Episode 22 – Economic Update, M&A Activity

Welcome to the TRSA podcast. Providing interviews and insights from the linen, uniform, and facility services industry. Most Americans might not realize it, but they benefit at least once per week from the cleanliness and safety of laundered, reusable linens, uniforms, towels, mats, and other products provided by various businesses and organizations. TRSA represents the companies that supply, launder, and maintain linens and uniforms. And in this podcast, we will bring the thought leaders of the industry to you.

We’re back again with another episode of the Linen Uniform and Facility Services podcast, interviews and insights by TRSA. I’m your host, Jason Risley. Our last episode featured information on TRSA’s new safety and health certification. If you haven’t heard it yet, make sure you go back and listen. This week’s edition of the podcast features a live recording that we did in September at TRSA’s 106th annual conference in Boston.

I’d like to give a special thanks to our annual conference event partners, Jensen and M and B Hangars. On the final day of the conference, Andrew Whitman, a senior research analyst at Robert w Baird and Company, gave a rundown of the economy and key financial metrics for the linen, uniform, and facility services industry based on numbers from publicly traded uniform companies and survey data gathered from commercial laundry operators. Let’s listen in on Andrew Wittmann’s economic and competitive update on the industry from TRSA’s recent annual conference. Okay. We have a lot to get through today.

Joe, thank you for having, me back. My partner, Justin Hocky, and I always love coming to this conference, seeing you all. And, we try to keep it fresh. They’re gonna see a lot of the same things. You’re gonna see a lot of new things.

You’re gonna get updates on everything. I’m not gonna waste too much time. And there were there are gonna be slides in here that I’m going to skip. As always, these slides are available to all of you. If you wanna reach out to me or make sure that TSA They obviously have a copy here at TRSA.

Conclusions first, detail second. The economy has generally been good. The labor markets are tight. You all experience this everyday. And there’s good growth in the in the industry.

Competition, pretty much everyone’s investing in the plant for efficiency, and in customer service. We’ve been seeing IT upgrades in particular over the last several years. Ancillary service offerings, continue to be remain an area of opportunity, we believe. Consolidation is kind of the new thing that lots of people wanna talk about. Certainly, in my role working in the investment community, with the publicly listed companies, there’s a lot of lot of talk about that.

We will, share some thoughts on that later. Capacity utilization, we think for the industry is at a record high today. Pricing power, you’ll see when we get to the survey results. The pricing power that I think is being experienced by most participants today, is above average, which is good. That’s some of the conclusions that we come away with.

Baird, we’ve been around for a 100 years. We’re a small investment bank based in Milwaukee, but we’re a global firm now. We did a really big acquisition, and now we’re sitting on over $2,000,000,000 of revenue and was 5,000 professionals helping people manage their investments and make good financial decisions for businesses and for their personal family. These are some of the other companies that we do research on. Obviously, we’ve got the uniform rental companies on here, but other business services as well, including, Ecolab, one of your key vendors.

We’ve been aligned with TRSA, like we said, for a long time. And if you’re not on our email distribution list, it’s not just the once a year that we come to this, but we also have almost monthly updates on the labor market and how that affects the uniform rental business. We have our quarterly surveys for the uniform rental. And now, for the last, 2 or 3 years for the linen rental businesses. And, we’d love to share those with you.

We always do ask for your participation in response in those surveys. They’re anonymous and confidential, so you should feel confident that your information is safe. We’re gonna start out with a kind of a financial market overview, then we’re gonna do economics, and then we’re gonna go through the survey results. If you’ve been watching the financial markets, generally speaking, it’s been a bull market for a really long time now. Earnings growth on average is what I’d call decent in the mid to upper single digits.

The Fed, we have a lot to say in interest rates. There’s been a lot that the bond market’s been telling us. But the Fed has been easing. You saw that, gosh, I guess that was this week. We have our 2nd interest rate cut.

And we were raising rates in the fed. The US fed is recently as in December. The 10 year, benchmark 10 year has absolutely collapsed, although it’s rebounded here in the last week. The yield curve, we’re gonna we’re gonna show a bunch of slides on the yield curve. You probably hear a lot about the yield curve, and why it’s been flat and inverting.

We’ll talk a little bit about that. We’ll show you what that looks like, because when you read in in the popular press, they just say it’s inverted. You don’t see what it looks like. We’re gonna show you what it looks like and and why that matters. But, you know, GDP last year, was good.

It’s a little bit slower so far this year, but unemployment is at a multi decade low. Okay. Here’s the the charts are starting now. So here we go. This is the, the blue line is the the yield on the 10 year benchmark.

You can see here, we were 3% not that long ago. We’re about 1.7 today after hitting about 1.45 about 2 or 3 weeks ago. That is a very low interest rate. If you look at some of the things that caused this, we always like to look at the size of the money supply. Basically, the Feds balance sheet size.

One of the things that’s been happening at the Feds is they expanded the balance sheet size through the great recession. You can see how much more money they put into the system, the big spike there coming out of the gray bar, which is the recession. Then over the last few years, the feds actually elected to shrink the balance sheet that usually should slow the economy, slow it down a little bit. And actually, just recently, they decided to stop shrinking the balance sheet. And, they’re talking about potentially expanding the size of the balance sheet, which is what the rest of the world is doing.

