Chris Wilmot and Ron talk about the changes and the challenges they have faced in the heavy equipment industry.

Right.

Well, Ron, I'll tell you, if you had asked me early on, did I ever have any interest in selling? or repairing bulldozers or wheel loaders or motor graders, I would have told you I didn't even know what one was. And so I never woke up like many kids that grew up that way, thinking about being in the heavy equipment business. I was a golf professional up in Washington and ended up getting married. And my father-in-law said, you know, my wife requires to eat every day and golf professionals don't make very much jingle. Can I help you get a job? And it hit me at the right time. So I got out of the business and I started with a company in Charlotte in a program that they started with me. I was the Alpha test case. like a new management training program. And my first job was in the parts warehouse. So it was interesting showing up in white shoes and a cashmere sweater the first day. I learned that neither one of those worked very well in the parts warehouse. So that's how I got started. And I've been in distribution most of my life, but I spent eight years. with a manufacturer running a deal. I was their dealer development manager for the U.S. And I traveled around the U.S. putting together their dealer network and making changes where I had to and improving where I needed to. And so that's, and then I started a dealership in Florida. For the company that I started with, L.B. Smith, I started a dealership in a hotel room in Florida, one person, when I had no idea what I was doing. I probably ended my career the same way, not much idea what I was doing. But we hired good people, and we always put the customer first and our employees. 1A,1B. And we ended up pretty successful, Ron.

It's the nature of our business. And you and I have been talking about this subject for at least 20 years. periodically is the undercapitalized distribution network. Our dealers don't have enough net worth to do the things that they need to do. They either have too small a territory or in some cases too large a territory. The responsibility shift where manufacturers shift responsibility to dealers. And then Customers shifted up to dealers and dealers are in the middle in our industry. And then you take like the rental business, for example, and it takes money to be in the rental business. And manufacturer says, yeah, I don't have a program for you to have the machines, but I need you to have 50 Artec trucks in just your rental fleet. Well, that takes capital. That takes net worth to put together rental fleets. And so dealers are caught in the middle, in my view, and I think the industry view. And it's a never ending issue. And so it's until until dealers can figure out a way. Non-cat dealers, I'll say non-cat dealers can figure out a way. to increase their balance sheet, it's going to be always a question of, do I have the assets to take care of my customer? And it's a tough situation. So you take a company like L.B. Smith that started in 1916, at one time had 16, they were in 16 states. And they were one of the first companies to break, I mean, back in the 70s, to break that magical $100 million revenue number. Now, you know, small little companies representing an import excavator can have that kind of revenue.

It has changed a lot.

the answer to the question. And CAT has, because of how successful they have been and how CAT manufacturer, in my view, has helped dealers transition their business to a parts and service supported business where there is chance of margin. CAT has helped dealers become. Very profitable. And because of that, you know, they don't own the dealers, but they have a major share of their mind. And our cat is focused, purely focused on, and cat dealers are focused on what's best for Caterpillar. And I would be in the same position.

Exactly.

Well, and see, therein lies the... lies the magical wand for distribution is absorption. I've been kind of retired now for about 10,12 years, and I've done some stints in consulting. And one of them, I worked with a freight liner off-the-road truck dealer. And it's amazing how their business is structured. And a similar business is structured as opposed to the heavy construction industry. An off-the-road truck dealer is turning his parts eight to ten times a year. A heavy equipment dealer, a good one is... What,3.7,3.8 turns a year on? In that range. In that range, a good one is. And so you just look at the utilization of cash. Turning your inventory means you better have a pretty sophisticated ERP system to control your inventory, know how to order. But it's taking... If you have $8 million worth of parts inventory and you turn it eight times, you're doing $64 million worth of business and look at the margin that you have been able to put together. And then you add the service to support it. And this truck dealer that I was working with had 138% absorption. And this was in... Like 2010 or 11, when I was with him, when everyone else was laying off people and going through it, those truck dealers, if they were hurting, it's because they couldn't get product. Yeah. And they couldn't get anything to sell. But that takes a long time to develop a model like that as well. But it's absorption. is the key to industry profitability.

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Someone else's money.

And so it's all shifted to the guy making the smallest margin, the guy making the smallest margin in the middle, and that is distribution. Yep. Taking most of the risk.

Exactly.

