Surveys show trailer industry getting optimistic, with 78% expecting sales to increase in 2010

May 1, 2010
REPRESENTATIVES from RSM McGladrey Inc gave an update on the trailer industry entitled, The Good, The Bad, and The Ugly! Fortunately for attendees, it

REPRESENTATIVES from RSM McGladrey Inc gave an update on the trailer industry entitled, “The Good, The Bad, and The Ugly!” Fortunately for attendees, it was mostly good.

Director Dale Billet, managing director Tim Koch, and manager Sam Reschly said results gleaned from surveys and from 130 clients in the trailer industry indicate that people are moving away from a pessimistic view and have a somewhat positive view for 2010.

There were fewer competitors in the marketplace, but also fewer dealers, meaning that in the next year, “there will be a lot of fighting for the dealers that are left, and manufacturers will decrease their prices,” according to Koch. There were leaner operations, with reduced inventory levels (manufacturing and retail), head counts (including cutting valuable employees), and benefits, but because the best employees were left and they were all happy to have a job, there was improved throughput.

Koch said the first quarter of 2010 has seen increased sales and a better climate.

“There's increased foot traffic at the dealer level and lending institutions are beginning to open up credit,” he said. “There has been a positive financial performance, whether that's net income or however you choose to measure it. If you've done what you should do to control costs, as volume goes up, if you haven't adjusted your cost structure back up, your margins go up and you should be able to turn a bit of a profit. There are leaner operations, with reduced overhead and increased volume.”

McGladrey's surveys showed that 78% expect sales to increase in 2010, with just 8% expecting a decrease and 14% no change. Eighty-four percent of respondents are greatly or somewhat relying on increased product offerings, 90% are greatly or somewhat relying on increased volume to existing dealers, 42% are greatly or somewhat relying on increased volume to international customers, and 100% are greatly or somewhat relying on acquiring new customers.

“So this gets back to what we expect to happen in the next year with the dealer base: If you're out trying to get new customers, people are in talking to your dealers,” Koch said. “The cycle continues. Expect to see that it will be kind of a dealer market over the next 12 months.”

Foreign search for materials

Billet said there was a sharp decrease in inventory levels, with many companies dropping by 50%. Their survey said 70% are using foreign sources to supply inventory, competing against just-in-time inventory models and requiring longer lead times and prepayment. Approximately 50% source at least one-quarter of their raw materials from foreign sources.

“People are seeing that there are cost savings to go international,” Billet said. “The low-cost area may have been China in the past. I see people moving to Mexico because the cost structure is going up in China.”

About 70% have implemented lean principles in some capacity. The following have plans to improve specific supply chains in 2010: sales process management, 32%; product development, 52%; manufacturing flow, 47%; demand planning, 37%; customer-relationship management, 63%; and supplier-relationship management, 58%.

Asked if there was still room to reduce inventory levels in 2010, 26% will reduce levels by up to 20%; 16% will reduce levels by greater than 20%; and 58% will not reduce levels.

“There's certainly optimism on being able to reduce inventory,” Billet said. “That is somewhat surprising, given the amount of inventory reduction you had over the past year.”

On key supply chains, 53% indicated a high risk of transportation disruption and 48% indicated a high risk of supplier disruption.

“As this thing starts to ramp up, if suppliers have cut back significantly, are they going to be able to ramp up production at the level you need?” he said. “So you may have some disruptions just because they can't react quickly enough if you start to see an upturn.”

He said health care remains a large component of a company's cost structure, with 72% fully insured, 17% partially self-funded, and 11% who do not offer health insurance. Fifty percent see health costs increasing by at least 10% or more in 2010.

Rising costs are a huge concern, with 58% expecting increases in energy; 74% raw materials; 69% operating labor; and 48% freight.

Next Page: Lending Practices, Partnering With Your Lender

Lending Practices, Partnering With Your Lender

Reschly said McGladrey went to a full spectrum of lenders and picked their brains: JP Morgan Chase (national); Fifth/Third Bank (large regional), Lake City Bank (small regional), Goshen Community Bank (community), and GE (floor plan).

The general trends: lending institutions have been one of the hardest hit industries in 2008-2009; credit availability remains tight, but opening up slightly; there are mixed messages, with government advocating publicly to loan funds but behind scenes tightening restrictions through regulation and compliance requirements); their perception of a business and industry is what they're basing loans on, including focusing on reduced sales volume.

“Lenders are exiting industry groups, and that is primarily with national banks,” Reschly said. “We've seen one or two considering exiting trailers and RVs. Regional and local banks will be more committed to industries that are in their regions.”