And so in this chart, the blue line is the United States Fed. It’s the same line going back to 2,002. This is the balance sheet size again and proxy for the amount of money that is out in circulation. And you can see that, one of these lines is not like the other. I’m gonna say that a couple of times in the next few slides.

The US is different. We’ve been shrinking the money supply. The ECB, the European Central Bank has been continually raising the size of their money supply in order to get the economy going. China is is is yellow, same. Bank of Japan is kind of that gray line.

They’ve been growing the size of their balance sheets, their central banks, all in hopes of expanding their economies. We’ve been able to shrink it and still grow, and expanding their economies. We’ve been able to shrink it and still grow. And that’s just one indication of why we’ve been different. Here’s another reason why we’ve been different.

This is the benchmark central bank rates. Similar chart to what I just showed you here. Is the blue line that kind of stair steps up there. Everybody else including the the the the Bank of China which is the red line, you You can see they’ve been cutting their interest rates in order to get their economy going. What’s super interesting here is the Bank of Japan is the brown line European Central deposit rate here, very negative.

It’s been negative for a while. Negative interest rates from the for the central banks to to try to get people to to infuse cash in the economy. We don’t want you to keep it. We don’t want you to save it. We want you to put in the economy.

Get us going. It’s been a long time. The rest of the world what I’m saying here is the rest of the world has been trying to get their economies going. We have not. And, you know, you say, what makes us so different?

Totally fair question to ask. Kind of an eye chart here, but the second line here in the red, and what we’re showing here is the inflation rates, the the interest rates from the the central banks, and what the real interest rate is. So, just take the difference between them. Basically in the United States, our real interest rates after inflation are 0. This is a stacked chart as to where everybody else’s central banks interest rates are.

You can see in Germany central banks on a real basis after inflation are minus 2.3%. Really pretty shocking. Everybody else is negative. We’re the only ones at 0 on real interest rates. Super interesting chart that I came across.

I thought I’d show it. Okay. So yield curve. Right? What’s the yield curve?

It’s the interest rate, is on the vertical axis and the horizontal axis is the duration of the government bond. Normal economy is the yellow line. The yellow line is this is the United States Treasury, yield curve. The yellow line is what it looked like a year ago. In in a normal situation, short term rates are supposed to be lower than long term rates.

So you’re supposed to have this kind of nice upward slope like we had a year ago, when everything’s normal in your economy. But when things go bad and people think that the future, is is not so good and you’re going into recession, long term interest rates fall down and your short term interest rates are higher, and then you get this thing called an inverted yield curve. And, over the last week, month, or even today, which is the green line, you can see that short term rates and long term rates are pretty much the same. So they call it a flat yield curve. And it’s indication usually that, something is, going to be going wrong in the future in your economy and slowing down.

Another way of looking this is, the Another way of looking this is, the, what is this one? This is the spread between points or 2% more for a 30 year bond, than you did for a 2 year bond. And now, that spread is only 50 basis points different. This is another example of the yield curve flattening out another way to look at it. So financial markets, obviously the stocks have been very strong just in general, and particularly the publicly traded laundry stocks.

Valuations are near record levels today. That is important. Uniform stocks from my client’s point of view, institutional investors, big mutual funds who own these stocks, they’ve been seen as relatively safe havens in the industrial economy to invest in. They’re not seen as a cyclical, they’re seen as pretty good businesses. So, as a result of that, the valuations in the public markets have been bid up pretty significant honestly.

There has been I say, a year ago, there’s a lot of concern from my investors in the sector that labor pressures were gonna eat away a lot of margins. But price increases have been It seems like more than enough to offset that. And so that fears about the labor market while it’s still very much a challenge aren’t as high as they used to be maybe a year ago when there was a lot more nervousness about that. And I think that’s again mostly due to the pricing environment that’s generally been available to the companies out there. The thing that I mentioned earlier is about investors in the publicly traded stocks have been kind of very, very focused on doing one, the view that there’s one more big M and A deal, consolidation deal that is going to happen.

We’re gonna talk about that more in some slides, but that is definitely at the forefront of a lot of investors minds today. This is a bit of an eye chart as well, but it’s actually pretty interesting. What we’re gonna do here in the next three slides is kinda show, a view of how investors have been looking at the big three publicly listed, uniform rental stocks. And we’re gonna do that, by forecasted airmarks and sent tosses and UniFirst earnings. And what we wanna see here is in a in a in a stock that’s gonna go up, you’re going to want to see our earnings estimates for the future of these 3 companies rising.

And when they do that, over time, which is the the x axis here, you’re gonna see more green. That means there’s more analysts like me that are raising estimates. When they’re yellow, they’re not changing. When the bars are red, we’re cutting our estimates. So here’s Aramark to start out.

There’s a lot of yellow and red. Earnings estimates have been coming down. Their performance has not lived up to expectations. I think, many of you, from what I’ve heard over the last couple of days, maybe seen that yourself. This is not only in the uniform business, this is also their food business.

But the net of it is that there’s a lot of yellow, and there’s a lot of red a couple of years months ago when we we cut our expectations. Obviously, you’ve seen some of the changes there. Unifin’s a little bit different story. A lot of green there. Right?

This is a this is a big deal. The A couple Let’s see. Earlier this year and late last year, you’ll note that there was some red bars. At that time, UniFirst cautioned that labor was going to impact their profit margins, pretty significantly. And so we all had to cut our estimates at that point in time.

