Episode 9 – Market Trends, M&A Update from Baird

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.

 

Thanks again for tuning in to another episode of the Linen Uniform and Facility Services podcast, interviews and insights by TRSA. I’m your host, Jason Risley, the senior editor of digital and new media at TRSA. Before we get into this week’s episode, I wanted to take a moment to talk about some feedback we received about our last episode with the disc wizard, Nancy Roberts, a certified behavioral analyst. Nancy shared some great insights about how commercial laundry operators can identify and hire the right employees and retain that talent once they’re on board. While Nancy shared some great content, some of you had trouble with the audio quality.

 

We are looking for ways to improve the audio quality for future episodes, and maybe we can have Nancy on the show again when we are certain that the audio quality will be top notch. As for quality, there should be no such issues with this episode here as this week’s podcast features a live recording that we did in October at TRSA’s 100 and 5th Annual Conference and Exchange at the Scenic Meritage Resort and Spa in Napa, California. 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. Thanks again for your feedback on last week’s episode. It will help us improve the show in the future.

 

Hope you like this week’s episode, and please feel free to send us your comments through email at podcasts attrsa.org. Once again, that’s podcasts attrsa.org. Now let’s listen in on Andrew Wittman’s presentation on the textile services industry’s bottom line performance from TRSA’s recent annual conference. Start with your conclusions is what I learned a long time ago. We’ll we’ll go through the agenda a little bit, but right now what I’d say is the economy is good, labor markets are obviously very good, and it seems like everyone’s growing pretty well.

 

There’s a lot of capital investment that’s happening in the business, and has been happening in the business for a while. I think that’s an elevated thing that’s continuing to happen today. We’re going to continue one of the key points that we’re going to make today is that the leaders in this the companies that are growing the fastest are really broadening and deepening the product and service lines. We our our probably most important thing that we would pitch today if we had to give advice, this is not our job to give advice on how to run your businesses, but it really does feel like broadening and and sweetening the pot of what you can offer is the key right now in this marketplace to grow. Consolidation, we’re gonna have a chance to talk about that, since we didn’t get the chance to talk about it last year.

 

And it seems like because capacity utilization is very high, pricing environment, which is never good, seems to be better than better than normal today. So, this is the agenda. We’re gonna really focus on the first half of it. The second half of it is stuff that we’ve shown for, many years. You’ve seen most of it before, and it’s not that different.

 

So, if we don’t get to the back third or half of the deck, don’t feel like we’re missing out because you’ll have it for reference later. So just for Baird, we’re a 100 year old company next year. Really excited. We’re an employee owned investment advisor. You know, we’ve got 40 different people like me covering different sectors of the economy.

 

The, the uniform rental, area is mine. We’re 3,000 employees strong at Baird and we’re a really great place to work. We’re number 12 on Fortune’s list of places to work. This is a slide that shows that, our clients really like what we do, and trust us. You know, one of the things that we’ve done is we’ve we’ve teamed up with TRSANow forever, some other industry groups, forever.

 

And frankly, we’re only as good sometimes with the information that we get. There are more investors today that are concerned about valuations. I know in this room, everybody thinks they’re worth 2 times revenue, and that’s probably a pretty good number. As any of you know, that’s not always the number. Today it is, and that’s a pretty good high water market.

 

It’s not dissimilar in the public equity markets either. We will look for things like like what the Fed is going to be doing, to see how that’s going to affect business valuations. This blue line here is the yield on the 10 year note over the last, year or so. And the point that I wanna make is that it’s up a lot. We’re at 3.15.

 

Last year at this time, it was really closer to, like, 2. So this is a really big change in the discount rate by which every other financial and equity method is valued by. It’s it’s good to see rates higher, because it’s giving more risk premia to investments, but it’s also challenging because, what this is, these three lines, this is the yield curve. This is how much you pay for US Treasury note of different durations, and anybody who’s watching the financial press probably heard about yield curve inversion, and every time that the yield curve inverts or gets flatter, it’s a potential sign of a recession. And so what we have here is a year ago, the yellow line, you have a nice steep curve.

 

You know, short term rates are low, long term rates are high, and you like to see that’s a good sign for growing in investments here in the in the red, that’s a month ago, a week ago, and today here in the green, you can see that it’s much much flatter. If long rates are lower than short rates, pretty much pretends a recession every single time. And this is something that lots of market analysts are watching for signs of the end of the cycle. It’s not lost on anybody that we’ve had an up cycle for 10 years. Right?

