What Does it Really Cost to Invest in: Facility, Equipment and Training. Tim Ronak Senior Services Consultant AkzoNobel May 22, 2015

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1 What Does it Really Cost to Invest in: Facility, Equipment and Training Tim Ronak Senior Services Consultant AkzoNobel May 22, 2015

2 What Does it Really Cost to Invest in: Facility, Equipment and Training Tim Ronak Senior Services Consultant AkzoNobel Performance Coatings

3 Introduction The technological face of the automotive industry is evolving exponentially

4 Introduction The technological face of the automotive industry is evolving exponentially Onboard safety systems and controls Telematics and web connected vehicles Accident avoidance Autonomous driving capability Hybrid power systems CAFE requirements Pressure to increase vehicle efficiency Vehicle construction materials Vehicle construction techniques (Friction stir and Laser welding)

5 Introduction This increasing rate of technological innovation and implementation in the auto industry requires higher specialized Environments, Equipment and Training than any time in the past. Moores Law: Historically automotive Technology implementation has been following a similar trajectory as the exponential progression of transistor compaction doubling every 18 months It is expected to continue for another 2 decades and may accelerate at an even faster rate of change!

6 Example: Historical Method of Welding/Joining steel

7 Example: Historical Method of Welding/Joining steel 35 Years 20 Years 10 Years 8 Years?? Years

8 Introduction FACTS : New technology typically displaces old technology Investment $$ in specific Facility, Equipment and Training for a specific new technology is realizing shorter periods of return for the investment $$. In order to be capable of repairing and servicing this new auto technology businesses are REQUIRED to invest capital in people and tooling to stay current and capable. There are expenses directly related to Training Labor to be capable & qualified (authorized) to perform the repair Savvy business owners will recognize that they require additional returns on that additional invested capital.

9 Introduction The crucial questions are. What does it REALLY cost to make these investments? How do you get compensated for that INVESTMENT of time and capital? The following 6 questions attempt to quantify this

10 Session Outline 1. What does the Current and Past Collision Environment look like regarding Labor Profitability Trends? 2. How much should I spend and why do I need to invest in additional Facility, Equipment and Training? 3. How do I determine my ROI on those investments and what is a reasonable return?

11 Session Outline cont d 4. What time period should I consider as payback for this incremental NEW investment? 5. How do I equate the Additional Capital expense into a reimbursable charge? 6. Should the cost be passed on to the customer or is it a cost of doing business?

12 1. Current and Past Collision Industry Labor Profitability Trends

Current and Past Collision Industry Labor Profitability Trends Observed Labor GP % expressed as True Cost of Labor has been declining. TCL Labor GP% 54.5% 54.0% 53.5% 54.3% 53.

13 Current and Past Collision Industry Labor Profitability Trends Observed Labor GP % expressed as True Cost of Labor has been declining. TCL Labor GP% 54.5% 54.0% 53.5% 54.3% 53.9% 54.0% 53.5% 53.7% 53.9% 53.7% 53.0% 52.5% 52.6% 52.0% 51.5% Feb 07 Feb 08 Feb 09 Feb 10 Feb 11 Feb 12 Feb 13 Feb 14 Source: Acoat selected industry average

14 Current and Past Collision Industry Labor Profitability Trends Facilities that record less than 50% TCL labor GP are being observed more frequently in the last 2 years Facilities under estimate impact of mandatory payroll expense TCL Labor GP% 54.5% 54.3% 54.0% 53.5% 53.9% 54.0% 53.5% 53.7% 53.9% 53.7% 53.0% 52.6% 52.5% 52.0% 51.5% Feb 07 Feb 08 Feb 09 Feb 10 Feb 11 Feb 12 Feb 13 Feb 14 Source: Acoat selected industry average

15 Current and Past Collision Industry Labor Profitability Trends Decreasing TCL Labor GP% can be attributed to at least 4 factors A) Wage and benefit Unit costs are rising faster than lagging Labor reimbursement rate per Unit Billed/Produced and Units Paid B) Absence of a RETAIL Door rate in market areas C) Credit Card Effect D) Vehicle Technology training expense is advancing at frantic pace

Current and Past Collision Industry Labor Profitability Trends Decreasing TCL Labor GP% can be attributed to A) Wage and benefit Unit costs are rising faster than lagging Labor reimbursement rate per