But since then, it wasn’t as bad as they said. And so, earnings estimates you can see have gone up pretty strongly and this is one of the reasons why Unifirst stock has performed very well. Centas is a little bit of the same story here. You can see there’s very little red here, very little cutting of expectations. In fact, over the long term here you can see this is a 2 year chart Over the last 2 years, there’s a hell of a lot more green here, than the other ones.

And that just shows you, that they’ve been able to beat expectations, and raise the bar for how much profit, they’re getting. We’ll get into some of the reasons why, but just an example. If if you would’ve asked me a year ago what they’re gonna earn next year, I would’ve said they’re gonna make about $8 of earnings per share, and now it’s 8.5. I mean that is not inconsequential to take up your estimates by 6% in the last year. So, just wanted to show you that.

And as a result, this is kind of a measure of the blue line versus the S and P 500. The blue lines are uniform rental companies kinda average last, decade, how they’ve performed. You can say they’ve done very well versus the S and P 500, over the last, on a year to date basis. That continues to be the same case here, so shorter time frame, but the uniform stocks have been good. This is another way of looking at the individual companies.

You know, in in in the last month, Aramark’s been one of the best stocks. Interestingly enough, we’re gonna talk about that in a sec. But over the last year, trailing 12 months in the bottom right, you can see Cintas has been the best performing stock. And today, if you looked at the way that these stocks are valued, there’s a huge divergence. Cintas growing by far the fastest in this industry is now earning an 18 multiple on their, on their EBITDA, and a 30 multiple, 29 multiple on their earnings per share.

That compares to, like, an 11 multiple for the other 2 companies. So, Centas is getting really really strong valuations. This is a stock that my clients, really see as a sound investment because of their operational prowess, and their market position, and investors have been willing to pay valuations for the stock that they haven’t paid since the late nineties. So, Cintas is doing well. I charts for the next three charts.

I’m not gonna go into it in detail because I don’t think we have time, but what these all are is how the valuation multiples of the companies has evolved over time. And so this is Aramark’s in their most recent public iteration, how it’s gone. And you can see that it’s been kinda choppy. Again, I’m not gonna spend too much time, I don’t think you should either. But this one’s kind of more interesting at Cintas.

So I will spend a little time on it. The top chart is their EBITDA multiple. The bottom line is their PE multiple, and if you and this is a 10 year chart, so if you went back 10 years ago on EBITDA, Cintas traded at 8 times EBITDA, again, it’s trading at 20 times EBITDA. So you wonder why the stock is done so well. When your EBITDA multiple does that, you can’t help but be a wonderful stock to own.

That’s what’s happened. UniFirst is kind of a blend between the 2, it’s kind of bounced around a lot. But it’s up today versus certainly up today at 11 times versus an average closer to about 8 times on the EBITDA multiple basis. So in the most recent quarter, here’s a chart Cintas, Airmark, Unifirst for the rental businesses. Compare like what did they post?

Organic growth rates at Cintas of 6.8% for the whole business. This is the rental business as well as their ancillary product business. Aramark only 3%, UniFirst 6%, that was an acceleration for UniFirst. Senior First up at 6%. It’s actually been a while to see them do that.

When you look at how is the trend been in terms of how much faster did they grow last quarter than the quarter before that, UniFirst grew almost 2 percentage points better than the prior quarter last quarter. So they’re seeing dramatically accelerating organic revenue growth. The other companies showed some sequential acceleration as well. And you can see the margin profile of those businesses. Cintas’ last quarter 18.5% operating margins, only 10% at Aramark, and 13% at UniFirst.

So, in case you haven’t checked in, the profit margins that’s in task doing, they continue to stand out amongst the other ones. You can think of all the reasons I think scale is a huge reason there. But I would also say pricing is probably a factor to their margin profile as well. Interestingly enough, the margin, if you think about the year over year margin growth that Unifirst put put up over 200 basis points of margin expansion last quarter, which is really interesting to see. Aramark’s margins were actually down by 3% growth, which is a little bit disconcerting, particularly when you think of the fact that they’re now just over a year into the integration of AmeriPride where they should be pulling cost out of that.

In the prior year, they had all the cost from AmeriPride. This year, they should have some of that out, and their margins were still down with better than inflationary growth. This is a very key factor and a reason why we’ve been less positive on their stock. This is quite disconcerting to us, when you when you really think about that. So air marks.

Everybody’s like, Andy, what’s going on in air I’ve had the question a number of times. So here’s my, let’s talk about Aramark. Most of you probably know that they got a new 20% shareholder. Starboard Value Investors is a very well known activist investor. They came in and a week after they filed their position, they had the company’s CEO fired, which, most of their investors would would have said was probably overdue.

They’ve been over promising and under delivering to their shareholders for quite a while. And so, Mantle Ridge, is is This is only their second investment, but, I said Starboard. These guys used to be at Starboard. A couple of guys fragmented off for Mantle Ridge, and they own 20% of the company. They haven’t said what the playbook’s going to be.

They haven’t said, the firing of the CEO was pretty obvious, but we get the question all the time, Andy, what’s the game plan? So here’s what we think the game plan is. Again, this is totally Baird, What we would probably recommend, they’re gonna probably push for multiple board members to be, maybe an entire slate of the board to be changed out. They’ll probably get a settlement to get 3 or 4 new board members on. But they would say, how can you keep the same board that led to the value destruction there?

