“There has been a lot of interest, but not much information”
Andy Graves, CEO MAG
At the recent Tucker Rocky/Biker’s Choice Dealer and Brand Expo in Texas (February 9-10) AMD Magazine met with MAG CEO Andy Graves to discuss some of the tough issues that have faced the group since the merger in May 2014. We found Graves to be ready and willing to face the issues, discuss the strengths that the combined group can build on, and the opportunities it is now looking to develop …
The 58-year-old Graves joined MAG in January 2015, some seven months after news of Tucker Rocky owner Lacy Diversified Industries’ audacious acquisition of Motorsport Aftermarket Group had sent shockwaves around the industry.
At the time, I remember describing it as being like someone dropping a very large rock into our humble pond, and it doesn’t seem like a single month has gone by since then without some kind of news (negative or otherwise) about LDI’s struggle to get their arms around the behemoth they created. Lacy acquired MAG, and then merged it with TR into a new combined group holding company in a growth market – one that has stalled since the deal was done. Frustratingly for everybody, it has done so following a period of initial, if fragile, recovery from the impacts of the 2008-2012 financial crisis.
Graves’ background in the boat and marine leisure industry has parallels with the powersports aftermarket, and his reputation as a consolidator preceded him into a 24 month-cycle of creating an entirely new management structure and rationale for the combined business – a process that has certainly had its downs as well as ups.
“The similarities are a big part of what attracted me to the role with MAG” said Graves. “I had been involved in specialty markets that were driven by leisure dollar spending, where the major items were engineered and manufactured goods. I also spent time in distributive environments, logistics, and with brand development and management, understanding and seeing how brand values can be evolved.
“So I felt quite comfortable in terms of being able to come to terms with, and understand, the issues and the opportunities quite quickly – and it is very much about the opportunities. Just like the marine and boating industry, powersports is passion and lifestyle led. In markets like that there are always going to be opportunities thanks to the enthusiasm of the market’s consumers.
“The one thing that I was clear about straight away was to understand the group as being essentially three different but compatible and mutually supportive businesses; with each helping dealers’ customers enjoy powersports as the common denominator.
“Number One - Tucker Rocky and Biker’s Choice are leading distribution businesses that have their own set of requirements in terms of capabilities, capital and relationships.
“Number Two - MAG is a brand business with its own specific needs. Whether manufactured or third party sourced, and with MAG, as everyone knows, our products are mostly made here in the United States in our own factories, brand management and product development brings its own set of challenges, requirements and opportunities. That’s why separation of brands from distribution is a big part of the strategic three-business model we are building.
“Number Three - our retail group, with Motorcycle Superstore and J&P Cycles, is again a separate business discipline, and is therefore a third unit within the combined MAG entity.
“So, to answer concerns and comments that we have heard about taking some of the historically TR brands, especially some of the apparel lines, and placing them into our brand business, well that makes strategic good sense. People who manage brands need to be allowed to focus on doing that. The distribution business can then be entirely focused on providing our dealers with the great products and services they need to capitalize on the many opportunities they have. Opportunities to profitably grow their businesses by helping their customers enjoy their motorcycling experience.
“Three distinct businesses, our Brand Group, our Distribution arm and our Retail e-commerce operation, three distinct business opportunities, each with their specific characteristics and requirements.”
We went on to discuss the decision that the owners took to bring in an outside CEO, one who could settle the operation down, exploit available synergies and eliminate duplications. Graves was equally to the point: “There was no obvious CEO candidate within the management of the two businesses pre-merger, no natural leader. So the decision to look outside made complete sense, and also offered the benefit of having someone with fresh perspectives and experiences.”
Asked to give a frank impression of what he thought about what he found when he started in January 2015, Graves’ answers went straight to the sometime benefits of those outside perspectives in their precision and simplicity.
“Well, this is a seasonal business,” he said. “Things tend to happen once a year, in a sequence, so the merged business has now been through that cycle twice and is now beginning its third season. It is interesting to think about what we have learned and what we have achieved.
“The big thing, and it’s not really surprising, was that cultural changes were needed. When you bring those kinds of leading companies together, there is always going to be a need for change in each of them and inevitably that creates concerns. Even though most of the issues we addressed were quite positive for the businesses, nonetheless a lot of people found that their world changed a bit.
“The merger brought a lot of benefits for a lot of people, but we had to work through their concerns, we had to help people understand “what does this mean for me, what does this mean for the company I work for.” While that can take time, if the right decisions are taken, and implemented quickly, then the benefits can also become apparent equally as quickly. The three-business model has certainly brought clarity and focus in that respect.