16 Current and Past Collision Industry Labor Profitability Trends Decreasing TCL Labor GP% can be attributed to A) Wage and benefit Unit costs are rising faster than lagging Labor reimbursement rate per Unit Billed/Produced and Units Paid Higher costs to retain a decreasing number of trainable workers Department Labor Eff% Impact of Lean Flat Labor efficiencies 169% Concession Units 166% 164% Metal Dept. Paint Dept. 200% 190% 180% 170% 160% 150% 140% 130% 120% 110% 100% 162% 159% 151% 160% 159% Feb 07 Feb 08 Feb 09 Feb 10 Feb 11 Feb 12 Feb 13 Feb 14

17 Current and Past Collision Industry Labor Profitability Trends CLARIFICATION: Database Units are NOT clock hours! The Database guides do not dictate specific time The Database guides discuss labor UNITS! Exactly WHAT is a UNIT? A UNIT is a measurement of time that it takes an AVERAGE skilled Technician, with an AVERAGE set of Tools, in an AVERAGE equipped facility to complete a specified operation!

18 Current and Past Collision Industry Labor Profitability Trends Decreasing TCL Labor GP% also attributed to: B) Absence of a RETAIL Door rate in market areas No prevailing rate survey process in place Perception that customers should pay same/less than insurers Incomplete understanding of what the real cost of providing equipped and qualified labor is Widespread increasing use of Credit Card for payment

19 Current and Past Collision Industry Labor Profitability Trends Decreasing TCL Labor GP% also attributed to: C) Credit Card Effect Rapidly increasing use of Credit card for payment Eroding Realized Labor GP as shops are being pressured into taking cards for Payment of jobs and deductibles Shops have not adjusted to retail pricing model to deflect this increasing erosion of marginal profitability Walmart retail prices for shrinkage Lets look at an example

20 Credit Card Effect Customer Pay Example: 1. $2500 Repair 2. 45% of repair is labor = $ $60/Unit = 16.7 Units Case 2% $2500 x 2% = $50 $50 / 16.7 Hrs = $2.99 NOTE: Because we also give a 2% discount on this $2.99 higher rate the actual amount is $2.99 /.98 = $3.05 Case 4% $2500 x 4% = $100 $100 / 16.7 Hrs = $5.99 NOTE: Because we also give a 4% discount on this $5.99 higher rate the actual amount is $5.99 /.96 = $6.24

21 Subsidized Sales Tax When there is a sales tax present you also need to additionally offset the tax 7% = $175 of sales tax ($2675 total collected) 2% of $175 = $3.50/16.7units = $0.21/Unit 4% of $175 = $7.00/16.7units = $0.42/Unit Note: This $175 is a pass through cost to the business and the secondary discount increase adjustment in this case is too small to address

22 Net Credit Card Effect To cover the CC Fee with a 7% sales tax present you need an additional $3.26 ($ $.21) to $6.66 ($ $.42) over the Original $60 Door Unit rate to cover the lost revenue In this case the adjusted Retail Door Unit rate needs to be at least 5.4% to 11.1% higher to just to PRESERVE your previous profit margin

23 Net Credit Card Effect SO In this case when original door rate is $60.00 to fully offset the credit card effect on the Sale and Tax the door rate should be between. $ $66.60 to fully offset the reduction in dollars collected due to the CC fee discount! What about deductibles?

24 Current and Past Collision Industry Labor Profitability Trends Despite TCL Labor GP% declining D) Vehicle Technology is advancing at FRANTIC pace Vehicle construction and technology is changing yearly Repair methodologies become outdated quickly Different Vehicles require differing skills specialization (no more one skill all vehicles) Higher requirement for precision Accident avoidance On board safety system functionality OEM certification to restore technology is REQUIRED Increasing rate of Training and Technology $pend required as the pace of technology obsolescence increases

25 2. Why and how much should I spend investing in Facility, Equipment and Training?

26 Why and how much should I spend investing in Facility, Equipment and Training? This is very difficult to define as every business will make their own investment decision Aluminum Repair Equipment ($75 $150,000) New Measuring/Fixture Equipment ($15 $20,000) Hybrid Technology ($15 $35,000) New Welding equipment Requirements ($15,000) OEM certification Training ($2500 $9500/Tech/Yr) Certification documentation fees (APN) Carbon Fiber repair ($??)

27 Why and how much should I spend investing in Facility, Equipment and Training? Each Facility is likely to have a different circumstance they will face Ultimately each facility may make different choices Not everyone will want to repair aluminum Not everyone will want OEM certification Not everyone want to service Hybrid Technology Not everyone will want to continually invest in Tech training

28 3. How do I determine ROI and what is a reasonable return?

