Business model breakdowns: ag equipment dealer Titan Machinery, with Shane Thomas

0:02If you look at 10 or 20 years from now, and again, even if you don't believe in the future of electric weeding and those sorts of things, the future of where crop protection is going to be enabled, a lot of it is going to come from the actual pieces of equipment.

0:17Shane Thomas: Hello and welcome to Ag Tech So What? Brought to you by Tenacious Ventures. I'm Sarah Nolet and back here again with my co-founder Matthew Pryor. Hey, Matthew. Hey, Sarah. And our friend Shane Thomas from Upstream Ag Insights. Hey, Shane. Hey, Sarah. Well, we are building on our first two episodes that were business model breakdowns. We did one on co-ops and one on Monsanto. Both got actually a ton of really strong engagement. Quick take from me on the Monsanto one. I was thrilled with how many folks got back to us on how incredible of an experience they had to work inside Monsanto. We had over a dozen employees, ex-employees, just saying what an incredible culture it was and how amazing it was to work there.

1:03Shane Thomas: So that was somewhat unexpected for me, but a really positive thing from that episode. Well, today we are going to another part of the ag industry, and we're going to talk about agricultural equipment and, in particular, dealers. And I know that a lot of these are private, so we're going to look at this kind of through the lens of one of the equipment dealers, which is Titan Machinery, which is a listed company. and what we can learn from them and then a little bit of what we think that might mean for the future. So Shane, maybe starting with you, what is Titan Machinery? Give us a bit of the high level.

1:39Yeah. So Titan Machinery is the largest CNH dealership in the world. They have about$2.5 billion in revenue, primarily coming from selling agricultural equipment and the parts and services that support that along with some construction revenue as well. And they sell products like Case IH and New Holland and Case Construction equipment. They're based in the United States, but they have about 144 locations total, with 90 of those in the Midwest US, some in Eastern Europe, as well as some locations in Australia too. They are one of the largest dealers for CNH and one of the only publicly traded ones.

2:19And so they give a good lens of, you know, margins, revenues, business segments, and the dynamics around ag equipment sales and ag equipment dealers.

2:29Shane Thomas: And a lot of that's why we want to talk about dealers. I've heard many conversations that just talk about equipment or equipment companies. And there's not enough nuance in who makes it, who sells it, that kind of thing. So pretty interesting area to dig into. Matthew, why were you excited to talk about dealers? I just like it's the agist of ag, right? Like equipment dealership is just where it all happens, where the big iron gets moved. And in terms of business model, you know, it's such a cornerstone of how economic value flows through agriculture. I mean, we talk a lot about ag retail as well, but I think between equipment dealerships and ag retail in the end, that's where the rubber really meets the road in terms of economic value flows.

3:20Shane Thomas: So I think most people think like a dealer is on a tractor shop, like a physical place that you go in and buy a tractor. What is it actually, Shane? I mean, that's one part of it, I guess. The dealership is where the equipment from the egg equipment manufacturers either sits on a lot. That's where it transacts with the farmers. And so you have the dealers that actually have customer relationships with the farmers and sell pieces of new and used equipment, whether that's a combine, whether that's a tractor, whether that's some sort of tillage implement, they are the ones that sell that equipment to the farmer.

3:54And that's kind of the core of the pillar foundation of their entire business. But then on top of that, there are three other segments that support it and drive it. And one of those is parts. So the parts that go for something that breaks down on the tractor or the combine is the next component. And then the third component is really the service. So going out with the technicians to bring the parts, deliver the parts, actually put the parts onto the piece of equipment and support the farmer in getting their equipment up and running. And so you'll hear a lot of talk in the dealership world of really supporting customers and minimizing downtime.

4:30So if a farmer has an issue, really part of their business model where they add value is ensuring that if somebody that has bought a piece of equipment from them or has a piece of equipment that they can service, they get up and running and into the field as quickly as possible. So that's kind of the third component. And then you have rental, which is typically the smaller or the smallest portion of the business specific to Titan, especially, but these all have different revenue numbers and margin structures around them as well. Really, it is that first sale of that large piece of equipment that drives all the other parts of the business over time.

