In some ways, we've all seen this cycle before. It's the beginning of a recovery. The rental industry is rediscovering its confidence. Walking the trade show floors at the winter conventions — Associated Equipment Distributors and World of Concrete in Orlando, the American Rental Association show in Atlanta, the Bauma show in Munich — equipment manufacturers were selling more machines than they could produce, leading to concerns about long lead times and how they could take advantage of pent-up demand. Rental people talked about having plenty of business, jobs breaking loose and demand catching up with supply. Signs on the horizon appear bright and brimming with growth potential.
But before we all buy new vacation homes, there are still issues that lead to pause for thought. Rental rates, which took as brutal a slashing over the past few years as, arguably, ever in the industry's history, are still rock bottom in many areas, and while rental companies, larger ones especially, talked of rental rate increases, many RER 100 executives see little improvement, if any, and say that rates are unable to bring the kind of return on investment to guarantee the bottom line they need. And boosts in the prices of oil and steel are causing manufacturers to pass the costs along to their customers by adding surcharges to the prices of equipment.
Looking at the numbers for 2003, more companies increased than decreased, although the increases were far from dramatic in most cases. But volume decreases didn't, in many cases, imply bad news as many companies made improvements that rental volume numbers don't reflect. A number of RER 100 executives said their companies decreased revenue but are more healthy today than they were two years ago as the economic slowdown forced them to make structural changes that have improved their companies and positioned them for stronger performances in the future. Just like certain aspects of a baseball player or team's performance don't show up in the box score, it bears noting that the RER 100 is based on rental volume and that volume is not necessarily indicative of profit margins or whether or not a company is prepared for a business increase.
An economic slowdown often implies the need for correction in the economy as a whole and in individual company infrastructure. Many companies saw the slump as a golden opportunity to improve their systems and find ways to make their companies leaner and more efficient, reducing headcount, and cutting general expenses, sometimes quite ruthlessly. Many seriously analyzed long-standing methods and looked for ways to streamline systems, often driven by more advanced information technology systems. These improvements will play a major role in determining how effectively those companies benefit from the better times most see on the horizon.
Not the least of these systemic changes involves rental rates, which continues to be a hot topic among RER 100 executives. Some have done significant restructuring because of rental rates. For example, Ahern Rentals (No. 15) has restructured the compensation system for its sales staff based on a series of matrixes that increase commission when rates reach a certain level and decrease it when rates drop below prescribed levels. H&E Equipment Services (No. 10) developed a software program to improve rental rates and other companies have put pressure on sales staff on the local level to raise rates. Fourth-ranked Sunbelt Rentals has fine-tuned its commission structure to reward rate improvement, while 9th-ranked Neff Rentals has re-evaluated rates and instituted a floor to keep staff from offering low rates based on emotion or desire to obtain a given rental contract at all costs.
Several large companies, most notable industry pace-setting United Rentals, have reported rate increases as high as 6.5 percent in the first quarter. While some RER 100 executives report they have seen no improvements in their marketplaces, others say they have seen upgrades, particularly on the local or regional level. But even this regional improvement points to the need for improvements on the local branch manager/sales staff level, as well as the need to improve consistency in applying organizational objectives through the national-regional manager-district manager-branch manager chain of reporting and communication.
Larry Pedersen, of Campbell, Calif.-based A Tool Shed (No. 85), who has not been shy about being critical of national chains in the past, says he has seen encouraging rental rate improvement in his marketing area and gives credit to the national chains for starting with themselves and making structural rate changes. Others, such as Hastings Puckett, of Puckett Rents (No. 58), counter by saying they have seen no evidence of improvement by national chains in their areas. Jim Dietz of National Lift Truck, Franklin Park, Ill. (No. 86) adds that rates are lower than they have ever been.
Some companies, such as Red Mountain Machinery (No. 66) have been able to improve rates by improved attention to computer-generated profitability studies. “Our sales force has had to take the approach of either get the rate up or the units will be sold off,” says Red Mountain CEO Owen Cowing.