Well, they are. And, you know, you know, Ron, I've thought I've thought a lot about through the years about things to do different. And I I have a little. I'm not, I'm not, this is not self-serving, but I have a little consulting business. It's not very active because I'm not promoting it. But I always said to my customers, if I can't help you, don't pay me. And I know people don't want to hear that. But, but, but dealers almost have to be kind of, you know, we're, we're, we're caught in the middle a little bit. And, You know, you think about technology and how that's changed. And you think about ERP networks that many dealers have moved to that kind of gives you the instant balancing of your inventory and balance sheets. And they have BIs and tacked to them and everything. The whole, and I'm talking circles a little bit, I apologize, but the real deal is when you take your eyes off the customer, when you take customer satisfaction out of your equation, I think customer satisfaction is the only way to guarantee you profitability.

So what does that mean? That means they lower their parts inventory. So they rely only on the manufacturer, which means their backorder recovery goes from... one or two days to 10 days. So a customer buys 10 40 ton Arctic trucks from you, two of them are down, it takes 10 days to get a part. He's losing 8,000 yards a day in payload pay. And so, you know,80,000 times whatever his bid number is, he's losing money. Because the dealer is in the middle and can't stock the parts. That's right. And exactly what you have said. Same way like service. Yep. So you go and a manufacturer cuts a dealer on a national account deal where he gets, to your point, less than 100% for parts and service and has a... service requirement that they have to respond the very first day to this national account. And then as good paying customers get pushed aside, it has to be a partnership and that's the reason the cat dealers are so wonderfully profitable and great because the manufacturer has helped the dealers understand if I'm going to grow, I'm going to have your share of mine and you're only going to be thinking about us.

Absolutely not. You know? Absolutely not.

Is it the price of entry? Is it just take way too much investment to get in it?

There you go.

And Lee Bear in some areas has some equipment, but it's very sporadic.

you better load one up all low, boy. Yeah.

Is that because the cost was too high or they didn't get what they paid for? Or machines, I mean, there's a lot of reasons for that. Machines become more component exchanges. Repairs are more component exchanges instead of parts. I mean, there has to be a number of common reasons for that.

Okay. So it comes back to the human issue, doesn't it, Ron?

Okay. So, you know, I had a guy that I worked with, and you know him real well, but we sat and reorganized one year exactly what you said, our whole service issue. And we gave probably one of your tests, but we gave every mechanic a baseline test to see what they knew. It was probably one of your tests. And as a matter of fact, I think it was. And so then we put service people in different categories, journeyman, beginning technician, master mechanic, so on. I think there were four categories. And then we tied a pay scale to that category. And it just wasn't based on longevity is what you know and how much you can earn for us.

And then we started paying people to go to extra schools for us. And we gave you an increase in pay. If if you took this much training and and we I think back then there was a number floating around the industry and maybe you're responsible for it is that three percent of your total labor hours all be tied up in in training. Well, that's pretty expensive. But, you know, but it's also you can't afford not to do it. And but but and then we went to all of the major tech schools in Florida. And we devised a program where them actually gave money or gave them exchanges, an engine transmission or an axle. One that we had, we loaned it to them for them to train on. And in return, we got an opportunity to hire their first or second graduating guy from their class just to try to find. But it's going to be a much bigger issue going forward. People would rather work on a computer for $28 or $30 an hour instead of working in the sun for the same price. Yeah.

I can't imagine it. not to do an infomercial for what you have done most of your life, but training in this industry, and not just sales training, but you have focused on operational excellence in the parts and service department. And, you know, when you look it up, Ron, your name pretty much stands by itself. The rest of the trainers, they're all over here in sales. I mean, there's... There's more cookie sheet stuff. But when it comes down to operational to attack the hard issues, you know, there's not many out there that want to do that.

Correct. So let's say-If you turn it eight times, you get 200%.

So I know where to get a whole. And to your point, a buyer now for a large paving company, say, or a big rock quarry, they have professional parts buyers, professional buyers. They buy all kinds of things from paper towels in the shop supplies to axles and engine transmissions. And they, to your point, and the reason why parts and service or dealers are losing business, this guy sits in his office and calls 10 Volvo dealers in the southeast or up through Maine, if you're in Florida, and he's shopping prices. And somebody will always sell it to him cheaper than the price he has. But then it's hard to capture the rest of it. And see, this is where dealers fall down. If they lose that business and the rebuild engine fails, who are they going to call? They're going to try to call the local dealer, not the dealer in Maine they bought it from. This is where I go back to a dealer has to be focused on customer satisfaction. You know, does anything aggravate you more when you call a business and you get a rototel computer answering and press three and you try to do that? four or five times, and then you get a voicemail. You're trying to call a guy at a order park, and nobody answers the phone. You get Jim's voicemail, and he says he promises he'll call you back. It's tough to live with. It's tough for me to live with.

