THE BOOK OF MYTHS.CATERPILLAR (UK) LTDLEICESTER VISITOR CENTREPECKLETON LANE, DESFORDLEICESTERSHIRE LE9 9JT

TELEPHONE: +44 (0)1455 826 736

WWW.CAT.COM

NEW YORK’S SEWER SYSTEM IS INFESTED WITH DEADLY ALLIGATORS.

YOU CAN SEE THE GREAT WALL OF CHINA FROM THE MOON.

YOU CAN’T MAKE MONEY OUT OF BCP MACHINES.

EXPLODING THE MYTHS.

THERE ARE NO DEADLY ALLIGATORS IN NEW YORK’S SEWER SYSTEM. YOU CAN’T SEE THE GREAT WALL OF CHINA FROM THE MOON.

BUT YOU CAN MAKE GOOD MONEY OUT OF BCP MACHINES. THAT’S A FACT!

Caterpillar established its fi rst major facility outside the US more than 50 years ago in the United Kingdom. The presence of Caterpillar in the UK has grown rapidly in recent years, and the company now employs over 10,000 people. The United Kingdom is the largest base for Caterpillar outside the United States.

Here’s another fact: the Holy Grail doesn’t exist (But you just might fi nd it here... so read on!)Over the past 3 years, we’ve been talking to, working with, and fi nding out what turns certain Local Contractor (LC) Dealers into truly top performers, year in year out. These are the ones we’ve learned from.

The central question we asked was: “What are the key components that make you successful in the LC business and how do you measure it?” Six key answers emerged…

Not just to explode the myth that there’s no money in BCP machines, but to discover the secrets of their success, to share with all Dealers, everywhere. Learning from top performing Dealers is key to developing strategies that bring profi ts to the BCP business. We wanted to use what we discovered to create a winner’s profi le that everyone could learn from, to discover the best practices that help attain higher PINS, and lead to real, long term profi ts.

Brad RindererJassen VolkJohn DanesiMike PospischilMike EllisKevin RobbinsSaint CurrinHasting Puckett

General Construction Sales ManagerVP of Compact Equipment DivisionCCE/Agri-Business General ManagerGeneral Sales ManagerGeneral Construction Division ManagerSenior VP, Director of Rental ServicesRegional Sales ManagerSenior VP - Sales, Rental, Product Support

Gregory PooleBlanchard MachineryWhayne SupplyJohnson MachineryCarter MachineryRing PowerRing PowerPuckett Machinery

1 > Executive leadership supports the business. 2 > Defi ned accountability for the Local Contractor business segment. 3 > Strong rental footprint with allied and aerial product. 4 > Recognize the value of product support for the Local Contractor. 5 > A commitment to PINS leadership 6 > Active measurement of Participation and Close.

SECRET WEAPON DISCOVERED

IN DEALERSHIP.

After talking to the top performers, this one’s defi nitely not a myth. Successful Dealers use Multiple Price Options (MPO’s) as a central part of their business strategy. And like all the best ideas, it’s perfectly simple. If you dispose of Used Equipment through auctions you’re missing a big money making opportunity.

Here’s why: by being able to set different price points for your various machines ( i.e. New, Cat Certifi ed Used low hour machines and regular Used equipment ) you can get a customer into a CAT machine that he could not normally afford by offering a quality Used Machine. MPO brings you into contact with new customers, allows you to sell them parts – and hopefully convert them to being a new machine customer in the future. And there are more secret weapons to more business in the following pages…

The second part summarises the Dealer’s organisational structures. This is intended to show that different organisational structures can bring success - providing the common Dealer practices are in place, and put to good use. The best is last. We’ve identifi ed key Dealer metrics and best practices for the total LC business and each functional area. This checklist is not exhaustive. In fact, certain metrics being used by Dealers may not appear here. That’s why, in the tables that follow, a blank column has also been added, so that you can insert your own values for comparison.

The fi rst part is an executive summary of the common Dealer practices that are an essential part of a successful Dealer’s market strategy – the ones that need to be in place to succeed in the LC business.

LET’S GET STARTED.The CAT and Dealer team believe strongly, however, that the ones shown here are the critical metrics that really have proved to make the difference between success and failure in the LC business.

TOTAL BUSINESS ACCOUNTABILITY - ONE STOP SHOP...

Common Practices:The majority of the participating Dealers had the practices listed in this table which we (and they) consider essential in order to succeed in the LC business.

