Published Last Week

1. Topicus: History, Culture, and Organic Growth Techniques

2. Roper Technologies: Frontline Education Acquisition

3. Lithia Motors: Servicing Economics

4. Air Products: Hydrogen Megaprojects

5. Cogent, Lumen & Global ISP Networks: A Customer's Perspective

6. Belron, Safelite & US Auto Glass Repair: TPA Agreements

7. Markel Reinsurance: Public Entity Book

8. Volution Group: UK Ventilation & RMI vs New Build

9. BrightSpring Health Services: Challenges in Leveraging Nursing Assets

10. Ashtead Investor Day 2024

Topicus: History, Culture, and Organic Growth Techniques

This interview with the Former Managing Director of Topicus, who has over 20 years experience at the company, is part of our research project on how Topicus drives higher organic growth than other CSI operating groups.

This interview follows up on prior coverage of TOI organic growth in interviews on its healthcare division and education division.

We explore how TOI deploys the First Chicago Method for M&A and investments in existing and new product lines both pre and post-TSS merger:

Another change was that investments were treated differently. So with pre-merger, there was already, as I told you, it went from very informal to a more formal, centralized approach. And that trajectory went even further. So you have to go for serious proposals. You had to go to Robin. Perhaps you know that there are four scenarios. With the internal rate of return, that has to be 20%. And that's a spreadsheet that they use for acquisitions. But exactly the same spreadsheet is also used for internal investments. Given the way this is constructed, it is impossible to get a serious internal investment through this pipeline. - Former Managing Director at Topicus

The First Chicago method and IRR hurdles set by Mark and Robin determine the type and rate of reinvestment into existing assets to drive organic growth. This interview goes on to explore how such methods shape new product development, the culture differences between TSS and Topicus, and the challenges for CSI and TOI to switch on the organic growth engine if the M&A opportunity declines.

We plan on summarizing our lessons on how TOI drives organic growth later this month.

Roper Technologies: Frontline Education Acquisition

This interview with a Former Executive at Frontline Education, a VMS company acquired by Roper Technologies, follows nicely from our prior work on Topicus Education. Just as TOI owns Dutch Student Information Systems for primary and secondary schools, Roper owns a similar VMS asset in the US. Both operating companies have >80% market share:

The US has about 13,000 school districts and 85,000 schools in the US, with Frontline claiming about 8,500 of those districts as customers, which is over 80% market penetration. However, on average, about 2.8 products are used per school. Out of the large portfolio of products, there was significant cross-selling, which was the focus rather than greenfield, since market penetration was already high. The go-to-market strategy focused heavily on relationships, selling, and maintaining strong customer experiences and satisfaction to position for cross-sells. - Former Executive at Frontline Education, Roper Technologies

With such high market share, both Roper and TOI deploy cross-selling techniques to drive organic growth. TOI with ParnaSys and Somtoday expanded to software solutions that serve parents as well as students:

Today, companies like ParnasSys or Somtoday, they are monoliths that solve about 15 to 25 problems for a school, depending on the modules they choose. Our point solutions are more affordable, costing between €1 and €5. Schools are eager to buy our new solutions or modules because they are cheaper, effective, integrate well with their student information systems, and simplify contract management. This is one of the biggest drivers of our organic growth. We look into what schools are using and consider if it's something we can also build. - Former Head of Topicus Education

Frontline Education also evolved to become a one-stop shop for customers which drives NRR:

When it came to selling in the market, there wasn't a huge demand for the whole suite. As I mentioned, the average was under three products out of 30-plus; everything was about cross-selling. Once you gained a little traction beyond those three products, then you could start a conversation that says, "Hey, look, you've got six of these products. We've got a Frontline central app that's the single sign-on and so forth, where you can actually access all of them. Maybe you should consider the entire suite." So, we kind of snuck up on the one-stop-shop conversation rather than leading with that as a selling mechanism. - Former Executive at Frontline Education, Roper Technologies

The interview goes on to discuss Frontline Education in more detail and how Roper deploys organic growth tools within its VMS assets.

Lithia Motors: Servicing Economics

In this interview, a former 30-year GM at Lithia, the $6.8bn US-listed franchise dealer, focuses on the evolution and economics of the company's servicing department.

While parts and service represent around 10% of the company's revenue, it constitutes more than 35% of gross profit.

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This is due to significant markups charged for servicing both new and used vehicles.

I would say 40% on parts. The markup on labor is 80%. The only cost in labor is the cost of the technician. - Former GM at Lithia

This interview goes on to explore how new and used car servicing may look over the next decade and how vertically-integrated models like Tesla may impact franchise dealers.

Air Products: Hydrogen Megaprojects

Last week we published an interview on Air Products' hydrogen investments. In this interview, a 30+ years Air Products veteran compares the company's hydrogen strategy to the traditional industrial gases business and with peers Linde and Air Liquide.