5:07Shane Thomas: And how should people think about a dealer in terms of distributing for one OEM or manufacturer or many, especially in ag? I guess the answer is it depends. So you have like the John Deere's of the world where it tends to be, if you're a John Deere dealer, you are a John Deere dealer and that's what you sell is green paint. If you're the CNH side of things, it used to be you sold New Holland, so blue paint or KSIH red paint. What you hear now is the purpling of that segment where you have the initiative from the new CEO at CNH, Garrett Marks, to really get both those colors under one roof. And so they're selling multiple different colors now.

5:46And then you have the, call it, Eggco dealerships. There's other ones, of course, Kubota and different players' class, a lot of different machinery and equipment companies. So there's some nuance there, but generally they are selling, call it, one to two brands sort of thing.

5:58Shane Thomas: And you mentioned before like different margins and different kind of operating models there. How should we think about margins there? Yeah. So on the equipment side of things, that's obviously you sell a$500 ,000 tractor, really big total revenue, but really thin margin. And the margin structure specific to Titan is going to vary depending on where you're at in the equipment cycle. So the commodity cycle and just how profitable farmers are, for lack of a better term. when things are really good for a company like Titan, you'll see 13-14 % gross margins on that. Where we're at today in the cycle, you're more in that 5-6-7%.

6:37So pretty low, pretty thin margins by most measures. And then you get into the higher margin segments. And this is really the parts where they're making about 30 % gross margin on the parts side of the business. And then if you get into the service, you're even higher than that, you're at about 60-ish percent, 65 % gross margins on that. and the rental side of things, you know, 25%. But what's interesting is when you kind of bring all this together, you have about something like, I don't know, 75 % or so of the revenue coming from the actual equipment itself. But when you look at the total gross margin for a singular dealer, for example, you're going to have about two thirds of your gross margin dollars coming from the parts service and rental side of it.

7:21And so you can really see how the driver of profitability comes back to that parts service rental side of things. And one of the kind of key KPIs and metrics that you'll hear people in this industry talk about is absorption rate. And that's really the percent of your operating costs that can be covered by that gross margin from parts service and rentals. In an ideal world, I think everybody targets 100%, meaning when you get into a downturn sort of scenario like we are now, you can have 100 % of your costs covered by your parts service rental side of things. Where Titan is today is about 75 % absorption rate.

7:59So about 75 % of their costs are covered by that parts service rental side of things. And they've been as high as 82, 83 % when things were a little better, but that's kind of where they're at today. But everybody ultimately is trying to get closer to that 100 % side of things.

8:14Shane Thomas: You talked about the kind of absorption rate and why that's important and how it's counter-cyclical. One of the other ones to maybe pull a thread on is how big some of this equipment is and how much these are big capital expense items. And yet the margins on them and how much that can contribute to the overall performance of the business relative to the margins in some of the other segments is actually kind of really distorted. So I don't know, those two things really are interesting to me in terms of the business model and how you might think a dealer makes money, which is like sell really expensive stuff, and how they actually make money, which is kind of the optimization across the revenue streams and really thinking about margin.

8:53Shane Thomas: Matthew, what comes up for you when you hear about kind of dealers 101 and Titan? I found this part fascinating, actually. That idea actually inverted what I thought was true about the difference between what you called absorption, Shane, which I think is fascinating and totally makes sense now that you've explained it that way, which is basically that if they've got their parts and service business right, then they're kind of covered. And so their equipment sales then are what does all the margin contribution and helps them ride out the hard times and make hay when the sun's shining, which totally makes sense when you then think about the primacy of the trust relationship, the availability of the parts, the speed with which they can get broken equipment back up and running.

9:41Yeah, it's really interesting in terms of how that positions you as a dealer. If you can have a 100 % absorption rate, for example, because all of a sudden now you get into the times like we're in today where you're not as desperate to sell machinery at a certain price so that you can meet ends meet so to speak and so now all of a sudden you can sell it your lower margin and still be okay and now all of a sudden your install base is higher for the future which allows you to get more parts and service and revenue it's a flywheel of course of sorts and if you listen to heightened for example talk on their calls they'll talk a lot about how do we optimize our dealers so that we can get the right sort of setup in place so that we can better serve our customers, have that downtime decreased, have them want to come purchase from us.

