good morning as Craig mentioned my name is Pete Stavros I'm a partner in the New York office and I run our industrials group and as an industrials investor as you can imagine I spend most of my time with manufacturing companies and within a manufacturing company the majority of the workforce are blue-collar workers who are paid an hourly wage in fact that's usually the vast majority of the employee base and despite the fact that that group of employees is so large and so important what we find time and time again is that the relationship between the company that they work for but between the blue-collar workers in the company if they work for is not a positive one and oftentimes is outright contentious and of course that impacts performance and so we've been spending the better part of the past decade doing is trying to understand why that relationship is not working what we can do to improve it and thereby improve the performance of our companies and drive some of the operational change that johannes and craig have talked about and also positively impact the lives of these employees so that's what I'd like to talk about for the next 25 minutes or so so this some history of poor employee relations when it when it comes to blue-collar workers this goes back generations this is of course where the labor union movement started this is actually a picture of my dad he was a blue-collar worker he worked for a construction company in Chicago and earned an hourly wage and I just remember at the dinner table countless conversations about conflict between the workers and and their employers so as a as a kid growing up I was able to see this through the eyes of an employee and now as an adult I get to see it through the eyes of the company that's been kind of fascinating to see both sides of it there are a lot of reasons I'm sure why this relationship doesn't work but one of the really obvious ones that I've observed is the hourly wage itself creates a huge misalignment of incentives so you've got on the one hand the employer who cares about quality cost on-time delivery and the employee who just cares about hours because that's exclusively how they are paid so if you look at the bottom line just as one example think about a situation where the employer falls behind on a job they've got upset customers they're working overtime to try and catch up it's very expensive terrible thing for the company it's actually a great thing for the employee they get more hours and they get time and a half or double time for the overtime hours so if you're the employer and you've got the vast majority of your employee base as blue-collar workers with exactly the wrong incentives how do you engage how do you behave and what's very common is to just apply an extreme amount of oversight and monitoring of your employees and as you can imagine the employees often don't react well to this they evade oversight where they can and where they can't they meet the bare minimum of expectations so over years this really devolves into a situation where the company gives up on the people that people give up on their jobs they stop investing themselves in their work and and worker morale is very poor so here's what we've been trying to do in industrials we've been trying to use our portfolio as a bit of a laboratory to experiment with ways of changing this relationship and we're in a great position to do this because of course we're constantly buying new companies and that moment of change in ownership is a golden opportunity because people are not only open to change they're expecting change so what I'd like to do now for about 10 minutes is take you through a case study this is one of these examples that johannes and craig both referred to this had been owned by private equity three times prior to KKR a lot of head-scratching when we bought the business what could you possibly do with this this had been known by smart money for 20 years and one of the things that had not been addressed was was engagement and using the whole workforce to drive the operations of the business the company makes overhead garage doors like the one you see here in the picture they're based in Arthur Illinois and when we bought the business the company had from top to bottom about 800 employees each one represented here by a purple dot now 600 of the 800 were hourly workers in the manufacturing plant and another 54 were truck drivers paid by the mile so very similar to being paid by the hour and then you've got the balance here of salaried office employees now of the total employee base 18 had ownership in the business when we bought the company so that those are the green dots in the lower left corner and those 18 people got to pay out of 57 million when we bought the business and 30 million went to two people so this is really a microcosm of the industrial world in this country the vast majority of employees barely getting by on an hourly wage and then a small segment with ownership and as everyone in this room knows capital is is so much more productive than labor that's the group getting ahead and the getting ahead is concentrated in the hands of a couple of people so this is kind of what we see in almost every situation so youyou see something like that you wonder geez I wonder what employee morale might be like well in the manufacturing world one other thing to look at if you want to get a quick snapshot of how employees are being treated is look at safety and this is something we see time and again the workers are usually not being taken care of at the most basic of levels there they're not even getting sent home safely at night and so this what we're showing you here is the total recordable incident rate it is an OSHA mandated statistic which shows you for every 100 workers in the manufacturing plant how many are getting injured on the job every year and this first-aid simple first aid does not count these