Content Published Last Week

1. Ferguson PLC: Plumbing, Waterworks, & HVAC Business Quality

2. Vroom: Operational Challenges to Scale

3. Inchcape: Auto Retail Distribution Dynamics

4. Sunbelt Rentals: Pump & Power Specialty Equipment

5. Evolution Gaming: APAC GGR by Country & Crypto Casinos

6. Evolution Gaming: A SE Asia Operator Perspective

Ferguson PLC: Plumbing, Waterworks, & HVAC Business Quality

One angle of our research on Ferguson is to understand its potential advantage of distributing products across business lines such as plumbing, HVAC, waterworks, etc. At a high level, this strategy seems to lack real operating synergies.

For large contracts, the general contractor building the hospital or school will sub-contract the plumbing, electric, and heating to different sub-contractors. Each sub-contractor will source equipment from their own distributors when the site is ready for their installation job. There seems little benefit to scale in winning larger national tenders given the process of subcontracting construction work.

There is also little product overlap between FERG's business lines which limits material distribution scale effects. Maybe the benefits of revenue diversification on reducing cyclicality offsets the complexity of running multiple lines? This interview with the Former CFO of Ferguson PLC explores FERG's potential synergies in more detail and compares the underlying quality of its plumbing, waterworks, and HVAC business.

That's a good question. It's a fair question because we always felt that our value was less than the sum of our parts. But they all had something in common. They either had a similar customer base, bought similar products, or were products that could go through our distribution centers. So, if it fit one of those three parameters, there was enough synergy to make it make sense for us. There are a couple that you could question, but most of them, like waterworks, was a great business for us. Some of the customers were the same as our plumbing. Some of the products were the same, and HVAC was a good business for us. They used the distribution centers to some extent, and they're all B2B industrial distribution. So they had that in common as well. - Former CFO at Ferguson

We also breakdown FERG's gross margin and explore the benefits of inflation on B2B distributors.

Vroom: Operational Challenges to Scale

In mid-2020, VRM raised ~$500m and listed on the NASDAQ at ~£3bn market cap. Last month, it closed its online used car business to focus on its finance and services business. This interview shares insights into VRM’s challenges to scale and provides an interesting case study for CVNA and KMX shareholders.

Local logistics and reconditioning density remains key to successfully scaling an online used car dealership model nationally. Given VRM’s set up, it could take 14-21 days just to deliver vehicles sourced from customers to the reconditioning hub. This hits GPU in two ways: higher variable operating unit costs and higher daily vehicle depreciation.

In many cases, however, we would have to transport the car from a Manheim location where we didn't have a reconditioning relationship, or from a standalone hub that would do light cleaning and prepping of a vehicle for delivery, but not reconditioning. We would get the car, let's say from Orlando, and take it to our Orlando hub. That's about 25 to 40 miles. Then we would put it on an eleven-car hauler to get it to a reconditioning hub. Those are the factories. So that was another step in the process. We were pretty much relying on the Manheims of the world. - Former Executive at VRM

After realizing outsourcing recon and delivery was too expensive and slow, VRM attempted to replicate part of CVNA’s processes. This interview sheds into the operational complexity or sourcing, reconditioning, and selling cars online and is an interesting case study for anyone owning CVNA or KMX.

Inchcape: Auto Retail Distribution Dynamics

In this interview, a Director of Dealer Networks for the EMEA region at Nissan sheds light on the dynamics between automotive OEMs and distributors across different European markets as Chinese brands look to gain distribution in Europe.

