Diversifying into construction equipment.

Almost half of the Gehl Company's current revenues come from a business that didn't even exist for the company ten years ago - light industrial/construction equipment manufacturing.

The Gehl Company, of West Bend, WI, has built agricultural equipment for all of its 138 years in business,

William "Bill" Gehl, company president and CEO, credits the skid steer loader for enabling the historic ag company to enter - and find success - in the construction equipment market. Already a popular product with agricultural customers, the skid steer loader was redesigned in 1985 for cross-over marketing aimed at contractors and other light industrial applications.

"We continued to sell skid steer loaders through our ag implement dealers, but we started an entirely new sales and marketing effort aimed at the construction industry," Gehl said. Thus, a dual distributorship for the skid steer loader resulted.

The company's diversification into construction equipment manufacturing continued with the 1987 acquisition of the DynaLift rough terrain forklift and the addition of a line of small asphalt pavers to its construction line in 1991.

To continue to grow the business, the company needed access to additional capital, so it offered stock to the public in November 1989, opening at 14-1/2, and selling about 80 percent of Gehl shares. For the first time, the majority of Gehl stock was held outside the family.

Developing a company focus

Despite filling niches in both ag and construction segments, Gehl was hit hard by the recession of 1991 and 1992. The company was in deep financial trouble - to the tune of $37 million in losses. Sales of their products just about came to a standstill, and Gehl stock fell to 2-3/8.

"Ag markets were slowing and the price of milk was low. At the same time, construction equipment sales also came to a halt," Gehl said. "The company had financed a lot of field inventory which stood on dealer lots, so we had a tremendous amount of debt service to pay. Our operating costs plus our heavy debt caused the company to literally start hemorrhaging financially."

A management change put Bill Gehl, a third-generation member of the family and a member of the board of directors, in charge of the company. He was a lawyer by profession, with additional experience in investment and brokerage. Victor "Vic" Mancinelli, formerly of W.H. Brady Company, was hired as the company's chief operating officer. The immediate goal for the company was to stop losing money; the long-term goal was to return the company to profitability.

To counteract the financial losses, the company underwent a severe downsizing in terms of both people and products. Gehl's product line was redefined and company goals were readjusted, efforts that brought quick results. In 1993, the company met the first goal - they broke even instead of losing money. In 1994, the company made about $5 million profit, followed by record earnings of nearly $9 million in 1995 and $9.6 million in 1996.

Bill Gehl summarized the redirected thinking that carried the company past the rough financial times: "We first had to recognize that Gehl Company, given its size and resources, couldn't be all things to all people. So, over the years, we have reduced the number of product offerings in order to get the organization focused on our core products to which we can add value and support with appropriate customer service. We believe this will result in improved sales for our dealers and improved satisfaction for our customers.

"In brief, our manufacturing and marketing strategy is to tightly focus on fewer numbers of products and to deliver better products with enhanced features for our customers. That's important ... given the size of Gehl versus our larger competitors that have far more resources than we have."

Economy directs expansion

Company expansion is still a priority, accomplished mostly by acquisitions and partnerships. Phased growth and increased capacity plans depend on the market and the economy, according to Bill Gehl. In 1996, because of increasing demand for the construction products, Gehl started an expansion project to double the capacity of the Yankton, SD, plant, which produces both the telescoping rough terrain forklift and the paver line, and first phase of additional production capacity at the Madison, SD, plant, which produces the line of skid steer loaders.

"From the company's decision in 1986 to diversify into construction, that side of the business has grown from zero to about 45 percent of our total revenues," Bill Gehl explained. "In order to continue to maintain and grow market share, we have to expand those plants."

He says the real key to the growth and popularity of the skid steer loader, which remains the company's best selling product volume-wise, is the multiplicity of uses for the machine. The number of attachments for use on the skid steer loader has proliferated, as have the number of applications, which Bill Gehl calls "critical drivers behind the machine."

"It's gone beyond what it was viewed as traditionally - a machine to move and carry dirt and manure on the farm," he said. "Today's skid steer loader is a versatile mobile power source on the farm and the construction site, with higher hydraulic capacities to power such attachments as augers, tree spades, sweepers, asphalt cold planers and snowblowers."

In December, the company introduced their dealers to two new larger skid steer loader models, the 5635 and 6635, which were redesigned from the ground up. The new 35 Series models feature more engine power, increased lifting capability, an extended wheel base, better visibility for the operator and an enlarged operator's compartment.

Ag focus on dairy states

While expanding the construction side of the business, Gehl has continued to invest in its agricultural line of products which is produced in West Bend, where Gehl headquarters are located, and in Lebanon, PA. However, the agricultural market is more targeted than the construction market.

The market for haying and forage equipment, for which the company is traditionally known, is primarily the dairy states of the Midwest, Northeast, Middle Atlantic and South. The target market is the small and mid-sized dairy farmer who grows a high percentage of the feed for his own cows that are milked on the farm.

