The Octane Fitness booth was among the busiest at the IHRSA show last month in Orlando, Fla.
The Brooklyn Park, Minn.-based company displayed its new commercial Zero Runner, among other products, and is feeding off the momentum from its acquisition by Nautilus Inc. The $115 million purchase from private equity firm North Castle Partners was completed on New Year’s Eve and announced in January.
Nautilus CEO Bruce Cazenave was at the IHRSA show visiting attendees in the Octane Fitness booth. In May, Cazenave will be celebrating his fifth anniversary as CEO. (He also briefly served as acting chief financial officer of Nautilus in 2013 and 2014.) Prior to joining the Vancouver, Wash.-based company, Cazenave was managing director of the business consulting firm Inflection Point Consulting, where he consulted with and served as an executive advisor to private equity firms in the U.S. and Europe. He has also had executive roles at Timex, Black & Decker and Timberland.
Cazenave took time out of his busy schedule at IHRSA to talk to iClubs about the company and its acquisition of Octane Fitness.
iClubs: What is it like to be with Octane Fitness this year at IHRSA?
Bruce Cazenave: I’ve only been to two IHRSA shows, the one last year and this one. It was a year ago exactly this week when I first met the founders of Octane, Tim (Porth) and Dennis (Lee), and that’s when we started to have a conversation about some of the things they’re doing and we talked about what Nautilus is doing. And then as time progressed through the year last year, we actually decided it would be great to bring these two companies together.
iClubs: During the course of last year, there was some talk that there might be a deal between Life Fitness and Octane Fitness. What did you know about that and how concerned were you that another player in this industry would get Octane before you got it?
BC: We knew there was a lot of other interest, from more than two parties, at least. We were watching to see what was going to happen. When we heard that that deal didn’t go in terms of what they were working on during the summer, we approached the private equity firm along with the founders and said, “Would you be interested in talking to us? We still have an interest. We could do this in a very non-obtrusive way in terms of due diligence.”
We knew strategically it made a lot of sense. It fit perfectly with what we were looking for in terms of what we call plus-growth drivers. On their own, they’re growing, they’re innovative. They have tremendous customer relationships, both in specialty channels as well as commercial. That’s something we really wanted and needed, and it would take us years to develop that organically. They also had a bigger international component than we did. To give you an idea, 2 percent of our sales was coming from outside North America; 22 percent of Octane’s sales was coming from outside North America. So it gave us more of a platform to build a bigger international business, which we’re working on.
I think the thing that put it over the top for us was the fact the culture fit. We had a number of things we were looking for, and [Octane] checked all the boxes. We looked at over 100 companies, to be honest with you, over the span of two years. Many of them we eliminated because they didn’t have audited financials or they didn’t have something we would need as a public company. There were still quite a few that we went deep on. There were others we eliminated because we didn’t feel it was a good culture fit. We have a very strong culture at Nautilus in terms of teamwork, innovation, a lot of good things going on in that regard. We consider it the oil in the engine. We wanted to find somebody who had a similar kind of culture that we could just marry up. We found that as we got to know more people below the Dennis and Tim level (at Octane), we said, “These are just like our people.” They had the same reaction to us. They said, “Nautilus is just like us.” So it worked out really well.
iClubs: With any acquisition, there’s a transition. How is that relationship going so far three months in?
BC: The biggest thing we’ve done is run up some frequent flyer miles. A lot of their folks have come out to Vancouver, and our folks went to their facility (in Minnesota). Every time everybody comes back on both sides, it’s like, “It’s just like us. It’s another Nautilus or another Octane.” It’s worked out really well from that standpoint.
We are very focused right now, particularly this year initially and into next year, on we want to make sure that both businesses are on a growth trajectory, and they both have strong product pipelines for the next three years. We don’t want to disrupt any of that. The idea is, how do you bring some of the assets that both companies have so that you can make both sides even better? That’s what we’ve been doing. We’ve been growing very rapidly. Revenues have grown well over 20 percent over the last two years. Over the last five years, revenues have grown about 15 percent per year. They’re doing a similar type of thing. We want to layer Octane on top of Nautilus organic growth and keep both going on the right trajectory.
iClubs: Did you target the commercial side of the equipment industry specifically or were you just looking to grow as a company when you were looking at various companies to acquire over the last two years?