Several companies have drawn the line in the sand more dramatically and suffered rental volume drops in the process. In a couple of cases, the companies were traditional distributors such as Binder Machinery (No. 97), which decided that if rental didn't provide an appropriate return, the company would concentrate on the parts and service and equipment sales portions of its business. Others took a hard look at rates on each piece of equipment they rented and decided that if those assets didn't provide an acceptable return on investment, the only alternative was to rid themselves of them. Some of these companies fall in the category mentioned above — those that may have suffered rental volume decreases but became more profitable in the process.
In terms of distributors, and nearly half of the companies on the RER 100 still see equipment distribution as their primary business model, the fever with which many pursued rental several years ago seems to have abated. Rental still remains a very vital portion of the business for many equipment distributors and the manufacturers they represent. Many, however, clearly found that the rental business was more complex than they realized, or found that they lacked the personnel to succeed in the short-term rent-to-rent business in a big way. How much of this shift is attributable to the recent slowdown, and how many of them will reinvigorate their rental program if rates improve and customer demand picks up, still remains to be determined.
Similarly, some manufacturers have had second thoughts about diving into the waters of rental-channel development. While Atlas Copco still owns the industry's second-largest rental company — Rental Service Corp. — many in the industry believe it would welcome the opportunity to divest its rental division, although recent actions taken by the parent company based on long-term strategic plans indicate an intention to stay in the business for the long haul. Others such as Komatsu and Deere have, after putting their toes in the water, either decided to stay on shore or hesitated about getting in deeper. Komatsu, which had experimented by acquiring several dealerships that it nudged into developing short-term rental programs, seems to have turned away from ownership of the distribution channel although many Komatsu dealers operate successful short-term rental divisions with more than half dozen Komatsu dealers on the RER 100. Deere, which had owned close to half of Phoenix-based Sunstate Equipment Rental (No. 13), sold its ownership portion to the majority ownership group.
However, manufacturer ownership of the rental channel has certainly not gone away. Caterpillar's rental program continues to grow, with Caterpillar evolving into the world's largest rental company with, at press time, 1,387 rental branches worldwide, and 379 in North America, where it would most likely rank in the top 5 on the RER 100 if the dealerships that own the rental centers weren't individually owned. More than ever before, Caterpillar dealers dominate the RER 100, representing 24 of the 100 listees, for a total of $733.3 million in estimated rental revenue. And this number does not include the dozens of dealerships that aren't listed.
Although it hasn't grown as fast as it originally projected, Volvo Rents' franchise program has grown steadily and stably. The company's management team has attracted a number of veteran industry professionals that have brought expertise, intelligence and perspective. By being able to monitor and advise franchisees on an ongoing basis, upper management has helped them achieve their goals and stay on the path to stability and profitability. The program certainly appears to be here to stay and Volvo Rents makes its first appearance on the RER 100 with rental volume estimated by RER.
In addition to the earthmoving manufacturer-owned rental programs, manufacturers such as Thompson Pump (No. 43), Waco Scaffolding (No. 45), SafeWorks LLC (No. 54), and Lynn Ladder & Scaffolding (No. 79) are renting direct and proving that manufacturers can occupy a specialized rental niche without competing with the companies they sell to. For example, Thompson Pump's rental division handles highly specialized applications that general rental companies and national rental chains typically can't handle, often referring business to or working in partnership with Thompson. Godwin Pump, not listed, has a similar rental program. Large generator manufacturers are getting into the rental game as well. Kohler, which operates Kohler Rental Power, has a thriving power-generation rental program through factory-owned branches and distributors. And engine and generator manufacturer Cummins rents large gensets through its distributor network and is a growing competitor in that market.
So although the movement toward manufacturers' ownership of the rental channel has not taken hold as quickly as many in the industry expected, many manufacturers who may have been considering that business model have had all they could do to stay afloat during the recent slump and might revisit the possibility during an upturn.
Any machines out there?
Most RER 100 executives are very positive about a potential upturn in the very near future. While some had expected 2003 to be a breakout year, it wasn't. More are predicting that 2004 will be, although about an equal number feel there is no such guarantee and see only a slight upturn in 2004 if that, but expect 2005 to bring more of a significant business boost.
To many manufacturers selling to the rental market, one major question lingers. Have rental companies increased buying because, after years of aging their inventories, they had no choice but to replace, and therefore were primarily buying replacement fleet? Some companies are definitely buying with expected growth in mind, although others are far more cautious. And that growth could be retarded by the lack of available machines.