are typically trips to the hospital so you can see when we bought the business there were 14 out of every 100 workers with let's say hospital visits every year so as I mentioned we had 600 in the plant so 6 times 84 6 times 14 would be 80 for hospital visits per year over the course of let's say a five-year hold period that would be most of the workforce which is kind of a staggering failure on the part of the company so we did the first employee survey the company had ever seen shortly after we bought the business and not surprisingly the results were terrible we had a 30 percent response rate and 90% of the results were well below benchmark and in in our favorite question most people who filled out the survey said it would have absolutely no impact and unfortunately the survey company got rid of that question so we can't track our performance against it so as is always the case this lack of engagement will manifest itself in poor performance and so the company had as an example of quality challenges that match matched their safety challenges so if you have a safety issue you will always have a quality issue because it reflects a lack of process or a process that is out of control and that's what we had it at CH I there was also no margin growth despite pretty robust volumes as the housing market was recovering and there was excess working capital in the business this is a bill to order model and they had still a ton of inventory in the business so we bought the company we brought in new leadership established a new set of priorities we brought a real process orientation to the business and then importantly we rolled out this employee engagement model that we've been developing over the better the part of the past decade and this is constantly evolving we're trying to improve it all the time but as it stands today there's three legs to the stool on our engagement model the first one is investing in the workforce making people feel cared for showing you want to invest in their professional development making everyone in the business and owner down to the janitor who sweeps the floors in the manufacturing plant and then engaging with the community through the company so this kind of community service is all about building pride in the organization and I'd like to just talk through each of these in the next few slides so first investing in the workforce again this is all about making people feel cared for and we typically would have training in everything from lean manufacturing through to sales force effectiveness in this case the burning platform as I showed you was and remains safety of the employees so you can see in a short period of time we've cut the injury rate in half but you can also see it still well above the benchmark and there's two things that we're doing right now that we think will take us below the benchmark and hopefully on a path to world-class safety the first one and I think these two will give you another sense for how this employee base feels they've been treated over time the first one is we're changing the staffing model so what the company had done was because the business is so seasonal they would lay people off right before the holidays during the slow period and then rehire in the spring to save on labor cost that was obviously a morale issue but it was also a safety issue because the people that you let go of right before the holidays they can't afford to wait around till the spring so they would go off and do other things which meant you a portion of your workforce that was new every spring and then they hit their first busy season in the summer and those were the ones who all got hurt so we're changing that we're gonna keep the labor force intact through the slow season it's going to cost us a little bit of money on labor but it's going to have a huge safety benefit and a huge morale boost second thing is we're air conditioning the facility so in the height of busy season in July and August it gets to be a hundred and ten degrees in the plant and in the trailer that we're loading the doors into it can get to be 125 plus in the trailer and so you've got people running around like mad to meat production requirements and all they've got are a couple of fans to try and cool them off and so they get hurt they make mistakes so we think that's going to have another big morale boost and safety benefit so that's the first thing we do invest in the people the second thing is as I mentioned make every one owner in the business so you go from a situation like this to one where everyone participates in in the financial upside in the business and to give you a sense for how we do this we do this with very large option plans so much larger than a typical private equity firm would do and it's important that we use options because we obviously only want our investors getting diluted to the extent there's real performance and in terms of order of magnitude what we're talking about if you take one of our truck drivers at c-h-i we gave them an opportunity to invest up to five thousand dollars in the deal right along safe alongside Kate care on the same terms they could do zero and we'd still give them free options but if they did the maximum of five thousand we gave them free options that under our base case we think will be worth $200,000 so this is really life impacting amounts of money now we've learned that it's more complicated than just sprinkling ownership around a company and then flying back to New York and watching the results flow in as Johannes mentioned we are deeply deeply involved in our companies from an operating perspective we also do a lot to try and have this ownership be real for folks and drive performance and make it more than just a you know feel-good story so part of that is education a lot of people have never owned equity before and these options are options in a levered cap Puddle structure so it's a complicated