 

So, the Fed is raising the short term rates, that makes this go up. The good the inflation expectations for the long term are actually fairly muted still, and the confluence of those two things leads to a flattening of the your yield curve. So I gotta watch out for that would be the takeaway. Public uniform stocks have been very strong performers over the last few years. Valuations have been high.

 

They’re off a little bit from from the their all time peaks, but they’ve still been high. What I would say is generally speaking, most of my clients, will see the uniform rental business as a relatively safer type of investment than some other industrial stocks that they might otherwise invest in. So they’re seen as a safer alternative option. So, here’s another kind of interesting chart, in case you’re worried about their competition, you’re thinking about the competition. Super interesting chart here I always look at.

 

What we show here is between green, yellow, and red is the view of analysts like me and how we see their their next year’s earnings power changing over time. And in Aramark, mostly their food service business here, it’s a lot of yellow. That means that our view hasn’t really changed for in terms of what they’ll earn a year from now. At UniFirst is more green. That means that we’ve been raising our expectations for what UniFirst can earn.

 

A lot of that has been driven frankly by their revenue growth coming from, better sales after a couple of difficult years where the oil and gas downturn really hurt them. But at Cintas, this is probably the one that’s the most interesting. I showed a little longer trend for Cintas. I actually showed 2 years. The last one were 1 year.

 

Here you see there’s a lot of green. Looks like one person moved their numbers down. But basically, Cintas has been really, really surprising investors. People like me, analysts like me, with their ability to drive more profit through their system. A big part of this obviously was the G and K merger, which we’ll talk about.

 

But some of it is just the company’s, overall ability to grow. So we’re gonna talk about reasons why we think that they’re growing, more than the rest. So, it’s probably the single most frequently asked question we get is how does Synthas so consistently outperform its competitors, and raise expectations? We’ll touch on that question a couple of times through the presentation. I think it matters for a company that now we estimate has anywhere between a third and a half of the marketplace.

 

This is how our uniform rental stocks have done the blue line versus the S and P 500. You can see they’ve really come off a lot here. This is the percent change, year to date. Recently, they’ve been really challenged. UniFirst reported earnings today.

 

Their stock is down about 7% on a on a weaker than expected profit outlook for for the next 12 months. Okay. So here’s the valuations. This is so now this is where everybody’s like, okay. What’s Cintas worth?

 

Because they wanna you also wanna think about what your business might be worth. So Cintas today is trading at 15 times forward EBITDA. So if you look at the next 12 months, Cintas is trading at 15 times. One of these is not like the other. The other 2 companies that are publicly listed are trading about 10 times forward EBITDA.

 

On a on a revenue basis, I didn’t redo this because revenue is easier for everybody to do. UniFirst is probably about 1.7 times revenue. Syntax is actually gonna be trading over that kind of idea, that that 2 times revenue market, because the the growth that they’re they’re posting, right now. So that’s the context is where some of the other guys are trading. And these are charts that I’m not gonna look at, but this is Aramark, and this chart up top is the EBITDA multiple over time.

 

So this is like the last 10 years, and you can see that it’s kind of gradually gone higher. Synthesis especially has gone higher from 10 years ago in the depths of the recession, you know, single digit EBITDA multiples to today, you know, that 15 range. Really remarkable charts. So anybody who’s looked at Cintas stock recently has clearly seen that it’s been a total monster over the last 10 years. It’s not all because of their earnings.

 

People have decided to pay more for every dollar of earnings that’s that Cintas has been putting out because of a very steady track record of earnings growth at that company. Unifirst not that dissimilar, very nice strong multiple expansion over the past decade as well. So, that’s my overview of the equity markets and what a lot of my clients are thinking about as they look at the publicly traded, you know, for rental stocks. But I thought the next thing to talk about was the fact that we had 2 huge, M and A transactions happen in the last couple of years. So we’re gonna start out just kinda giving you the details, financial details around what happened with Cintas and G and K.

 

So obviously, it’s not, it’s not new news anymore, but this was the largest transaction in history up into the time. Four times more revenue at G and K than the the next largest deal. There was no regulatory review, which was kind of interesting to some people. There was no forced divestitures of any G and K Assets by Cintas, which was super interesting. I not totally unexpected to me.