Lengthened lead times could be, as one RER 100 executive says, a two-edged sword. While lack of availability could slow down the growth of rental companies who can't obtain needed machines on which to base expansion efforts or reach out to new markets, it could also create increased demand for rental services because if rental companies have long waits for needed equipment, so must the end users. One would assume many end users would rent if they would have to wait six months to buy a machine. Such concerns will certainly help to keep used equipment values high.
While many companies say they began to turn the corner in 2003, the consensus was that conditions were still quite tough. As Dave Griffith, CEO of Modern Group (No. 42) says, “We're still in hand-to-hand combat.” But the majority said 2004 was off to a better start and that demand from their customer base was clearly on the upswing for 2004.
Greenwich, Conn.
Wayland Hicks
www.unitedrentals.com
Scottsdale, Ariz.
Freek Nijdam
www.rentalservice.com
Park Ridge, N.J.
Gerry Plescia
www.hertzequip.com
Charlotte, N.C.
George Burnett
www.sunbeltrentals.com
Chicago
Duff Meyercord
www.nesrentals.com
Fort Lauderdale, Fla.
Jeff Putman
www.nationsrent.com
Atlanta
Joe Dixon
www.homedepot.com
Pittsburgh
Al Bove
www.maximcrane.com
Miami
Juan Carlos Mas
www.neffcorp.com
Baton Rouge, La.
John Engquist
www.he-equipment.com
New Iberia, La.
George Walker
www.aggreko.com
Greenville, S.C.
Gary Bernardez
www.ameco.com
Phoenix
Mike Watts
www.sunstateequip.com
Homer Denning
Dallas
www.briggsequipment.com
Las Vegas
Don Ahern
www.ahernrentals.com
Edmonton, Alberta
Ian Reid
www.finning.ca
Atlanta
Luis Ramirez
www.gepower.com
San Antonio
Allyn Archer
www.holtcat.com
Asheville, N.C.
Barry Natwick
www.volvo.com
Denver
Paul Nolan
www.hssrentx.com
Denver
Bruce Wagner
www.wagnerequipment.com
Stoney Creek, Ont.
Randy Casson
www.battlefieldequipment.ca
Mesa, Ariz.
Jim Lowry
www.empire.cat.com
Austell, Ga.
Mitch Imielinski
www.red-d-arc.com
Santa Ana, Calif.
Don Schmid
www.eccoequipment.com
Charlotte, N.C.
Bill Cummins
www.lbsmith.com
Tampa, Fla.
Lance Ringhaver
www.ringhaver.com
Grand Rapids, Mich.
Larry Behrenwald
www.aisequip.com
Pleasant Grove, Calif.
John Johnson
www.holtca.cat.com
Broadview Heights, Ohio
Kenneth Taylor
www.ohiomachinery.com
Bridgeview, Ill.
B. J. Bohne/Lance Bohne
www.imperialcrane.com
Channelview, Texas
Louis Tucker
www.mustangcat.com
Las Vegas
Mary Kaye Cashman
www.cashmanequipment.com
Reserve, La.
Jay Dinger
www.louisianamachinery.com
Miami
John Socol
www.kellytractor.com
Seattle
Bob Kendall
www.starrentals.com
Montreal
Andre Veronneau
www.simplex.ca
Northridge, Calif.
Mike Groff
www.northridgerentals.com
Vineland, N.J.
Joseph Pustizzi Jr.
www.tricoequipment.net
Mississauga, Ont.
James Burns
www.wajax.com
San Diego
Tom Hawthorne
www.hawthorne.cat.com
Bristol, Pa.
Dave Griffith
www.moderngroup.com
Bridgeville, Pa.
Judy Anderson
www.andersonequip.com
Orange, Fla.
Bill Thompson
www.thompsonpump.com
Cleveland
Marty Coughlin
www.wacoscaf.com
Seattle
John Harnish
www.ncmachinery.com
San Diego
Jerry Zagami
www.clairemontequipment.com
Newport, Ky.
Ken Arlinghaus
www.artsrental.com
Austell, Ga.