What is different with many of these current investments, and you can look at Louisiana, NEOM, and others and see that much of this is more of a "field of dreams" strategy. There's a significant degree of "build it and they will come," which differs from the historical approach of industrial gases and certainly from much of Air Products' history. - Former Senior Director of Product Management at Lumen

Cogent: A Customer Perspective

By acquiring the U.S. long-haul fiber network of Sprint Communications, Cogent planned to connect the Sprint assets to its 800 carrier-neutral data centers in North America. This aimed to architect Cogent's network to provision waves within a couple of weeks through long-haul connectivity and metro rings dedicated just to the wavelength facilities.

In this interview, a former Senior Director of Product Management at Lumen explains why this has been harder than expected to execute.

They've been focused on that and not as focused on lighting up waves one by one before the foundational work is done. Their hypothesis was that if you look at the top 50 to 150 out of the 800, a lot of the traffic would be flowing between those 50. They thought that if that were true, they would generate $100 million of run rate wavelength revenue. However, that hypothesis wasn't true, at least as they could tell. I kind of want to get your response to this. They basically said a lot of the routes, point A or point Z, is within that 50 to 100, but not both point A and Z. They basically have too diverse of a route map or heat map to get to that level of revenue with just 50 to 100 data centers that they do business out of. - Former Senior Director of Product Management at Lumen

Belron, Safelite & US Auto Glass Repair: TPA Agreements

Given that glass represents less than 5% of an US auto insurers' total claims cost, insurers outsource the administrative portion of this activity to third party providers or auto glass repair shops. Safelite has been using these TPA agreements as a mousetrap to win and grow their business with insurers.

The TPA model evolved from insurers recognizing that with limited resources, they should focus their energies on managing auto accident claims, which constitute over 80% of their total claims costs. They decided to outsource the management of glass claims, which are far less complex. This model has been evolving for over 20 to 30 years. There are still several competitors, but Safelite now has these TPA relationships with the vast majority of insurers. The value proposition to them is clear. - Former Executive VP at Safelite

In this interview, a Former Executive VP at Safelite sheds light on the importance of TPA agreements in the US auto glass market and how the company developed its competitive advantage throughout the years.

Markel Reinsurance: Public Entity Book

This interview is part of a series of our work to understand how Markel has built and scaled its insurance and reinsurance operation. We interview a 40-year reinsurance veteran at Markel on how Markel built and operated its public entity book:

When I was at Markel, we had an in-house claim staff. We would know for each account what our claim staff, based on the claims that were coming in, were projecting the ultimate loss ratio to be. They would typically add a trend and development factor onto those for the individual loss, because the loss was sometimes termed as a green loss. You don't know where it's going to go yet. It might take a long time to settle. So, there would be a projection of the ultimate loss ratio by account done by the claims staff. Markel had a very experienced claim staff, specifically operating only in the public entity space. On the public entity side, our claim staff were also very hands-on and would go out and do claims audits at the pools' locations where they would look specifically at member files that pools wrote to evaluate the pool's claims handling. In terms of how you are reserving this claim, are you doing the main things you should be doing to effectively handle the claims? - Former SVP at Markel Reinsurance

Volution Group: UK Ventilation & RMI vs New Build

Volution is a £1bn UK-listed provider of ventilation products to the commercial and residential new and RMI UK market. The company has grown through acquisition within and outside the UK. In this interview, a Former Finance Director for its main UK businesses describes the new build vs replacement & remodelling dynamics of the business which are key to the cyclicality investors can expect.

Our traditional refurbishment and maintenance business in both the public and private sectors accounted for about 60% of our total sales volume in the UK up to 2020. (..) The most exciting sector, however, is the new build residential market. This market segment features the most advanced and developed products in terms of efficiency, heat recovery, and other innovative features. The majority of our R&D investment was directed here, as it represents the future and the highest growth sectors. - Former Finance Director, Volution

BrightSpring Health Services: Challenges in Leveraging Nursing Assets

Around 80% of BrightSpring's nursing staff is split between home care, home health, and residential living activities. The interoperability within those divisions enables the company to achieve greater scalability than if they were operated as independent business units. This scale helps secure larger contracts with payors.

I think it's less about driving tangible benefits to the operating expenses of the business as much as it is about creating optionality with payers. Being able to show a payer that you're capable of delivering the care model you're pitching is crucial. Discussing having 1,000 nurses in Nashville, Tennessee presents a very different level of credibility and a practical way of providing the care protocols that are known to be effective and that a payer is willing to pay for. I see it more as creating new markets for BrightSpring, if they're able to capitalize on the interoperability of nursing assets that could then be used as part of a discharge program or continuation of care program for dual needs populations, in whatever states I see. - former Executive PMO Consultant at BrightSpring

In this interview, a former Executive PMO Consultant at BrightSpring sheds light on the challenges the company faces in leveraging its nursing assets.

Ashtead Investor Day 2024

This IP Podcast (Apple / Spotify) explores our learnings from our visit to Atlanta for Ashtead's 2024 CMD. We explore:

1. Potential challenges as Ashtead scales to national accounts

2. Why Ashtead may be more resilient than in prior cycles

3. Other major takeaways from the CMD