concept to explain we figured out how to do it over time we've gotten better at it and then what we do is share a lot of information about our business plans so it's quasi kind of open book management we share the business plan where we're headed how much money we make where we expect margins to go and then we try and tie the high-level plan down to all the different functions of the business so people know how they're contributing and how what they're doing every day creates value we do a lot to make the ownership feel real we do some things that would sound silly to people in this room we print physical stock certificates we've found that the physical manifestation of ownership really makes this feel real and tangible to people even though the the stock of c-h-i is is it's a private company it's not publicly traded we actually open fidelity accounts for people so that as our valuation mark improves they see value being created for themselves and their families and then the most impactful thing you can do which we try and do every chance we get is to pay an early dividend even if it's tiny because there's nothing quite like people receiving a check to understand that the ownership is real and that's what we did it at CH I and what we wanted to do was just play a 60-second video to bring you onto the shop floor in Arthur Illinois and have you feel what the enthusiasm that starts to build pretty quickly so this is only a little over a year into the investment we paid a very very small dividend it was only out of excess cash so for the hourly workers the range was one thousand three hundred to four thousand dollars which may not seem like a lot but you've got to keep in mind we're the fourth private equity firm to show up they've never seen anything like this also we emphasize that if we kept performing we could deliver many many many times this amount of money to people and lastly keep in mind half of America has no savings or negative net worth a lot of those people operate in manufacturing facilities so as you watch the video also just keep in the back of your mind what was when we showed up in terms of employee morale safety lack of investment in the facility the staffing model and now everything's starting to turn around so if we can roll that quick video [Music] so if you've been here less than two years in your full-time we're paying one thousand three hundred two to four years two thousand four hundred and four years or more almost four thousand dollars and these these amounts and so the payout will happen I think this is Friday you have employees feel like they are part of the company they do better perform better so it makes you more empowered to talk to upper management and to make sure that you get heard with ideas that you have or thoughts that you may have about something I think it completely changed the way everybody sees so that's obviously what we're going for is to get people to think differently about the company and their role at the company so those are the first two legs to the stool I mentioned investing in the people making everyone an owner the third part is this idea of getting the company involved in the community and this is one of these things a lot of companies do on a check the Box basis but what we found is if you do it in a in a meaningful way through the work of all the employees it can really have an impact on how proud people feel to go to work every day and so what we do is we find a charity that has a need for the product that our company manufactures so it's tied in almost naturally with the mission of the company and then we strike a formal partnership where we provide financial support free product free training and then we get the employees involved in the charity so in this case homes for our troops builds customized homes for wounded vets like the one you see here in the picture so we provide garage doors all over the country for wounded vets and then in the local community we're sponsoring entire homes and when those homes are getting built we basically rent buses and bus our employee base out to the home and help build it and I've been at ch I shareholder meetings where sometimes you get a bigger reaction out of some people through this work we're doing in the community then you even do around the ownership stuff so we did a one year later we did our second employee survey and the results were dramatically better we went from a thirty percent response rate to an eighty percent response rate with the results going from ninety percent below benchmark to sixty percent above benchmark so still a long way to go but a huge improvement in just one year one of the questions that our investors often ask us is can you give us an example of changed behavior what does an engaged employee look like so here's an example this is Larry Beil he's 60 years old he's been with c-h-i for many years and Larry invested the maximum amount the five thousand dollars I referred to earlier so he's looking at a very significant potential payout and Larry is very very focused on helping the company get better and here's a I'm gonna give you one example so you know as I've mentioned we spent a lot of time directly involved in our businesses and so we do things like ride along with truck drivers making deliveries to really understand you know how value is being created and where additional opportunities might might come from this is an actual route that Larry and I drove together this is from Arthur Illinois this is his central Wisconsin and western Wisconsin routes so you can see he goes almost to Minneapolis all the way up almost to Duluth back to the center part of the state and then we inexplicably send him to northern Michigan to deliver one garage door and so Larry says hey peep you know before I was an owner all I cared about was miles it's 90 cents a mile you could have me driving around in circles for all I care but I really