10:26That further increases our ability to manage our absorption rate and expand and eat up market share and support customers better. Specifically today, you'll hear a lot of these groups and Titans specifically talk a lot about consolidation of dealers. John Deere started it actually in like early 2000, something like that, whereas it's been more just on that sort of edge for CNH more recently.

10:49Shane Thomas: The piece we hear a lot about is like right to repair and like farmers frustration with that. So I'm curious how you guys think about the dealer's business model of, okay, build the install base. And then you're thinking about margin optimization and wearing through cycles with the farmer experience. Because on one hand, it's like, well, there's opportunity to discount this big capital cost. But on the other hand, it's like, I've got to get this crop off and availability of parts and service or my ability to fix it myself. Like, how do you think about the kind of tradeoffs for the user? Yeah, I mean, there is a tension there.

11:21Absolutely. It'd be interesting to think about where does that tension rest? Does the tension really rest on the dealership? Or is it the dealer who feels the tension from the customer, but it's actually originated from the OEM? I think probably in the deal world, that feels like it's absolutely the case. The dealer is working within a pretty tight band of what they are and aren't allowed to do and what they can and can't allow a customer to do themselves. Obviously, all changing now with the right to repair. but i think i don't know shane love to hear your view on this but my guess is that tension really is felt when there's underperformance when there's overperformance it's money well spent it's when there's underperformance and no optionality when that tension really kind of turns into a fire yeah that's well said but i think same sort of vein i was just out at a farm last week where they were telling me about the changes in support they received from their egg retail and they're Like we used to do everything with this retailer, but now we can't even go in on a Saturday morning during seeding to pick up product.

12:20We love dealing with them. We had no problem paying a little bit more before, but now we can't get anything out of them. They're phoning us on Thursdays saying, hey, what do you need for the weekend? And we're like, well, we don't know yet. I think it depends. And so they're like, we're going to go to whoever's going to support us. And so I think that same sort of mentality can be applied to this situation with dealers where, you know, when support's great, it's money well spent. But I think fundamentally, maybe to bring it right back to the right to repair side of things is, you know, there's still a lot of big things that a farmer is not going to fix themselves, that there's not just going to be random mechanics running around, always available to come in and support you on that the dealer is going to be required for.

12:56I think a lot of the right to repair is when it's like, hey, I just need to do this one little thing and I'm not going to wait four hours for this person to come out. And so I do think that there's maybe a slight tension there, but I do think that it ultimately just comes back to your comment, Matthew, of like if the dealer's doing a good job, there's not going to be a lot of concern. But the reality is just like in any segment of business, there's a lot of poor exiters and differing expectations sometimes that can lead to poor outcomes and perceptions. Another thing that I didn't fully appreciate but completely make sense is the financing relationship between the OEM and the dealer and how fundamental that is to the capital allocation decisions that dealerships are making.

13:41It totally makes sense in terms of the OEMs that based on them being the manufacturer that they effectively have margin to play with, then it makes sense that they have built up these large financing organizations whose job is effectively to manage the availability of credit as that capital item passes between the point of manufacturer out to the dealer, ultimately to the customer. And so that's the first element, which is that there is finance, large scaled finance in the form of provision of credit, often from OEM-originated sources. And then often that credit is extended for a significant time period, interest-free to the dealer to sort of give them the ability to carry the equipment.

14:30But it seems like, Shane, that those pretty punitive terms, like once that honeymoon mean period expires, the dealers can really get themselves into hot water and hence the importance of those decisions. Yeah. No, I mean, I think you stated it as well as I could, Matthew. I think at the end of the day, it gives them the opportunity to be able to manage these relationships and to be able to work with farmers in a more meaningful way for the dealership to have access to that capital. You look at CNH, you look at John Deere, they're financing. I don't know the numbers off the top of my head, but you look at JD Financial, they're a very significant player.