PARTS/SERVICE

CCE Managers for sale,service, used & rental

ISR for smallercustomers

Dedicated CCE servicebays and techs

Competitive labour,Standard jobs & fl at rates

PM Strategy in place

Retail Parts Strategy

MARKETING

Marketing critical to success

Seasonal Events

Telemarketing/websitepromotions

Demos/customer days

Target Trade Shows

RENTAL/USEDNEW SALES

Standardized PDI &machine confi guration

Committed to the Rental Business

Dedicated CCESales Force

Rental Fleet availablefor sale at all times

Motivating SalesCompensation Plan

BCP Rental & Salescombined

Committed to PINSleadership

MPO strategyin place

Actively measureparticipation

Strong Allied/Aerialpresence

Training Program(soft skills & product)

Used Market Strategywell developed

BENCHMARK METRICS Each Dealer provided input on identifying the key performance metrics along with their results to establish a Dealer average. The Cat Dealer Average was calculated by averaging available data from 2007, 2008, and 2009 from a number of Dealers. All agree that the benchmarks are: reasonable, attainable and arrived at from Dealer data.

Total business in each functional area is separated into primary and secondary metrics asidentifi ed by the Dealer team. A list of individual Dealer best practices follows each section, to provide greater detail on how these performance standards can be attained.

PRIMARY

TOP TIER METRICSTOTAL BUSINESS

GROSS PROFIT MARGIN %

DIRECT EXPENSES %

PROFIT AFTER DIRECT %

INDIRECT EXPENSES %

OPERATING PROFIT MARGIN %

30%

20%

10%

5%

5%

35%

25%

28%

20%

8%

4%

4%

35%

8%

OPERATIONAL ABSORPTION RATIO %

% NEW CUSTOMERS ANNUALLYSECONDARY

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INDIVIDUAL DEALER BEST PRACTICES

> Executive support to rental/LC segments is critical to success. The approach for the local contractor business is signifi cantly different to traditional business. Change management, fi nancial resources and time commitment is crucial to success. Success inevitably involves cultural shifts and lean cost structures.

> Defi ned accountability at a leadership level for the LC business. Accountability and taking responsibility are necessary to execute successful change.

> Different distribution strategy to focus on the LC vs. the traditional business. Critical customer requirements are identical (Value, Responsiveness, etc), but the defi nition of the ‘responsiveness’ requirements is considerably different between a residential customer (hours) and a heavy construction customer (days). LC requires a different business model to meet expectations.

> Clear understanding of the LC opportunity for the Dealership. Understand the rental, used, work tool, and product support contribution. The local contractor market segment is typically in the fi rst three for industry opportunity.

> Separate fi nancial statement including all business functions (new, used, rental, product support). Accountability for a business requires a comprehensive income statement. Managers need visibility to the entire revenue stream that customers and BCP models contribute.

> Defi ned accountability for Marketing to support the LC business. It’s impossible to justify the cost of calling on local contractor business face to face. Marketing efforts are critical to pull customers to the Dealership in cost effective and targeted ways. Marketing must generate leads, qualify leads, and distribute leads to improve participation and closure of a deal.

> Diversifi ed product offerings to support the LC – machines, rental, consumables, and product support. The local contractor represents ‘non-traditional’ customers. In a business based more on cash fl ow, purchase convenience is a real advantage. The ability to rent, purchase, and fi nance all products will pull a customer to a Dealer.

> Vision of what success looks like along with an execution plan. To implement a business model change (drastic or minor), the plan needs to defi ne how success is measured. Success includes but is not limited to: revenue, profi t, coverage, market share, participation, close, % new customers each year.

> Dedicated, retail facilities to support LC for all business needs. Local contractors are prone to do business where they are comfortable. The appeal of our BCP and rental competitors is their welcoming, retail environment. Most local contractors feel that they are unimportant in traditional main stores... that the Dealer doesn’t want his business. Creating a welcoming environment is challenging in large facilities, but it can be done!

> Partner with reputable industry leading companies (e.g., landscape company) to gain access to unique customer base.To build awareness in a specifi c industry, Dealers learn where retail activity occurs and build a brand presence. These can be cost effective touches in untapped markets.

> Salesmen need to be an indispensable resource to customers. Therefore, they must be an indispensable resource to the Dealer. Decisions need to balance the tangible and intangible cost of developing a salesman (training expense, learning Dealer culture, experience, customer relationships). Because salesmen are revenue generators, some Dealers are willing to operate at a loss in a functional area during a downturn... because they know when things turn around they retained the sales force that will maximize the upturn.

> 70% of advertising and promotion mailers are product support focused. Marketing departments frequently focus the majority of their attention on new machine sales when rental, product support, and used drive more profi t to the bottom line.

