ACV Auctions Survey, Stevanato, Danaher, FERG, UMG, GoEasy, Miller Industries, GYM

Content Published Last Week

1. IP Survey: ACV Auctions vs Physical Auctions

2. Danaher's Pall: Medical vs Biopharma Segment Quality

3. Stevanato Group: Glass vs Plastic Drug Containers

4. Ferguson: Waterworks and Plumbing Distribution

5. Universal Music Group: Catalog Acquisition, DSP's & New Talent

6. GoEasy: Store Operations

7. Miller Industries: Towing Market Dynamics

8. IP Podcast: The Gym Group, Basic Fit & Discount Gyms (Spotify / Apple)

ACV Auctions: Independent Car Dealer Survey

Over the last 6 years, ACV Auctions has consistently been winning market share of the dealer wholesale auction market reaching ~8% in FY23. We’ve curated all our existing research and explain how ACV’s digital auctions and inspection reports compare to physical auctions in our recent ACV Learning Journey.

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This week we published a survey of 8 independent dealers to understand how they compare digital vs physical auctions, limitations of ACV’s process, and long-run challenges and opportunities for ACV to win a majority of the wholesale auction market.

The survey sheds insight into the psychological and emotional factors at play in the wholesale auto market that may limit the long-run growth opportunity for digital auctions. We explain how dealers feel about not being able to see or touch wholesale vehicles on ACV and how they value inspection reports. One conclusion from the survey is clear: ACV has better inspection reports than Manheim and other physical auctions.

I feel ACV currently has the best inspection report being used for todays automotive auction sales both on-line and in-person, many of really good quality pictures inside and out, under hood, and under to include the frame, a recording of the motor starting and running, also they use a higher-end OBD scanning tool to read both current and history codes so if someone did a quick erase it will or should show up. The only inaccuracies might be an issue of drivability at higher speeds like axles, rear ends, drive shafts, and etc. - Indie Dealer Respondent 3

However, just being better than the physical auctions may not be good enough for ACV to win material market share. We explain why in the survey.

Danaher's Pall: Medical vs Biopharma Segment Quality

Danaher’s Pall, now combined with Cytiva, owns leading filtration technology for bioprocessing. As DHR reminds us, Pall is present across various stages of the process:

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We interviewed a Former President at Pall who spent over 30 years at the company mainly running its Medical division, which mainly sells filters and SUT to hospitals, and within the core biotech unit.

One interesting observation from the interview is how Pall’s Medical business became commoditised in the late 2000’s / early 2010s. Kingsley eventually sold the blood filters, one of the largest parts of Pall Medical, to Haemonetics, to leave a cleaner, superior portfolio for DHR to acquire.

Prior to the acquisition by Haemonetics, we had a blood unit that dealt with blood centers and hospitals, selling blood filtration technology. There was a separate unit called 'hospital' that sold infusion line filters, breathing filters, and water filtration filters to hospitals. Then there was an OEM division that sold membrane technology, in either sheets or rolls, in various formats to companies for their own branding and market distribution. - Former President at Pall

Pall’s blood and breathing filters became commoditised as the price declined by 90% over a decade:

To give a brief history, Pall Medical started with breathing filters and infusion line filters. That's how the division was born. However, as the market matured, it reached a plateau and then started to decline. From a hospital perspective, during my tenure, we saw a decline in breathing filters and a stagnation in IV, infusion line filters…There were many competitors who invented similar membrane technology housed in a more appealing, compact, and efficient design. Initially, breathing filters were priced around $20 each, but the price has dropped to about $2 or even less now. - Former President at Pall

Pall’s edge in selling filters to hospitals was competed away.

Can this happen to Pall's biotech portfolio?