15:04not just in equipment, of course, in inputs and other things as well, too. And so very, very influential group. But I think, fundamentally, if you don't manage your floor plan, if you don't manage your inventory, you can be upside down as a dealer really, really fast. And that's where you have to think about not only your new equipment and financing that, but the used equipment, because when you sell a new piece of equipment, you often have used piece of equipment come in, then you have to think about how do you move that. And if that sits on your lot for six, nine months all of a sudden that starts to get harder and harder to move so you have to have a plan and i think i was reading a stat one day where you know the average combine new combine that gets sold there's usually somewhere like two three four even different pieces of used equipment that come in because now someone's trying to upgrade and so you get this cycle constantly so in that instance shane you were just talking about this idea that great i just sold a million and a half dollar capital item, big, you know, header or something.

16:03I got two pieces of equipment back as trade-in and then I have to manage the impact to my balance sheet of how long I can keep that for the effective price that I paid for them, given the trade-in value. And yeah, something that I didn't appreciate either is the rate at which those used assets in particular is much more susceptible to economic conditions, given that they lose value much faster. The decisions that individual dealers or a network of dealers make about how long to hang on to a new piece of equipment, how long to hang on to used equipment, really make a difference. And as you said, Shane can put them upside down in a real hurry.

16:48And so it seemed to me really material in terms of like what would be exemplars of a well-run, consolidated dealership group. It was that kind of capital discipline to sort of see where things are going and really force the hand of the operators to say, nah, like get that off the books. You know, there's no chance that's turning up the other way. maybe that idea of like more consolidation really tight kind of corporatized capital allocation decision making and those sorts of things yeah totally because as you consolidate obviously you can move equipment to different areas and the different things rather than just being a two to three dealer like there's a ton of benefit there but i think even what you might be alluding to is you know if you look at some of the titan financials i think they moved a bunch of equipment because their inventory got out of whack starting in like late 2024 and it kind of stayed elevated and it's just starting to kind of come down now but they made some very targeted moves to say hey we're going to move this at really low margin because if this sits it's just going to depreciate more it's just going to sit on our balance sheet it's just going to be harder to move and so they moved it at a really low margin i think it was like sub one percent or something if i read the numbers accurately and so you know i always think about things from an agronomic perspective like You need to understand agronomic problems so you can go out and have a conversation about the right products to support that.

18:14But if you're a salesperson at a dealership, you have to know everything about all the different customers so that you can say, oh, I might have somebody that wants that used piece of equipment over here. And if you don't have that really boots on the ground, integrated insight into the different markets and the farmers operating there, it'd be really, really hard to move equipment effectively and profitably. And I think that's why you also see some of this consolidation, too, is just because these smaller mom and pop, one, two, three, four dealership size just can't do the same things that a Titan can do.

18:47Shane Thomas: I want to go to people, but just before we do, to me, that whole picture and the inventory example that Titan went through and the financing piece is actually, I think, part of the answer to the question of what's the relationship between OEMs and dealers. And the OEMs will have things like incentives around that, like to get the equipment to move faster or like where the commission lies. So I actually think that's, as I understand it, one of the levers that govern the relationship between the OEM and the dealer is those kind of like incentives. And I don't know if they're like rebates yet or they're but they're levers that the OEMs pulling to sort of control the behavior of the dealer.

19:22You're spot on where there'll be actual sales incentives or incentive dollars to support the dealers. And you even see this come up on CNH and Agco and John Deere calls where they'll actually say, hey, you know what, our margins were lower this quarter or this half or whatever it is. And this percentage or this amount of it is because we were giving incremental incentives to the dealers to help them move some of this log of inventory. And so that is fundamentally one of the benefits of having that dealer base there so that you can actually get this stuff moving. because used equipment is crucial to selling new equipment to have that ability to trade stuff in because a farmer's not running these things into the ground until they don't run it all.

20:02And then getting a new piece of equipment, at least not on average, you need to have that used side of things and you need to be able to bring new products in still at the same time. And so it gets to be a really synergistic relationship. There's definitely a reason that there are dealers in the equipment space and all that there's ag tech startups that are focused on going direct. And we'll see how that impacts them as they try to scale, of course. And then you get into this AI-enabled technicians where we mentioned that the average dealer is dealing with one or maybe two brands. But then when you look at their used inventory, they could be dealing with a dozen or whatever the number is.