 

I don’t know that Cintas can get away with another one of these. I think if there would be another scale acquisition for Cintas, the the antitrust review would be a lot sharper and there probably would be some divestments. The deal value was a 19% premium to where G and K was trading at the time. And interestingly enough, Cintas estimated the cost synergies of of the G and K deal to be around $135,000,000 So just to put that in perspective, the EBITDA that G and K was, expected to put out that year was around $150,000,000, maybe $160,000,000. So the deal here almost doubles the the EBITDA that Cintas will realize from G and K over a standalone company.

 

So massive synergies, and it it’s no surprise that, you know, when when the deal was announced, both stocks went up a lot. And if you look at, like, who got the value, because both stocks when they announced the deal, both stocks went up a lot. If you looked at the equity cap that went up. The math was pretty simple. It’s like G and K got half of those synergies.

 

Actually, we had about a third of those synergies, and Cintas took about 2 thirds of the synergies. And even with that, and that’s what justified the 19% premium that G and K shareholders got in, in in the deal. So if you looked at it again, this is one traded over 2 times, enterprise value to revenue is about 2.2 times. And if you looked at it on the EBITDA basis, it’s around 13 times to get that one done. And and to do that, here’s the 2 companies kinda side by side.

 

Some of these are estimates because we don’t have perfect numbers, but it gives you an idea. It added about $1,000,000,000 of revenue to Cintas’ $5,000,000,000 of revenue in the rent in the rental segment here. You can see maybe most interestingly the margin disconnect between the two businesses. These are standalone numbers here. Customer count, number of employees, Bottom line is G and K today is around 20% of the overall Cintas business.

 

That’s the kind of take we say. How big was it felt really big? Well, G and K is about 20% of the overall business, in rough and tough numbers. Alright. So then the second deal obviously was the deal where AmeriPride, got taken out by Aramark, the 2nd largest transaction in history.

 

Super strategic for Aramark. They didn’t have a Canadian presence, and now they have a decent sized one. Obviously, wasn’t talked a lot about in investment circles, but Ameriprise is known as having a very large linen business, which was a little bit different, from what we’ve seen in most of the publicly traded companies. But it’s a $1,000,000,000 of cash here. They bought $600,000,000 or so of revenue.

 

And so, that’s a 1.7 times revenue multiple. There is apparently, there’s some tax assets or what I like to think of as net operating losses that Aramark is going to receive from AmeriPride, which are kind of as good as cash in a way. So, there’s $150,000,000 of those. And when you put that in there, there was 12 times EBITDA if you give them credit for the tax assets and the cost synergies, which is an awfully generous way of looking at things, but then it’s about a 6 times multiple. Side by side, same chart, different companies.

 

You can see here that just over $2,000,000,000 of revenue, about $600,000,000 will be from the AmeriPride deal. So, call it a third of the revenue today on a go forward basis is due to AmeriPride. You can see the other statistics here for that deal. But generally speaking, I think we’ve made this comment in the past, which is we think the deals beget deals. Certainly, it feels like with multiples at around that 2 times range, that everybody kinda knows what their business is worth today.

 

I think there’s a pretty good price discovery. We can haggle about the quality of assets, and is there a CapEx that’s deferred, and all these things. But 2 times feels like a good number today. I don’t know if the economy stays like it is today. It’ll probably stay 2 times.

 

If we roll over, it’s not gonna be 2 times. So, I actually think that there’s gonna be more tuck in acquisitions. I’m sensing that here in the last couple of days, that there might be stuff going on. I don’t think that there’s necessarily anything big, that’s out there. But one of the things that one of the big takeaways that we had here is this bullet here which says, the acquisitions have have really if you looked specifically at like Cintas, this is the company where their net income was growing probably in the low teens type of range.

 

They did the G and K deal, and instead of having 12% EPS growth, this is the company that grew the last couple of years 25%, rough and tough numbers. Probably a couple more years of maybe pushing 20% earnings growth. So the G and K acquisition really did juice their earnings. And you wonder why that stock has been good. I mean, that’s why.

 

So, not gonna spend too much time in this. We always show the chart here in terms of who’s got what market share. We’ll have more on this later. You got to add these 2 together here. This is CentOS is, like I said, is more of a third to a half of the market depending on how you wanna cut it.

 

This is if you were to look at outsourcing a whole bunch of ancillary service as well. This isn’t just a core uniform rental. We’ve got more detail on the back of the deck on this one, so so I’m not gonna spend too much time here. GDP is kind of the biggest barometer here. This year is more than last year.

