Connected Diversity

April 1, 1999
National Equipment Services' 22 companies have aerial work platforms, forklifts, generators, industrial hoists and many other types of equipment. But

National Equipment Services' 22 companies have aerial work platforms, forklifts, generators, industrial hoists and many other types of equipment. But the most important tools that CEO Kevin Rodgers uses are his cellular telephone and laptop computer.

Often traveling three days a week or more, Rodgers brings his phone and laptop as constant companions. He keeps in touch with investors, suppliers, managers, accountants, his office staff, owners of prospective companies he is considering buying and, of course, his family.

During a recent trip, Rodgers presented a telephonic "roadshow" to potential investors, giving a 15-minute pitch on the company to a group of people he couldn't hear - until the question-and-answer session after his talk - or see. Despite this unorthodox communication technique, the telephone presentation enabled him to come up with a portion of the $175 million NES raised that week.

Such is the way of life for the CEO of a company - based in the Chicago suburb of Evanston, Ill. - that has grown from ground zero to nearly $400 million in pro forma revenue in less than three years. On a typical day, Rodgers might meet with potential investors, visit a branch of a company and meet with its management staff, tour the headquarters of a possible acquisition target, or take a look at NES equipment on a jobsite. And, undoubtedly, he will talk on the phone and use his laptop to download his e-mail.

Rodgers oversees a far-flung empire of rental companies that operate with a degree of autonomy unmatched in this era of consolidation and rapidly expanding national chains.

Consolidators in many industries tend to promise owners of potential acquisition targets that little will change once they've been bought. Often, however, the reality becomes quite different after the deal is done. Those who have sold to NES, however, say there are only two demands: high growth and increased profitability.

Of the 22 companies NES has acquired since beginning its acquisition activity in January 1997, only a few of their owners have chosen not to stay with the company and they were already seeking to retire or leave the rental industry, Rodgers says.

And, with one exception, the companies have kept their original names. That's because, he says, once the name changes, so does everything else.

"Changing the name is one of the first things that makes it start feeling like somebody else's company," he says. "We want the company to look and feel just like it did before NES came along. If you start changing the policies and procedures so everybody is doing things the same way, you are failing to recognize the differences among the markets in which those companies operate and, just as important, that the people are different as well. Those unnecessary changes tend to alienate the employees, the founders and the top managers of the company."

While some companies give lip service to the concept of continuity, NES depends on it. Unlike other national rental firms with large corporate offices, regional managers, regional offices and extensive corporate infrastructure, the NES head office consists of only eight people, and its regional offices are the acquired companies themselves. Smooth operation depends not on roving supervisors who make sure things in the field are being done a certain way, but rather on the owners and managers of the acquired companies continuing to do the things that made them attractive acquisition targets in the first place.

What NES detractors and competitors say is a weakness - the lack of a large corporate infrastructure - Rodgers sees as a strength.

"Our head office is very lean," he says. "If you compare it to anybody else, no matter what kind of yardstick is used, it's a fraction of their size. This is one reason why our margins are [so high], because we run very lean. And it's not just the head office. It starts in Chicago, but runs right through the whole company." Rodgers serves as chief acquisitions officer and, before recently hiring a chief operating officer, was also operations chief .

Rodgers has found that relieving former owners of the administrative and fiscal pressures that burdened them as owners can be liberating, providing new energy that can counter a complacent tendency that often comes with financial security. In reality, however, these former owners retain equity and are among NES' largest individual shareholders.

Most of them acquired stock in NES after their companies were acquired, using a portion of the cash proceeds from the sale of their business. Options are used as part of the compensation package for former owners and key employees.

"In our experience, people will stay on if you treat them right and give them the freedom to run the business and enjoy doing what they liked about the business in the first place," Rodgers says. "Many sell, in part, because they're bored because they're doing things they don't like doing and usually aren't very good at. Owners spend a lot of time on administrative tasks and financial management because they don't want others to see the numbers or because they don't have anybody else to do it."

Mike Falconite, whose Paducah, Ky.-based 31-location Falconite Crane & Lift is the largest company in the NES fold, agrees. "I was used to operations and running the business," he says, "but as we got bigger, 90 percent of my time was spent finding money and talking to bankers. I hated going to all those meetings, wondering what was going on back at the yard."

In making an acquisition, one change that NES insists on is the hiring of a financial manager to help manage assets. "The financial manager can free the former owners to do what only they can do well, such as building relationships with key accounts and attracting new talent to the company," says Rodgers. "The key to this business is asset management. Many rental companies track information on a quarterly basis or even once a year." By contrast, NES runs reports measuring financial performance daily.

The financial manager, however, reports to the former owner, not to headquarters. "We don't want them to feel like we have a whole building full of people watching them," Rodgers says. "And, of course, we don't."