20:38And that's a lot of manuals that you have to flip through if you're a technician. That's a lot of different systems you need to understand from a lot of different years. And so if you look at the software companies like Brilliant Harvest or Visor Pro where CNH actually has their own sort of AI system that's essentially integrating all these manuals together. And then you can do a quick AI-based search, tells you where to look, tells you what to do. But then when you start to take all that in aggregate, all of a sudden you can have all that information on, hey, we're starting to see more of these concerns with this type of product.

21:06Now all of a sudden your sales team is better equipped to go out and have a conversation about some system, for example. And then you start to look at how these can tie into that ERP side of things as well, because now you start to know how those technicians are operating, where they're operating. And so I think all of it, to your point, ties together really, really well in terms of efficiency over time with these systems.

21:26Shane Thomas: It's also an opportunity and a bit of a challenge for the talent that the dealers need. Like you're operating in regional areas, often those are losing talent potentially. And yet the complexity of what you're dealing with, like you're not just sort of selling a piece of metal, I'm sure you have a sales team, but the parts, the service, and then like the agronomic complexity and the opportunity to venture into that agronomic area of how that intersects with buy versus trade-in and when you do stuff and how to optimize utilization. It seems like the skill set of people that a dealer would need is really changing and getting more complex and yet at the same time probably getting harder to find.

22:03Shane Thomas: And yet also then AI technology generally, how can that help as kind of equipment and agronomy and inputs like blur more, I think is another avenue that we'll see change. Yeah. I mean, I think there's access to talent clearly is a problem across the board. You know, there potentially is opportunity for sort of like retrofitting a lot of autonomy rather than necessarily buying net new. The idea that some of that talent could be running in an ops center style setting. So they don't necessarily have to be exactly close to where the equipment is to deliver some significant percent of the value. And it seems to create like a parallel.

22:43So we talked about the sort of related virtuous cycles of the parts and service covering absorption and then the opportunity around the kind of capital management for equipment. I think a parallel there would be the same with parts and service. But if you had remote managed retrofit autonomy with agronomically smart tech people, there seems to be a very favorable virtuous cycle between those two loops as well. and like zoomed out a little further, if you like a Ben Thompson style approach to looking at modularity versus integration across that whole stack, it probably shifts the, you know, if that's a box and you're dividing it three ways, customers somewhere, dealers somewhere, OEM somewhere, like a fair bit of that box today is still OEM.

23:30I think those kinds of models potentially make the box bigger for the dealers and them able to sort of participate and retain more of the total margin that's available. I think the kind of stretch goal there is this probably margin that currently goes to ag retail or currently goes to input manufacturers that you can add into that box. So yeah, fascinating kind of margin expansion opportunity there. I think that's kind of related to that question of, you know, what does tech and autonomy actually unlock and whose business model is best placed to take advantage. That's a great sort of commentary too, Matthew.

24:10Because if you look at over the last couple decades, there has been a lot more precision service offerings offered at John Deere dealerships or whatever it is. And that's not only including the retrofit sort of capabilities like you'd see in one of Agco's PTX channels, for example, but also just offering new types of soil sensors and those sorts of things at different dealerships. So 100 % becomes a new sort of revenue stream. And I think if you look at precision ag, you know, I'm an agronomist. So I'm always a man with a hammer in that, you know, that kind of agronomy is, you know, inputs and those sorts of things.

24:44But precision is inherently tied to that, but doesn't couple super well with inputs itself. It's really hard to be effective with inputs, but then also understand all the precision dynamics because everything related to enabling precision application or precision capabilities ties into a piece of equipment. And so that's where there's a really upper hand of these equipment dealerships to be able to support that service and service that effectively. And if you take that kind of where you were going, I think, Matthew, too, the next step is if you look at 10 or 20 years from now, even if you don't believe in the future of electric weeding and those sorts of things, the future of where crop protection is going to be enabled, a lot of it is going to come from the actual pieces of equipment and the application of inputs is kind of tied to that, whether it's the Harrington weed disruptor, whether it's the blue light managing weeds, whether it's sea and spray capabilities, you start to look at that and it's like, oh man, there's a ton of value that actually could be captured by the dealership equipment manufacturer sort of thing that the retailer and the traditional kind of agronomy groups have to navigate and have to manage.

