Episode guests
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Quick takeaways
- Focusing on value creation in industrial businesses through price optimization, cost reduction, and new business generation is paramount.
- Primary research plays a vital role in understanding a business's dynamics, unit economics, and future performance.
- TransDigm's success lies in its ability to adapt quickly, strip out costs, retain customer relationships, and navigate through challenging periods to sustain long-term growth and value creation.
Deep dives
Focus on Value Creation and Industrial Businesses
The podcast episode delves into the importance of focusing on value creation in industrial businesses. The speaker emphasizes that the only things that can change the intrinsic value of such businesses are getting the price up, getting the cost down, and generating new business. Other factors are considered tertiary at best. The episode highlights the value of finding great businesses and riding them for the long term while maintaining a focus on key themes like operations, capitalization, and culture. It also addresses the importance of conviction in creating long-term returns and the significance of primary research in the investment process.
Investing in Long-term Recurring Revenue Companies
The episode features an interview with an investor from the Investment Group of Santa Barbara. They discuss their focus on investing in early-stage businesses aligned with their long-term value creation approach. The podcast explores the belief that every business will eventually become software-enabled due to the ongoing digital transformation. The investor highlights the extensive role of primary research in their investment process, involving speaking with customers, former employees, and industry experts to gain insights into a business's dynamics, unit economics, and future performance.
Navigating External Shocks
The episode covers how the company navigated external shocks like the aftermath of the 9/11 attacks. During this period, the aerospace industry experienced a significant decline. The company responded by reducing costs while maintaining a focus on intrinsic value generation. They also identified new business opportunities, such as cockpit security systems, to counteract the downturn. The episode highlights the company's ability to adapt quickly, strip out costs, retain customer relationships, and navigate through challenging periods to sustain long-term growth and value creation.
Decentralization and Compensation Structure
The episode discusses the company's belief in decentralization as a means to empower employees and foster an ownership mindset. The company states its commitment to treat employees like owners, pay them accordingly, and grant them autonomy. The unique compensation structure is highlighted, which is designed to mirror the private equity model even in a public company context. The compensation plan aims to underpay employees in cash compensation while overallocating equity and basing rewards on the generation of intrinsic value over specified periods.
Key Point 1: Focus on growth and acquisitions
The podcast episode discusses how the market grows at a rate of four to five percent each year. In addition to organic growth, the company also emphasizes acquisitions as a means of expanding their business. The company has a playbook and criteria for selecting businesses to acquire, focusing on those that meet their criteria for profitability, such as having 15-20% EBITA margins. They prioritize businesses with growth potential and a clear path to a high return on investment. By strategically acquiring businesses in their industry, they aim to achieve significant growth and generate value for their shareholders.
Key Point 2: Capital allocation and decentralized organizational structure
The podcast episode highlights the transition in the speaker's role from operations-focused to capital allocation-focused under Warburg's ownership. As the company grew, they increasingly focused on capital allocation strategies. They established a decentralized organizational structure and emphasized a culture of value creation. To maintain this culture, they hired people who believed in and could work within this framework. They also conducted regular product line reviews, tracking performance and challenging underperformance. The company utilized training courses to reinforce their culture, and made sure to have a team that was involved throughout the diligence and integration process of each acquisition.
Today's episode is the first in a series of four on TransDigm, an aerospace components manufacturer that has appreciated over 1,750X since its inception nearly three decades earlier. In today’s episode we are joined by Nick Howley, TransDigm’s founder, long-time CEO and Executive Chairman. We explore TransDigm’s foundations under private ownership, digging into its core value drivers, decentralized culture, differentiated compensation program, and early M&A motion.
For the full show notes, transcript, and links to mentioned content, check out the episode page here.
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This episode is brought to you by Tegus. The team at Tegus has built a full company intelligence platform aimed at streamlining the investment research process. In preparation for the 50X series, we actively used Tegus to gain qualitative insights beyond traditional reported data. To learn more and enjoy a free trial, visit tegus.co/50x.
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50X is a podcast that dissects the anatomy of extraordinary long-term investments. The show is hosted by Will Thorndike and the team at Compounding Labs, and brought to you in partnership with Colossus.
In each episode of 50X, we look in detail at an investment that has appreciated at least 50-fold. From the seat of the professional investor and occasionally the CEO, we explore its origins, evolution, and eventual outcome, studying key themes around long-term value creation ranging from operations, capital allocation, and culture to pivotal buy and sell decisions. To enhance the quality and depth of our interviews, we rigorously study each asset in advance, diving into all available public and private resources.
Learn more and dive into our research at 50xpodcast.com
Follow us on Twitter: @50Xpodcast and @joincolossus
Show Notes
[00:00:00] – 50X Introduction
[00:01:48] – Sponsorship: Tegus
[00:06:52] – Introduction to Nick and TransDigm
[00:08:50] – Nick’s Background pre-TransDigm
[00:11:56] – Original Acquisition from Imo Industries in 1993
[00:15:33] – Thesis and Performance under Kelso & Co.’s Ownership
[00:18:42] – Genesis of Three Key Value Drivers: Price, Productivity, and New Business
[00:21:07] – Building the Management Team
[00:24:05] – Early Lessons on Value Drivers
[00:27:53] – Capital Allocation under Kelso & Co.
[00:28:51] – Sale to Odyssey Investment Partners in 1998
[00:30:26] – Strategy under Odyssey’s Ownership
[00:31:51] – Early Acquisitions and Integration Playbook
[00:37:26] – Early External Crises
[00:41:13] – Snapshot at Conclusion of Odyssey’s Ownership in 2003
[00:43:19] – Building a Decentralized Culture
[00:46:23] – Differentiated Approach to Compensation
[00:52:12] – Sale to Warburg Pincus in 2003
[00:55:51] – Shift to Inorganic Growth under Warburg’s Ownership
[00:58:08] – Evolution of M&A Process
[01:05:37] – Post-Acquisition Expectations and Post-Mortem Process
[01:09:48] – Divesting Acquired Assets to Maintain Focus
[01:11:29] – Embedding Value-Generative Culture via Hiring and Training
[01:13:54] – Quarterly Product Line Reviews
[01:20:31] – Recap of Private Investment Returns and Snapshot pre-IPO
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