Nearing 75, Wheels’ Original Value Proposition Still Resonates

Scott, tell us what the focus is at Wheels right now.

Our focus prob­a­bly hasn’t changed much. One of our strengths is that we are very, very con­sis­tent. Our focus is in serv­ing our cus­tomers and tak­ing care of our clients. Doing a good job for them and try­ing to under­stand what it is they need from us, what is on their mind, what has them con­cerned and serv­ing them well so that we get to stay their fleet man­age­ment company.

What are fleets telling you that they’re most con­cerned with right now?

Our clients, like most cor­po­ra­tions, are doing more with less. They are under a lot of pres­sure to deliver results. The large cor­po­rate staff just isn’t there any­more to imple­ment a lot of the things they want to do. It may be safety. Cer­tainly it is eco­nom­ics; every­one wants cost sav­ings and every­one wants to run more efficiently.

It is sort of ironic, fleet is a really, really good deal right now and has been for quite a while. The vehi­cles that we use are bet­ter, they last longer, they are safer, they are more effi­cient, more reli­able, and right at the moment the resale val­ues are extremely good and the inter­est rates are very low.

The cost of fleet is excel­lent but it hasn’t taken any pres­sure off fleet man­agers and sourc­ing peo­ple who are respon­si­ble for fleet in terms of reduc­ing the cost of fleet. It is the nature of Cor­po­rate Amer­ica; it is not unique to fleet.

There are some things they want to do from a cor­po­rate stand­point and some things they want to do locally and dial­ing that in right, par­tic­u­larly when there are fewer and fewer peo­ple at cor­po­rate to make that hap­pen but they are still account­able for it. We get a lot of those kinds of requests — help us make this thing hap­pen what­ever it might be. Reg­u­la­tory com­pli­ance, safety, envi­ron­men­tal, cost sav­ings; you know it dif­fers com­pany to com­pany.

How are we tak­ing some of the costs out of the fleet?

Like I said, fleet is actu­ally really very effi­cient. Right at the moment it is good to be a fleet oper­a­tor in many ways. Prob­a­bly the one excep­tion is fuel. It is kind of inter­est­ing that we have got­ten used to $4.00 a gal­lon gaso­line in the United States. At the same time, fleet fuel economies are going up pretty rapidly. We are see­ing fleets change, dri­ver behav­ior change with­out much rebel­lion that you wouldn’t have been able to get done ten years ago, even five years ago, and so aver­age miles per gal­lon has been going up in terms of vehi­cle choice and in-vehicle tech­nol­ogy. The rest of fleet is a pretty good deal right now.

I think one of the parts of fleet that is not well man­aged is safety. We still have way too many acci­dents in the fleet indus­try. Com­ing through the bad econ­omy the last few years, it was all about tak­ing out cost. Peo­ple are becom­ing more rev­enue focused. The down­time of the vehi­cle is directly tied to their cus­tomer ser­vice and their rev­enue and so they are increas­ingly look­ing to do a bet­ter job on that.

How does Wheels help the global fleet?

Our rela­tion­ship with ALD is excel­lent. ALD is very, very strong in many other parts of the world includ­ing Europe. We work with ALD on a num­ber of global clients. Often times they are tak­ing baby steps and are exper­i­ment­ing with global fleet. Vehi­cle choice and even why com­pa­nies have vehi­cles dif­fers in cer­tain parts of the world; it is very much about com­pen­sa­tion in some places and in other parts it is a tool. We still don’t have in many cases, global prod­ucts so I can’t really buy a global vehi­cle. I can’t buy a global financ­ing prod­uct. It is still an indus­try where you mostly are buy­ing regional fleet products.

It also kind of mir­rors our clients as well because they are still buy­ing region­ally. They are buy­ing North Amer­ica, they are increas­ingly buy­ing Euro­pean, but not yet buy­ing global. They’re talk­ing a lot, look­ing at their inven­tory, and look­ing at some poli­cies glob­ally, such as vehi­cle eli­gi­bil­ity. Cer­tain things they are requir­ing their local coun­tries to do, but real global con­trol, not many are doing it. Some have pushed a num­ber of things pretty far but global fleet still tends to be regional fleet.