Negative earnings revisions for so long. You gotta make a change. Replace c level management. Well, that happened. I wrote this slide before, he was actually fired.

So now, that’s actually happened. And then really, the the biggest way to create value at Aramark would be to figure out some way to not only spin off the uniform business, but to combine it with somebody else, because of the very powerful synergy potential. And so if you had a 20% stake in this company, and you wanted to make money for your investors in a 5 year horizon, you gotta start there. And so that’s led to what we call the domino effect of like what’s gonna happen if if if if if Aramark’s got a shareholder that says, you gotta combine it. Then it’s like, okay.

Who you’re gonna combine with? And what does that mean? So we’ve been saying, is it Cintas? Do they get together with Unifirst? And we can all speculate.

You know, I’m I’ve written this. If you’ve been reading my research, I still believe that the first domino is is is is Mantle Ridge saying to spin off Aramark’s business. But I think at the end of the day, when the dust settles here, if there’s a deal that’s going to happen, this is totally if hypothetical. This is nothing I know. This is hypothetically.

I’m a believer that ultimately, Syntas and UniFirst would probably be the most likely ones to get together. We’ve written that, we’ve said that. And the reason we think that is we think there’s better cultural compatibility, we think the union issues at Aramark are gonna be really hard for either one of the other two companies to get around. So our belief is that while the first domino might be related to Aramark, the last domino might have to do with with Cintas and UniFirst ultimately, for whatever that’s worth. The other shareholder, initiative is going to improve Aramark’s food business in North America where they’ve been losing share, similar to their uniform business.

So, they’re definitely going to have to focus on that. All right, so we’re gonna get into a little bit more of that here. We’ve showed the slide on the kind of the details behind Cintas and g and k. I I guess the update to this slide, now that we’re almost a couple of years in, is that when Cintas first announced this deal, they said they’re gonna pull out a $140,000,000 of cost synergies. You might remember that G and K had a $150,000,000 of EBITDA.

So, they were almost gonna double the EBITDA, and that was the kind of the punch line from the last couple of years. But the interesting thing is, Cintas said it was going to take them 3 full years to kind of get at that run rate to find the $140,000,000 of cost synergies. And as we sit here today, they’ve actually delivered the full $140,000,000 cost synergies a year faster than they thought they would. So now, investors are starting to think about, is there more cost synergy that they’re going to pull out. I don’t know that they necessarily will, but I would just say that executing that kind of integration a year ahead of plan, is pretty rare.

And so I’m gonna leave my comments on on G and K and Cintas to that. But again, these are charts that show kind of side by side the number of facilities, revenue, things of that nature. And I’ll just leave that for you to look at later. Aramark and Ameriprise is we’re a year and a half, little better than that into this one. What I would say about the progress on this one from what we can tell, I’ve heard a lot of people saying anecdotally, I’m getting business from Aramark.

It’s not just one. There’s plenty of people saying that the integrations maybe not going as well, and they’re picking up business as a result of that. I think that’s true. But when we actually look at the numbers, we have an estimate of what we thought, Ameriprise revenue should have been. And we can see exactly how much it’s contributing to Aramark.

It’s probably slightly below plan. They’re probably losing a little bit more business than, than you’d think. But it actually hasn’t at least the numbers so far haven’t borne out that there’s been a massive revenue loss from the from the AmeriPride deal, From what we can tell that can change going forward, we’ll know, but for right now, it doesn’t look like there’s been significant revenue loss, that matches the commentary I’m hearing from many of you guys. Here’s that one. Okay.

So, this is just kind of a slide, and I put this one together for my investor clients, which is pretty interesting. And it’s like, the point of this slide is to show how massively how massively synergistic putting 2 uniform rental companies together can be in terms of earnings. And so this is like, I don’t know what I say, how I’d call it, but it’s kind of the law of gravity. And so, what we do here is we show, you know, the financial revenues of G and K and AmeriPride, and and and the values that they got bought out on. But in the bottom where the red circle is, we look at the synergies dollars that were promised as a percentage of the company’s revenues, which is about 13% of the company’s revenues get our anticipated cost synergies.

In other words, your margins go up by 13 percentage points in these two examples. And if you looked at the percentage of the EBITDA, your EBITDA as a result of that goes up by about 84% if they’re able to deliver those cost synergies. And Cintas was and we’ll see about AmeriPrides cost synergy, but those are pretty compelling numbers that I think really make the case for continued consolidation. So it’s another big question I’ve gotten is, Andy, do you think consolidation continues? The answer is yes.

It hasn’t stopped in decades. Why would it stop now? Ultimately, antitrust for the big guys is gonna be a factor. But like I said earlier, I do think there’s room for one more big deal there. So here’s just a side by side comparison for context, a lot of people just, it’s nice to see these things side by side.

So here’s revenue, EBITDA, margin percentage, number of employees for the 3 big guys. I mean, you kinda all know this, but these are the actual numbers. I thought I’d put it up there. So bottom line here, Cintas is more than twice as big as Aramark’s business after Ameriprise. So even with Ameriprise, Cintas is still more than twice as large as Aramark here today in terms of revenue dollars, just for some context.

And that we just had a list of some of the bigger deals that we remember seeing. The purchase prices in terms of multiples of revenues, and EBITDA. Obviously, the more recent deals have been going for about 2 times revenue, a little bit more in G and K’s case, and around 11 or 12 times EBITDA. He wants to know what their business is worth, so you all kinda know that. That’s not anything new.