29 How do I determine ROI and what is a reasonable return? Investing in business REQUIRES a return greater than what is available in alternative secure investments. It is the reason people invest! An analysis should be done in advance of investment to determine what that investment will actually COST the business. Represent that cost as an INCREASE in variable direct costs and look for ways to justify/secure a RETURN. The idea that capital investment is just a cost of doing business is a myth!

30 How do I determine ROI and what is a Methods: Payback Period ROI NPV IRR reasonable return? The time it takes to recover the initial cost of investment Overly Simple ROI essentially compares the magnitude and timing of investment gains directly with the magnitude and timing of costs. A high ROI means that gains compare favorably to costs. Quantifies the idea that money you have now is worth more to you, today, than an identical amount you would receive in the future. shows directly how returns from a proposed action compare to inflation, current interest rates, and to investment alternatives

31 How do I determine ROI and what is a reasonable return? Return On Investment (ROI) is Components are: ROI = (Gains Cost)/Cost ROI is the positive benefit to the investor resulting from an investment of some resource. Quantifying the BENEFIT (ROI) is the primary challenge and means we need to accurately determine BOTH the Gain and the Cost The goal is not to simply BREAKEVEN The reason to invest is to generate a RETURN

32 How do I determine ROI and what is a reasonable return? Simple ROI = (GAIN Cost)/Cost GAIN This would be the incremental $ value benefit you generate after your investment decision There should be some incremental return beyond just the investment to reflect the opportunity cost and risk The incremental return needs to meet or exceed the investors required return demands or the investment should be avoided Have time frames been considered

33 How do I determine ROI and what is a reasonable return? Simple ROI = (Gain COST)/COST COST This is the $ value of the total actual investment Include ALL costs of the investment and consider if there is some related additional expense Interest expense / finance charges Increased Asset or property taxes Opportunity cost of Alternate Investment Reasonable to consider a target return % Amortize over Usable life of investment

34 How do I determine ROI and what is a reasonable return? Return (ROI) This is unique to each investor and their individual motives Several ways to quantify the value both Objectively and Subjectively (Social or Monetary) Every investor should have a minimum target return they are willing to accept Typically should be higher than a more secure alternate investment to reflect associated risk

35 4. What payback time period should I expect for an incremental investment?

36 What payback time period should I expect for an incremental investment? Each investor will have their own rationale for what they expect a payback period to be It is an over simplified view of ROI and typically only considers breakeven Since breakeven implies no profit the investor essentially risks capital for no reward Recommend that one should perform a more complete ROI analysis that factors in all costs as they occur against the desired rate of return

37 What payback time period should I expect for an incremental investment? Payback is an Overly Simplified type of return on investment decision Typically payback only considers the repayment of the actual investment cost (Breakeven) Considerations Time frame (does the item wear out) Residual value Technology (will it need updating) Does it appreciate in value Were there setup costs Where there finance charges Any asset taxes

38 5. How do I equate capital expense for facility, equipment and training into a reimbursable charge?

39 How do I equate capital expense for facility, equipment and training into a reimbursable charge? IDEALLY First we need to quantify the actual capital needed for the investment. Second we need to define our acceptable return for that investment of capital Third we need to determine how to capture revenue related to that expense and how to apportion it to the revenue it generates

40 How do I equate capital expense for facility, equipment and training into a reimbursable charge? Lets apply these 3 steps to the following Technology Investment Categories for this discussion: Labor Training Expenses Facility Expenses Equipment Expenses

41 How do I equate capital expense for facility, equipment and training into a reimbursable charge? Training expense In order to resell collision Labor it must be qualified The concept of a single rate for labor for all tasks may be outdated (ironically we used to differentiate) The precision and skill required to restore collision damage is increasing exponentially! This increases the frequency and cost of obtaining training to remain Qualified to repair Much training is becoming an annual requirement for individual OEM certification and some of it can be VERY expensive and time consuming

42 How do I equate capital expense for facility, equipment and training into a reimbursable charge? Training expense calculation example : 1. Identify all of the training related expenses on an annualized basis 2. Determine the current labor GP% before training related expenses 3. Determine the total annual productive output potential of the labor resource 4. Divide the annual training expense by the annual output to calculate cost of training per potential labor unit produced 5. Weight the per unit amount with current labor GP% to find the adjusted increased labor unit charge to maintain prior GP%

43 How do I equate capital expense for facility, equipment and training into a reimbursable charge? Facility Expense Additional Facility expense implies that you are increasing capacity or reconfiguring use Increasing capacity creates room for additional sales Reconfiguring use may suggest a different pricing method Reasonable expectation would be to determine breakeven and return sales targets

44 How do I equate capital expense for facility, equipment and training into a reimbursable charge? Facility Case 1 Simple small business perspective: If I borrow $75,000 in capital to invest in facility/equipment to do Aluminum work ($75,000 / 12 months = $6,250) As long as I get more than $6,250 per month in Aluminum repair it paid for itself in one year.

