The HOLT CAT Continuing Journey Towards World Class Forecasting. Paul Hensley November 2014

The HOLT CAT Continuing Journey Towards World Class Forecasting Paul Hensley November 2014

The Holt family has been in the Caterpillar Dealership business for over 80 years. 5 th Generation in the business is actively working here today and will take over in next 3 years. Heritage back to the beginning of Caterpillar, Inc.

1904 Benjamin Holt invents a tractor with self laying tracks and names it the Caterpillar Stockton, CA Competitors include Best Tractor Company Moves Holt Manufacturing Company to Peoria, IL in 1925 Merges with Best Tractor Company and forms Caterpillar, Inc.

1925 William K. Holt starts South Texas Caterpillar Dealership Headquartered in San Antonio 1925 1961 No Direct Heirs to Take Over Dealership Holt Atherton and B.D. (Pete) Holt (Nephews)

1961 B.D. Holt Company formed and headquartered in Corpus Christi, TX Smallest Caterpillar Dealer in the World Several Counties in South Texas Knew every Machine and Serial Numbered Unit in our Entire Territory Not Much Need for Forecasting We Had Personal Relationships with Every Customer

1983- Peter Holt joins B.D. Holt Company as President Peter Holt buys CAT Dealership in Western Ohio for diversification Looking for opportunities to grow Energy Industries in Corpus Christi, TX

1987 Atherton family sells Holt Machinery Company to B.D. Holt Company Corporate headquarters moved to San Antonio, TX Original William K. Holt Company territory put back together Values Based Leadership Program Instituted by Peter Holt New name Holt Company of Texas

1990 s Continued Growth as CAT Dealer Southern Louisiana Caterpillar Dealership Territory Purchased Peter Holt acquires San Antonio Spurs Basketball Franchise in 1995 (5 time NBA Champions) Southern Louisiana Caterpillar Dealership Territory Sold

2002 Darr Equipment Company Caterpillar Territory Acquired Territory north of Waco to Red River was part of this acquisition More than doubled the size of the old Holt Company of Texas David swallowing Goliath New Company name HOLT CAT

A More Complex Business Model 2002 acquisition created over 400 cost / profit centers Excel spreadsheets became unwieldy and hard to work with Had to break down sales and expenses into different files Still budgeting to line item detail Many months of work with no value creation Each year became harder to manage Every year we would beat budget and congratulate ourselves on a job well done

The First Step: Clarity Systems Began the search for a Budgeting System in 2005 Created a team to evaluate and propose a solution Assistant Controller, Accounting Manager, Business Systems Manger Collected Voice of the Customer with Surveys Involved several levels of management input Companies reviewed: Cognos Hyperion Clarity Systems Prophix Budget Maestro Used our processes (Decision Focus) - to determine our choice

The First Step: Clarity Systems Allowed us to move from a cumbersome method of budgeting to a more dynamic and flexible one Reliable data Efficiency Flexibility Reporting capabilities Rolling Forecasts

The First Step: Clarity Systems Early Acceptance All managers and supervisors entered their own budgets and ran their own reports Small amount of training Improvements Developed reports to assist managers and finance department for reporting Continued to refine input templates Stability of the product

The First Step: Clarity Systems 23 straight years of sales growth We started to believe that we were invincible and that growth would be endless Budgets were something that you put out there, beat every year, and we were all superstars And then.

The Great Recession of 2009 Caterpillar had warned us about trough planning Other parts of the country had been suffering for a year or two Texas was on fire We told Caterpillar to send us more equipment we needed more What we really needed was an intervention and a wake up call We got it in January of 2009

The Great Recession of 2009 By early February 2009, we were assembling a leadership team called the Sustainability Team to formulate a plan Everything was on the table new revenue ideas, expense control, inventory reduction The Plan was quickly formed and execution was set into place Reduced headcount by 25%, inventory / rental fleet reduced by $200 million in 18 months, overall expenses reduced by $50 million

The Move to Forecasting Accident or Opportunity We forecast a low, medium, and high scenario, but didn t set a formal hard number The budget was dead The Discussion Forecasting became a better tool for managing the banks and owner s expectations in an uncertain time than a budget would have been

The Move to Forecasting - Accident or Opportunity? The budget was and is like a cockroach it s almost dead, but we have to bring Raid out every once in awhile to spray on it Our President and COO do not want one we began managing the spend by not giving them a budget to hide behind

Forecasting 1.0 CAT Dealers have a benchmarking system called CDBG (Caterpillar Dealer Benchmarking Guide) that we use to see how we are doing relative to other dealers This system is helpful, however its just a relative system Our goal is to be world class in everything that we do, so the benchmarks are just a guide Many times we are at the top of these metrics, so we have to set our own targets

Forecasting 1.0 We still have managers that regularly ask for a budget Want to use this as protection to cover themselves like a blanket I only spent what you gave me to spend I already made my number I exceeded expectations, because I beat my number I don t want to put something out there that I can t make I might not make my bonus

Forecasting 2.0 We weren t sure how the year was going to turn out We set a target and in order to track how we were doing and we set a forecast to compare to that target Result a 33% increase over our 2009 results

Forecasting 2.0 A funny thing happened though our expenses were reduced by a full percentage point which fell to the bottom line We attribute at least part of this to not having a formal budget If we had a budget, spending patterns would have been different This is much like the Statoil case our people are responsible, accountable people and they did a good job of controlling expenses

Forecasting 2.0 Because we were forecasting the type of results that we were getting, we was able to influence our owners to accrue extra bonus dollars to reward people for the extra effort This was a huge boost for the organization. I m not sure whether the operations guys even realize what we did At first they hated the forecast, because it was scary for them..