Tom Tucker
www.yanceybros.com
Waco, Texas
Don Moes
www.eqdepot.com
Mississauga, Ontario
Willie Swisher
www.stephensons.ca
Monroe, La.
Scott Cummins
www.scottcompanies.com
Charlotte, N.C.
Gregory Poole III
www.gregorypoole.com
Tukwila, Wash.
Dave Voeller
www.spiderstaging.com
Edmonton, Alberta
Sam Cosgrove
www.coneco.ca
Cambridge, Ohio
William L. Baker
www.southeasternequip.com
San Juan, P.R.
Jose Cestero
www.puertoricowire.com
Richland, Miss.
Hastings Puckett
www.puckettrents.com
Pointe-Claire, Quebec
Pierre Pontbriand
www.hewitt.ca
San Juan, P.R.
Francisco de Armas
www.compresores.com
San Leandro, Calif.
Eric Martin
www.petersonpower.com
Burnsville, Minn.
Dick Brown
www.tempair.com
Fargo, N.D.
Dan Butler
www.butler-machinery.com
Elmhurst, Ill.
Crain Patten
www.pattenind.com
Rochester, N.Y.
Richard DiMarco
www.admarsupply.com
Chandler, Ariz.
Owen Cowing
www.redmountain.com
Woodstock, New Brunswick
Heath Alexander
www.atlanticrentals.com
Birmingham, Ala.
James Cowin
www.cowin.com
Dallas
Michael Detzler
www.thenewcontinental.com
Knoxville, Tenn.
Wes Stowers
stowers.cat.com
Hatfield. Pa.
Jim McKeever
www.furnival.com
Springfield, Ill.
Ray Roland
www.rolandmachinery.com
Lexington, Ky.
John King
whayne.cat.com
Little Rock, Ark.
John Hugg/Robert Hall
www.hugghall.com
Wappingers Falls, N.Y.
Gene Lois
www.handyrent-all.com
Temecula, Calif.
Rick Clause
St. Louis
Daniel Tumminello
www.midwestaerials.com
Salt Lake City
Mark Clawson
www.diamondrental.com
Lynn, Mass.
Frank Koughan
www.lynnladder.com
Wichita, Kan.
Walter Berry
www.berrycompaniesinc.com
Fort Worth, Texas
Eric Anderson
www.crescentmachinery.com
Wheaton, Ill.
Terry Hagy
www.rentalmax.com
Fairfield, Calif.
Ken deVries
www.allstarrents.com
West Columbia, S.C.
Joe Blanchard
www.blanchardmachinery.com
Campbell, Calif.
Larry Pedersen
www.atoolshed.com
Salt Lake City
Perry Pardoe
www.cateequipment.com
East Broussard, La.
Floyd Degueyter
www.clmequipment.com
Franklin Park, Ill.
Jim Dietz
www.nlt.com
Grand Prairie, Texas
Wilburn Smith
www.tkoequipment.com
Modesto, Calif.
Roy Airington
Santa Fe Springs, Calif.
Dennis Turner
www.pdqrentals.com
Phoenix
Marius Fabret
www.roadmachinery.com
Aurora, Colo.
Steve Carlson
www.ellenequipment.com
Leonminster, Mass.
Roger Gamache
www.taylor-rental-ma.com
Edmonton, Alberta
Bud Nowicki
www.rivervalleyequip.com
Mississauga, Ontario
Larry Pirnak
www.strongco.com
South Plainfield, N.J.
Robert Binder
www.bindermachinery.com
Aston, Pa.
Daniel Topp
www.etopp.com
Ponca City, Okla.
John & Larry Redwine
www.pioneerrental.net
Pittsburgh
Howard Creese
www.knickerbockerrussell.com
20 companies on the 1997 RER 100 were acquired that year. 36 listees on the 1999 RER 100 were acquired that year. 2 listees on the 2003 RER 100 were acquired last year — Holt Caterpillar of Ohio (No. 59 last year) was acquired by Ohio Machinery (now Ohio Cat); and Skyreach Equipment (No. 25 last year) was acquired by United Rentals.