Cintas, so, you know, I don’t know why I have this slide. It’s not really in the right spot. But since we’re talking about the the big guys, I I built this wheel here for for Cintas. And and it’s interesting because, you know, everybody’s like, oh, it’s huge rental uniform rental company and it is, but it’s actually 42% of their revenue is uniform rental. Certainly, what they call dust control and mats, that’s mop heads in there too, For 15% is obviously a big part of their business.

But that hygiene business and the kind of brown there, that’s their cleaning chemicals, their restroom supply, kitchen chemical supply, as well as their floor cleaning. I mean, none of that’s really small business anymore. You think about $7,000,000,000 of revenue and they’ve got $750,000,000 just in hygiene supply. Think about that for a second, just in hygiene supply. That’s an amazing size business when you think about how much soap and paper towel and air freshener they’re selling.

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Review the brochure and learn more today at www. Trsa.org/healthcare. Now back to the episode. So industry consolidation, I kinda talked about it. Let’s Talked about why the cost synergies are compelling.

We think cultural compatibility really matters a lot. And yes, we think it’s going to continue. So here’s the big picture stuff, we’re gonna do that now. We’re talking about how many people wear uniforms, how big is the market, who’s got what share, here’s what we can tell. These are all estimates, this is very hard math to do.

Here’s the way we see it. There’s 150,000,000 people that go to work every day in the United States of America. And we think about half of them could wear a uniform. Today about 46, today about a quarter of the workforce already wears a uniform. So there you go.

The market size and potential here for again, for just uniform rental, we think is somewhere in the order of $15,000,000,000 $16,000,000,000 And today we’d say that like 2 thirds of that is already being rented, or is in a rental program. So there’s like another maybe 30% of people that actually could wear a rented uniform, but aren’t wearing it today. So it’s mature, but it’s not fully penetrated. And there’s still a little bit more to do here. If you looked at garment rental only, these numbers are bigger than what we showed last year.

We went through it again. And we’d say somewhere around $10,000,000,000 $11,000,000,000 is, and this is just truly garment. This is not masks, this is not mops, this is just stuff that people wear. We think that Cintas is kind of roughly 40% of that market, maybe a little bit less, maybe a third of the market, and these are all kind of with air bands, air market universe. So that means that in today’s marketplace, the people that are already renting, not the people that could rent someday, but people who are already renting, The big guys, half, 60%, 70% seems too much, but somewhere in that neighborhood is the way we’ve done the math.

Over time, this is the layer chart of how we think that’s evolved. There’s this big discontinuity at the end where the blue line from Syntax gets bigger. We know what happened there. That was them buying G and K. Just estimates of what that looks like.

You know, left side of this chart is about 40,000,000,000 market in uniform rental, linen supply, direct sale. I don’t know how to define that because you can buy uniforms a lot of different places, but I don’t know. We took a cut at it, and then the sanitation stuff for the Jan San type businesses that can be sold off of one of the routes here. We think it’s a 39, it could be a 50,000,000,000, a $49,000,000,000 market if everybody were to outsource it today. And that’s how we see it stacking up.

This is market shares against that. Next part of the presentation is economics in the labor markets, checking in there. GDP, the broadest measure of overall US health. This year on a year to date basis, it’s 2.6%. Last year finished at 2.9%.

That means the economy’s growth rate has slowed down. We can talk about trade wars and all the other stuff that you hear about everyday. Certainly, this is part of the reason why you’re seeing the fed coming in, tying that back into what we’re talking about earlier. But let’s not forget here, you know, we’ve annualized, the tax cut stimulus that we had a year ago. It’s part of the reason why last year’s GDP growth rate was better.

We also have, we also have a government that has not been fiscally any more conservative than you think they would be. They’ve actually been spending quite a bit more, so that’s been stimulative to the economy too. So you can actually break down these GDP numbers into government spending and other things. But you’ll see that if you do that, it still has decelerated this year after a very nice clip at almost 3% last year. I think last year, if we would have had this conference, you would have heard us say, oh, the US economy is the best in the world.

Still is, but it was really firing all cylinders from a growth perspective last year. A little bit slower now. Retail drives about 2 thirds of the economy Retail drives about 2 thirds of the economy. So let’s check-in with the consumer here on this slide. Retail sales are up about 3 or 4%, which is good.

We like to look at durable goods like cars as a as a good indication. Very very steady about 17,000,000, 17,500,000 vehicles sold in North America. Been a pretty steady level for a long time. Again, the tax cuts happened last year, and that was helpful for the consumer. Construction’s a little bit weaker guys.

This is another pretty good indication because these are big spend items. Construction, if you look at total construction put into place, which is the broadest measure of construction activity in the US economy, it’s actually negative. The black line is the growth rate. The blue line is the absolute numbers, so the black line is kinda what matters here. You can see it’s negative in the most recent data point here.

And this would this would match other leading indicators of the economy. One that gets pretty closely watched is the Dodge Construction Index, which is the upper left hand chart, which is negative. This is, wind construction projects just start getting built. That’s what makes it what drives the Dodge construction index. That’s negative.

Another, leading indicator is architectural billings index. This is how many architects and engineers been kicked off to design future construction projects. This is a kind of a sentiment measure, just ticked negative here in the last couple of months. So construction is a bit of a bit of an issue right now. Housing, if you looked at housing starts flat year over year, they they were negative not that long ago.