Forecasting 2.0 But None of them gave back the extra bonus dollars that they put in their pocket

Additional Brands Added in Last 7 Years Linkbelt Cranes Holt Crane and Equipment Caterpillar Truck and Load King Trailer Business, plus truck accessories and service Agco Tractors Challenger, Massey Ferguson, Fendt Holt Agribusiness Screen Machine (Aggregates Handling Equipment) Numerous Other Ag Attachment Brands including Rogator, Terragator, and Claas Combines Global Mining Holt Mining

Forecasting 3.0 + Powering up for the Future New Stores / Locations (similar to an acquisition) Focus on Excellence Growing the Core Extending Brand / Diversifying

Forecasting 3.0 + Powering up for the Future Still have to constantly remind people of the virtues of forecasting and setting targets We need to revamp our incentive programs to encourage stretch growth, while focusing on a target and how we do relative to the rest of the market More development is needed to formalize system for forecasting getting better, but still much work to do

C u s to m e r E x p e r ie n c e I t s a b o u t th e C u s to m e r E x p e r ie n c e f o r u s h o w d o w e f o r e c a s t a c c u r a te ly s o C a te r p illa r b u ild s a n d d e liv e r s e n o u g h e q u ip m e n t s o o u r c u s to m e r s g e t w h a t th e y w a n t w h e n th e y w a n t it A r e y o u F u tu r e R e a d y to ta k e c a r e o f y o u r c u s to m e r s?

O th e r T o o ls W e A r e U s in g L e a g u e ta b le s a m o n g s to r e s to im p r o v e p e r f o r m a n c e in c u s to m e r e x p e r ie n c e / lo y a lty. B illy B e a n R e p o r t ( s e e e x a m p le ) ( W o r k in g to g e t th is b r o k e n o u t b y d e p a r tm e n t)

G a lt S tu d y ( P a r ts ) L o o k in g th r o u g h th e d a ta in s te a d o f a t it F o r e c a s tin g tr e n d s in c u s to m e r s w e a r e n o t s e llin g to r a th e r w h o w e a r e s e llin g to. L o o k in g a t p o te n tia l p r o f ita b ility o f th e s e c u s to m e r s a n d h o w w e c a n s e r v e th e m. H a s c a u s e d u s to d o u b le # o f P S S R s ( P r o d u c t S u p p o r t S a le s R e p s ) f r o m 2 2 to 4 5.

G a lt S tu d y ( M a c h in e S a le s ) L o o k in g a t P r o f ita b ility b y P r o d u c t T y p e b y C u s to m e r ( W e h a v e n e v e r d o n e th is b e f o r e ). W e h a v e b u ilt a P r o f ita b ility T o o l m e a s u r e s th e f u ll p r o d u c t lif e c y c le p r o f ita b ility ( S a le s, p a r ts, a n d s e r v ic e o p p o r tu n ity ) D r iv e s d e c is io n m a k in g a n d f o r e c a s tin g

C a te r p illa r s A c r o s s T h e T a b le I n itia tiv e A ll a b o u t b e tte r f o r e c a s tin g a n d p u ll th r o u g h o f b e tte r r e s u lts. R e q u ir e s d e a le r s to m e e t to p 2 5 o p e r a tin g p e r c e n ta g e p e r f o r m a n c e b y 2 0 1 8. R e q u ir e s d e a le r s to f o r e c a s t a n d p e r f o r m to th a t f o r e c a s t.

A c r o s s T h e T a b le D e a le r s h a v e to b e c o m e b e tte r a t f o r e c a s tin g. M e tr ic s w ill b e d r iv e n e a c h y e a r d e s p ite m a r k e t f o r c e s. F o r e c a s tin g a c c u r a c y w ill b e c o m e e v e n m o r e im p o r ta n t. V a r ia b ility in m a r k e ts ( i.e. O il a n d G a s ) w ill f a c to r in to th e e q u a tio n.

Where Do We Go From Here? Forecasting is even more important today for us we are in many different markets, so we have to have a better line of sight to where we are going (Ag, Construction, Oil and Gas (lots of variability), Infrastructure) We are in a growth mode which means we have to manage resources to facilitate that growth new locations, new markets Markets are diverse and as a result we have multiple variables (ex. 2013 PSD down, 2013 Machine up within our company)

7 Keys to Better Forecasting Your job of influencing is never done Someone will always want to go back to the good old days of how we used to do things. Use language that helps people to change their thinking forecast, target, plan (Try to eliminate budget from your vocabulary) Our desire to grow actually helps to facilitate the move to a forecast since it is forward looking not backward looking don t bungle away opportunities to promote change

7 Keys to Better Forecasting Change takes time Like turning a dragline slow and methodical Processes are getting formalized to drive the organization (i.e. measurement of forecasting accuracy, metrics, global leading indicators, etc.) We are a values based organization, so we already have a lot of the key principles of the Beyond Budgeting Round Table forecasting fits right in with this goal. You never stop learning!

Questions Paul Hensley (210) 648-8473 paul.hensley@holtcat.com H o lt is a m e m b e r o f th e B e y o n d B u d g e tin g R o u n d ta b le ( w w w.b b r t.o rg )

A p p ly in g B B R T P r in c ip le s a t H O L T C A T

The 12 Beyond Budgeting Principles Holt s Checklist 1. Values 2. Governance 3. Transparency 4. Teams 5. Trust 6. Accountability 7. Goals 8. Rewards 9. Planning 10. Coordination 11. Resources 12. Controls

A Values-Based Company