Transcript of “Creating Competitive Advantage” Webinar for Shell Marketers

Presenters:

Jennifer Richards, President, National Association of Shell Marketers (NASM)

Jennifer Richards has been with NASM since February 2004, and her duties include overseeing the day-to-day business of NASM, association membership and marketing, convention planning, financial management, and communications. Jennifer is well-versed and experienced in the Washington, DC policy and association fields. Jennifer holds a dual degree in International Studies and French from the University of Idaho. Prior to joining NASM, Jennifer worked as the membership coordinator for the Satellite Broadcasting & Communications Association. Jennifer resides in Stafford, Virginia.

Chris Santy, Managing Director, Patriot Capital Corporation (PCC)

Chris Santy brings more than 15 years of equipment finance and leasing experience focused solely on the Retail and Commerical Petroleum industry. Prior to his efforts at Patriot Capital, Chris ran the Southeast Region for Tokai Financial Services, a division of Tokai Bank of Japan, soliciting and funding transactions and vendor relationships in the office equipment segment. Chris is a graduate of James Madison University. As the founding member of Patriot Capital Chris, together with the tenured staff have grown Patriot from a small, regional organization to its current position as the largest equipment lender focused on the retail and commercial petroleum fueling space with offices throughout the country. Chris cites the company’s aggressive sales approach, true customer focus and outstanding banking and Manufacturer/Distributor partners as their key to continued growth and success.

Webinar Transcript

Jennifer Richards, NASM: Good afternoon, everyone! I would like to thank you all for joining our webinar, “EMV – Is the Glass Half Full?” Our speaker is Chris Santy, Managing Director of Patriot Capital. Chris brings more than 15 years of equipment finance and leasing experience focused on the Retail / Convenience Store and Commercial Petroleum industries. Chris founded Patriot Capital, and, with his team, has grown Patriot Capital Corporation from a small, regional equipment financing organization to the largest equipment lender in the retail fueling and commercial fueling industries. Patriot Capital Capital was honored in January 2015 as the Best in the US in equipment financing by the PMAA, Petroleum Marketers Association of America. And with that, Chris, I thank you for your time today.

Chris Santy, Patriot Capital: Jennifer, thank you very much for putting this webinar together. We’re proud to be longstanding NASM (National Association of Shell Marketers) members. We appreciate everyone who’s in attendance today. And as Jennifer had mentioned, the title today is “EMV – Is the Glass Half Full?” The purpose of this webinar is to give fuel marketers and C-store owners some ideas, thoughts, and education around EMV and the impact EMV requirements may have on their retail business, discuss some of the challenges that might face NASM marketers, and also some ideas to help make the EMV spend something that has a better ROI, and is of greater benefit to the Shell marketers on the phone today, and as well as all NASM members. So, with that, let me go ahead and get started.

Firstly, a couple of disclaimers. The materials presented are based upon Patriot Capital’s research and perspectives. Please contact your advisors for specific advice regarding taxes, accounting, and payment and fuel equipment decisions. Materials in this presentation are confidential and intended only for Shell marketers participating in this webinar. With that being said, the agenda is as follows. [With] the change in landscape in retail petroleum, we’re going to talk briefly about some of the recent capital market changes. We’re going to dig a little bit deeper into the regulatory changes that come with EMV. Specifically, what are they, when did they occur, and why. The second purpose of the webinar today is talking about ways to leverage EMV to create a competitive advantage, such as operational efficiencies, improved customer experience, and capturing new contacts or contracts.