> Recognize Rental is a critical piece to the success of the CCE/BCP business. Successful rent-to-rent Dealers remark that rental and the local contractor customers overlap 80%+. Rental provides: 1) new customers, 2) quality used equipment, 3) product support, 4) PINS, and 5) sizeable profi t to a Dealership.

> Understand the importance of increasing machine population to generate product support opportunity. Dealers are reaching this critical mass by repairing non-Cat machines, pulling local authority work into workshops, or centralising rental/machine prep/branch repairs at limited locations. To justify dedicated bays and technicians, a Dealer needs to consider that generating the same revenue as a traditional Core Machine Industries (CMI) shop requires a magnitude of 4 to 9 times the volume of equivalent CCE invoices.

PRIMARY

NEW MACHINE SALES

REVENUE MIX %

GROSS PROFIT MARGIN %

DIRECT EXPENSES (NEW & USED COMBINED) %

FINANCIAL INVENTORY $ TURNOVER

TOTAL BCP/CCE PINS %

CLOSE RATE (RETAIL ONLY - SALES TYPE 1,2,3,4)%

PARTICIPATION (RETAIL ONLY - SALES TYPE 1,2,3,4) %

25%

14%

10%

4.0%

29%

70%

50%

2.5%

$ 1,000,000

1.2

40

25%

14%

15.9%

2.3%

29%

68%

52%

9%

$ 3,404,309

1.2

30.32

WARRANTY %

INSIDE SALES REP $

MIX PINS RATIO (AVG AREA DN)

ANNUAL NEW UNITS PER DEDICATED CCE SALES REP

SECONDARY

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> Defi ned accountability to sales reps through scorecards drives visibility and execution on key performance metrics. Individual salesmen’s product knowledge (Cat & competitive) and sales performance are scrutinised and compared to those of their peers. Sales reps know exactly what their targets are and they are updated quarterly on results.

> Soft skill and product training is not an option. An ever increasing competitive sales environment coupled with diminishing product differentiation demands a well educated sales team. Financial incentives are in place to drive engagement. Competitive trade-ins are also used as opportunities for product training.

> Updating inventory on a monthly basis. The local contractor customer can be an impulsive buyer. Having product pricing (new, used, rental conversions) and inventory on the ground at all times is critical.

> RPO strategy in place. RPO strategies to provide multiple price points for customers. 80% conversion from RPO to outright sale.

> Share commissions between CCE reps and heavy reps for both CCE & major Core Machine Industries (CMI) products. Promotes teamwork and removes hesitation of sharing customers. Encourages what is in the best interest of the customer and the Dealership.

> Dedicated CCE Reps/Combo Reps. Focused reps have grown the Local Contractor/Rental business and created better support for the smaller customer.

> Lead Management System in place and being utilised to monitor existing and new business. Many Dealers have the software in place, but most critical to success of any CRM system is the process and training that encourages salesmen to use it.

> Actively use participation and closure rates to manage the retail business. Track participation to drive coverage or business changes. Drive business decisions by managing to a forward-looking forecast rather than from a historical perspective.

> Execute work tool sales strategies. Open doors to new customers. CCE salesmen actively promote used work tools with new machine sales to improve competitive price position. Work tools RPOs are also used to provide a customer solution.

> Promote CCE sales as a lucrative career position. CCE is not treated as training ground for CMI reps.

INDIVIDUAL DEALER BEST PRACTICES

USED MACHINE SALES

PRIMARY

REVENUE MIX %

GROSS PROFIT MARGIN %

USED & NEW UNIT RATIO%

20%

20%

300%

90

10%

10%

25%

23%

217%

206.8

6%

7%

AGED INVENTORY (TRADE - IN ONLY - AVERAGE DAYS)

% TOTAL CAT AND ALLIED TO AUCTION

GROSS MARGIN % (TRADES)SECONDARY

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> Certifi ed Used Fleet. Dealers create an additional market price point for used machines with warranty and minimum condition requirements, similar to automotive. Actively promoted on websites, target mailers and salesmen hot sheets.

> Inventory for sales at all times. Dealer does not make rental conversions dependent on time, but on ROI of the machine. Washout analyses are completed to determine how rental fl eet mix needs to change – Cat Allied, New and Used.

> Used equipment inventory and prices in front of the salesmen weekly. “Hot Lists” provided regularly (e.g. weekly to monthly) to all customer-facing reps (new, used, rental, product support) to actively sell used.