Again, another in this indicator of of construction. Gonna skip that one. Let’s talk about inflation. Inflation, honestly, we haven’t had a lot of it. So the what we said, you know, there’s is some fear that all the stimulus in the economy would cause big inflation.

We’ve seen the labor inflation certainly, it’s around 3%. But honestly, the broadest measure of inflation, the US economy is still been around that 2% range. It’s actually a little bit less, a 1.8. So, because inflation has been low, that has been one of the factors that’s allowed the Federal Reserve to say, okay, let’s give it a little bit more juice. If we don’t have inflation, we can stimulate the economy without worrying about inflation getting out of control.

And that’s why you’re seeing the fed easing today. Manufacturing, this one’s getting a little soft too. I don’t have the slide in here, but there’s the PMI, purchasing manufacturers index. That one went negative, last month in August. And, got people’s antennas up on that one.

So they’re watching for softness in the manufacturing economy. It’s definitely slowing, but if it goes negative, that’s more disconcerting. The one measure we do have on here from the from the ISM index is the bottom chart here. You can this is the employment manufacturing index, for employment and manufacturing. You can see it slowed down pretty significantly.

I showed that one, because I think there’s relevance to many people in this room. The other way of looking at this, you you always hear on that first Friday of the month, you get the monthly jobs report. Okay. Top right corner here is the monthly jobs report, the average for any particular year. The red bar is in 2019 year to date.

And you can see that bar is a lot shorter than last year last year. 223 jobs per month this year, so far, year to date, most of the years in the books, 158,000 jobs per month. We slowed in job creation. You guys know that I like, looking at initial claims. Every week we get data from the government that says how many people lost their job last week.

And this is still continues to be an outstanding number, here. Gosh. When you when you think about it, initial claims have been around 200 to 215,000, initial jobless claims every month. That is, or every week. That has been an astoundingly low number.

You can see the context, you’re going back to 1967 in the top chart. And you can see that, you know, just how low 200,000 initial claims is in the grand scheme of things. We actually like anything under 400,000, and so 200,000 is shocking. And what’s really crazy when you think about that, again, it was like 1969, the last time it was at these levels. You You think about how much the population is grown, so we just take that number and normalize it per, 1,000 people of population.

And you can see right here that the initial claims adjusted for population are kind of shockingly low. And that means that the unemployment rate is 3.7%, which is, the lowest, since 1970, I guess. It’s in 1969. Since 19, it’s really in the modern history, it’s never been this low. So, the unemployment rate is extraordinarily low, which means that more people should be coming out to go to work because there’s been labor inflation, and we should induce more people to work.

And so far that actually really hasn’t happened. What’s actually happened is that the employment participation rate remains about 62%. It’s been less bad. It’s the the employment participation rate is is the top chart here guys. You can see in 2,001, we had employment participation was 67% of the workforce was out there, it’s about 62%, 63%.

You can see there’s a slight upward tilt in the most recent years, just very slight, but not that much. And so, still a lot of people wondering like, where is everybody? Why aren’t you coming out to work? And we can talk about disability laws and other things, which are real things that have affected that. But it’s still is a little bit surprising that we haven’t seen more people teased out into this workplace considering.

And the point of this slide is, these total eye charts. I’m sorry. But the point of this slide is to show that when you when you start This is the part of the presentation where I cut into the overall labor market trends, where we look at all jobs, including professional jobs, where we tie to work. We look at just the jobs that people will wear a uniform. And so point of this slide is to say that people who wear uniforms is actually seeing better employment growth in things like manufacturing, some of the service industries that would wear uniforms than we have, even in professional services or government jobs.

And that’s been a long time trend. You’ve heard me say before. I’m saying it again this year. And so, so when we look at just this is an end, we call this our ad stop employment index. This is a subset of that monthly job ads number of people that we think job categories that we think wear uniforms.

And so, why it’s not 200,000 jobs a month, this is a smaller number. We like to see this number around 50,000 jobs a month. And this year so far, it’s only been $44,000 a month. The last couple of years it’s been around 50 or 60. So we’re seeing that same slowing trend in job creation specific to uniform rental markets as well.

Thought I would highlight here today, it’s specifically if you looked at manufacturing. This is just manufacturing jobs in the government data on a year to date basis. Only 6,000 manufacturing jobs created each month last year. That was twenty 2,000 created each month. If we looked at construction, similar trend, right?

14,000 per month this year versus 26,000 last year. Slowing. I hope you’re getting the drift here. Next segment is the, what are things that are happening from our survey. Thank you all so much for the 30 or so companies that participate every quarter in our survey.

Please, please, please, we need your feedback to continue to make this a robust and helpful thing for everybody in this room. If you are not participating, please do consider participating in our rental survey. If you’re not getting our emails, please reach out to me and give me your email, so we can get you on this. The survey guys, it takes like a minute. Everybody knows who’s taking the survey, knows that this whole thing takes like 2 minutes tops.

So it’s super low impact. First question in the survey is always, which of the following best describes your rental revenue trend in the last 90 days? And the answer is, did you beat your budget, meet your budget or exceed your budget. And last quarter that we just published this last week, we had 92% of the people beat or exceeded their budget expectations in the September time for the quarter ending August September timeframe, which is historically extremely good. So people are doing great on total revenue.