First off, I’m sure C-store operators have noticed the good old days are back, in terms of the capital markets. Rates are at a generational low, credit and liquidity is free-flowing into the markets again, and it’s a great time to be a lender, from our perspective — but it’s an even better time to be a borrower for equipment. So why is that? Interest rates are as low as they’ve been in the generation. It’s easy to get money today, and equipment financing has become more aggressive. At the same time, spreads have remained very, very low because there’s a lot of competition in the financial marketplace. With that, it becomes more important than ever with EMV on the horizon to make sure that as a fuel marketer, you’re employing the optimal mix of financial instruments. Meaning, what are you doing with your bank to prepare them for what’s coming up with EMV? Is your bank line of credit in place? Is your senior lender relationship optimized? Do you understand the appropriate or proper relationship for the upcoming equipment spend that you and your dealers will be making? With all the things that are going to be occurring around EMV, and that may mean dealers who need equipment, jobbers who need equipment, jobbers who choose not to make the migration, and maybe up for sale. Are you considering dealer locations that may come up for sale and how that would fit into your business strategy? Think about your capital stack holistically and say, “What are the parts and pieces that are best served for the various needs and opportunities that may come with EMV?” We will also cover Section 179 Accelerated Depreciation impact on taxes and other considerations. I would like to make one thing very clear before we go into Section 179. Section 179 and Bonus Depreciation is an extremely attractive write-off benefit, which came back through Congress and was approved in December of 2014 for the tax year of 2014. It has not been reapproved for 2015, but with the Republican Congress and the Republican Senate, everything we are hearing and everything the market is starting right now is that it will be reapproved for 2015. I’d advise you to talk to your accountants, talk to your bankers regarding Section 179, and whether or not they believe that that’s the appropriate write-off for your business. I’ll go into the details of Section 179 shortly.

The capital investment alternatives for the EMV spend are really the things that you as jobbers see every day. We’re coming out a great margin year in 2014, both for jobbers and for retailers, and your cash position is probably healthier than it’s been in recent memory. Now together with that, you’ve got your lines of credit tied to your hard assets, possibly tied to accounts receivables. The other two options are equipment financing and operating leases. To go through these, the line of credit is cheap these days and your senior lender is probably easier to deal with than ever, and the cost of capital is as low as you’ve probably ever seen it. Equipment financing and operating leases give you a lot of benefits but they are not always the cheapest way to acquire equipment, and I want to say that out loud, and I want to say that because we’re aware of it and it’s the fact of the matter.

Another point I want to bring up is operating leases. Operating leases — or off-balance-sheet leases — are now widely available. So for those of you who are growing, who might have debt to equity covenants, who might have liquidity covenants, who might have some agreements with your senior lenders that restrict your ability to borrow outside of that senior relationship; we have the capabilities, as do other financial firms, to put together off balance sheet financing or off balance sheet leases so that it is not an asset or a liability, it’s simply an expense item on your income statement. What are the trade-offs on capital investment? Well, as I’ve mentioned, you’ve got this great cost of capital at the banks. And with that generally, comes more significant collateral requirements. What do I mean by that? Generally, banks are looking for more collateral than just the equipment. Commercially, for an equipment financing company like Patriot Capital, our only collateral is the gas pumps, or the POS system, or the underground tanks, or the canopy, or the LED canopy lights that you finance with us. A bank might be looking for accounts receivables, they might be looking for hard asset loans, they might be looking for a second or a primary mortgage on the property.

Secondly, is controlling. Senior lenders are often times looking to have a broader and greater relationship with their borrowers than simply the equipment. And lastly, the covenants that I had mentioned. Whether it’s debt to equity, whether it’s no further borrowing, whether it’s certain liquidity ratios, all of those things were seen more and more common with senior lender relationships, both in the jobber market and in the dealer market.

Now, on the other side of the equation is equipment financing or equipment leasing. None of those collateral requirements control or covenants exist. None of those apply to equipment financing. However, you’re paying a slightly higher cost. Now, why is this important to notate? This map that you see in front of you speaks clearly to EMV, and the pickup rates with EMV nationwide. So what you’ll see here is you’ll see the United States has very low EMV adoption.

But in Canada, South America, and Central America, it’s a 96% adoption rate. In Europe, it’s a 96% adoption rate for EMV. In Africa, it’s a 76% EMV adoption rate. So what exactly does the liability shift mean?

