Thermador Groupe (ISIN FR000006111) – a true “hidden champion” from France ?

Back to my favourite hunting ground France, the country which, according to the “famous” Harvard professor Niall Fergusson, will burn this summer.

Thermador Groupe is (as many others) a result of my boss screener. The score is not super high but indicates that it might be a high quality company at an attractive price. So what are those guys doing ? According to Bloomberg the following:

Thermador Groupe wholesales plumbing supplies. The Company buys plumbing supplies primarily from manufacturers outside France and distributes them throughout France. Thermador distributes ball, butterfly, check, motor-operated and solenoid-operated valves, pneumatic actuators, central heating system components, plastic pipe, and domestic and small community pumps.

Doesn’t sound too exciting but that is usually a very good sign.

Valuation looks Ok, but not exciting:

Market cap: 247 mn EUR
P/E (2012) 11.7
P/B 1.9
P/S 1.2
EV/EBITDA 6.2
Div. yield 5.4%

The company is debt free and showed 5.4 EUR net cash per share at year end 2012. So far so good, but why should this company be a “hidden champion” ?

A quick look at profitability over the last 11 years shows already, that those guys seem to do something right:

NI margin ROE ROE adj
31.12.2002 6.5% 12.7% 15.9%
31.12.2003 7.7% 15.4% 22.3%
31.12.2004 9.3% 18.4% 20.5%
30.12.2005 10.1% 19.5% 23.6%
29.12.2006 11.2% 22.6% 24.4%
31.12.2007 12.0% 24.5% 24.3%
31.12.2008 11.0% 22.2% 22.3%
31.12.2009 9.2% 15.9% 18.8%
31.12.2010 9.6% 15.8% 17.4%
30.12.2011 10.6% 17.8% 20.1%
31.12.2012 10.1% 17.0% 20.1%

High single digit margins and consistently ~20% return on investment implies that those guys know what they are doing.

But it gets even better. Despite good growth in those 11 years (sales doubled), the showed a very healthy free cashflow generation.

<

EPS FCF p. Share DIV
31.12.2002 1.66 1.09 1.51
31.12.2003 2.10 3.49 1.44
31.12.2004 2.70 1.40 1.44
30.12.2005 3.10 3.11 1.80
29.12.2006 3.96 0.94 2.06
31.12.2007 4.84 1.16 2.31
31.12.2008 4.96 2.27 2.61
31.12.2009 3.90 6.56 2.61
31.12.2010 3.99 0.97 2.61
30.12.2011 4.83 3.84 2.61
31.12.2012 4.98 4.25 3.05
       
Total 41.02 29.08 24.07

Around 75% of earnings have been converted into free cash flow and again, 90% of free cash flow has been paid out as dividends. Those are quite impressive numbers for a “traditional” business.

Business model

Again, the question here is: How do they do this ? On the surface, a wholeseller should not be able to make a net margin of 10%, so there must be a lot more to this story.

Thankfully, one doesn’t need to look around in the web to find out about them because they produce a fantastic annual report in English language.

If I understand correctly, the Thermador business model looks as following:

– they are basically the interface between a large number of manufacturers and DIY stores / local wholesale companies
– they are specializing on relatively complex pump systems where few if any manufacturers are able to produce the full range of components
– in effect they are a kind of “virtual” conglomerate which offers those system and guarantees availability of all relevant parts
– it looks like that they mainly source in Italy and China and then warehouse and distribute the systems in France
– according from their numbers, they buy stuff from around 200 producers and sell/distribute to up to 3000 customers per subsidiary

The last bullet is important: A “Normal” wholeseller, for instance in the food industry doesn’t have a lot of end clients. In such cases it is relatively easy to “cut out the middlemen”. For a wholeseller with a larger number of partners on each side, it is much easier to create value and extract higher margins.

Interestingly, they manage to do this (so far) by only 1 big distribution center in Southern France.

Uniqueness of the business models:

Despite having 8 subsidiaries which sometimes use the same providers and have the same clients, they are run completely independent. That is what they say in their annual report:

People sometimes ask us about the suitability of our organisation chart: why 8 subsidiaries with 8 management teams, 8 sales teams, 8 purchasing departments, 8 warehouses, etc. Wouldn’t we achieve economies of scale if they were aggregated? On the contrary, we think that the drawbacks this presents are more than counterbalanced by the efficiency inherent in small, specialised and highly motivated teams.