Taking a look at NES' strong internal growth, one can conclude that its way of motivating former owners appears to be working effectively.

Strength in diversity With so many of the companies NES acquires involved in niche markets, there is no competitive advantage for it to develop a national or brand identity. NES' strength is based not on customers' finding the same inventory mix in every market, but rather on its selective involvement in a variety of specialized niches in diverse regions of the country.

Because of its lack of infrastructure, NES hasn't had to consolidate or cut personnel after making acquisitions.

"One of the things we're proudest about in terms of having high margins is that we're doing it with top-line growth and improved asset management," says Rodgers. "We're not improving the operating performance by firing people. We haven't laid off a single person at any of the companies we've bought. We don't try to cut expenses by consolidating back-office functions. We're getting margin improvement by taking the people who are there and adding to them and growing the top line, the revenue arc, and increasing the amount of volume through the individual stores, which ends up increasing profitability."

Investing in the fleets has been a hallmark of the NES modus operandi from its beginning, typically investing considerable funds in new equipment at acquired locations. It also opens branches and makes smaller acquisitions under the banner of the individual company.

"The amount of investment is determined on a case-by-case basis, depending on anticipated demand in the markets served by the acquired company," says Rodgers. "In most cases, it is significantly more than the amount the company has traditionally invested, because in most cases, the acquired company's growth, no matter how impressive, has been held back by a lack of access to capital."

Of course this strategy can succeed only if Rodgers and his NES team - which includes co-founders Paul Ingersoll, senior vice president, and Dennis O'Connor, chief financial officer - choose the right companies to buy in the first place. Being financially sound and having a management team with the right personality and skills are major parts of the equation.

NES looks for already profitable companies with strong positions in their particular markets. Equally important is the company's market segment. Most NES companies are oriented toward the industrial market, rather than strictly construction.

Rodgers' interest in the industrial market goes back to his years before NES when he was U.S. CEO of Australia-based Brambles Equipment Services. "At Brambles, the most profitable, stable source of revenue came from the industrial customers," says Rodgers. "When I started with NES, one of the first things we decided was that we were going to focus on the industrial market."

Rodgers believes that the industrial market has greater growth potential than the construction market and is far less cyclical. He says his goal is to have about half of NES' revenues generated from the industrial market.

Complementing the industrial focus, about a third of NES' revenues come from companies engaged in niche marketing, focusing on products and customer bases outside the general rental arena.

For example, Industrial Hoist, Brazoria, Texas, is the nation's largest rental provider of electrical, mechanical and pneumatic hoists. Worksafe Inc. of Grand Rapids, Mich., TSM of Madison, Wis., and newly acquired Barricade & Light Rental, Phoenix, focus on barricades and traffic safety equipment. Dragon Rentals, Beaumont, Texas, and Houston-based Sprintank specialize in the rental of temporary liquid storage containers to industrial and petrochemical customers. Genpower, based in Deer Park, Texas, specializes in large pumps and generators. NES Studio Equipment, Sun Valley, Calif. - the only acquisition to carry the NES name - rents aerial work platforms, with about 99 percent of its rentals going to movie studio location applications, with the equipment modified for use on those projects. About 50 percent of NES' combined equipment fleet is aerial, primarily aerial work platforms, forklifts and cranes.

"I like niche markets, something that's a little different from the general rental," Rodgers says. "Specialty companies, or companies that serve a niche market like the studio rental company, usually have higher operating margins than general rental companies. They have a little more protection in a downturn in terms of pricing on their products simply because there aren't as many competitors that offer their type of product; where with general rental, lots of companies are doing the same thing with the same equipment."

All vendors are preferred Unlike most national rental companies, buying equipment from preferred vendors is not the NES way of doing business, in part because of its diversity. Although NES enjoys national account status with most major suppliers to the rental industry, the company's policy is to let each acquired company, or division, choose its suppliers.

"If a guy prefers Genie or JLG or Snorkel, that's up to the local guy," Rodgers says. "We don't want to take a guy who's been representing ABC Co. for 15 years and tell him he's got to switch to XYZ Co. because we're going to save an extra 5 percent. It might make sense on paper to go all with one product, but if a company has been promoting a product all those years and now you switch it to a competitive product, it's very confusing to the customer and to the employees. The 5 percent is easily lost if the group is not as aggressive and confident about the products that they're representing."

Bullish about the future Despite skepticism by some about NES' ability to hold its own in an industry increasingly dominated by consolidators that have participated in mega-mergers, Rodgers is optimistic about the company's long-term viability.

NES' long-term plan is to grow at least 35 percent every year, he says, with about half of that growth coming from internal growth and the rest through acquisitions. With the company getting 20 percent internal growth, it doesn't require a lot of acquisitions to make up the other 15 percent. If a recession slows internal growth, Rodgers says NES has enough capital to step up its acquisition pace, opportunities for which are likely to abound in a downturn.