25:49But I think to bring this back to your point is that's margin expansion for them that I think is really compelling over time. Yeah, well, a question we continuously have about AI in particular is what is its role? Is there a world where AI sort of becomes like the commoditized productivity trap? Like the classic example there is that a better weaving loom just results in lower garment prices for the end consumer, right? Nobody manages to capture any of that improved margin along the way. And I think there's a world where that is true of AI in a lot of instances and potentially the beneficiary is the businesses that are going to get much better because of what AI will do for their business.

26:30And I think dealerships absolutely fall into that category. And I think that further underpins that hypothesis of that virtuous cycle between them getting much better, the kind of right to repair, creating degrees of freedom that aren't currently there today. and the inexorable march of AI to make a lot of those things easier to do, more efficient to do, cheaper to do, less reliant on people that you have to have within 50 miles of wherever the equipment is.

27:02Shane Thomas: So that's like one sort of branch of the tree is like the optimization of dealers and agronomy. The other like I guess leading indicator that I've heard in dealers is just call centers, like just like how the service dynamics and the demand for like real time 24-7 support that we see in the rest of the world is playing out in agriculture. And so dealers using things like call centers. And then you think about someone like Titan who operates in multiple geographies. And you could even imagine one call center like, you know, Australia is sleeping when the U.S. is awake and vice versa. And so some of the economies of scale that you get in multi-geography, which all of that That goes to me to be like, on one hand, the power of the existing ag infrastructure and like how much access to capital and support and how hard it is for an ag tech startup to disrupt that.

27:52Shane Thomas: But then on the other side, like, you know, as they get bigger, it's more fragile and these kind of opportunities exist. One of the other dimensions that ag tech startups are trying to disrupt in or play in is like just to go direct. And you see that a lot with some of the autonomy startups. Obviously, Swarm Farm Robotics is one of our portfolio companies. What do you guys reckon about the strategy of we don't need the dealers or a vision where the dealers are actually not really adding a lot of value in these relationships and actually going around them could make sense? I know, Matthew, you've had lived experience not in the autonomy space, but in building Observant, like you had to think a lot about distribution, you know, a smaller piece of equipment at a different time.

28:27Shane Thomas: But obviously some lived experience of what goes in the channel versus what can go direct. Yeah, I mean, in the end, you're in a very physical world and a significantly harsh environment for equipment. And you can't do anything about the fact that stuff breaks. So then when we talk about dealers, I think fundamentally it's the trust of being able to know that I can get out of a jam quickly. You know, technology, digitization and bits and bytes don't offer all that much. I mean, it is drone and drone delivery. And, you know, there are things that might move at the margins. I think it's more likely the case that that's a psychological underpinning that, you know, that local person is going to have my back.

29:11But if I can then build up all these other services that are much more digitally delivered, then I think it probably creates stickiness and an opportunity to go after other margins like Shane was talking about. I think that's probably the more likely thing than like seeing everything go to farmer direct, which has been persistently shown to be very, very hard to scale. Yeah, I think it would be hard for sure. It's interesting if you like come at it from if I'm carbon robotics or if I'm farm farm, for example, but, you know, it probably comes down to just first principles of like, well, what does that farmer need?

29:51Like what is actually being delivered from the dealership? Of course, it's this support side of things, but what does that support actually mean? We need access to physical parts in a timely fashion. We need access to diagnostics in a timely fashion. We need access to the actual support of the person to walk us through that. The kind of baseline is, well, we have dealerships, but I'm sure there are ways around that. You have to get creative and do a bunch of unique things to deliver on those sorts of promises to that farmer to give them confidence that they can buy from you and that you're going to get them up and running when they need.

30:26But I assume that there's ways to get creative. And part of that is probably going to come from AI sort of capabilities. Like what does it look like if you have an actual piece of equipment that is connected to Starlink all of the time that can have a diagnostics ran through it? Again, I'm theorizing here, but essentially that would give you the diagnostic component. And then if you have the support component where it's AI, you can talk to somebody any day of the week, any hour of the day sort of thing. You just hit on two of the three, then what does it look like to have a parts infrastructure in place so you can get the part you need?