> Inside sales reps (ISRs) cost effectively improve coverage. Dealer uses this position to generate product support and machine sales business with customers that cannot be reached by traditional methods. Variety of role responsibilities from: information, awareness, quote to close, and customer assignment.

> Additional compensation is given to Product Support Sales Reps (PSSRs) if they complete the Cat and competitive trade inspections. PSSR’s completing the inspection improves the speed of inspection and causes the product support rep and machine rep to work collectively. This provides a potential product support lead should the unit stay in channel. When completing a trade-in evaluation, turn-around time cannot exceed 24 - 48 hours.

> Used customer recognised as unique opportunity. The Used customers have different buying behaviour but demand the same focus and effort as a new machine buyer. Execute exclusive used customer “red tag” events with Cat & allied products to draw in new customers and maximise revenue by avoiding auctions. Used events have shown the importance of having small allied CCE and BCP products to attract customers.

> Used is a key component to increase fi eld population and to generate more product support opportunity. Rental rollouts and used trades are at a point in their life cycle when they are starting to consume parts and service. It is critical to make a concerted effort to keep these customers in channel.

> Actively promote customer consignments. The advantages are two fold: 1) It provides a value to customer by placing the machine in a retail environment 2) It expands the Dealer’s available price points and on-the-ground fl eet inventory with minimal fi nancial exposure.

> Maximize Cat Finance Repossessed offerings for additional customer price points. Actively include Cat fi nance inventory in customer search for used equipment.

> Incentives for sales reps to pre-sell trade-ins. Reduces costs associated with used trade-ins (carrying costs, shipping, merchandising, prep).

INDIVIDUAL DEALER BEST PRACTICES

PRIMARY

RENTAL

REVENUE MIX %

GROSS PROFIT MARGIN (STRAIGHT LINE DEPRECIATION) %

GROSS PROFIT MARGIN (ACTIVITY DEPRECIATION)%

EBITA AS % OF REVENUE

FINANCIAL UTILIZATION

MAINTENANCE EXPENSES AS % OF RENTAL REVENUE

ALLIED ACQUISITION % OF TOTAL FLEET ACQUISITION ($)

FLEET AGE (MONTHS)

TIME UTILIZATION %

25%

50%

20%

40%

35%

15%

30%

30

65%

33%

31%

30%

22%

36%

24

52%

$ 400,000 $ 576,742WARRANTY %

SECONDARY

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> Allied products are a key contributor to profi tability and expanding the rental customer base. Allied product increases foot traffi c and opens the door to non-traditional customers.

> Attachments /Work Tools are rented to customers without a machine. Work tools are independently tracked and rented to provide customers with more valuable offerings.

> Used work tools are part of the Multiple Price Options (MPO) strategy with new & used equipment. In addition to rental rollout work tools, used work tools are purchased as part of a price point strategy.

> Utilise rental counter as complimentary coverage for rental and local contractor customers. Provide incentives for Rental Sales Coordinators to update customer lists. A gift card was provided as an incentive to Rental Sales Coordinators, which resulted in a surge in eNewsletter addresses.

> Majority of the rental store customers do not overlap with traditional customers. Rental customers represent an untapped market for machine and product support services.

> Merchandise and consumables in the local contractor/rental store is profi table. Beyond an incremental revenue stream, it opens the door to non-traditional customers.

> Support MPO Fleet. Adopt a rent to sell strategy to meet market price point requirements while maintaining rental viability from a fl eet and profi t standpoint.

> Strong rental footprint covering most of the rental opportunity with dedicated facilities and/or co-locates with main branches. To meet rental customers expectations, rental equipment needs to be within a reasonable proximity to the job site. Without a stand alone store, a Dealer needs to create a retail environment inside their facilities for consumables and allied products to generate incremental business and attract new customers.

> Part of the Local Contractor value equation is providing a rental solution. Rental is the lynch pin, it generates PINS, used equipment, additional profi ts, and most importantly new customers.

> Rental salesman need to be viewed as an added value resource. Machine salesmen who are responsible for rental revenue with their assigned accounts utilise rental salesmen to provide customer solutions.

INDIVIDUAL DEALER BEST PRACTICES

PRIMARY

PARTS

REVENUE MIX %

GROSS PROFIT MARGIN %

DIRECT EXPENSES %

15%

27%

10%

2.5%

$ 700,000

10%

27%

12%

9%

$ 2,815,214

TOTAL SERVICE FILL AT BRANCH %

INSIDE SALES REP $SECONDARY

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> Promotional activities for products and services to the local contractor segment are done quarterly. Local contractor machine repairs and purchases occur sporadically in comparison to traditional customers who have almost continuous repair work in Dealer workshops. If a Dealer isn’t “top of mind”, the local contractor can fi nd other suppliers for parts and service.