How has the global financ­ing mar­ket affected fleet?

It is inter­est­ing. LIBOR got a bad name because some banks were manip­u­lat­ing what LIBOR was, but what a lot of peo­ple don’t under­stand is that our clients actu­ally ben­e­fited from that. The banks were actu­ally manip­u­lat­ing LIBOR down; they were mis­rep­re­sent­ing what it was really cost­ing them to bor­row because they didn’t want mar­ket to be con­cerned about their credit. So they were under­stat­ing the cost of LIBOR. Since float­ing rate fleet lease financ­ing is often tied to LIBOR, the clients actu­ally got a lower inter­est rate than they would have oth­er­wise gotten.

We see a lot of peo­ple using LIBOR for float­ing rate; now with rates so low, many of our clients have cho­sen fixed rate leases. Our large clients used to be entirely float­ing rate, and as inter­est rates have gone so low the last few years, peo­ple have jumped on fixed rate and locked in.

Where do you think inter­est rates are going in the near term?

Clearly the mar­ket says what the expec­ta­tions of inter­est rates are and the market’s expec­ta­tions are very low. It seems hard to believe that inter­est rates can stay low. Right now the ten year trea­sury is still under 2 per­cent and there just doesn’t seem to be any end in sight. Who knows how long the Fed is going to keep up their mon­e­tary pol­icy and it will prob­a­bly change very rapidly when the Fed decides they don’t want to do this any­more. It is a very good time to be financ­ing your fleet — a very good time ver­sus his­tor­i­cal norms.

Are fleets that tra­di­tion­ally own their vehi­cles tak­ing a sec­ond look at leas­ing?

I would say, yes and no. We have had some clients who have owned for a long time who have gone to leas­ing. But I don’t think it has to do with cost, I think it has to do with liq­uid­ity. One of the things that the 2008 finan­cial cri­sis taught peo­ple was that liq­uid­ity and access to cap­i­tal mat­ters. We have had some very large own­er­ship clients con­vert to leas­ing or are at the moment look­ing at leas­ing very, very hard. They are look­ing at their bal­ance sheet liq­uid­ity and they are not tak­ing it for granted, which is kind of ironic because we are back to where there is quite a lot of liq­uid­ity in the market.

At the same time, we have had some large lease clients look at own­er­ship because they see they are hold­ing a lot of cash. They are sit­ting with cash earn­ing short term returns which are very, very low, and they are say­ing, “Gee maybe I could put it into a three year or four asset — a fleet vehi­cle – still very liquid. I can get out if I want and get a bet­ter return than I am get­ting on my short term funds.”

Of course there is a dif­fer­ence between invest­ing cash for 30 days and buy­ing a three to four year asset. When clients think about invest­ing money for three and four years, now they have a dif­fer­ent expec­ta­tion for return. Go buy a three year cor­po­rate bond, what is the return going to be on that? It is essen­tially the same as the inter­est rate for three years on a lease. It’s the cost of three or four year dura­tion in the credit mar­ket. After peo­ple look at it, they say – okay, I get it, and they con­tinue to lease.

I wouldn’t say we’ve have had a lot of whole­sale shift­ing between leas­ing and own­er­ship but a lot of peo­ple are think­ing about it; so, kind of in both direc­tions for dif­fer­ent reasons.

Are you find­ing that com­pa­nies’ credit wor­thi­ness is improv­ing?

Cer­tainly, ver­sus where they were in the depth of the reces­sion of 2008 and 2009 — yes, bal­ance sheets have improved, earn­ings have improved. It’s a lit­tle eas­ier to get peo­ple through the credit stan­dards our lend­ing mar­kets are look­ing for. The flip side of it is, as more financ­ing liq­uid­ity has come back into the mar­ket and as peo­ple who have cash are look­ing for a place to invest, pri­vate equity is back. When a com­pany with good credit gets bought by pri­vate equity, they inevitably lever up a nice invest­ment grade or close to invest­ment grade bal­ance sheet, turn it into a triple C credit, and we can’t finance them anymore.