The 8 subsidiary directors do indeed have maximum freedom to develop their companies, and enjoy the support of the Group, which provides them with the financial, property and IT resources they need. They are very close to their markets, and have many years’ experience with the Group, with a sound knowledge of their businesses. Guillaume Robin looks to Marylène Boyer and Hervé Le Guillerm for day to day support in managing the Group. A more formal monthly meeting reviews cross-company issues and makes the decisions needed to ensure the Group works efficiently. Each week, the nine directors get together for lunch to talk about current topics. Twice a year, they spend a whole day off-site to discuss strategy and organisation. Finally, each January, fifty managers and supervisors from the Group get together for presentations of each subsidiary’s projects. The audience is then invited to ask the subsidiary directors about their visions, analyses, decisions and forecasts.

For anyone having “inside” experience in a large international company with a big HQ, this almost sounds too good to be true. Coincidently, I just read “The Outsiders” and I have to admit, that up until now I didn’t really think about organizational structures so much. But based on the book and my own “day job” experience, I believe that such a company without a big HQ has in itself a competitive advantage against competitors with a rigid hierarchies. Such companies are much faster and at the end of the day more efficient, because the big waste always happens at headquarters.

As a picture in the annual report shows, all the companies are located next to each other, however in different buildings.

thermador

What they seem to share (and what makes a lot of sense) is their IT system and of course the distribution center.

A few real “gems” from their annual report:

Since our teams are part of small companies, each person feels personally concerned: waste leads to an increase in costs and a drop in profits. We are therefore careful to turn out lights when we leave offices, close windows when the heating is on, recycle paper and to avoid heating (or cooling) excessively.

or this one:

Our travelling salespeople do not have “company” fuel cards. When they use their vehicle for professional travel, they are reimbursed on a per-kilometre basis. It is in their interest to drive economically. When they rent vehicles, they are limited to small cars which consume little fuel. Also, we ask all employees of the Group to live within 50 km of our head office.

Other positive facts:

– Management owns shares, management salaries are reasonable
– organic growth, no acquisitions
– clear structure, no minorities
– conservative discount rate for pensions (3%, below official guidance)
– all real estate owned, no signifcant leases

.
Profit sharing with employees

Again from the great annual report:

Variable component:
Since the beginning, Thermador Groupe subsidiaries’ profits have been shared with employees. Even before statutory profit sharing, we introduced our own brand of profit sharing in Thermador, the first company created in the Group’s history. This virtuous practice spread to the other subsidiaries subsequently. Profit sharing is the result of a year’s work, during which the management teams present the operating accounts of each subsidiary on a monthly basis. Everybody can understand how the annual result is put together, and what mass of profit sharing will be distributed. The distribution of that mass is decided by the management team, and takes into account each individual’s performance as fairly as possible.

In each subsidiary, the profit sharing amount therefore depends on profit, which means there are major differences between the companies of the
Group. It varies from 12 to 27 % of salary. The average for the Group is 22% of gross annual salary.

Again, this is something I have never read in such a clear and precise way in an annual report.

Funnily enough, a lot of this sounds exactly like in the Les Schwab autobiography I have reviewed a few days ago. Who would have thought that something like this can be found in “socialist” France ?

Stock price & valuation

The stock price is still far away from the highs in 2007:

From a valuation perspective, I don’t want to be too sophisticated. This is not a super cheap stock but a very high quality stock. Would this be a UK or US stock, it would trade at least at 8-10 EV/EBITDA. As this is a French stock, one should not expect a lot of “action”. Nevertheless I find it attractive at current levels as I am convinced that they will find ways to grow their business in the future.

Risks

Clearly, the economic situation in France is the biggest risk. Thermador started to expand interenationally. In their own style, they created of course a seperate entity for this. We will see if the business model works internationally as well. The unit Thermador International founded in 2007, grows quite quickly, but has yet to achieve the profitanility of the other subsidiaries.

Additionally, any consolidation, either on the manufacturer or client level might make Thermador’s business more difficult.

Finally, some very clever B2B internet company could try to compete with Thermador. However, I think Thermador is much more than matching producer and clients. There is a lot of distribution know how and facilities involved plus guaranteeing services and spare parts within a short time frame. But clearly, this is something to watch out for.

Summary:

Thermador is in my opinion a true “hidden champion”. For me the reason why this company trades below its “true” value is the uniqueness of its business model combined with they way the company is run and organized. Together, this is what I would call a “Les Schwab moat”, the power of a highly motivated company in a competitive market.

Clearly, the current situation in France doesn’t make things easier for Thermador. Nevertheless I entered into a 2.5% portfolio position at EUR 58.20 per share. As this would bring my net France exposure above 20%, I sold out the Bouygues stock as a risk management measure.

