The Software Will Tell You

Feb. 1, 2006
Dan KaplanCEODaniel KaplanAssociations Morristown, N.J. RER: It's obviously going to be a big year in equipment rental. Any particular thoughts about

Dan Kaplan
Daniel Kaplan
Associations Morristown, N.J.

RER: It's obviously going to be a big year in equipment rental. Any particular thoughts about how much the market is likely to grow in the year ahead?

Kaplan: There are three ways a rental company can grow rental revenue: fleet growth, rental rate increase and improved equipment utilization. In 2006 I would anticipate that the rental fleets will grow between 2 to 4 percent. Fleet utilization was essentially maximized in 2005; I would be surprised if fleet utilization improved more then 1 to 2 percent in 2006. Rental rate improvement is the wild card. We saw an average rate improvement of 8 percent in 2004 and an average rate improvement of 8 to 9 percent in 2005. Achieving rental rate increases in 2006 will be formidable coming off two strong years.

My estimate for rental rate increase in 2006 is 5 percent plus. It is possible to achieve rental rate increases in 2006 greater than 5 percent, depending on equipment time utilizations.

For now I would anticipate total market rental revenue growth of between 7 to 9 percent in 2006.

There has been a lot of recent activity behind the scenes in potential merger and acquisition talks involving rental companies. Do you expect to see a lot of consolidation among larger companies? With the market so strong, why are so many companies interested in selling?

I believe we will see a minimum of two of the top 10 rental companies being sold or consolidated in 2006. Companies are interested in selling because the owners of the large rental companies are financial players, not strategic owners; they are in it for the money.The reason to sell now is the high relative EBITDA of the rental industry and the high EBITDA multiples. Why wait for a downturn?

To the majority of rental companies, the activities of these larger companies are not so significant. What should smaller and medium-sized rental companies be thinking about in terms of improving their market position?

Service, service, service and more service!

In busy times such as these it can be easy for rental companies to sort of sit back and watch the business roll in, enjoying the strong business cycle. How do you suggest they position themselves for improved market share?

There is a saying: “revenue heals all wounds.” In good times like today, even the weaker competitors are looking good. I would recommend that now is the time to go back to the fundamentals. Listen to what the software is saying. I hope independents are truly utilizing their rental software.

I recommend the independents eliminate poorly performing assets and lower their fleet age. They should invest in their facilities and improve their company's image. They need to invest in building a stronger sales force and initiate safety programs. Independents need to invest in employee training programs. They should improve the quality of the product they offer to their customers. I suggest they raise their rental rates.

When times were busy in the late 90s, a lot of companies became over-leveraged and suffered when business slowed down. How should companies avoid making this mistake?

Interest rates are low; money is readily available. The investment community likes our industry. I am not concerned about being over-leveraged; I am concerned about operating a profitable rental company that is focusing on return on capital employed and servicing the customer. If a rental company is managing itself with the correct financial metrics, over-leveraging will not be an issue.

At this year's ARA show, you will be inducted in the ARA Hall of Fame. What thoughts do you have about this honor and what does it mean to you?

Words cannot describe what this honor means to me. I truly love this industry and what the industry has done for me personally and for my family. This honor truly gives meaning to years of hard work along with a deep appreciation for the professionals who worked along with me and share some of the credit for the honor I am about to receive in February.

Larger rental companies are improving their training programs. Smaller companies would like to improve training, but are less likely to spend heavily on training. How do you suggest smaller and medium-sized companies approach the important issue of employee training?

We are speaking more about a commitment to improve the quality of one's staff, and then the budget. If an independent was truly interested in training and not just giving lip service, there are many avenues on how to train employees inexpensively. Let's start with the ARA-offered courses. There is Construction University at The Rental Show. There is the ARA lending library with VCR tapes. There is product-knowledge training offered by the equipment manufacturers. Sales training courses are offered around the country by various organizations, not specific to the rental industry; they work.

You've emphasized before the importance of professional appearance at rental centers. As you travel and visit rental companies, have you seen much improvement in this area in recent years?

As I travel, I see the larger rental companies like United, Hertz, RSC and Ahern on major campaigns to improve the appearance and operating efficiency of their rental centers. I cannot say the same for the independents. The more sophisticated rental companies understand the meaning of your question. Unfortunately the gap is widening between independents and the chains.

In the past you've mentioned the potential of GPS in having a major impact on the industry. Are you seeing widespread adoption of this technology?

The more sophisticated rental companies are all in trials with GPS and remote wireless tracking devices. Remote wireless offers not only GPS, but the ability to receive information on the hours of usage and other critical operating data. Remote wireless is the next step beyond rental software that will enable the rental operator to improve the efficiency of their rental operation, know more about the equipment usage and properly bill the customer. In short, remote wireless will improve the profitability of a rental company. I know one rental company that will shortly order 5,000 remote wireless devices. In the future remote wireless will be a standard for our industry.

Are there other technological developments or other trends that you expect to have a big impact on the rental industry in the foreseeable future?

Look for RFID — radio frequency identification devices — to take hold. Look for further consolidation of the top 10 rental companies. I expect the gap to increase between the independents and the top 10 rental companies. Obviously the movement from ownership to rental will continue. I expect to see a global rental industry with rental revenue exceeding $75 billion dollars in the not-too-distant future.

Any trends that have developed over the past year internationally in the rental market? Is rental growing internationally at as fast a pace as you anticipated?

From a rate-of-change point of view, the rental market is developing at a greater rate of change in Latin America, Europe, and Asia than North America. From a dollar point of view, the market is growing at a greater pace in North America than anywhere else in the world.

Just like we in North American are enjoying the movement from ownership to rental, so is the rest of the world. Look for the largest changes to occur in China and India with populations of 1.1 billion and 1.3 billion people respectively.

Remember, the international community has the benefit of the knowledge and experience of the North American rental industry. You will see many of our foreign colleagues at The Rental Show in Orlando.