It seems unlikely:

The major difference lies in how it's regulated and implemented. In a hospital, a breathing filter just needs to meet certain specifications related to breathing circulation and resistance. In biotech, however, you validate a product within your process. It's linked to the prior step, the next step, and so on. It's a whole process that you validate through extensive testing to ensure it meets the overall specifications. - Former President at Pall

The fact all filters are spec’d into the bioprocess at the clinical stage provides the potential customer lock-in that Pall Medical lacked. But this doesn’t mean you don’t need to innovate. Another observation from the interview is that Pall acquired its lead in SUT filtration.

This leads to another question: How much of biotech M&A should really be classified as maintenance R&D?

Pall’s ATMI and MediStad BV acquisitions were arguably crucial to maintain its positioning in the bioprocessing value chain. Without such acquisitions, it’s unclear how competitive its filtration portfolio would be today. Unlike in DHR’s industrial days, biotech M&A seems more maintenance than growth capex. Maybe we should bake in maintenance M&A to stay abreast of underlying technological changes in bioprocessing?

The primary risk from a Pall perspective is that Asian companies, like those in China, are doing exactly the same thing without infringing on patents. This is always a concern as they could potentially replicate products in a way that doesn't infringe on patents or when the patent has expired, and then sell it at a cheaper price with the same quality. In the past, quality was a concern as it was challenging to maintain a consistent level of quality over the years or across different production batches. However, this has improved. Therefore, American-based companies like Pall and GE need to ensure they are always one step ahead of what the Asian market can replicate. This requires continuous development and innovation. They cannot afford to rest on their laurels just because they have a significant market share or are the market leader. There's always a risk of being overtaken - Former President at Pall

Stevanato Group: Glass vs Plastic Drug Containers

Stevanato Group, an Italian drug packaging company, is expecting high demand for its glass containers due to the growth in GLP-1. This former Amgen VP discusses major risks:

If there's a way to move away from glass to a more reliable supply that doesn't interact with the molecule, that would be ideal. We're seeing more use of plastics, even in bioreactors. Disposable bioreactors were rare 20 years ago, but now they're common. These changes take time because you need scientists who are familiar with these materials and are willing to question traditional methods. - Former VP at Amgen

Stevanato recently acquired Balda, a company that produces plastics to mitigate such packaging material risks:

Both plastic and glass have their own unique set of problems. For instance, when forming plastic containers, unlike glass, static electricity can quickly become an issue. This can occur during production, sterilization, or filling suites. To counter this, you have to incorporate antistatic equipment to prevent static electricity from building up and attracting particulates to the container, or worse, inside the container. - Former VP at Amgen

Ferguson: Waterworks and Plumbing Distribution

FERG is one of the most diversified B2B distributors for residential and commercial contractors globally.

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This interview compares the fundamentals of FERG's Waterworks vs Plumbing distribution lines. Both business units operate as standalone P&Ls with separate branches and sales teams. Waterworks branches have a higher inventory balance given customers require fewer SKUs and the equipment is larger and more expensive. Waterworks also has a lower gross margin than plumbing but higher EBIT per branch given the opex to serve municipalities is lower than SME contractors. Plumbing is also more competitive:

I would say the plumbing sector is more competitive because it extends into the retail space. Plumbing doesn't just involve the pipes behind the walls, but also the toilets, fixtures, and faucets. The aesthetic appeal of these items matters to the client, which is where the retail aspect comes in. This is where we compete with big box stores like Home Depot and Lowe's, as well as online retailers. - Former Director at Ferguson Plc

Although there are limited operational synergies, waterworks can be a leading indicator and enable FERG to win new residential or commercial plumbing and HVAC projects:

we began making waterworks acquisitions in the Southeast, particularly in South Florida, as early as the 80s. There was a significant construction boom and a need to establish infrastructure from scratch. This presented a great opportunity. The waterworks sector of our company is strategic. It's not just a profitable business necessary for the construction cycle, but it also serves as a leading indicator. When infrastructure is being installed, it signals more to come, including plumbing, HVAC, retail space, lighting, and other elements. - Former Director at Ferguson Plc

An interesting risk from this interview is around FERG's antiquated ERP system...not sure how many $40bn companies are still running on DOS!