When you look at ad stops, ad quits, whatever you want to call it, we’re seeing generally that the customers seem to be net hiring here at a rate that’s, pretty good, in the historical context here. I think the index, the number came out at like 58.3. This is where 50 is kind of no change from the last quarter. So, anything above 50 means that it’s a little bit better from last quarter, and ad stops seem to be a little bit better in the summer than they were in the spring. New account pricing trends, always challenging, always less than 50.

This is like how competitive do you need to be on price to win that new account. And if you get 50, you didn’t have to be any more aggressive on your pricing to get that new account this quarter than last quarter. And this is one of the rare occasions where as the number came out at about 50, you didn’t have to be any more competitive to get that new account this quarter than last quarter. In the grand scheme, that’s good than having to cut your price a little bit lower to get that new account. So while it’s not good, the fact that it’s not worse is good.

Base account pricing, this is your annual price increases. We ask you, you know, how much were you able to get this year? Pretty interesting, we show the Pareto diagram here. You got more than 4%. We had 20% of the respondents saying that they got more than 4% price increase.

Think about that. I thought that was pretty good. And then if you combine that for people that got at least 2 to 4%, you had, basically half of the the the survey respondents said they got at least 2% pricing, sometimes more than that, which is great. Couple of price cuts in here, but on the average, when we kind of blended out, we estimated about 1.7%, we call it about 2%, which isn’t dissimilar from historical trends. This is the average price increase for the annual price bumps over the last, whatever, 6 or 7 years.

Right around that 2% range, it seems like where it always comes out on average. But you can see, obviously going back to this one where some people are getting more. That takes us to how much new business is in the marketplace question, which is over the last 90 days interest from people who are not currently using a rental program. This is not people from competitive wins, where you’re taking it from somebody else, but are you finding new business in the marketplace? And the answer is, yeah.

Pretty good clip here, but 56 on that score of 50 is the same as last quarter. So then the last question that we ask is, what are you thinking about the future? What’s the growth rate that you’re budgeting for the next 12 months? Here we got a very strong response this quarter actually, the best we’ve seen in quite a while. The average growth expectation was 5.3% growth, you can see that compares very well versus history.

And when you break it down and I show you the Pareto diagram, you can actually see that most people are thinking 3 to 5% growth, but a whole bunch of folks here, 5% to 7%, 24% of the respondents think that there could be north of 5%. A whole couple of people thinking price increases in the high single digits. I almost feel like it’s a bit of an outlier there, but this is what led me to say that I think the pricing environment seems pretty good today. All right, let’s do this a little bit faster for the linen side. Survey says, remember that guy used to, say, survey says, you kiss the ladies on the cheek.

Remember that guy? I liked him. I thought he was funny when I was a kid. So linen. So the trends in linen were good, but probably not as good as they were in uniforms is kind of my overall picture.

Here, not as many people were beating the budget in that late summer quarter. New account pricing, it was 47, which is consistent. Things haven’t degraded over last quarter. Base account pricing, average response for that annual price increase 1.6, I think it was 1.7 in the other one. Pretty good price increases here.

It doesn’t have those big ones, it doesn’t have the the Pareto doesn’t skew as much the very high growth as they did in Uniform Rental. When you look at the annual price increase, that’s the trend. 1.6 compares okay versus the history that we have here. New business, the amount of new business available for linen rental is similar to what we saw in Uniform, which is pretty good a little bit more than last quarter. And when you ask about the 12 month growth outlook, gosh, I don’t think anybody would really complain on average that 4% or 4.5% growth for the next 12 months in your Linden business would be a bad growth rate at all.

And that compares pretty well. So, that’s how that one scored out there. If you do the Pareto on the outlook for organic growth expectations, almost everybody thinks there’s 1% to 5% growth out there, which is not bad. So we’re almost done here. Last section is from Joe and from you guys when we put the TRSA annual performance report together.

Many of you guys already saw this report. What that report doesn’t do is it doesn’t give you a great time series. So we we take that data, we try to give it a little bit more context. And so we just pull the highlights, because there’s a lot of data here. And we just pull out what we think is the most salient point.

So let’s start with revenue growth. Independent operators have seen overall sales growth comparable to national firms is the line that we say here. Again, if you look at the the the the TRSA performance reports going back many years now, they came out at 4.6%. That sounds a hell of a lot like the survey I just showed you. Right?

And it’s not that dissimilar from what the public companies put out there either. So this is a little bit more of an eye chart. This is now we’re looking at it by category, linen, industrial, healthcare, and I guess what I would say here is, there’s a lot of variance between the business lines. The linen business in the last couple of years seems to be growing a little bit better. Industrial has been doing very well.

The healthcare market in terms of revenue trends seems to be a little bit more challenged when you cut in this in the last couple of years. I’m looking here now at the brown mines on the chart. You can see that 17 was was a really good year, but 18 much slower. I think, we’ll see next year how how nineteen’s coming out. This one I always like.

This is the one that shows, I think if you looked at the actual data in the performance report, there’s a category that says, like high performing firms versus not as high performing. I don’t know what the detail is here. But basically it says like, for those of you that have got higher than average margins, like where does it come from? So we show, I guess they call it typical and high margin firms. And then, you know, we don’t get a lot of detail because they try to make everybody’s income statement look the same, and you gotta kind of bend stuff kind of in the categories.