And yet, more and more and more dealers. I mean, I've had... are going to that. They want to save the $15 an hour of a person answering the phone. However, if they had in many, many operational systems now have these, you call your business and when that phone number hits the screen, it populates immediately with Ron Slee Construction Company, your address, your branch addresses, your shop numbers, and right below it, it starts populating the... Your

Your equipment list and your purchasing habits and the whole nine yards. So a guy calls up and says, and you transfer them to the parts department, and the guy answers the parts. He said, hey, Jim, this is Ron. I need some filters for my 120. The guy's smart enough to say, hey, is that 61245? He said, yes. He said, I got them. Do you want to pick them up or do you want me to ship them? And the call, instead of taking 30 minutes to look up a serial number and what parts goes with it, he's done. So those little technology advances are focused on. customer satisfaction, and improving the quality of service. And in every case, people will pay for better service. People will pay for better quality.

It is value. And yet, we're slow to adapt to some of those things. The big guys are. I bet CAD has all those systems.

It's a relationship model. Exactly. You know, these, and I'll tell you, if you're non-Caterpillar, you better have something to offset that big mammoth machine that they have. And they're going to have more parts. They're going to have more techs. But you can have, you can get, share of wallet and share of mine and an opportunity to put your machine in there if you would help develop a culture of customer satisfaction with your customers. And I'm going to tell you, Ron, it's going to even get tougher. Start integrating millennials in your system. And I'm not... I'm not saying anything bad about younger people, but you and I get it a lot better because we had to work for a living. And our entitlement meant I was entitled to get a check on Friday if I worked 40 to 50 hours. Yeah. You know, it's a challenge for distribution.

I do too.

Right.

You're so very true. You're true.

I think that the systems are great, but you have to have a system that helps you provide customer service. It was just like the example we talked about three minutes ago about when the phone calls and when the phone rings and you have a matrix of information that puts you. so much further ahead, that would be an investment that would, that with training would give you a return. Yep. The, the hiring, hiring technical people and technical support, Ron is going to be a huge challenge. And don't think that we aren't in for a big, a real big issue when. If some kind of infrastructure bill is passed in Washington, who is going to do the work? I'll give you an example. Right through the middle of Orlando, now there's a $2.7 billion, almost $3 billion private public funded I-4 job. It's 27 miles. It's almost a $3 billion project. What that has done is that has sucked up all the what I call miscellaneous or incidental labor. There's nobody you hired to work on golf courses to cut grass. There are so many things in the workforce that were done by that type of labor group that are not available. And it's going to be a continued issue. You know, you have to have people on the wash rack. You have to have people to unload and load low boys. You have to have people to work in the parts department warehouse. There's going to be a continued HR issue. And if senior management and distribution doesn't spend. extra time thinking about how he's going to provide people to grow his company, you know, take a company and grow it from 75 to 125, and you had 50 people to do it. Boy, in the old days, when I started my dealership down here, I knew every single person because one of my pushes was to make sure we hired the right person. Well, as you grow, you lose control of that. But part of your culture needs to be having your managers that are trying to hire good, right people, honest people. And it's going to be a continued challenge. It's going to be a real challenge. It may not seem like a big deal, and it may seem like an internally focused project of, of working on your balance sheet. It's going to be your balance sheet.

It's going to be people. And then training them. Yep. Then training them. What do you think dealers are spending now on training? Do you think they're spending 3% of their labor hours? I wouldn't think so.

And you're talking about technical schools. Everything. Because not everybody wants to go to the University of Calgary or the University of Florida or Ontario State. You know, they don't want to be there. That's right. But they're good, productive people that we could put to work and train them and enhance their life. And they're available. Yes, they are. They are available.

It's not complicated. You know, but you have to ingrain the whole culture through your companies. You know, and it's a little simple things like you have to have a fair health insurance program that meets all your customers' needs. You don't want to lose your best mechanic for 50 cents an hour to the Komatsu dealer. You know, you want to build a base around him. Yeah, you got to have, you have to make continuing education a part of your culture. It has to be people, good people want to grow. They want to expand and they want to have the answers. It's just a culture of developing in a dealership. Like we used to do it 25 years ago. And I'm afraid, I'm afraid we have lost. some of those because it's so internally focused on every single penny. And maybe that's easier to say than do, but I think guys like you and I could do it.

I have, Ron. Thank you. I appreciate it.