have at the plant. We wouldn't be able to manage our business well if we had to go after United, who's buying quite a few loaders or excavators, especially in the current environment with the supply chain. - National Accounts Manager at Volvo Construction Equipment