Simply put, the party causing a contact chip transaction to not occur will be financially liable for any resulting fraud or data breach or losses. Quite simply, look at the transaction scenario below. If you have a mag stripe card at a mag stripe terminal, the merchant generally is not liable. So in other words, the bank has not produced a chip-enabled card, the merchant has not produced a chip- enabled processing terminal. The merchant is not liable.Now if the bank provides an EMV chip card – and I’m going to get into how many of these chip cards are getting into the market right now but if the bank provides a chip card, and the merchant only has a mag stripe terminal, then the merchant generally will be liable. If there’s a chip card provided and a chip card enabled terminal, the merchant again will not be liable. So what we want to think about here with EMV is it’s not a mandate, it’s a liability shift. The problem is that the liability will become yours, and that liability can become quite significant. Many of the major oil brands have announced timelines that they want their brands to be EMV compliant, and I encourage you to check with your territory representative to understand the requirements for Shell marketers and Shell dealers in your area.

So where are we right now with EMV as it relates to the cards out there and the cards with chips? The Smart Card Alliance provided the following information; 120 million Americans have received an EMV chip card so far. The Smart Card Alliance states that we’re on the eve of a tsunami of mass chip card issuance. The payment industry’s consensus is that 575 million chip cards will be issued by the end of 2015. Now, that represents 71% of all credit cards and 41% of debit cards. Currently, nationwide, there are 78,800 EMV merchant locations.

MasterCard states that 63% of consumers want an EMV chip card immediately, and 87% are comfortable with transitioning to chip cards. So the important part of that is to understand that from a consumer standpoint, the message is being pushed out not only in our industry but it’s being pushed out because of the Target breach, because of the Home Depot breach, because of the various other challenges, and on a worldwide scale, so much chip card acceptance. Here are the EMV timelines. October 1 of 2015 is when the in-store liability shift is due. And then, the forecourt liability for your dispensers is October 1 of 2017. Some of the major oil brands are covering liability for an amount of time beyond October 1 of 2015.

What are some of the EMV upgrade examples?

If you’re a VeriFone user, your POS system by October 1 of 2015, you will need a Commander or RubyCI upgrade as shown. If you’re Gilbarco, the Passport needs software and a PIN pad upgrade. On the dispenser side, the Encore 700 S is a new dispenser purchase that would be EMV ready with the card reader option. The Encore S 500, the Encore 500, the Encore 300, the Gilbarco Advantage can all get a FlexPay Two Retrofit Kit. Something important to note: traditionally, you wouldn’t think that a Retrofit Kit would be a financeable item. But the fact of the matter is that at Patriot Capital, we’ve made it available, we can finance the Retrofit Upgrade Kits for dispensers nationwide. So if the right solution for you is not a full pump replacement, and it is Retrofit Kits, then that’s going to require significant capital, you can count on us to help you there.

Gilbarco also has their Secure PumpPAY to provide upgrade kits for the Wayne Vista, Wayne Ovation, and the Tokheim Premier.

On the Wayne Fueling side, the Ovation with the iX CRIND is their new dispenser, which is EMV ready with the right options. They also have what’s called an iX CRIND retrofit kit for both their Vista and Ovation model. So again, for some of your sites, you may have equipment that requires a full upgrade, some of your sites you may just need retrofit kits. Whichever path you choose, it’s important to start looking at what these upgrades might call for, who you’re going to be purchasing them from, and how you’re going to pay for it.

We strongly recommend engaging your local PEI factory authorized distributor or contractor to help you with this EMV planning.

Section 179

I mentioned to you at the beginning that Section 179 is not reapproved. So there are absolutely no promises made, but the indications and the expectations are that it will be reapproved for 2015. In simplest terms, Section 179 allows for up to two million dollars, if you acquire $2 million or less of capital equipment in the calendar year, the first half a million is 100% tax deductible, and everything else up to two million is 50% tax deductible. So if you’re looking at an EMV spend that could be $4 million, what I would encourage you to do is meet with your accountants and say, “Okay, if Section 179 comes back, how do I maximize my tax savings?”