wanted to show you that this is what I'm seeing out of our scheduling department there's no way we're making money on this stuff because I know what you pay me to deliver a door and I know roughly what we're charging for a door so you go through the math and of course Larry's right and we're making no money and this was reasonably pervasive in the scheduling department what was happening was we were overriding our own route scheduling system to accommodate small deliveries our heart was in the right place we wanted to accommodate small customers and small orders but it was costing us a lot of money and this is what happens when employees start to become engaged is it almost becomes an issue of prioritizing all these ideas so to touch on what both johannes and craig mentioned here's an example again the we were the fourth private equity firm to show up as a building products company so people said margins were already very good at 21% KKR must be crazy why would they be buying this and you can see in under three years we're pushing 30 percent in the EBIT down margin and we've taken almost all the working capital out of the business so this started at 12% of revenue which in the industrials world is totally respectable probably top quartile and by 2018 I think will be negative on working capital so in the time we've got left what we wanted to do was talk to you or maybe tell you about some of the conversations we have internally about what could this kind of engagement model mean for the industrial economy if this were to become more common and we discuss it on three dimensions wealth and income inequality productivity and technology disruption just to touch on the last one which might be the least clear is the idea is that you know technology is great unless you're the blue-collar worker who's getting disrupted and if we can get our employees using their whole brains like Scott nettle likes to say and get them behaving like employee owners they are less likely to get disrupted and more likely to survive alongside of technology and I'll give an example that so starting with inequality we all know there's a massive inequality problem in the country and broad-based ownership could be a part of the solution we wanted to illustrate what this can mean for people by touching on capital safety this was a business we bought in 2012 they make fall protection equipment so like the safety harness and the cabling system you see this gentleman wearing on the top of a wind tower we owned the business for three and a half years and sold it to 3m when we when we initially bought the business though this was what the picture looked like so very similar to ch I 1,250 employees 35 people had ownership the vast majority were hourly workers in the plants in the distribution centers making you know 14 to 18 dollars an hour those 35 people when we bought the business got a payout of 157 million and two people got sixty of 157 million so again a microcosm of the industrial economy more broadly so we rolled out our engagement model our broad-based ownership our operational improvement program and it was a great investment for our investors and it was a fantastic outcome for the employees when we sold the business so we went from only 35 people even participating in ownership to 204 making more than $100,000 and 44 making more than a million and if you're worried about the top two people in the lower-left here they actually made more money with us than they did in the prior deal so this can work everyone can participate in in value creation we wanted to play one other video this one's about 90 seconds long and this is some footage that was captured inside of our Red Wing Minnesota plant and this is the moment that the employees find out what their equity is worth this is the first time they hear that news if you can play that video when the announcement was made we were listening and when he said they unmount my heart stopped I looked around at all of the people that I knew and some of them were crying and I knew how much some of them really needed help and it was just really touching to see and I think I was more excited for everyone else than I even was for myself one girl who's a single mom of two had never had a new car and she was 45 years old and she got a brand-new car her first one ever and she was so excited and there was another girl who had been married for about I think four years and she and her husband had never had a honeymoon and they went on a honeymoon to see people jumping for joy tears of joy coming up and hugging you because of this great news that you're able to give them it really was one of the most rewarding days I think I will ever have in my life so one of the unexpected benefits of this program was the impact it had on our senior leadership teams and how much easier it became to drive operational improvement and break down barriers to change and that that gentlemen Kevin Kaplan at the end who ran the US business for us once we rolled out the program it just kind of became all about how do we maximize the value of the equity and really deliver for our people now although it has nothing to do with inequality can't pass up the opportunity to show you the results again just like c-h-i fourth private equity firm to own capital safety margins were already really good in the mid-20s these re Badal margins and you can see in three and a half years we took them from the mid 20s to almost forty percent people would have said that was impossible and craig tells me you are there's some people here who are tough critics and we need to show a little bit more data so just so you don't think we're cherry-picking this is the last five industrial deals we've done and you can see the margin improvement on the low-end has been six hundred basis points and on the high-end has been over a thousand basis points and three of these businesses had been owned by private equity