“The focus was on helping people get comfortable with the changes, but I think that now, having exited 2016 and with the peak of the 2017 season on us, we have gotten past that. We feel that there is a good platform being built. The alignment of our brands and the alignment of the Tucker Rocky and Biker’s Choice sales forces all feel right. We have a lot of really good and talented people who are now able to pick their heads up and look forward and outside at their marketplace, rather than looking more internally and trying to respond to the merged environment.
“It has been interesting as a cultural challenge, but I definitely sense that we have worked through that now and that stage of the process is behind us.”
One set of the many external market concerns I discussed with Graves revolved around the potential for negative strategic market impact from the merger.
Whether or not some of the signals that appeared to be coming out of the proto-group were near the market or not, one was that Tucker Rocky and Biker’s Choice might be heading out of third party distribution altogether; another that we might start seeing dumping and price attrition, as a channel tier was absorbed by a factory-to-e-commerce capable operation; and that with the primary competitor having previously been the primary customer for most of the MAG brands, there has been a lot of concern about the direction of travel that this apparent consolidation and realignment of product lines was taking, or could be about to take. Especially in the context of a market way softer than the one that Lacy must have been banking on.
“Given our size and the pre-eminence of our brands, inevitably we get a lot of attention. We are a group of leading players in the market. But a lot of the fears have been misplaced. Overall, what we have done will be seen as having been good for the industry.
“We have added a major dynamic to the market. Dealers and their customers will see the benefit of that. We believe that the distribution skills and services we bring both to the MAG brands and to our third-party partners will benefit everyone – riders, dealers and vendors. We have created additional critical mass that results in a higher quality product, service and value to consumers. Riders have very special characteristics that they share in common with other enthusiast groups, but they also have basic requirements that they share with all of us as consumers – they want ever better products, prices, and an improved buying experience .”
I discussed with Graves how those initial concerns had moved. Now it is the massive level of debt being carried by the merged entity that has a lot of people worried. Surely the debt that has been incurred, combined with a market in which sales are soft, has reduced the net value of the combined business? One that some say Lacy’s overpaid for in the first place? From the outside, it has looked very much like, in effect, LDI mortgaged Tucker Rocky in order to make the deal happen. In that regard, wasn’t it more of an acquisition than a genuine merger, and isn’t that debt going to be a burden that affects progress and hands the initiative to competitors?
“The deal as structured was a merger. Both businesses went into a new holding company as partners.
“Strategically it has been handled as a merger of equals. As to the debt, well debt is nothing new. MAG had debt and the prior owners [Leonard Green & Partners of Los Angeles] still have a significant stake in the combined business, but their risk has now been spread across all of MAG, as is that of all the lenders.
“It is no secret that the market, especially in the second half of 2016, has been challenging, and like any business we dealt with those challenges. We are realistic and understand that market conditions will remain uncertain, so we are only forecasting that we will be broadly flat in 2017, and we are geared accordingly.
“The rumors that have been circulating about our financial status are largely unfounded. We have very strong cash flow generating capabilities. We had strong cash flow in 2016, and we expect the same in 2017. We don’t have any operating constraints based on our financial structure.
“The debt is largely term debt. The strength of our owners means we have favorable interest rates and the debt terms are out to 2021 and 2022. We have the earnings power to service our quarterly interest payments, and there are no balloon payments. At this point the focus remains on performance, and like any business, if we get that right, then we will have options when the debt reaches maturity. As to what they may look like come the time, and how we may choose to act when the time comes, well we can’t know that at this stage. We just have to continue to focus on the day job so we can make sure the options are good ones; and at this time it looks they will be.
“It has been a tougher market for sure, but I have confidence that we can build significant value in the next two or more years.”
Asked to elaborate on the synergies and benefits he thinks the merger has brought, Graves is adamant that what is being achieved will be a game changer for the long-term health and viability of the market, as well as for the three businesses concerned.
“There is now a platform that wasn’t there two years ago, and as that stabilizes it will bring two distinct and equally important benefits.
“We needed to expand and strengthen Tucker Rocky in the V-twin market, and in one step we have decisively done that. TR now accounts for more than half of the U.S. sales of the MAG brands and has grown our V-twin market sales in the face of a weak market – we are now seeing significant sales volumes in the V-twin sector, and we have momentum.
“Secondly, Tucker Rocky is now a much larger supplier to our retail group. We have been able to move some of that sourcing volume from other third parties and distributors. We and our vendors are seeing big wins as a result.
“The wins come in the synergies too. Just to give you one example, we were able to move the inventory being supplied from Kuryakyn’s relatively small and expensive warehouse at Somerset, Wisconsin, and not just consolidate it into the five-outlet Tucker Rocky distribution center footprint, but in doing so considerably grow the available inventory and improve speed and cost-efficiency to our dealers.