Look at the top line of this chart. “Cost of equipment $600,000.” Remember I just stated the first $500,000 is 100% tax deductible, so there’s the $500,000 write off on the first line. Now, the bonus depreciation, everything over $500,000 and up to $2 million is 50% deductible that year. So there’s another $50,000. That’s the difference between $500,000 and $600,000 at 50%. You still have $50,000 of un-depreciated assets left, and we just, for example, say put this on a normal first-year depreciation on a straight line for $7,145. So what does this mean? This means that if you acquired $600,000 worth of equipment, and if Section 179 was reapproved, the first $557,000 would be 100% tax deductible this year. If we’re assuming a 35% tax rate, what that means is that you’ve saved $195,000 that you would otherwise have paid to the federal government in taxes.

So as you’re planning for EMV with your advisers, think a little bit about what is the best tax strategy for you, and how can you plan it out to maximize your tax savings. Understand where you’re at with Section 179 and on standard depreciation schedules, and how can you best time these acquisitions to make the most of the lowest interest rates in a generation.

So what all can be included in an equipment financing program for C-stores?

We finance virtually everything at a convenience store, or at a jobbership, or at a dealer site, and that can include everything from the dispensers and also the retrofit upgrades, the POS systems including simple upgrades, imaging, interstate signs, signage packages, car washes, EMV, car wash entry systems, canopies, LED lights, UST upgrades. Inside the store, [everything] from beer case to coolers to freezers to racks can be financed. Anything that you can think of on your site, we’re capable of helping you finance or lease – whichever type of program is best for your business. You could find more on our website, PatriotCapitalCorp.com, under EMV information. We’ve published quite a few articles that discuss in more detail EMV implementation. I also want to point out that your equipment distributor is well versed in this. So you can talk to your Gilbarco, Wayne, VeriFone, or your NCR authorized equipment distributor to determine what’s the most appropriate equipment path for your site.

A few final takeaways. EMV has global acceptance outside the US. The forecourt is the last major non-EMV target for crooks. Capital markets are wide open. Interest rates are at a generational low. The EMV rollout is going to require significant capital investment. What’s the best purpose for your capital stack? Where does your senior lender play? Where does an equipment finance partner play? Where does your cash play? It’s going to take a lot of different resources to address this, so make sure to think hard about what’s the best use of your money. Equipment financing is a tool that leaves assets free and clear. Patriot Capital is the industry leader because of our industry expertise and our hassle-free application process. We’ve got reps throughout the country who are able to meet with you personally, to help you understand our various programs. We’ve got a promotion going on for the Veeder-Root 450. It’s 2.9 and 4.9 financing. There’s going to be an announcement in the near future that speaks of some additional promotions that I think are going to be very exciting. Please be on the lookout for them. All of these promotions offer industry’s lowest rates. If there are any questions, I’m happy to answer them. We’ve been a proud NASM member for eight years.

Jennifer: Thanks, Chris. There was one question that came through on the chat feature here. Why haven’t Chevron, Valero, and 76 come up with an EMV plan like Shell has?

Chris: Wow! So I can’t speak for other oil companies and what their intentions are, or what they’re planning to do. What I would say is that I think all of the major oils are focused on this. If they haven’t come up with plans yet, I think they’re probably on the horizon or in the planning stages.

Chris: Well, thank you very much. Jennifer, I really appreciate the time. I appreciate you setting this up for us. I hope it was valuable to the marketer members, and if there are any other questions that come up, please don’t hesitate to call.

Jennifer: Sure thing, yes. Great. Well, thanks, Chris. Thanks, everybody else for joining us as well. Once you close your browser window, please give the page a minute to redirect you to a very brief survey. Your comments are very important to both NASM (National Association of Shell Marketers) and to our speaker. Thank you again, everyone, for joining us, and I hope you all have a wonderful day.

Chris: Thank you.