 

This is 2,008 year to date, over 3 times the combination of a good economy, plus some deficit spending from the government, yields better economic growth, tax cuts, etcetera, all are stimulative. And so, if growth wasn’t a market improvement from last year, you’d have to wonder what’s going on. This is the logical outcome of all the confluence of very healthy velocity of money that’s in the economy. We look at a lot of retail indicators. Generally speaking, this is retail sales.

 

Retail sales have been growing kind of mid single digits. You’ve been seeing that kind of number from like the big retailers in particular. We also look at things like consumer confidence can be, you know, you can see it in auto sales, which have been kinda flattening off. If you look at the health of the consumer. Those are the 2 of the things we like to look at.

 

Construction activity is another, area where you like to look. Lots of charts here. This is a chart called the Dodge Momentum Index. This is a statistic that put out by Construction Monitoring Group that basically says like, have you hired an engineer to do a construction project? And if you and so it’s a leading indicator.

 

You can see that there’s been lots, and this is the last couple of years here where it goes kind of vertical. So people have been investigating building stuff, broadly speaking. And so this was a pretty good forward indicator for construction spending. Housing starts, we had some housing data in the last couple of years. In fact, there were some today that wasn’t as good.

 

There’s been the hurricanes have a negative impact on housing starts. So the housing starts today were down like 5%. That’s not good, but there’s hurricane impact. Generally speaking, the ones that we like to look at are, you know, house house prices here have been growing nicely, but they’re starting to level off in the last couple of months. So watch out for that.

 

And this is the housing start that you can see. Good recovery out of the downturn, a little bit more flat lately. You look at inflation, interestingly enough, consumer price index, x energy. This is the one that everybody talks about, kind of right in that low two range today. Kinda where the Fed likes if you’re a fed watcher.

 

That’s kinda where people want the metrics. Very manageable level of inflation, generally speaking. Average hourly earnings, Lots of talk here the last couple of days. I expect, you know, labor inflation’s gonna continue to be a theme. The data from government’s showing a little bit of it, but honestly it’s not.

 

From all the markets that we follow, the labor inflation that we’re seeing is not broad based, but at the very lowest end of the labor spectrum it is. You know, the closer you are to minimum wage, the more labor inflation you’re feeling is definitely the mojo of kind of where you’re seeing average hourly or earnings. Industrial production, ISM, I don’t really wanna talk about it, but ISM is when you look at it to anything over 50 is kinda like contracting is below, expanding is above. This is a measure of the industrial economy in general, and ISM has been very nice between 5560. I won’t get too much more into it than that, but it’s a good barometer, very closely watched metric of the industrial economy at very good levels.

 

When you look at monthly jobs additions in the economy, this is the monthly jobs report that comes out the 1st Friday every every month. I mean, what can you say? You had the downturn, it was awful, you had a couple years of recovery, but like really here guys, since 2013 until today, so like for 5 years, monthly job additions have been right around a 190,000 jobs per month forever, and there’s been very little indication that that’s changing. So it’s been really, really steady, and that’s been, I think, generally really, really good. And so that’s the the chart that I really wanna show here.

 

This is the average non farm payroll additions by year and this is the year to date. So right there around 200. Very, very solid again. Jobless claims, I like this one the best because this is like, this isn’t like economist massaging numbers and changing them all the time. These are actual real people that could be identified, so it’s a bottoms up types of metric.

 

And and this is this is literally a crazy stat to me. I I getting my wrapping my my mind around just how impressive the statistic is, or this metric is is is hard. So claims initial jobless claims are at a was that say, 45 year low. And this is this is so this is, you know, we’re we’ve been in the low 200,000 per month. You know, we the the red line at 400,000 is like, you know, what economists say is good.

 

Like anything, jobless claims under 400,000 is good, and we’re like almost half that. It’s crazy good. And the crazy thing about this chart, which goes back to 1967, is that we’re this is an absolute metric against population growth. So you go forward one more. If you normalize this for population, so this is initial claims divided by the the non institutional population.

 

So this is just, like, working adults, and it’s I mean, this is going back to 1950. You can see, like, look at this. I mean, it’s it’s it’s silly low. Unemployment, what can you say? 3.7%, you all know that, so why should we belabor the point?