> Product Support ISRs need to have unique offers that can pull customers into the Dealership: Offers to customers need to focus on customer benefi ts. Does it save him money, does it make him money, or does it make his life easier? Offers need to be constantly changing so that they appeal to the customer every time an ISR calls.

> Dealer promotes CSA/PM to touch customer early in the machine life cycle. If Dealers neglect nurturing the customer relationship in the fi rst three years, they most likely will not be “top of mind” when the customer needs a repair. Maintenance products and/or services provide a viable touch.

> Retail parts strategy (promo: do-it-yourself and do-it-for-me customers). The local contractor is more likely to repair CCE equipment than a traditional customer. Dealers will win over local contractors and become business partners if they provide what the customer wants when he wants it and how he wants it. (Parts Kits available through Service contracts).

> Ownership of CCE parts sales growth. Growing CCE parts requires parts volume (high turnover) and focus on customer buying preferences. Don’t expect local contractors to give you their business… we have to earn it. Ownership of CCE parts and services needs to reside where demand and customer retail exists.

> Technician priority – 1 hour or less delivery to service bay. Local contractors expect Dealers to respond quickly to their service needs – on demand service. CCE technicians need to receive parts quickly so that repair time meets or exceeds the customer’s repair time expectations.

> Inside Sales Reps (ISRs) to cost effectively improve coverage. An inside sales rep is an established way for many Dealers to maintain smaller customer relationships. Studies have shown that smaller customers prefer to be contacted by phone, Email and fl iers so that they can respond when it is most convenient for them.

> Promote fl at rate specials to generate incremental business. Flat rate pricing is critical to success. This is the automotive approach, which creates an appealing retail environment.

INDIVIDUAL DEALER BEST PRACTICES

PRIMARY

SERVICE

REVENUE MIX %

GROSS PROFIT MARGIN %

DIRECT EXPENSES %

STANDARD JOB UTILIZATION

FLAT RATE VARIANCE %

15%

65%

42%

35%

10%

7%

69%

40%

10%

3%

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> Dedicated techs/bays for BCP/CCE equipment. The majority of repairs for CCE equipment involve a trouble shoot job code and a replacement component. At the same time you need profi cient technicians on smaller equipment to reduce cost. Dedicated bays and technicians shows commitment to servicing small equipment in a timely manner.

> Service mangers share technicians across divisions (traditional shop, local contractor shop, rental shop) to balance workload and to maintain the service revenue and expenses. Maintaining a backlog of repair work for CCE equipment is critical to its profi tability. Product support represents 30% of the compact equipment store revenue.

> Flat rate pricing – fi rm price to customer. The service sales strategy needs to evolve from internal standard jobs to external priced jobs.

> Ownership of CCE service sales & promotion. The value and benefi t of Dealer service department is a marketable product that needs to be defi ned and communicated to customers just like machine sales, especially local contractor customers. Promote service capabilities to both Cat and competitive equipment owners.

> Standard jobs to drive internal effi ciency with rental machines and customer revenue work. To improve rental operations and drive down maintenance expense, the service department needs to actively look for opportunities to standardise rental specifi c work.

> Service coordinators/advisors to handle customer calls. Local contractor contact person that can advise the customer on the most cost effective course of action for their machine repair.

> Measure their performance with BCP products using KPIs. Service operations recognise CCE/BCP equipment and the local contractor as unique.

INDIVIDUAL DEALER BEST PRACTICES

DON’T BELIEVE THE MYTHS.

Santa Claus was dreamed up by Coca-Cola. We only use 10% of our brain.Entering your PIN backwards at any ATM summons the police.The Titanic was the fi rst ship to send SOS as a distress call.Nero fi ddled while Rome burned.The Loch Ness monster is alive and well.

What we’ve tried to set down here are the critical fi nancial and operational benchmarks for the LC business, drawing on the experience and day to day business practices of a number of top performing Dealers. The fact is, if they can do it, so can you.

THESE ARE THE TOOLS THAT CAN BUILD UP YOUR BUSINESS (WITH OUR SUPPORT). NOW PUT THEM TO WORK FOR YOU!To keep this information fresh, the LC team will be working with these Dealers regularly and updating the metrics twice a year. If there are any metrics or best practices that are not clear, or you need more description, please contact your Caterpillar Local Contractor Rep.

YOU CAN MAKE GOOD MONEY

OUT OF BCP MACHINES.