From Order-Takers to Rainmakers
For several years, Neff Rental was widely viewed in the industry as the least successful of the national chains that went public in the late 1990s, and rumors were rife of impending bankruptcy or sale. But since Juan Carlos Mas took over as CEO in early 2002, returning leadership to the Mas family that founded it, Neff has begun quite a process of change, reducing debt, taking the company private and revamping the company's organizational structure. RER's Michael Roth recently spoke with Mas about how the company has changed and his projections for 2004.
RER: Do you expect 2004 to be a better year than 2003 and how did Neff Rental improve itself?
MAS: We do expect a better year in 2004. Many of our actions through the down cycle began to pay dividends with strong improvement in the second half of 2003 and Q1 2004. We believe this improvement is a function of our increased operational efficiencies, training and innovative sales programs coupled with a strengthening economy and rental rate environment.
Did you make changes during the downturn that resulted in a better company?
We made various changes in our business during the industry downturn. We constrained our cap ex budgets to address the issues of oversupply in the marketplace and effectively reduced under-performing fleet and deployed those dollars to higher return categories. We streamlined the number of regions we operated in and strengthened our region and corporate staffs by adding additional service managers, training personnel, business-development managers and sales management. We focused intensely on having more information about our customers' business and managing our sales process to improve the success rate of our sales force. This has allowed us to be more selective in our customers and more successful in targeting the most likely customers to rent from Neff at an acceptable rate. We are well on our way to converting our sales force from order takers to rainmakers.
What kind of improvements will you concentrate on in 2004?
We will continue to tweak our fleet mix to adjust to our customers' need and to continue growing the high ROI categories and divesting of under-performing fleet.
What do you consider the biggest areas of concern in the rental industry currently?
I believe the industry's biggest concern should be the oversupply of equipment in the marketplace. This industry has a very sensitive supply/demand curve. The strengthening rate environment can easily erode if fleet growth is met with weakened or static demand. Hopefully, the industry has learned that not only must there be reasoned purchasing and an efficient cost structure, but also a new model relative to fleet age and service/maintenance.
Rates have been a major concern in most of North America over the past few years. Have you seen a rate improvement in the marketplace and what has Neff done to control and improve its rate structure?
We have seen substantial rate improvement in the past 10 months and believe that is a direct result of the aforementioned programs. We have also instituted various accountability and management tools. One of these tools is instituting floor rates throughout the company to prevent the urge to make a deal on emotion at a low rate.
Are you concerned about growing lead times from manufacturers or higher costs of equipment because of rising steel prices or other cost-related issues? Will this be a problem for you in the coming year?
As a result of improved industry conditions and the aging of the fleet the whole rental industry appears to have made a substantial increase in capital expenditures this year. This, compounded with the steel shortage, has put a strain on manufacturer lead times and leading to steel surcharges from a number of manufacturers. We have not had any problems with our 2004 purchasing, but do understand the issue could impact us in our 2005 program.
Weeding Out the Losers
Red Mountain Machinery, based in Chandler, Ariz., with branches in Escondido, Calif., and Las Vegas, has carved out a niche for itself with the rental of heavy equipment in a large territory in the Southwestern United States. RER recently spoke with CEO Owen Cowing about current business conditions, Red Mountain's new computer system and the company's approach to improving rental rates.
RER: Do you expect 2004 to be a better year than 2003? Do you expect increased demand from your customer base?
COWING: Red Mountain Machinery forecasts a slightly improved year over 2003 due to an increase in demand, however, the shortage of competitively priced equipment will inhibit us from substantially increasing the size of our rental fleet. Most of the improvement for us in 2004 will likely be caused by upward pressure on rental rates and improved demand for existing equipment.
Did you make any changes in your inventory in 2003?
We adjusted our fleet mix selling off under-utilized assets and increasing rental rates on machines that were not profitable. We are continuing to adjust our rental fleet mix by retiring less profitable machines and replacing them with units that require less hours of maintenance and provide improved cash flow.
What are some of your major concerns? I imagine that in your business, renting heavy equipment, for example, availability of mechanics must be something you have to deal with constantly.