 

And this is where these numbers here are the last couple of recessions, the last few recessions, and you can see where they all troughed out. In 2,008, we got 4.7. 2,001, 3.8. We’re 3.7 today. Structural unemployment, wow, we’re really getting the weeds right now.

 

This is this all has to do with labor force participation rate. Again, super long chart. I think this goes back to, what is that, 1980 or something. You can see that there’s a lot of into the 90s you had labor force participation getting up into the mid sixties. And then today, we’re right around 62 percent.

 

You would think that higher wages would cheese out more employees to work, but frankly, it just really hasn’t. There’s all kinds of things, disability and just aging demographics that factor into this. Skills gap is is the one that most economists cite, that people aren’t qualified for the jobs that are available. But in general, the takeaway continues to be that not as many people are participating in the labor force as probably could, or maybe you would say should. That holds back our economic growth.

 

I chart here, basically what this shows here in the bottom is the chart where I’d focus is like how quickly has the number of people employed been changing, and the answer has been around 2%. At one point, it’s about 2 a half percent here, and 13, 14, it’s about 2%. It’s how many more people are employed today than were the year prior. So, it’s growing, which is good for people who wear uniforms, obviously. Average and this, you know, this is now we’re getting even further in the weeds.

 

If you just looked at construction, as an indication of of kind of investment and growth, this is the construction monthly job ads. Been a pretty good number here for a while. If you looked at manufacturing, important to industrial launderers, it’s been pretty good. Woah. What happened here in 2014, 15, and part of 16?

 

Oil price. The manufacturing economy suffered what I would say was a recession for 3 years. The rest of the economy didn’t, but the the the the amount of investment that happened in 12, 13, and oil and gas drove the industrial economy for this country. And it dried up, and so we had a little recession there, and we’re back. Oil prices are 70.

 

Food service, big driver of heads has been a huge secular trend in the business. Uniform rental trends, this is my pitch for the survey. Please please please participate. The fundamentals of the survey are good. Ad stop index is good.

 

Employers are hiring. Most when we ask like how you think you’re gonna do or how did you do versus your budget. Most people are saying they beat their budgets. Very good new business out there. Surprisingly, because a lot of people think that this business is matured.

 

I think, you all have proven that it’s not. There still seems to be very good new business out there. Base pricing trends are are are I’d say improved, and growth expectations, the mid single digit range continue to be, the the average for the group. Bit of an eye chart here. I’ll point you to take this home and look at it later.

 

You know, which describes your revenue rental trend in the past 90 days. The bottom line is what you wanna see is you wanna make sure that, you know, that the people that are missing their expectations is low. So the red bars are small, the green bars, and the no change bars are large. And the the idea here is that these are small, so people are beating their budgets. And if you asked about how have ad stops been, again, 50 is, you know, no change sequentially over the quarter.

 

Ad stop rates have been slightly positive at a pretty good level here for the last couple of quarters. When you ask about new account pricing, this is what I always say is the most depressing chart that we show. Say how was your, how was the how was your your your pricing for new accounts been versus last quarter? Anything under 50 is worse than last quarter. So for 15 years, you guys are telling me that your new account pricing has been worse than last quarter.

 

I don’t know. I think people like to be negative, but it’s it’s certainly tough. Pricing, this is last quarter, like, you know, how many people were able to raise prices, and, 33% of people said they increased them, and most people said it didn’t change, and not many people said they had to cut their prices. So that’s pretty good. And and this is if you looked at your existing business and how much were your it gets how much of a revenue increase were you able to get off of your existing accounts.

 

The number’s been 2% here the last couple of quarters. I actually think it’s probably a little bit better than that, just my sense. But based on the survey population that we’re getting, it’s around 2%. New no pro programmer interest is good. Again, 50 is no change since the prior quarter.

 

No programmers. You’re converting more people who’ve never had a rental program. Really for a while here. This is a really good chart. Growth expectations, most folks are seeing growth in the next 12 months around 4%.

 

I’m gonna skip some more of these charts here, leave them for later. Just wanna show you, this is rent this is the the the growth of your the big three, if you will, and and how fast they’ve been growing their business organically. This is excluding acquisitions and FX. Cintas has grown over the last 3 years an average of 6.6%, Airmark at 2%, UniFirst at 2.6%. If you’d expand this a little longer time frame, air market would be unchanged.

 

Centas would be higher. UniFirst would be higher. This is weighed down by these very low levels where they had challenges in their oil and gas business, which is a significant piece of business for them. Weighed on their growth for a while. Today, UniFirst just reported results of 6.6% organically, which was a positive surprise versus most people’s expectations.