“As another example, we have also been able to move our QuadBoss ATV/UTV products brand and others, especially our own apparel brands, into our Brand Group, and that works really well. Yes, there is that cultural impact, but the result has been a powerfully improved business unit. Again, we’re no longer looking internally for fixes now, we are concentrating on looking externally for the opportunities to grow sales.”
Moving forward, what does Graves see as being those opportunities, and what are the challenges that the combined business may yet have to face?
“Well, like everyone else, we have to eye what the general forecasts are for the market ahead and our ‘flat to modestly down’ industry scenario is consistent with the estimates that the likes of Harley and Polaris are giving themselves.
“Maybe our forecasts will prove overly cautious, I’ll take that; but it is better to outperform modest expectations than to fail to meet over-ambitious targets. Like us, I think a lot of people in the powersports parts and accessories market are seeing some cause for optimism. It may well be that there is a degree of post-election improvement, and if there is, and if that translates into more people spending more money on parts for their motorcycles and the other recreational vehicles we have product for, then we are ready for it.
“Either way, I do believe we are in good shape and should be able to outperform the market. We are focused on giving our customers reasons to get excited about the business opportunities we have for them, and to help them make the most of the opportunities they can find for their riders from within our offerings.
“We spent heavily to improve our businesses in the second half of 2016, at a time when the decline surprised a lot of people, and we intend to continue doing so to make sure we are positioned for growth in a slow growth market.
“The platform we have built means we now have the strategic muscle needed to succeed, and we will continue to invest heavily in our sales force and R&D programs - this is absolutely the time to be doing so.
“If funding that and other investments has meant temporarily curtailing expenditure elsewhere, then that is what we have done; if it has meant curtailing some expenditure altogether and changing aspects of how we were doing business, then we have done that also.”
One issue that has been something that I personally have always wondered about, (and it becomes especially relevant from an international dealer’s perspective) has been the complex matrix of channels through which a shop owner could buy a Kuryakyn branded product, for example. Sometimes there have been anything up to six or seven channel options available to a dealer, with domestic U.S. distributors competing with dealer direct sales and, internationally, pan-European and national distributors in Europe competing against all the above as well as each other.
Does Graves see the merger of those brands with a major distributor such as Tucker Rocky as the moment in market evolution when that complexity is resolved?
“Well, Kuryakyn is a good example. The focus has to be on providing the best quality of dealer buying experience we can. It is all about service and inventory, and if a dealer gets that best by buying from us, then great – we want to be the best choice he can make. The power is in the dealer's hands: they can choose to buy directly from Kuryakyn, purchase through Tucker, or have Tucker drop ship directly to their end customer, taking advantage of the practices we have in place to support brick and mortar dealers who also operate an e-commerce business.
“If his route of choice is through another distributor though, then that’s ok too. If dealer direct is his preference, then also great. So long as it is our product that is being bought and used it’s a win-win. For us it is about driving sales, not restricting them. Availability, choice and competition are critical to that; and to driving up the standards of what everyone does for our brands, ourselves included.
“We do not have a particular policy for this; we have a more pragmatic approach. How do we win in the market place? How do we drive those sales? How do we link all the elements to make sure that it is a Kuryakyn product that is enjoyed by our dealers’ customers? How do we offer dealers the best buying and service experience using all of our assets? That is where our focus is.
“As a result of the merger, we have the strategic capabilities that we were missing. Now that we have been through the process of finessing the business, we have successfully positioned the business for the future. We are all optimistic about the months and years to come.”
That being the case, I asked Graves if it is a case of “every Dollar being green and gorgeous” regardless of how it gets into the MAG/TR balance sheet?
“Well they are, but it is up to us to compete for the business effectively. We are working to outperform others, but we have to earn that, and we are also absolutely committed to helping our business partners in the industry. We want our vendor and dealer partners to succeed too.
Finally, I asked Graves about international operations, and he made it quite clear that, certainly as far as Tucker Rocky and Biker’s Choice are concerned, domestic U.S. sales are the key priority, and for now that there are currently no plans for overseas expansion.
He said that maybe in the medium to long-term that is something to look at, but that for now “you will see Tucker Rocky and Biker’s Choice focused on the markets here in the United States, and the MAG brands will look to their international sales themselves, as they have done very effectively for several years with their third party distributor partners.
“Our plan is for Tucker Rocky and Biker’s Choice to stay firmly U.S. focused. That’s not to say that there isn’t opportunity for us in Europe and Asia, for sure there is – but we have to take things in sensible stages. At this time, we see those opportunities as being through the sales that our market leading brands can continue to achieve internationally, not through our own international distribution.”