Chemtreat

Chemtreat is a leading American company specializing in industrial water treatment solutions. While that might sound a bit dry, for a value investor, it's a story bubbling with potential. The company provides customized programs, chemical products, and expert services to prevent corrosion, scale, and other issues in its clients' water systems—think cooling towers, boilers, and manufacturing processes. Acquired by Danaher Corporation in 1994, Chemtreat operates a deceptively simple yet powerful business model. It doesn't just sell chemicals; it sells a complete service package that ensures a customer's multi-million dollar equipment runs smoothly. This creates incredibly “sticky” customer relationships and a recurring revenue stream that is the envy of many industries. It's a classic example of a business with a deep economic moat, making it a fascinating case study for anyone looking to understand what makes a high-quality company tick.

At its heart, Chemtreat’s success isn’t just about chemistry; it’s about brilliant business strategy. The company is a textbook example of several powerful competitive advantages working in perfect harmony.

You've heard of selling a cheap razor to lock in sales of expensive, proprietary blades? Chemtreat perfects this model.

• The Razor: The initial on-site analysis, system setup, and ongoing technical service provided by Chemtreat's expert field engineers. This service is deeply integrated into the customer's operations.
• The Blades: The continuous, required purchases of Chemtreat's specialized and often patented chemical blends.

The cost of these chemicals is a tiny fraction of the value of the industrial equipment they protect. For a factory manager, paying for Chemtreat’s service is a small insurance premium to prevent a catastrophic, multi-million dollar plant shutdown.

Once Chemtreat is managing a customer's water system, it is incredibly difficult and risky for that customer to leave. The switching costs are enormous, not in monetary terms, but in operational risk. A new provider's formula might be slightly off, potentially leading to corroded pipes, damaged machinery, or contaminated products. This isn't like changing your brand of coffee; it's more like changing the brand of a life-support system. You stick with what is proven and reliable. This dynamic gives Chemtreat significant pricing power and protects its business from competitors.

The Chemtreat business model contains all the ingredients that investors like Warren Buffett and Charlie Munger seek in a long-term investment. It's a “set it and forget it” business from the customer's perspective, which translates into a wonderfully predictable enterprise for its owners. Key attractions for the value-oriented investor include:

• Predictable, Recurring Revenue: Long-term service contracts and the constant need for chemical refills create a steady, reliable stream of income. This makes forecasting future free cash flow far more certain than for a company reliant on one-off sales.
• High Return on Invested Capital (ROIC): Chemtreat is an asset-light business. Its most valuable assets are its chemical formulas (intellectual property) and its highly trained service force, not huge, capital-intensive factories. This allows it to generate outstanding profits relative to the capital tied up in the business.
• Mission-Critical Service: In an economic downturn, a company might cut its advertising budget or delay office renovations. But it absolutely will not stop treating the water that is essential to keeping its core operations running. Chemtreat’s services are non-discretionary.

Understanding Chemtreat is incomplete without understanding its parent company, Danaher. Since acquiring Chemtreat, Danaher has applied its world-renowned Danaher Business System (DBS). DBS is a corporate culture and toolset dedicated to kaizen, or continuous improvement. It uses rigorous, data-driven processes to constantly enhance quality, delivery, and innovation while systematically eliminating waste. For Chemtreat, this meant that an already excellent business was supercharged by an elite management philosophy. The DBS framework helped optimize everything from its supply chain to its sales process, making a strong company even more efficient and profitable. For an investor, the combination of Chemtreat's powerful intrinsic business model and Danaher's operational excellence creates a formidable engine for long-term value creation.