Koch said start-up companies are viewed as very high risk because 90% of them fail.

“Reducing risk is critical to lending institutions,” he said. “Their portfolio has gone higher risk because some of the companies are not doing well. Most start-up companies lose money for one to two years.

“There is required information for new loans, for all sizes of lenders. They want a detailed business plan with forecasts and projections on how you're going to succeed in one to three years. It shouldn't be based on what you think the industry is going to do. You should have data on what's going to happen in the industry.

“They want to see an experienced management team. They want to see people who have done this before in this industry. Maybe they did it in another industry, but it won't be as strong a case as one in this industry.”

He said lenders making new loans are looking for documentation of an owner group with resources and available cash.

“Lenders do not want to fund losses,” he said. “They want to see a capital cushion, where owners and partners have put in enough capital to fund those losses. If you can get more financial partners to help spread that financial risk, that's appealing. They also want personal guarantees. They want you locked into that line of credit — your house, boat and car … everything you have. They want to make sure it's not going to be easy for you to turn around and walk away from this.

“And never ask, ‘How much can I borrow?’ That immediately raises alarms on the part of a lender that you haven't really thought it through and implies a lack of management of working capital and cash requirements.”

Communication is a key

For existing companies, lenders suggest shopping the business, but the general trend is minimal changing of lenders.

“If you do change, new loans will need many of the items noted for start-up companies and three years of financial statements — audited or reviewed preferred — and at least a one-year projection, and income tax returns,” Koch said. “You need to communicate frequently. Talk to lenders and let them know what's going on. They don't want to just see a financial statement every quarter or every month. They want to understand what you are doing to increase business and reduce costs. They don't want any surprises — especially unfavorable news. If I've lost a key dealer, what are the things I'm going to do to pick up a new dealer or increase sales? If you're not profitable or out of compliance, develop and communicate a plan quickly. The plan should be realistic, but only one is needed — no best- or worst-case scenarios.

“Lending limits are generally subject to the borrowing base. There's a downward shifting in borrowing base components. The limitations are 3-to-1 (debt to net worth), and most are lower than that. Cash flow and EBITDA are highly important.

“Banks are focusing on dealer concentration, margin trends, and management of inventory levels. Lenders do not want to run your business. But you really have to talk to them and make them a business partner.”

Reschly said community banks serve small- to medium-sized businesses (five to 50 employees). They're willing to be a secondary lender, and offer the advantages of local decision-making and relationships, and being able to fill the void left by floor planners.

Pros: committed to investment in the local area; make local decisions and want to develop a relationship with the business; may want a portion of your loan needs (ie, inventory) and provide a backup lending source.

Cons: loan limits are typically low ($1.5 to $2 million); less stability and more risk than larger institutions; a large portion of investments in commercial real estate could result in “hundreds more community and mid-sized banks” failing over the next several years, according to the Congressional Oversight Panel.

He said floor planning lenders are minimal national players.

“There has been some stabilization over the past few months,” he said. “But dealer closures and financial losses are still occurring. Floor planners have scaled back operations but see the downturn ending.

“In the next six to 12 months, there are plans to open up to 10 to 15 manufacturers. Floor planners will be very cautious on extending credit. Interest rates should not change significantly — probably a slight increase. Inventory levels are currently low and will probably stay very low, and credit lines will not increase significantly due to inventories remaining low.

“There is very little desire of floor planners to support startup businesses. A startup business case would need to be extremely compelling for a floor planner to participate.”

Reschly said materials are typically 60% of product costs, so commodity-cost management is a very key area.

“We've experienced roller-coaster pricing for the last several years,” he said. “The forecast is an increase at a moderate rate in 2010 in the commodities you purchase: aluminum, steel, and lumber. But manufacturers have typically been slow to react to cost changes and have passed through increases.

“Don't try to manage everything you buy. The Pareto theory applies: 80% of your material costs are in 20% of your items. Focus on the 20% — typically aluminum, steel, and lumber. Pass on cost increases to customers quickly, if possible. Manage inventory levels to minimize costs and provide flexibility.

“Minimize risk with buying strategies. Do you have sources so that if you did have a disruption, you could buy from somebody else quickly and have little disruption? If commodities start to go up, are you able to lock in longer-term pricing. If they're starting to go down, are you able to do spot buys and still maintain a consistent supply in order to operate effectively?”

About the Author

Rick Weber | Associate Editor

Rick Weber has been an associate editor for Trailer/Body Builders since February 2000. A national award-winning sportswriter, he covered the Miami Dolphins for the Fort Myers News-Press following service with publications in California and Australia. He is a graduate of Penn State University.