But if you do that, and you look at the typical TRSA margin, the bottom there, the dark gray, typical 7.2% margin. The high performing firms are 13.6% margin. So you got whatever, 600 basis points of margin differentials. So where does it come from? And generally, honestly guys, it’s mostly in that light gray portion what they call the fixed price or fixed cost bucket of plant costs.

And so kind of broadly defined plant cost seem to be the biggest opportunity. Although, don’t sell the administrative costs short here, the highest margin firms have 100 basis points advantage in administrative costs over the typical performing firms. Merchandise cost is a factor up there in the blue, but compared to these other fix cost and administrative cost, it doesn’t look like the merchandise cost is as much of a factor. Certainly, every little bit helps. I’m not saying it doesn’t.

But in terms of the biggest buckets, that’s where it comes out. Profit margin trends. This data gets a little bit wonky because there’s some non comparability year to year about who participates and who doesn’t. It’s always difficult with these surveys. Very hard to normalize for you know, the data type I guess, on on average, the data would show that margins in 2018 were down.

I don’t think I believe that. I don’t think you guys would believe that. And so I show this because, you know, your profit margin trends matter, but it doesn’t really feel right to me. Could be, but that’s what the data was showing. Sales per route, great metric, great productivity metric here.

2018, nice step up about 5%, step up in productivity after a year prior to that, which was another 5%, 6%, 7% productivity step up in 2017. So productivity sales per route looking good. Sales per employee, similar. I like the sales per route. I think it’s a better metric personally.

Maybe you agree, maybe you disagree. And then this is, again, just looking at plants costs in the blue bars versus route costs in the gray bars here, just because they’re big buckets. We wanted to show those how those have trended over time for the for the typical T RSA firm. And you’ll see that the plant costs have generally come down. In 2018, they are up a little bit over 2017.

But the trend line has been down as the fixed costs have gotten better leverage with 10 years of growth behind. And, energy costs as a percentage of revenue. I like this one because everybody’s got energy costs and we all kind of know what it is. So energy cost is a percentage of revenue. Basically what I’d say is flat last couple of years.

But I always like to make this point because maybe you know this, maybe you don’t. But so, 4% is a good number. If I and and dealing with the public companies that disclose this stuff, if you listen to Unifirst conference call, they say, yeah, about 4% revenue goes to energy. And this is electricity, natural gas, gasoline, diesel, the whole slate. Everything in energies.

UniFirst, pretty big player obviously, 4% of revenue. Percent of revenue. Anybody I think I’ve said this one before. Anybody know what Cintas’ energy costs are as a percentage of their revenue? Anybody wanna hasten to guess?

2. 2. That’s right, 2%. They got 200 basis points in margin differential just on energy prices due to their scale, and because of the investments that they’ve made in their plant, to be honest. But I think it’s a shocking number.

I still like to show that one over time. And then here’s just some other stuff going back to the big guys, and this is the last segment. Give you a context of what some of the big guys are doing because we have this information. Here we have the organic growth rates for the rental businesses and the 3 big guys. Syntas, Airmark, and UniFirst, all in one chart, all in the same skills.

You can see how they’re growing relative to each other. I don’t think anybody’s surprised at the relative ranking of these numbers, but Cintas here at about 6 6.5%. This is 3 years of quarterly data is what we’re showing here. And you can see the kind of the trend line. Cintas has been the kinda rock solid in that 6, 7% range.

Aramark’s been pretty volatile in their organic growth rates over time, and, and and lower on average. UniFirst is interesting in if you could go back 3 years, they had a lot of energy exposure. They had a lot of for any of you that are in Texas, in particular, West Texas, in particular, even more so. Had a lot of exposure that really hurt their organic growth rate in 2014 when oil prices collapsed. Since then, they’re starting to get some of those jobs back, and their growth rates perking up with them, and that’s explaining why Unifirst organic growth rates have been better.

And then if you just kind of average out their profit margins, which is kind of unfair because all the companies are different. I mean, you’d see margins kind of flat to down at Aramark. Unifirst margins have been been falling over actually a 4 or 5 year trend. Cintas margins have been improving. On average, if you average them all out, they’re kind of flattish.

But in the different companies, they’ve been trending pretty differently over time. This one I always like to show, I showed this for the first time, I think 2 years ago. I didn’t have a chance to show it last year, but I really like this chart because I think it shows, again, some competitive data here which shows the total revenue, number of facilities, revenue per facility, and you can see that, and the profit dollars per facility. You can see Syntas is doing what we estimate around $13,000,000 $14,000,000 of revenue per facility, versus like half that at the other 2 publics. Alright.

Thank you all so much. Best of luck. Best of luck in your businesses. Andrew’s presentation shined a light on the current state of the economy and more importantly, the linen, uniform, and the facility services industry heading into the Q4 of 2019. If you want a copy of the slide deck that Andrew talks about throughout his presentation, send an email to podcasts attrsa.org, and we’ll send you a copy.

If you want to participate or receive a copy of Baird’s quarterly uniform and linen rental survey, contact Andrew Whitman at awitman@rwbear.com. That’s awittmann@rwbear.com. We’ll be back 2 weeks from now with another episode of the Linen, Uniform and Facility Services podcast. Until then, don’t forget to subscribe, rate, and review us on Apple Itunes, Google Play, and Stitcher.