30:58Is that a 3D printing capability? I'm just spitballing here, but you can start to see where it is probably how those groups think. You guys correct me if I'm off, but I'm assuming that's kind of how they would start to think about things is from those sorts of first principles. Yeah. I mean, I think an element that's important here and something that we've talked about a lot before is that, you know, don't confuse the user for the beneficiary in add equipment, the user and the beneficiary are the same as the farmer. And so fundamentally, that's who you're managing for. And so I think, Shane, everything that you've said, I would put into the category of, you know, if you believe that farmers fundamentally are risk managers, then nothing about the way they get the equipment or that the equipment is serviced can take risk mitigation out of their hands.

31:42You can't limit their degree of freedom. And you can't limit their ability to mitigate a risk or to feel like they've got the ability to mitigate the risk. And so I think there's a risk here that are conflating direct versus non-direct with the real issues, which are self-determination and ultimate governance over risk. And that could be you want to transfer it, i.e. it's a warranty issue and come and fix the thing. or like if I want to go somewhere else and this dealer can get there faster than that dealer can, that's the choice I want to be able to make.

32:16Shane Thomas: I think it's such a fundamental distinction because it's different in the input side of things and goes to the core reason why some of these startups, I believe, want to go direct is it's not, in this case, so much about margin, but so much about the frustrations that farmers feel of the limitations of the dealers and that they're not there when something's broken and that they can't fix it themselves. And so it's really that like customer pain point that they're solving. And then it's to Shane's point, like, how do you come up with a business model and a go-to-market and how does autonomy and AI and new models change things that might mean a future without dealers is more possible than it has been in the past?

32:51Yes. Like dealers themselves aren't the issue. It's when they operate in the form of like a tightly controlled franchise-like dealership, that some of those constraints are what kind of get in the way of the farmer being able to make the choices that they want to make. So I think that's more likely the thing that will break down than whether or not there are regionally located, large, service-oriented businesses that deal in both equipment and in complementary services.

33:24Shane Thomas: Matthew, break down that difference a little bit more because I'm not sure you use the term franchise there, but what do you see as the two differences? So I guess it would be the difference between when you go to a gas station or a service station and there's a shop there and you can buy lots of different things as opposed to an in and out or a McDonald's, like you get exactly what's on the menu. And it's great because I know what I'm going to get, but I can't kind of go off plan much. And so I think because historically, especially in the Deer case, have run as dealerships that are part of a tightly controlled, effectively franchised, they're not franchises, but like in the kind of conceptual sense, not in the business and legal sense.

34:07Often then we conflate those two things together. It's just like that large local business that I buy my equipment from and my service from is tightly coupled to the original manufacturer and therefore the rules that they operated with inside and therefore what I can do are all determined by that. I think we will start to see an erosion of the rigidity of the relationships more so than we will see structural changes in the sizes and activities undertaken by those businesses.

34:36Shane Thomas: Yeah, got it. And another thing that could change, and I'm keen to hear Shane, if you're, I realize I'm being very Australian. I've said Keen at least twice. I've said Reckon at least twice. This is like I'm fully into the Aussie mode on this podcast. I'm interested, Shane, in your thoughts on something I've heard a lot, like the tail wagging the dog, like just as these dealers consolidate and as they get bigger. I mean, Titan is not a small business. What power do or will dealers have back the other way over OEMs? My high level thoughts would be having never operated in that segment. So I don't know exactly how the power struggle is by any means.

35:12But, you know, as heightened today is as reliant on CNH as CNH is on them in a lot of ways. But I think to get to your question on that, Sarah, is you start to look at, they could theoretically go somewhere else. And there's been talk, I've had a lot of questions come in of like, well, what happens if Chinese manufacturers start to come in? And what does that look like? But you could even ignore the Chinese side of things and just say, hey, you could start to bring in more Eastern European manufacturers into North America or whatever, I think those options are there. I think, you know, the challenge probably becomes more just like any other industry of like marketing, like I want a Coca-Cola and a farmer might not know this brand.

35:50And so how long is it going to take to build up the brand and the recognition and awareness of these other players and give them the confidence that they can spend whatever it is, a half a million dollars, and it's not going to break down in the most important time of the year. And so there's probably some flexibility, but brand is a power. if we're looking at the Hamilton Helmer sort of seven powers framework here in North America and Australia, I assume too, for sure. It's very much a farmer wants the red or the blue or the green or whatever. And it would take some time to really get them open to some of these other tractors or pieces of equipment that they'd be open to.