 

Gonna skip some of this stuff here. When you look at profit margins, love to highlight this one folks. Cintas is 2 and a half times larger in revenue than these guys, and their margins in their uniform rental segment are 16.4% versus 11% for everybody else. Great stat, walking around knowledge, maybe compare it to your own business. Cintas, if you looked at their energy prices as a percentage of their revenue, because of their scale.

 

This is electricity, diesel, natural gas, and gasoline. So basically energy prices all in. Who wants to take a guess what Cintas’ energy prices over last year? Cintas’ scale advantage affords them 2% of their revenue goes towards their energy prices. 2% of revenue is energy prices.

 

It’s a shocking statistic. That same number at UniFirst was 4.2% last year, similar in Aramark. So they get 200 basis points just on energy prices alone. I think it’s a shocking statistic. Productivity, this is a great chart.

 

I love this chart. It really shows a lot here. When you look at and this is kind of fuzzy math. Not every facility is created equal, but we’re trying to compare the big three in terms of the revenue and the number of facilities that they have. And sure, Cintas has got almost twice as many facilities as anybody else, but their revenue is a hell of a lot more than 2 times.

 

And so when you look at revenue per per per facility, it’s like 2 x anybody else’s. It’s a shocking statistic. Again, it’s fuzzy math. It’s not perfect math. But directionally, I think it says a lot about the scale advantage that comes with being, the biggest player in the industry.

 

And then just again, these are numbers that are publicly available if you were to read, their SEC filings at Cintas. But we like to make them you heard me at the beginning talk about you need to find other ways to sell more stuff to your customers, whether it’s brought a new product line or what have you. I mean, Syntas has done that. This is a 12 year look between what used to be uniforms in 2,006, 56% of revenue. Now it’s only about half of their core, segment is uniform.

 

This is if you it actually be less than if you added in their 1st aid business and other stuff. But if you look at what’s changed, you know yeah. Sure. They’ve they’ve, you know, mats are actually down. You know, everybody’s talking about selling mats.

 

Who doesn’t like selling mats? It’s a great business. But at Cintas, mats have actually become less important to their overall business. The big change here is hygiene folks. 14% of their revenue is that hygiene segment.

 

It’s the restroom business mostly, not only. And and that’s grown really obviously very significantly from 8% of the revenue 12 years ago. So that’s where the biggest delta is, and and their business has been growing as a result of that. This is average rental revenue in EBIT dollars per facility. If you kind of average, this is trying to get the industry like how is that trended over time.

 

For this is not just Cintas, this is everybody kind of on a simple average basis. The math got kinda screwed up here because of integration costs. But the revenue, you can see how the revenue per facility has generally for the industry been growing pretty significantly over the last 15 years. Revenue per route, it’s hard to say. This is Cintas only.

 

The bottom line is in the last few years, it’s up a lot. Hard to know exactly how many routes are happening because Cintas is taking routes out through the integration process. So, these might be too high, but the general the trend line of revenue per route at Cintas has come up pretty significantly and it’s worth noting. This is the TRSA survey, where they ask all of you to, give your performance of your company, and they aggregate it. And so the average, TRSA firm last year grew grew about 4% there, and it’s been kind of in that range the last couple of years.

 

If you looked at TRSA member data here, as well, this data gets a little bit wonky here, but, you’ll see that the health care, and the linen operations, F and B Linen have been have been some of the better growth. This is sales growth by business line. The tallest bars are the blue, and the light brown, that’s healthcare, and linen have been in the TRSA membership base, have been the fastest growing. This is, Census department data showing how fast the industry has grown in uniform rental. And the answer is it’s been growing in the mid single digits, based on government data that looks at industrial launderers and linen supply companies.

 

And so, that justifies that the market is growing in that mid single digit range. Super important, I think I showed this last time. If you looked at the TRSA competitive intelligence survey, you might notice that they show the typical TRSA. This is profit margin, margin drivers, buckets of cost, stack bar, chart variable cost, fixed. This is the high margin companies.

 

This is the lower margin companies. And you say, well what’s the biggest difference? Well, the biggest difference is plant costs. Plant costs is where the high margin companies really separate themselves from the lower margin companies. If you wanna know how you compare.