45 How do I equate capital expense for facility, equipment and training into a reimbursable charge? Facility Case 2 More sophisticated Businesses consider cost of capital: My current GP% is 38% so for that same $75,000 investment I will only consider the incremental GP$. The timespan is 3 years before I pay for the loan and may need to update again. Financing costs at 10% over 3 years are $15,000 Year 1: 10% = $7500 Year 2: 10% = $5000 Year 3: 10% = $2500 $15,000

46 How do I equate capital expense for facility, equipment and training into a reimbursable charge? Facility Case 2 cont d. More sophisticated Businesses might consider: Initial investment cost is $75,000 Plus the financing costs +$15,000 = $90,000 So a total investment of $90,000/.38 = $236,842 in additional sales needed over 3 years to breakeven on the investment. $ 236,842 / 3 Years / 12 months = $6,578 of ADDITIONAL SALES per month

47 How do I equate capital expense for facility, equipment and training into a reimbursable charge? Facility Case 3 More sophisticated Businesses consider Op. Cost ROI: Initial investment cost is $75,000 Plus the financing costs +$15,000 = $90,000 Plus The expected ROI to investor of 15% $90,000 x 1.15% = $103,500 (Investment plus return) Now a total investment of $103,500/.38 = $272,368 in additional sales needed over 3 years to breakeven on the investment. $ 272,368 / 3 Years / 12 months = $7,565 of ADDITIONAL SALES per month

48 How do I equate capital expense for facility, equipment and training into a reimbursable charge? The Time Value of money is one of the tenants of investment Technology Investment to equip to repair cars REQUIRES skilled labor to complete Labor consumes time in the act of repairing cars It is reasonable to look at the return of investment $$ based on the labor time the investment is used in generating a return applied to the specific technology need

49 How do I equate capital expense for facility, equipment and training into a reimbursable charge? Facility Expense Calculation example : 1. Determine the Total Facility Investment 2. Determine the required return on that investment 3. Calculate incremental sales targets that provide sufficient revenue to cover cost and return 4. If additional work Volume is not forthcoming consider adjusting to higher Door Unit rate for specialized work 5. Develop Plan to achieve target sales or rate increases

50 How do I equate capital expense for facility, equipment and training into a reimbursable charge? Equipment expense Equipping to be capable to service or repair new technology may not necessarily increase efficiency Additional expense without incremental sales implies higher per unit charges to maintain prior profit levels Precision repair and diagnostic procedures typically require specialized equipment for new technology Assurances that a vehicle can be demonstrated to be returned to OEM specification has a value

51 How do I equate capital expense for facility, equipment and training into a reimbursable charge? Equipment expense In some instances specialized tooling may quickly become obsolete as new devices are deployed Self Piercing Aluminum Rivet Tool (Illinois Case) Original Tool for BMW was $4,500 One year later new Mercedes Tool $uperceded that Tool but cost $9,000 Next year certification and repair procedure changed and new Mercedes Tool was now required at a cost of $14,000

52 How do I equate capital expense for facility, equipment and training into a reimbursable charge? Equipment expense calculation 1. Determine the Total Equipment Investment 2. Determine the required return on that investment 3. Calculate incremental sales targets that provide sufficient returns 4. If additional Volume is not forthcoming consider higher Door Unit rate for work 5. Develop Plan to achieve target sales

53 6. Should the increased costs be passed on to customers or is it a cost of doing business?

54 Should the increased costs be passed on to customers or is it a cost of doing business? Every investment in business is for the purpose of creating customer value with a RETURN to the investor The very definition of customer value is what are customers willing to pay for When Investment costs are incurred for the singular purpose of creating customer value they should be passed on as a cost to the customer in one way or another The challenge is to CLEARLY KNOW YOUR COST before you justify and ultimately ESTABLISH YOUR PRICE!

55 Tim Ronak AkzoNobel (949) Contact Tim for the presentation spreadsheet here:

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