36:25So that might be more of the challenge that would come up.

36:27Shane Thomas: I think that's a good chance to go to takeaways here. There's obviously tons that we covered. We didn't get a chance to unpack that China and kind of disruption from that angle more, which I think is fascinating. And the role of dealers in offshore equipment's ability to come in and kind of undercut current markets is a whole other dynamic there. Takeaways in particular for like startups or ag investors in learning about how the current world works and thinking about how it might change in the future. What takeaways do you have? I think for me, I'm fascinated at the role that technology could potentially play along that kind of modularity versus integration.

37:09I think that for a significant period of time, we've seen pretty static boundaries in that regard with respect to OEMs and their dealers. But increasingly, we've touched on, but not really talked about, kind of incumbents being challenged by either new players, new models. potentially new vertically integrated net new entrance the defense of the delivered value to farmers will be really important and so I think therefore the parts and the delivered service stay as really important in resisting that and so I think that as we've touched on those are areas where technology will be enormous enablers and kind of vertically integrated solutions dealers as major customers, dealers, as potential acquirers even that we didn't really touch on in terms of like, maybe some of them have an aspiration to really take that challenge on directly.

38:03It would be brave and probably need some brave capital behind it. But yeah, that would be fascinating. I'm really looking forward to see how that plays out.

38:11Shane Thomas: Shane, what do you got? Yeah, I think one thing that sort of stands out to me, if you're a startup, for example, And, you know, I've heard people say, well, you know, a dealership could acquire some ag tech companies or so-and-so could acquire these companies. But the reality is if you look at the multiples that Titan is paying for some of the companies that they've acquired, you know, your three, four, five X EBITDA sort of thing, they're really, really low multiples. When you look at how startups get valued, some of these are crazy, you know, it's 15 X or 20 times a revenue or something even crazier than that.

38:43It's really hard to absorb that for an actual dealer. And I think Sarah and Matthew, we talked about that previously, but to kind of tie that into, if you're a startup and you're either hoping to get a relationship in with these dealers, or you're trying to get in with the dealer, because there's a lot of mismatched incentives in the sense of if I'm a dealer, I want to spend my time selling equipment so I can get my install rate up. You can go in there and say, Hey, we'll give you 50 % of this$50 ,000 system, but then you have to learn how you spend all this time, all these different things. It's still hard to get distribution.

39:16I think really understanding the problems and challenges of the technicians, for example, really understanding where the margin comes from within these dealers gives you a good understanding of where you can go in and have an impact in supporting them so that you can get their attention a little bit quicker, or maybe just have it resonate a little bit deeper so that you get more of their time so that you have the potential to get access to the market via them would be the kind of takeaway that stands out to me because there's a lot of just misaligned incentives mismatch sort of multiple numbers that kind of come together here.

39:49I think that there's a lot of dealers and groups that are interested in learning new technology and deploying new technology. I think it's just about understanding where and how they are going to see upside and benefit in the context of their business that needs to be painted for them.

40:04Shane Thomas: Yeah, my takeaway is related to that around the so what for startups and for investors and startups in this space and what are the real advantages of the existing system and the access to capital and the access to finance on the equipment side. And we talked about with inventory and smoothing and then the physical location and the capital that that takes to set up and then the install base and the dual monetization strategies of the install base and ability to weather the cycle, whereas a lot of startups are starting fully from scratch. And so not that any of that is a reason that it's not a good space.

40:37Shane Thomas: It's actually lots of ways you could think about disrupting or margin reallocation, but just, again, understanding why it is the way it is, how it works today, and then where you think it's brittle or where you think there's opportunities to change is where the magic can come from. So awesome. Thank you guys so much for this one. And for anyone listening, if you've got another specific business or type of business in ag that you want us to break down, kind of have a conversation like this about business models in the future, please get in touch and let us know. And anything we got wrong about equipment dealers or Titan Ag or Wright, we'd love to hear from you.

41:09Shane Thomas: So that's it for another episode of Ag Tech So What? I'm Sarah Nolette. Catch you next time.