In addition to the skid steer loader, of course, Gehl offers many products for its agricultural customers: forage harvesters, blowers and boxes, running gears for forage boxes, mixer feeders, disc mower conditioners, swing frame mower conditioners, disc mowers, wheel rakes, round balers, side delivery manure spreaders and box spreaders. Bill Gehl says the company looks at several of these products, such as the total mix ration mixer feeder and the disc mower conditioner, as having growth potential, even in a mature market.

"For example, the TMR mixer feeder is a popular machine for the dairy farmer who is trying to improve his productivity through a more consistent and better feed ration for his animals," he said.

He believes the company can remain competitive in both the agricultural and construction segments by continuing to improve their products and by offering products with higher value in niche markets. The company expects markets to grow for the round baler and other haying equipment. The round baler business is important to Gehl, and it is an area in which the company plans to devote more R&D resources. In haying tools, the company plans to emphasize wider disc mower conditioners because the technology is improving and the market for the machine is growing.

Markets for the patented V-tank, or side-discharge, manure spreader, which was completely redesigned in 1996, are also expected to increase. Case in point - in January, Gehl and New Holland formed a new partnership agreement in which Gehl will manufacture a V-tank that will carry the New Holland brand. It will be sold through New Holland dealers. In exchange, Gehl-branded box-type manure spreaders will be manufactured by New Holland and sold through Gehl dealers.

"Such agreements offer Gehl Company the ability to focus on manufacturing fewer products while enhancing efficiencies in operations. Additional partnerships and manufacturing agreements will allow for growth and reduced operating expenses. By carefully managing our manufacturing resources, Gehl will be competitive in the niche markets which have been served by the company for the past 138 years," Bill Gehl said.

Gehl's exports outside North America account for 15 to 17 percent of sales. The ag segment, which has exported since the 1940s, has successfully extended into several countries where dairy operations and crop conditions are somewhat similar to those in the US - Australia, New Zealand, Japan and a number of countries in Latin America and South America.

The skid steer loader is the most popular Gehl product worldwide. Europe has an established distribution system, directed by a former Gehl employee in Germany. Recently, the machine has opened the door to markets in Eastern Europe, the Middle East, Korea and South America.

Dealers as partners

To reach both the ag and construction segments of their market, Gehl kept the ag network that has existed since the company's early days and developed a separate distributor network of construction dealers. Today, the construction network is nationwide, with 110 construction dealers in approximately 275 locations, enabling the company to react quickly to regional changes. The ag dealer network includes approximately 550 dealers located primarily in the targeted dairy production states.

"In construction, the benefit of having broad distribution in major markets across the US is that we're able to participate in the strong activity when and where it occurs - and it does move around. When construction trends have an upturn in one part of the country, it buffers the effect of a downturn in another," Bill Gehl explained.

Gehl sells products strictly through its dealers. Although there are no protected territories per se, there is almost no overlap between dealers serving the same industry or between the two sides of the business. The skid loader is the only product that both types of dealers handle, and construction dealers are more urban by nature, so any overlap will generally be in a fringe area.

Bill Gehl says the dealer distribution is critical because of the service aspects of the business. "We consider our dealers to be our partners. They are the front line for delivery of good service, and that's important to us and important to our end users."

He calls the field sales forces on both the construction and agriculture sides of the business important intermediaries between the dealers and the company. The field sales force helps dealers develop realistic business plans for the following year, determine what market shares to expect on specific products for their areas, increase sales and be better dealers for Gehl.

"Our intent is to help our dealers improve their businesses by devoting sufficient resources to that effort. Not only do we want to provide them with new and improved products, we want to provide them with appropriate backup and service, too," He said.

What does Gehl look for when selecting dealers? One key element is financial capability - a fiscally strong dealer who can continue to provide equipment and service the end customer. Another important factor is overall management, knowing what they want the business to accomplish and having an overall business plan.

"We look at how well they provide service, if they have adequate parts people, if they have a knowledgeable sales force and good technicians who can service the machines properly, and if they are well positioned in the markets in which we want to serve customers," he said.

Looking ahead

"In agriculture, we don't see ourselves venturing much beyond our well-established product niches," Bill Gehl said. "Our strategy is to grow the business in a controlled way, capitalizing on our expertise in those niches and improving the delivery of the product to the customer by continually upgrading our dealer network.

"In construction, the strategy is a bit different. We want to enlarge our offerings with a more varied product line. We believe we can leverage the strengths that we've developed in manufacturing and marketing to take on additional products that fit well into our current distribution. We see a trend of continuing growth in the light construction equipment market, and we plan to participate even more."

Gehl Company 143 Water St., PO Box 179 West Bend, WI 53095-0179 Ph: 414-334-9461 Fax: 414-338-7517

Chairman of the Board and President/CEO: William Gehl COO: Victor Mancinelli Ag Director of Sales: Bill Elias Construction Director of Sales: Jim Barnes Year originated: 1859 Number of employees: 825 Number of plants: 4 Financial Public (NASDAQ: GEHL)