BC: We know that we have certain modalities in our home use market that would lend themselves very favorably in the commercial space. We license some of those things today to people at the IHRSA show. By having the research and development capability and the talent that Octane has, it can actually develop some of those products for the commercial space better than we could ever do on our own. In fact, we probably couldn’t do it on our own. It’s just a whole different mindset in terms of how do you maintain (equipment) in the gyms. You don’t have to worry about that so much for the home use.
iClubs: Core Health and Fitness has Nautilus-branded equipment. Are you concerned about brand confusion in the industry?
BC: There is a little bit of that, but we quickly dispel that in terms of the difference between our licensing business and our core business. Octane is part of our core business now. We still license Nautilus for strength, and we license Schwinn for the indoor cycling bikes. But that’s really the only brand licensing that we have today. For those people who aren’t close enough to it, we can quickly tell them this is how it works.
iClubs: Nautilus had been fully invested in the commercial sector before those assets were sold. Would you say the Octane Fitness acquisition signals a return for Nautilus into the commercial sector?
BC: We’re definitely in commercial to stay. The nice thing about it is that Octane has a much different business model than what Nautilus had in commercial. Our commercial business was not a profitable proposition for the ways we did it — manufacturing, the leasing that we did and all the things Octane does not do. Octane has a very profitable and growing commercial business, and we’re just going to continue to feed that. We’re serious about commercial, and we’re going to bring the Nautilus Inc. assets to bear to help have a bigger platform in commercial.
iClubs: For future shows, do you plan to have a Nautilus booth or will it just be an Octane Fitness booth?
BC: I think it would just be Octane. We have a Schwinn Airdyne bike here that’s going into the light commercial market. It’s a great example of how Octane can take something that we developed … it would have taken us three years to get distribution on that. Octane, with its customer relationships penetration, both in specialty and commercial, we’ll be in the marketplace in a year, probably. There will be more and more of those kinds of things. As long as we’re licensing Nautilus, then we’re not going to have two Nautilus booths in the same IHRSA show.
iClubs: After the Octane acquisition, what’s the outlook now for Nautilus Inc. as far as more possible acquisitions?
BC: We took on some debt but not very much debt to buy Octane. In typical financial metrics, when you think about a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization), we’re less than 2, closer to 1.5, so it’s very manageable. We don’t want to take on a lot of debt, basically. We generate a significant amount of cash, and we figure we can pay off that debt. It’s a five-year amortized loan with a very low-interest rate, so we’ll be done with it very quickly.
We kept dry powder, though, in case there are other things that come up that makes sense for us. It’s safe to say it won’t be on the same scale as Octane, but we’re going to keep looking. I want to emphasize that our focus is to make the best out of the Octane acquisition in terms of creation of shareholder value for our shareholders.
iClubs: What does the Nautilus acquisition of Octane and the Life Fitness acquisition of Cybex mean for the industry?
BC: It’s definitely a fragmented industry. For different reasons, it’s an attractive industry, and that’s because there are tremendous tailwinds in terms of the general population around the world needing and wanting to become more fit and well and healthy. Baby boomers down to millennials, it’s going to be here for a long time to stay.
For us, we like to grow much faster than the industry is growing — 3 or 4 percent is like plodding along. We set our goals and set our structure up to grow much faster than that. The key is to continue to bring innovation. If you don’t have innovation, then the industry will get stale.
iClubs: How do you compare and contrast this industry from your experience in previous industries?
BC: I’ve always been with consumer-branded durable companies — Black & Decker, Timberland, Dorel Industries — and there are a lot of things that transfer over. The basic things are, you’ve got to work on innovation. That’s the driver. In order to get a value proposition to the consumer, where you can make a margin and the specialty people can make a margin, you have to have that innovation to bring people into the gym.
At the same time, the big thing for us is we’re always looking for operational efficiencies in the business. To give you an example, our company has doubled in size in the last four years. Our headcount—the number of people we have—is up 15 percent, and that’s before the Octane acquisition. It’s all by finding ways to do things differently so that you can bring more business and more transactions and more new products with more or less the same people. If we were to double our headcount, we’d be well over 600 employees right now. Instead, we’re at 375 before Octane. That’s really working well for us. You bring that front end of the business with innovation and marketing with the back end of cost improvements and operational efficiencies. At least for a public company, that’s why we set ourselves apart.