Much of my time in recent months has been devoted to analyzing the impact of rental industry consolidation. The key concern is this: How successful will the consolidators be in the coming years? If capital becomes limited, can their operating profit sustain their market capitalization growth?
I believe the consolidators will, for the most part, be very successful. Although several of the senior executives of these companies are not "rental people," they are seasoned businesspeople with a plan. Yes, the plans revolve around sophisticated financial models, but they also focus on people, information systems and training. The key executives I've talked to recognize the commitment that is required to develop the world-class infrastructure they all desire. They recognize they need time and good people to make their plans work.
Even though many question the acquisition prices that have been paid by the consolidators, I believe the operating earnings of these large rental companies will continue to improve. The management information systems that they have developed, or are developing, will allow improved regional utilization of equipment, better rental rate management and improved timing of equipment disposition. Leverage of the best operational practices of all the acquired businesses will further promote profitability. The larger volume purchases they will make will also provide a significant strength in negotiating acquisition price of equipment, which will further strengthen profitability.
The most important fact for all manufacturers to remember is that, even though many of the principal executives of the acquired independents have moved into "consulting only" roles, the organizations they created and the people they developed are still the same. All the qualities that made a good independent rental house have not been lost in consolidation. When the consolidators' plans work, they will leverage the best practices, people and qualities of these acquired independents into a formidable national or international organization.
Manufacturers will have to work through some changes over the next couple of years. Since the consolidators are, or will be, predominantly publicly traded companies, their desire to produce quarterly earnings, meet year-end financial targets and manage debt-to-equity ratios and loan covenants will cause structural changes to the manufacturers' historical experiences.
One example is the fourth calendar quarter being the fiscal year-end for most consolidators. Because every public company wants its fiscal year to end successfully, many companies will substantially reduce their capital spending to preserve cash and profitability. In the past, many manufacturers never experienced a slowdown in shipments in October, November or December because the rental industry was beginning to gear up for the new year. Because manufacturers like to level load their factories, rental companies took product through the winter months to ensure equipment availability in February, March and April when new construction starts would typically soar.
Many of the consolidators are not completing fleet acquisition plans until October, November or December. They don't really need large quantities of equipment until February or later, and they want to make the year-end look as good financially as humanly possible. Therefore, the manufacturers' fourth quarter takes on the look of an "inventory-build" quarter, rather than a "ship-everything-possible" quarter. Since many manufacturers, such as Snorkel, are also publicly traded companies, inventory-build and under-budget shipments are not acceptable to our shareholders.
We have had to work together with the consolidators to produce unique solutions and a "win-win" outcome for both parties. Achieving that kind of mutually agreeable solution requires true partnership and I see that prospect as a very exciting one. Partnership is often an overused but misunderstood phrase. Partnership around such issues as innovative financing, safety training, service and sales training, used equipment disposition, and other customer-desired value-added services will improve all the companies involved.
Several people have said to me that, with the advent of the consolidators, manufacturers are abandoning the independent rental operator. I can't speak for all manufacturers, but that is certainly not the case with my organization. The consolidators are largely a collection of independents and the remaining independents number in the thousands.
The people who managed these former independents or are managing the current independents know the industry better than any manufacturer. They help create true partnership. The independent spirit of rental operators helped create large manufacturers, and we will always be in their debt. I see the consolidators wanting to retain that independent spirit so they don't lose flexibility and adaptability.
The consolidators have accelerated the manufacturers' desire to create significant value-added services that will differentiate them from the competition. However, all the manufacturers' customers will be able to share in the creation or augmentation of value-added services. The whole rental industry will benefit from consolidation and improved partnerships.