Let me give you an example for clarity. I'm with Nissan, or rather, Renault Nissan. A few years ago, one of the major players in Africa was CFAO, a French company that distributes many brands across the continent. 10 to 15 years ago, CFAO was bought by Toyota indirectly, making CFAO essentially Toyota. Nissan canceled all importer contracts at that time because they didn't support the fact that CFAO, and by extension Toyota, was distributing their cars. However, 10 years later, they started discussions with CFAO again because they recognized CFAO's significant presence in Africa. This suggests that what might have been an issue in the past is not anymore. Nissan could face some issues. However, Nissan currently holds a 3% market share in Europe. The balance of power is not in Nissan's favor, and they will have to accept the presence of Chinese brands in showrooms close to theirs. - Director - Dealer Network for AMIEO region - Nissan Motor Corporation

Sunbelt Rentals: Pump & Power Specialty Equipment

Specialty equipment such as pumps and HVAC, flooring, scaffolding, and other equipment for live music or events contribute ~30% of Sunbelt and United’s annual rental revenue. Specialty equipment dampens cyclicality and improves robustness for national rental companies compared to 2007/8. Specialty also has a longer growth runway with lower rental penetration and higher lifetime cash returns than general tool equipment.

Recovery value is lower as specialty equipment is used differently and for longer. You could have a relatively low margin piece of equipment that lasts for 15 years and ends up having an attractive cash-on-cash return because it lasts for a long time. You could also have a very high margin asset which only lasts three years with a lower cash-on-cash lifetime return. There are dozens of ways that equation looks attractive or unattractive based on those levers. Core lifetime cash flow would be three times and specialty would be five to seven times.

This interview explores AHT’s Power and Pump speciality business with a 20-year rental veteran who started and scaled the division at Sunbelt.

A pump and power branch will occupy a large physical footprint due to the size of the products. These products are not only large but also require industrial facilities, such as a certified wash bay and waste oil disposal systems. This is to ensure compliance with the Environmental Protection Agency. In contrast, a climate control branch can operate from a 3,000 square foot warehouse in an industrial park, without the need for specialized equipment or a physical yard. This is because there are no engines within a climate control branch. As a result, the cost of the facility is much lower compared to a pump and power branch or a large general tool branch. - Former Regional Manager at Sunbelt Rentals

The interview goes on to explore how branch managers are compensated, how equipment is managed across stores in both specialty and gen tool, and challenges for Ashtead scaling its clustering strategy.

Evolution Gaming: APAC Operations

Over the last few months, we've been speaking to various APAC gaming operators and aggregators to understand how EVO's APAC business works. We published two interviews this week and plan to publish a learning journey curating our learnings in the coming weeks.

The first interview is with an APAC aggregator with 20-years experience and current relationships with EVO and Pragmatic breaks down the APAC market by GGR across countries and mix.

There are two types of GGR you need to understand. The first is cash GGR, which refers to players depositing physical or real currency money on the website. The second is crypto, or digital money, cryptocurrency. It's challenging to determine exactly how much Evolution Gaming or other operators are making from the crypto market. Evolution Gaming is very popular in Korea, despite its illegality. That's the cash market. I believe the number might be double in the crypto market. - Former Deputy CEO of Large Asian Aggregator

The interview goes on to share details of the GGR generated in China, Korea, Philippines, and other large Asian markets, the regulatory landscape, and why China isn’t a large market for EVO.

A second interview with an operator licensed in Curacao with activities across SE Asia and India further explores EVO’s APAC business.

If you're a small operator in India, you are also targeted by the Indian government. However, since we have no base of operations in India, their options are limited. They usually block our domain names, which is why we have multiple mirror websites. They also attempt to freeze our bank accounts, and they're improving in this area, reportedly using AI. However, for every problem, there's a solution. There are middlemen who can provide you with bank accounts for rent in India, Malaysia, Thailand, and other markets. These agents charge a set amount, perhaps 200 or 300 USD per bank account. (..) That's why in India, we frequently have to rotate our bank accounts, both the ones that players deposit into and the ones we use to pay out winnings. When we have a certain amount above the covered amount, we usually settle with the agent who cashes it out for us, taking a cut or charging a fee for the settlement. - Current SE Asian iGaming Operator

The underlying performance of EVO’s APAC business seems closely tied to the overall performance of the crypto market:

From that bank account, he will convert to cryptocurrency, to USDT for us, and he'll inform us of the exchange rates and everything. We pay all aggregators and those we have direct contracts with in USDT. - Current SE Asian iGaming Operator

We plan to publish a more detailed learning journey on our work in the coming weeks sharing what we’ve learned about EVO’s operations in APAC.