 

Sales per employee, it’s been flattening off lately. Again, it’s kinda monkey math, but it’s been flattening off the last couple of years. Don’t have a great reason why, but that’s what the data shows from from the TRSA survey. You know, and so, here’s energy cost as a percentage of revenue for the for the typical TRSA member. You can see it’s coming down as the top line is growing.

 

You’ve gotten some leverage out of the businesses. I’m actually surprised to see that this number is 2.7% because again, it’s 4% at the other big guys. I think that number is probably a little bit too low. But let’s talk about capital investment. I mentioned that there’s been a lot of capital investment in the industry.

 

So, if you looked at CapEx as a percentage of revenue, maybe you wanna compare here. CapEx as a percentage of revenue has been very elevated at UniFirst for a couple of years, and it’s gonna be elevated again this year. They’re gonna build several new plants, and they’re putting in an IT system. So, UniFirst CapEx number in that 7% range is really high. It’s been high.

 

It’s gonna stay high this year it sounds like. Cintas is at 5.5%. They’re on their way to 4 to 4.5 percent in the next couple years, a little elevated now as they integrate the acquisition. Aramark’s been about consistent about 4.2%. These are actually longer term averages for the big, for the big guys.

 

We like to think 4.5 is a pretty good number. Everybody’s number is their own, but that’s how other folks have been spending. This is another chart on CapEx over time. The different color bars of the different companies, showing the same thing I showed on the last deck. This is the number of rental facilities over time.

 

You can see that, actually the number of facilities from the public guys has been kinda flat lined. I actually think it’s actually up, but there has been a lot of consolidation, in the industry Cintas, this is showing the spending a little bit of time on back on Cintas. This is showing the different product lines, uniforms of the blue bars, the most important bars, but the other lines here are different things. The dark colors here are the other ancillary offerings. You can see these are growth rates.

 

This is This is indexed to a 100, and so the higher bars are the ones that have the higher lines are the ones that have grown the most quickly. And so, they’ve done a good job with catalog sales. The light gray here is dust control and mats. They’ve been seeing the same type of growth that most people have seen. Other Shop Tow, I guess this is the Shop Tow Business has grown really quickly as well.

 

And then we’ve got a whole bunch of stuff on market share. I wanna show a couple of things here. Specifically this one. If you narrowly define the uniform rental market as just the garment portion and nothing else, This is the way we estimated. We think uniform rentals $8,000,000,000 of revenue for rental.

 

Cintas plus G and K, 31 plus 12 is 43% of the market. Aramark at 17. It’s probably a little bit more than that. I don’t know. I guess we didn’t update that for AmeriPride.

 

It’s probably closer to 20. UniFirst at 16. That means that everybody else is maybe about a quarter to 70 to 70% of the rest of the marketplace. So this industry, point that we make all the time has gotten really consolidated. That’s really good for capacity utilization, which is really high.

 

And it’s really good to have an oligopoly of pretty rational players usually. Don’t hold me to that, but generally, I think Cintas, I think most people would say have been a pretty rational price. They’re not usually competing super on price. Any market’s different, but generally speaking, your biggest player is not a price discounter. That’s really good for the overall environment.

 

So our sense is that having a little bit more consolidation and super high levels of capacity utilization has been good for pricing in general, and it’s kinda different today than it was a couple of years ago post those two acquisitions. Here’s here’s a market share over time. Stack bar chart sent us at the bottom. You know what the blip is. That’s G and K going away, becoming blue.

 

Aramark, UniFirst Rest. This is going back to 1998. Again, it’s this pie chart over time. And you can see what’s happened. The big guys have definitely gotten bigger through consolidation and maybe a little bit higher growth rate.

 

You know, organic revenue growth seems stable in the mid single digits. Employment remains healthy or margins. Margins in most of the business are at prior peaks. Competition is investing in their businesses and diversifying product lines. And there’s still plenty of more business to be found are some of our key conclusions.

 

Please please please send us an email if you’re not getting our survey, to respond. We really would love to have you participate. It’s super important for all of us in this room and for TRSA. Thank you all for your time. We’ll see you again, hopefully sometime soon.

 

I hope that listening to that presentation gave you some new information on the state of the economy and more importantly, the linen uniform and facility services industry in the Q4 of 2018 and heading into the new year. 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 Wittman at awitman@rwbear.com. That’s awittman@rwbeard.com. Thanks for tuning in, and I hope everybody has a happy Thanksgiving.

 

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.