The risk lies in the limitations. What happens when the technology reaches a point where its core is no longer supported? As I recall, IBM currently supports the basis of it. But what happens when they decide not to anymore? It's like running on an old DOS machine today. It wouldn't work. However, the technology base that supports wholesale distribution isn't that large. No one is bigger, and it's a significant challenge. - Former Director at Ferguson Plc

Universal Music Group: Catalog Acquisition, DSP's & New Talent

While Universal Music's spat with TikTok continues, we interviewed a former EVP of UMG, responsible for catalog investments, to discuss the risks embedded in music discovery shifting to TikTok. Historically, catalog was only 50% of the label business:

"Catalog is a foundation of your business. But by then, it was a 50 50 business, 50% catalog, 50% new release. It was all about the latest Keane album. All this new talent coming in and making a lot of money for the company. - Former EVP at UMG

Now catalog is closer to ~80%:

Before Covid, we were on a progression of 60-40. Then Covid happened and it changed a lot more. It was 70-30 and now we're at 80-20, or even more. Right now, it's 80%. - Former EVP at UMG

The interview discusses how strategies around monetizing catalog have evolved, how labels have attempted to diversify revenue streams and how financial players are competing with labels for rights.

GoEasy: Store Operations

GoEasy is a CAD 2.8 billion market cap Canadian subprime consumer lender that has compounded diluted EPS at a 31.9% CAGR over the past 5 years. The company has been growing same-store sales for 55 consecutive quarters and has reported positive net income for 90 consecutive quarters.

In the subprime consumer lending business, delinquency rates constitute the largest cost item for the lender. There also seems to be a direct correlation between the delinquency rate and the human relationship developed between a lender's frontline employees and their customers. That's because subprime borrowers who need financial help to cover adverse or unexpected expenses value the help offered by subprime lenders and wish to maintain a good reputation within their local communities. This leads to higher collection rates:

I can tell you that our lowest delinquency and loss rates were on the East Coast, which has the smallest population in Canada. The reason is that they would see their clients in their communities. Even though all the information was confidential, there was a connection. We trained our teams to establish a personal connection. It wasn't a cold transaction, but a warm connection. Our clients need this kind of connection. They need to know they're not failures, they're not doing something wrong. They need to know that there's a connection. It's important to remember that relationships are crucial. We encourage people in the subprime space to stay in their branches... Losing a good branch manager can significantly impact the loss rates in those branches. Therefore, it's worth keeping good managers satisfied and in their positions. - Former SVP at GoEasy

In this interview, a former SVP of retail operations at GoEasy helps us understand the company's store operations, the importance of GoEasy's culture in building healthy relationships with subprime borrowers, and the difficulty of running a 100% online consumer lending business successfully.

Miller Industries: Towing Market Dynamics

Even though tow trucks are expensive investments, time pressure faced by towing companies often renders the purchase both impulsive and price inelastic.

"You would assume that for a tow truck costing six or $700,000, there would be a plan to purchase it, perhaps a year in advance. You would budget for it, start saving. However, in my 10 plus years of selling tow trucks, I've received countless impulsive phone calls. Customers would ask for a large wrecker and take whatever was in stock, regardless of the color or the $450,000 price tag. This impulsivity made stocking distributors the largest distributors. The more you had in stock, the higher your chances of selling. Even today, the top two or three distributors within Miller's network have the most inventory. - Former District Sales Manager at Miller Industries

In this interview, a former District Sales Manager at Miller Industries sheds light on the dynamics of the towing market.

IP Podcast: The Gym Group, Basic Fit & Discount Gyms (Spotify / Apple)

In this free podcast episode, we explore our recent published research on discount gyms discussing:

1. The key questions we've been studying around mature gym economics

2. How Domino's and its fortressing strategy is an interesting frame of reference for discount gym competition

3. The nature of competition in the discount gym business

4. Risks to GYM and BFIT and how we structure our research around the topic