15 comments

  • Strategiewechsel bei Thermador? Zumindest die erste mir bekannte Übernahme, 100 km vom Stammsitz entfernt. Ich bin verwundert. http://www.thermador-groupe.fr/vdoc/resource/filecenter/document/042-00005f-001/pr-thermador-groupe-30-june-2015-en.pdf

  • Warren's follower

    Niall Ferguson, the Harvard professor is just an ignorant! He doesn’t even know that french people are on vacation during the summer. I don’t think there has been any riot in Paris during the summer for the last 40 years!!

  • This article is a very good article i ‘ve seen on internet about Thermador Group. I’m french and i’m not sure “france will burn this summer”. I’m from Toulouse and maybe i don’t feel really the economic situation because AIRBUS works very well. There are a lot of fiscal reforms and this is good for us. Hey, don’t laugh, you’re are not really good in USA too, no ? I hope each country will find solutions. +++

  • memyselfandi007 :
    yes,1st quarter was down, nevertheless they were quite optimistic for the year. According to their report, construction of new homes is not the major part of the business but renovations.
    Funnily enough, I think buying great companies makes much more sense if there are “top line” bad news than if everything looks great.

    Yes, it does make sense to buy great company when there is bad news, assuming the shares reflect the news. In the case of Thermador, I don’t see that the shares are reflecting the deteriorating fundamentals, so no buy for me. I would be a buyer in the low fifties though.

    Also, not all UK shares are expensive – look for example at Camellia PLC (CAM.L)
    http://www.bloomberg.com/quote/CAM:LN
    A mini conglomerate with the main business being agriculture (tea crop) allover the world, very cheap metrics and a great balance sheet (substantial net cash). I would not call it a hidden champion but management is value conscious and runs the businrss for the long term. They probably serve scotch and smoke cigar in board meetings . I own shares and I think it’s worth checking out.

  • Thanks for the interesting post, enjoyed the reading of their 2012 annual report as well. What I still wonder about are 2 facts: high transparency on many items on one side, but no words about the competitors in the field and the challenges on the other side. Do you have any insight? And second question I wonder about: why Thermador International group is looking into 15 European countries (if I remember correct), but NOT into Germany and Italy. I have not found a single word about why not. For Italy one could suppose that the Italian suppliers don’t want it ?! But why not going into Germany, where construction market is very attractive at the moment – now would be the time.

    • wll, i am not sure if I have any special “insight”. But according to my understanding, their business model is quite unique so there are no direct competitors. The risks are as described in the post more “vertical”, i.e. consolidation among producers or clients.

      I find it also interesting theat they don’t go to Germany, this would be the most obvious choice. On the other hand, this shows that they are not naive. At least in the DIY sector, Germany is extremely competitive with almost no margins. So it could easily be that they decided that heir business model does not work so well in Germany.

  • I agree that Thermador is a great company, but I think they have major headwinds in the short term due to reduced construction activity in France. If I recall correctly, they recall their revenues to be down 10-15% YoY.

    • yes,1st quarter was down, nevertheless they were quite optimistic for the year. According to their report, construction of new homes is not the major part of the business but renovations.

      Funnily enough, I think buying great companies makes much more sense if there are “top line” bad news than if everything looks great.

  • Thank you, that company sounds really interesting.
    Much like these “typical german” family-owned hidden champions. I only miss the owning family. 🙂
    A company with a stable average growth rate of 9% seems to be fair valued for that price.
    It is impressive how a french company with less than 10% export share has maintained that well in the harsh economics since 2008.

    And I gree with you, the annual report is indeed among the best I have ever seen. I like it if a company not only compares to the last year but shows the business trend for the last 10years, but I have never before seen such a documentation even of the share price developement of the last ten years or the answered “Letters from your Shareholders” (Page 33). This is a unique transparency and service orientation they hopefully also show toward their business clients.

    It is also impressive seeing a company with a staff of 257 to achieve a turnover of 210 Mio€. More than 800.000€/head seems to be an extraordinary efficiency even for retail business.

    Some small hints:
    Headline: The ISIN in your headline is wrong, you missed the last “1”.
    Aquisitions: Financial Report, page 43, Note 2: “Goodwill arising from the acquisition of S.C.I Thely shares by Thermador Groupe in 1987 and 1990 […]” (But that has happened more than 20 years ago.)

  • Hi mmi,
    very good post.

    the stock is quite followed from several french value blogs.
    actually, what refrained me from buying the last couple of times I looked at the company:
    they issued quite a number of free new shares to the management
    and almost 100% french market…

    I also read a news report about them regarding their management practices.
    It seems ALL salaries at the company are internally public. That’s Transparency!

    cheers,

    Guiom

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s