May 23, 2022
Equipment Dealers: Caterpillar 2022 Investor Day
Key takeaways for our Equipment names
Our view: At Caterpillar Inc.'s ("Caterpillar"; not covered) 2022 Investor Day, the company provided an overview of its go-forward strategy (including the focus on leveraging data and CVAs to drive the parts/after-market business for its Dealers), showcased the R&D pipelines across its business units, and highlighted the advances in its digital capabilities. In this note, we highlight key takeaways from the event as its relates to our covered CAT Dealers, Finning and Toromont, as well as Ritchie Bros.
Read-throughs for Finning/Toromont
On digital/technology: Caterpillar had an installed base of ~1.2MM connected CAT machines as of 2021, which generates billions of data points that the company can leverage to drive Prioritized Sales Events ("PSEs") and e-commerce revenue for its Dealer network. PSEs manifest in notifications to a Dealer's workforce to target specific customers for revenue opportunities (e.g., renew CVAs, maintenance, etc.). Caterpillar is currently sending out ~400,000 of these notifications on an annual run-rate basis directly to salespeople in its Dealer network through CRM platforms. Further, CAT machines will also feature QR codes that can be scanned by end customers, which takes them to a CAT e-commerce parts platform that would have a parts list for their specific assets. Caterpillar noted this platform currently generates sales of ~$10MM/day across its global Dealer network and estimates it drives +24% incremental Dealer parts sales. CAT is targeting 50% growth in Dealer e-commerce parts sales over the next 3 years, which we view as directionally positive for Finning/Toromont.
On Product Support, the presentation highlighted that +60% of construction/mining equipment is now sold with a CVA, while the company also highlighted that across the global Dealer network, CVAs drive ~30% more parts sales compared to machines sold without CVAs. We note CVAs are a "win-win": for Dealers, they drive increased parts sales, create a recurring revenue source, and deepen relationships with customers, who in turn benefit from greater peace of mind and the ability to pursue rebuilds/ upgrades at a discount (sometimes 25%-50% of the price of new equipment). We note that increased use of CVAs has been highlighted by both of our covered Dealers' management teams, with Finning noting at its 2021 Investor Day that more than 85% of its new machines are now sold with a CVA.
On mining, Caterpillar expects future demand for CAT machines to be driven by a combination of increased demand for base metals that are needed to drive the energy transition, and a steady decline in copper ore grades over time, leading to an uptick in machine usage as ~30% more material is required to produce a constant quantity of copper. We note mining equipment is also especially attractive from a Product Support standpoint, given mining/resource equipment can drive 2.5x the original sales price in parts sales. Additionally, Caterpillar showcased statistics on its autonomous mining trucks. Its fleet of 525+ autonomous trucks is the largest such fleet in the world and has collectively driven more than 155 million kilometres (more than 2x the experience in autonomous operations of any car manufacturer). Taken collectively, we view this as directionally positive for both Finning/Toromont given each company's significant exposure to the mining industry (see inside for more details).
Dealer e-commerce penetration driving +24% incremental Dealer parts sales
Onboarding customers onto CAT e-commerce platforms (namely Parts.CAT.com) was shown to drive +24% incremental Dealer parts sales to customers, including more frequent buying of previously purchased parts/services and purchases of new parts/services. Caterpillar has been able to drive this result by creating a seamless e-commerce experience, whereby customers can scan a QR code on their equipment and be directed to a page on the Caterpillar e- commerce platform that contains all the information about their equipment. This could include a full parts list with ordering information from the local CAT Dealer, or instructions for DIY owners with a link to a repair kit that can also be purchased. We note that Dealer e- commerce parts sales across the system total ~$10 million per day, and Caterpillar has a goal of growing this by 50% by 2023. The heightened focus on parts (particularly through e- commerce) is a significant opportunity for both Finning and Toromont.
50% of all equipment sold now features a CVA
CVAs represent a key source of recurring Product Support revenue for Finning/Toromont and it was noted during Caterpillar’s presentation that 50% of all equipment sold now features a CVA (we note that this number was even higher, at +60%, for construction and mining equipment). Moreover, an interesting statistic presented was that CVAs lead to a ~30% increase in parts sales for Dealers compared to machines sold without CVAs. CVAs are a “win- win” for customers as well, as they provide customers with peace of mind in terms of uptime and maintenance/repairs, but can also lead to economical rebuilds (more on this below). We believe it is worth noting that CVA-driven revenue tends to pick up in years 3-5 of an asset’s life, so we would expect to see more benefits for Finning/Toromont from CVAs in the medium term as the base of CVA assets grows over time. Taken together, we view the increasing adoption by CAT customers of CVAs as a directionally positive trend for Finning/Toromont, and we will be looking to gather more insight on the adoption of these agreements over time. See Exhibit 3 below for the typical lifecycle of a Caterpillar CVA.