Is there any­thing in the finance realm that is start­ing to get you con­cerned about where we are headed?

I don’t think so. I am an opti­mist. Europe has some very seri­ous prob­lems that are a lot more com­pli­cated than I can under­stand. They have very dif­fi­cult issues to work through and cer­tainly we have very seri­ous pub­lic sec­tor bud­get deficits that just sim­ply have to change. It is just not sus­tain­able or we are going to end up like some of the sov­er­eigns in Europe. You see it at the local level, and you see it in states — my state of Illi­nois is a dis­as­ter from a finan­cial respon­si­bil­ity stand­point, and it is sim­ply going to have to change.

But I think cor­po­ra­tions have learned very valu­able lessons and have made some tough deci­sions. You see it in bal­ance sheets. You see it in cor­po­rate earn­ings which are very strong.

As you think of our busi­ness which is based on, at least in North Amer­ica, work­ers need­ing trans­porta­tion to do their jobs, we are tied to employ­ment and we see employ­ment strength­en­ing which is a really good thing.

Fleet size is really indica­tive of employ­ment. For sev­eral years in a row, many of our clients shrunk in head­count and fleet size and we made up for it by sign­ing new busi­ness. The last two years, our clients have added peo­ple for the first time in five years. That is cer­tainly indica­tive to us that our clients are more bull­ish, and they are grow­ing, and that can’t leave us any­thing but opti­mistic for the fleet business.

The scope of our busi­ness has changed a lot. Our clients are pres­sured to do more– to exer­cise more con­trol, to moti­vate the field in uti­liza­tion, to man­age field behav­ior, to sup­port field activ­i­ties, but with next to no resources at cor­po­rate. They turn to folks like us to help. So, the nature of busi­ness used to be, as you remem­ber, about deliv­er­ing a new vehi­cle, pick­ing up the old one and see­ing the dri­ver three years later. It is just not like that any­more. We have about 300,000 vehi­cles on the road and we do 40 mil­lion trans­ac­tions a year. That tells how much we are inter­act­ing with the vehi­cle and the dri­ver through­out the year for just every­thing under the sun that you can think of.

What is it that keeps Wheels so cur­rent, still respect­ing the past but always look­ing to the future and seek­ing to do every­thing right today?

I have only been around 15 years, so I can’t speak to what has made Wheels suc­cess­ful for 75 but I cer­tainly have my own obser­va­tion about what makes the place work today. To me, it is about the con­sis­tency of the val­ues. It is about the cus­tomer ser­vice val­ues; about under­stand­ing that we are a ser­vice com­pany and we only get to sur­vive if we serve our clients well, if we treat them well, if we bring value to them, if we serve them how­ever they want to be served.

BIO

Scott Pat­tullo, Senior VP of Sales, Mar­ket­ing & Account Man­age­ment, Wheels, Inc.

Scott joined Wheels in 1998 as Vice Pres­i­dent of Mar­ket­ing and Gen­eral Man­ager of Wheels’ mid-size fleet divi­sion. In 2001, Scott was pro­moted to his cur­rent role as Senior Vice Pres­i­dent, in which he over­sees Wheels’ Sales, Account Man­age­ment, Account Tran­si­tion, Mar­ket­ing and Inter­na­tional depart­ments. He has also served on the Wheels Board of Direc­tors since 2005.

Scott has more than 25 years of expe­ri­ence in strate­gic mar­ket­ing, busi­ness devel­op­ment and man­age­ment con­sult­ing, hav­ing held executive-level posi­tions at Chicago-area com­pa­nies NutraSweet, Sara Lee and A.T. Kear­ney. Ear­lier in his career, Scott worked as an engi­neer for the Cadil­lac Motor Car Divi­sion of Gen­eral Motors Corp.

[email protected]