In the heavy equipment rental sector, qualified, talented mechanics are critical. The difficulty in adding quality people is impacting on what types of machines we add to the fleet. For example, some models that traditionally have been a popular tool for earthmoving, and require heavy amounts of labor to keep repaired are being replaced by newer concepts. These concepts consist of units that are not as repair sensitive. Since less labor hours are required to run them in our fleet, we are slowly reducing the higher maintenance machines with the lower maintenance machines, i.e. fewer scrapers and more articulated trucks.
Rates have been a major concern in most of North America over the past few years. Are rates improving for your company? If so, why? Is it a result of changes that you've made in policy or improvements in the market?
We have been able to increase rates on some models due to better information from our computer systems regarding profitability. Our sales force has had to take the approach of either get the rate up or the units will be sold off. Our customers have indicated that they understand the costs of maintaining heavy equipment and have more often than not accepted the increased rental rate.
Are you concerned about growing lead times from manufacturers? Will this be a problem for you in the coming year?
Since we specialize in heavy equipment it will both hinder and help us. It will make it more difficult to obtain newer equipment for our fleet, but it will also make it more difficult for our customers to purchase equipment thus causing an increase in demand for our existing fleet.
During the past few years many companies made changes to operate more efficiently. Did you make any changes to operate more efficiently and how will those changes help you as business improves?
The major change we have made in operations is improved monitoring of our utilization and profit by machine family and model. In addition we replaced our financing methods to more suit our business. Through improved financing costs and terms, along with weeding out the losers, we anticipate much improved results as demand and rates improve.
Also, our organization spent a considerable amount of time and money in 2001 and 2002 in establishing a state-of-the-art computer operating system. In 2003, we improved our ability to mine this data for making better business decisions. In short, the last two years of toughing it out forced us to improve our systems and become a much better managed company. This has been accomplished by raising the bar for both our personnel and our systems.
A Small Step Upward
After a 6 percent drop from 2001 to 2002, the RER 100's 2003 total rental revenue increased year over year from 2002, but not by enough to get excited about. From $8.86 billion to $8.98 billion (or $8,982.1 to be a bit more precise), the 2004 RER 100 registered a year-over-year increase of about 1.3 percent.
Falling just shy of $9 billion, the 2003 RER 100's total rental revenue was the second highest in history.
RER 100 Fast Fact: Several years ago, the race to add branches was on and expansion was the order of the day. The 2003 results show 39 percent of 2004 listees with the same number of branches as the year before; 30 percent decreased their number of branches, and 19 percent increased.
The Caterpillar 100?
Not quite, but once again, Caterpillar dealerships with their Cat Rental Stores are playing a growing role on the RER 100, with 24 of 100 companies being rental extensions of Caterpillar dealerships. With 1,387 rental branches worldwide, Caterpillar is now the largest rental company in the world. With 379 Cat rental branches in North America, Caterpillar ranks only behind Home Depot, United Rentals and Rental Service Corp., in terms of total branches. If only the Cat dealers on the RER 100 were included, Cat would rank No. 4 on this year's RER 100. With about 40 more Cat dealerships not listed, Cat Rental probably ranks No. 2 in rental volume in the North American rental industry.
Asterisk denotes RER estimate.
Top 10: Let's Call It Flat
In last year's chart, covering 2002 revenue, the top 10 declined for the first time since the recession-wracked year of 1991. This year, covering 2003 revenue, it declined again, although since the decrease is a statistically insignificant less than half of a percent, the number is essentially flat year over year. Five of this year's top 10 increased rental revenue in 2004; five decreased.
RER 100 Fast Fact: 48 percent of 2004 RER 100 listees had revenue increases over the previous year, while 36 percent suffered decreases. Five percent were flat from the previous year and 11 were either first-time or returning listees.
Rentals, Eh?
While United Rentals, Rental Service Corp. and Hertz Equipment Rental Corp. have become major players in the Canadian rental market, Canadian-owned companies are still a major presence on the RER 100. Here are the companies with Canadian ownership, headquartered in Canada:
Edmonton, Alberta
Rentals (22)
Stoney Creek, Ontario
Montreal, Quebec
Mississauga, Ontario
Mississauga, Ontario
Edmonton, Alberta
Pointe-Claire, Quebec
Woodstock, New Brunswick
Edmonton, Alberta
Mississauga, Ontario