Positioning for 2011

Veteran rental industry consultant Dan Kaplan has never been shy about being candid and doesn’t mince words when it comes to assessing the prospects for the rental industry in 2010. Sharing his thoughts with RER’s Michael Roth, Kaplan offers his views on rental fleet sizes, rental rate discipline, the international rental market and the dangers of flooding an overcrowded market with additional machines.

RER: What are your expectations for the rental business in 2010?

Kaplan: I believe 2010 is going to be a difficult year. Only the very well-managed companies will do better in 2010 than 2009. Those that have taken actions to delete or sell off under-performing assets, close underperforming branches and cut their expenses will see a better year. For the industry as a whole, it’s going to be a year of positioning for 2011, and, as in 2009, survival and liquidity is the name of game.

Big national companies are better positioned. Rental rates will remain under pressure, but I am expecting rental rates to stabilize in 2010 versus 2009 and not see a decline like we saw in 2009 versus 2008.

Do you expect any particular sectors to perform well?

Those who have industrial bases will probably perform somewhat better. National accounts are critical to the success because national accounts have a stable rental base versus no revenue base at all, although national accounts require national account pricing concessions.

So in 2010 as a whole, I don’t see any sectors particularly strong. There are stronger sectors like industrial but the key to success for the rental industry is nonresidential construction and I just don’t see non-residential construction coming back any time before 2011, maybe 2012.

Not only is there too much capacity in the industry for non-residential construction, but there are too many buildings that have been abandoned like Circuit City. They have to be absorbed before people start building new buildings to drive non-residential construction.

What are some effective strategies rental companies can use during this recession?

I believe you have to get your fleet right-sized. The problem that the industry is having today and will have in 2010 is too much capacity, there’s just too much rental equipment for the amount of business out there. Time utilizations of rental companies today range from the mid-50s to the low 60s and that’s because there’s too much iron.

That time utilization is causing deterioration of rental rates. I’m hopefully expecting to see somewhat of an improvement in time utilization because many rental companies have taken action to cut fleet.

Some companies are moving excess fleets to new markets. Any thoughts about the effectiveness of that strategy?

There are two strategies regarding excess fleet. The first strategy is to sell off excess fleet, close branches and cut costs. The second is to take underperforming fleet and open up additional branches, spread it out and drive revenue. But the problem in the industry is too much capacity, and that strategy doesn’t deal with the capacity issue. It puts more fleet into another market place and the only way that fleet is going to find a home is for it to be priced to find a home, and in my opinion be somewhat destructive.

Moving into a new city where competitors have been for 25 or 30 years and then attempt to put equipment out on rent and get time utilization in the 50s, how do you do that unless you do that on price? That concerns me. I don’t think it’s a good solution to open more branches because effectively you’re increasing your operating expenses and you’re not increasing your revenue. So even if you open up in a new city, you have established competition, you have to endure reduced time utilization and come in from a pricing point of view. Although some companies have the fleet they still have to hire the people, they have to get the real estate, they have to get the operation going. I have studied the operating statements of those who have done this in 2009. Increased expenses, decreased revenue and you can’t see where the strategy works.

Do you expect a lot of rental companies and manufacturers will be unable to survive in 2010? Will we see an increase in merger or acquisition activity?

I think that we will see more merger and acquisition activity, and some really significant re-structuring of some of the major rental companies. The restructuring will cause changes of ownership. I’ve been predicting acquisitions and consolidation for a long time; I’m still predicting that in 2010. One of the few ways out is for somebody to get significant market share and be able to take action to drive pricing on their own behalf. That would be constructive for the industry.

Obtaining capital will continue to be a major challenge.

Getting capital is incredibly difficult except for major rental companies who had access to capital in 2009, like Hertz, RSC, United and Sunbelt. They all have positioned themselves from the capital point of view this past year.

What did you think of the Sunstate deal with Sumitomo?

Sunstate needed restructuring, it needed a partner. I think this partner will give Sunstate the ability to grow a much larger footprint than they have today. They could be a national player with a partner like Sumitomo. It’s a very well-managed company, with very good people, but the key was capital infusion. I don’t see Sumitomo becoming a partner just to maintain the current profile.

Do you expect to see more similar deals?

Yes. I don’t know that it would be a Japanese trading company, it depends on the acquisition price, but there are companies under severe financial pressure.

How is rental performing internationally?

I think Latin America is doing very well. When I say doing well right now, I mean maybe they will see increased volumes of 10 percent in 2010 over 2009. That’s not explosive but it’s a good market. I have clients particularly in Chile and Peru who are doing very well. They are getting good returns on capital. The question in the Latin American market is the instability of political situations like you see in Honduras. But it’s a good marketplace.

Europe is seeing pressure like the U.S., although not as severe. I’d say it’s a difficult market, but it will do better than we’re doing here. But big players — like GAM, Cramo and Hewden Stuart — are not seeing easy times.

What will be some of the keys to success this year? Finding untapped markets? Unique ways of marketing? Increasing sales efforts?

Independents have to look more to marketing and sales. Major rental companies who are downsizing their fleets know what they’re doing and are on the right course.

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