And with so much of NES' customer base in industrial markets and specialty niches that are far less competitive than general rental, the company is less likely to be hurt by a construction slowdown or short-term economic slump. And, most important, Rodgers and his vision have the continued confidence of its investors who are urging it to continue expanding.

NES has been very successful, and we believe it will continue to be," says John Molner, managing director of mergers and acquisitions for New York-based Brown Brothers Harriman & Co.

"Its achievement in making 22 acquisitions and successfully managing them is very successful by any standard. The company has made its earnings targets and has a good internal growth rate. NES has been as strong as any company in terms of performance and profitability."

Also profitable is the long-distance carrier for Kevin Rodgers' cellular phone. But NES can just call that part of the cost of doing business successfully.

For years, Kevin Rodgers rode the train into Chicago from his suburban home to work every day as chief executive officer of Brambles U.S. He'd often see many of the same people traveling the same route and, like most commuters, would greet people he saw regularly, rarely knowing their names or what type of work they did.

Little did he know that one of those people was planning to invest money with the goal of developing a billion-dollar rental company. His name was Carl Thoma.

As part of the Chicago-based investment group Golder Thoma Cressey Rauner, Thoma had been observing this growing industry as a strong candidate for consolidation. And Thoma had his eye on Rodgers, without knowing that he was regularly greeting him at the train station, the two men living just a few blocks apart. Thoma and his partners were aware of Rodgers' background at Brambles, where he had participated in a number of acquisitions in growing the U.S. subsidiary of the Australian firm into a multiregional rental player that ranked among the top 10 North American rental firms.

"I got a call from a guy at GTCR telling me he was working with Carl Thoma," recalls Rodgers. "He said they were interested in the industry and wanted to meet me and talk about backing me to do a consolidation."

When Rodgers showed up at the meeting, he and Thoma were amazed to see the familiar face of someone they rode the train with. Although the initial meeting didn't lead to an immediate business relationship, they agreed to keep in touch. Eventually, when Brambles asked Rodgers to consider a position overseas, he began to think more seriously about GTCR's idea of an industry roll-up.

With GTCR willing to commit as much as $50 million in equity to get the company started, Rodgers got on board, recruiting two other Brambles officials, Paul Ingersoll and Dennis O'Connor.

Still backed by most of the original investors, the train has left the station and is gathering steam.

National Equipment Services Evanston, Ill. History: The Chicago investment firm Golder Thoma Cressey Rauner targeted the equipment rental industry as a candidate for consolidation in the early '90s. GTCR recruited Kevin Rodgers, then U.S. CEO of Australia-based Brambles Equipment Services to begin acquiring equipment rental companies and unite them into a national network. Rodgers recruited former Brambles colleagues Paul Ingersoll and Dennis O'Connor. Beginning with a $50 million investment, NES made its first acquisition in January 1997. The company now has 22 companies, with 110 locations in 25 states, with several acquisitions pending at press time.

NES shares have traded on the New York Stock Exchange, under the symbol NSV, since the company's initial public offering in July 1998.

Background of CEO: Kevin Rodgers started in the industry in 1971 with Morgan Equipment, a distributor of heavy construction and mining equipment, in Papua New Guinea at the Bouganville Copper Project, becoming chief operations officer in 1986. In 1987, Morgan acquired the Caterpillar dealership in Western Australia, with Rodgers as CEO. He was hired by Australian equipment rental company Brambles in 1990 to serve as CEO of Chicago-based Brambles Equipment Services (U.S.), where one of his principal tasks was acquisitions.

Other key executives: Carl Thoma, board chairman; board member John L. Grove, founder of JLG Industries and Grove Manufacturing Co.; James O'Neil, chief operating officer; Dennis O'Connor, chief financial officer; Paul Ingersoll, senior vice president and treasurer.

Revenues: Total 1998 revenues were $225.2 million, with rental revenue of $165.9 million. The 1998 pro forma revenue run rate - including the revenues of companies acquired during 1998 for the entire year - was about $360 million in total revenues, about $260 million in rentals. NES projects that by the end of the first quarter of 1999, the total revenue run rate will be about $400 million, with $300 million in rentals. NES same-store revenueincrease during 1998 was 28 percent.

Revenue breakdown: Rental, 74 percent; parts and service, 20 percent; new equipment sales; 6 percent.

Key growth strategies: Emphasis on industrial rentals and specialty niches, careful attention to asset management, aging of the rental fleet with extensive remanufacturing capabilities; lean corporate infrastructure.

Philosophies: "Our strategy is based not on transferring equipment around among our different branches. It's based more on getting the right equipment at the right location to begin with."

"If we go into a recession sometime within the next several years, there will still be growth because we're still getting, as an industry, such a small percentage of equipment that's out there on the jobsite."