firms so moving on to productivity this is probably intuitive that engaged employee owners will be more productive employees but wanted to give you one example I'd love to talk about gardner-denver because this was a public company in 2013 and at the time there were 6,000 employees and there were 86 people with ownership in the company 86 out of 6,000 we took the company private rolled out this engagement model we've now taken it and transformed the company during the years it was private it's now public six thousand four hundred employees everyone's an owner in the company the least amount of ownership anyone has is equivalent to about 70 percent of their annual compensation so totally changed culture and the CEO Vicente and I spent some time after the IPO thinking about how we could prove to Wall Street that as a result of this engagement model we could in a differentiated way execute on an operational improvement agenda and we want to find something that we could really take a metric and move it in the right direction rapidly by working through all 6,400 engaged employee owners we pick networking capital for a bunch of reasons one is that everyone touches working capital in some way between receivables payables and inventory two is these are reasonably understood concepts because everyone's got inventory at home in their pantry and they all have bills to pay so they all have payables and you can really explain this stuff to people even if they've not got formal training and then lastly there's a lot of room for improvement so gardner-denver forever has had over 30% of revenue and working capital and when we started had almost 32% and if we drove the improvement we thought we could it would free up hundreds and millions of dollars of cash to reinvest in the business so we really went after this starting about a year ago we took a train the trainer approach which means you basically establish master trainers in your company they go around the world training new trainers and then they train the rest of your employee base so with just a few steps you can actually reach all 6,400 employees we did a lot of measurement and reporting so that people knew on inventory for example how we were doing by facility by product line every week and then lots of ongoing communication not just ongoing training but also celebrating success we've found this is a big way to drive engagement and to build on on quick wins so we had a film crew basically follow our management team around and capture these moments and we created little ceremonies out of them and then we take the video translate it into a bunch of languages and zap it around the world and we've found that creates positive followership so I won't play any of the videos in the interest of time but we've got dozens of these this example is of a woman named Holly and our read at UK facility after her training she went out and resolved a bunch of five year old accounts receivable that aggregates to a million pounds again people would have said that just would not be possible and of course the message to all the employee bases just imagine if everyone would behave this way so we just started this but we've already taken 230 basis points out of working capital gardner-denver public will be announcing results second quarter results soon if you're interested you can see how we're doing on this metric and then finally technology disruption if we go back to Larry the truck driver at CH I you know if all Larry is doing is picking up garage doors and dropping them off at customer sites someday that will get disrupted by autonomous vehicles but think of all the things a human being can do that a computer or a robot can't do so one is identifying improvement opportunities so our truck drivers are now constantly coming up with ways to load and unload doors or improve rat efficiency something a computer can't as easily do what it takes creativity second is another thing a computer can't do is actually get out of the truck at every stop and physically unload the doors it's we're the only company that does this because we've got this unique relationship with our drivers and it's a huge differentiator and a huge productivity benefit to our customers they can provide competitive intelligence to us so that when they are dropping off doors they're in the customers warehouses and they can see our share of wallet whether there's been competitive entry etc they can also serve and do serve as a feedback loop on quality when they are unloading the doors they take note of dented panels missing Hardware etc report it back to the plant and so we can fix the problem before it spreads and lastly another thing a computer can't do is serve as a source of customer relationship so these guys are almost like second line salespeople on the job that they do and the point in all this is that even if we had autonomous vehicles as engaged employee owners they're delivering so much value we would still have them sitting in the truck doing all of these things even if the truck was driving itself so as I mentioned at the outset this is very much a work in progress you know we've started in us industrials we are working globally and across business lines to see where this could have other applicability we were honored that Harvard and Rutgers have taken note of what we're doing and are starting to study what we're doing and are helping us isolate the performance improvement impact related directly to employee engagement so with that I hope we've done a decent job of proving to you that we're doing a whole lot more than just levering up companies and hoping multiples go up hopefully I've given you some sense for just how deeply involved we get with our businesses once we buy them as Henry likes to say that's when the hard work really starts is after after you make the acquisition so with that I'm going to hand it over to my partner Ralph Rosenberg you
