RERMAG

Outlook 2004

POWER TO THE PEOPLE

RER: What are the benefits of employee ownership?

Fien: When employees are given company stock each year, when they see the value of that stock appreciate each year because of the yearly profits, when they see the value of that stock at the time of their retirement and when they know that the company is obligated by law to buy their stock back at retirement, they realize that they can obtain significant wealth if the company is successful. Under those circumstances, it's natural for people to want to do all they can to make the company successful. They clearly have a vested interest. It's the role of management to show them the kinds of things they need to do and to establish a culture that encourages their constructive active participation.

Does an employee-owned company require a different business model than other companies?

There is no business model developed specifically for employee-owned companies. However, the model that I think works the best is the participatory-management model. It's called Theory Y Management. It was developed in the late 1940s but has become very popular in the past 10 years. This model relies very heavily on the intense and ongoing involvement of the people.

How does this model differ from others?

This model focuses more heavily on company culture and requires a management team willing to push decision-making down the ranks. The culture must be succinct, understandable, meaningful and relevant. For example, at Stone our culture revolves around our four cornerstones — respect, trust, development, communication. A true respect culture makes people feel that they are valued as people and that their contributions are appreciated and sought. A trust culture paves the way for active and effective participation because people are not worried that management will turn their recommendations against them. The development culture teaches people new skills so they can participate to an even greater degree. A communications culture makes people aware of all that is going on in the organization so they have a broader perspective of what needs to be done and how what they do and what they recommend doing fits into the whole.

How and what do you communicate?

Every department in the company “huddles” each morning or at the beginning of its shift — and we work three shifts. The “huddles” last 10 minutes. They discuss expectations for the day, issues that are in their way preventing optimal performance, and who the visitors to the company are for that day.

Each month we hold what we call “walkie talkies.” We meet with everyone in the company in groups of about 15 to 20 for 30 to 45 minutes. We review the previous month's financials actual to budget, discuss issues in the financials and opportunities for improvement. We discuss market conditions and give a quick competitive overview.

Three times a year we conduct President's Corners. These are meetings for everyone in the company in groups of 15 to 20. They last about two hours each. This gives our employees an opportunity to ask the president anything about the operations of the company, offer complaints they might have, and discuss the condition of the economy, new product development, or competition.

In addition, in September we review the Long Range Plan with everyone. This gives all the employees an opportunity to question and understand the key long-term strategies, the detailed product development plan and the comprehensive financial strategy. Further, in January we review the annual operating plan, which gives our people an understanding of the detailed strategies by department the company will undertake during the year as well as an understanding of the detailed annual budget.

Are you obliged to share so much information because your company is employee owned?

No. We share the information because it reinforces the respect and trust cornerstones and because it enhances each person's ability to participate more effectively.

To what degree are employees involved in decision-making?

They are involved in the decision-making process — analyzing the problem, reviewing options, making recommendations. But we don't run the company by consensus. Accountability is important, so for every decision there is one decision maker. Depending on the nature and cost implication, the decision could be made by an employee, a first line manager or the board of directors.

During the tough times over the past few years that most manufacturers went through, how did you communicate the business situation to your employees?

The monthly walkie talkies were the primary vehicle for discussing the market conditions. When it came time to make some tough cost-reduction decisions, our employees understood the reasons for the decisions and strongly supported them. If anything, our people worked even harder when they saw what was happening in the marketplace.

How does this participatory culture manifest itself on the factory floor?

We are about as close to a totally self-directed work force as you can get. Further, we build to order so the configuration of our plant changes each day depending on the orders that have to be shipped that day. At the start of each shift, our huddle process lays out our production expectations for each individual and for the work cell in total — so each person knows what has to be accomplished and who is doing what. Rarely do things happen according to the plan. When circumstances change during the shift, our people meet without the foreman (we call them coaches), determine where the issues are and then re-deploy themselves to address the new circumstances. We can do this because of our cornerstone of development — welders can assemble, assemblers can paint and so forth. Lean manufacturing and a self-directed work force are powerful manufacturing techniques. They are easier to implement in an ownership culture.

Is your model practical for rental companies and does a company have to be a certain size to be employee owned?

Theory Y management can work in any type of company — not just manufacturing. There are no legal requirements that govern the size of an employee-owned company, but as a practical matter I would think you would need enough people to create a critical mass so the dynamics can take hold. I would think a company would need at least 10 employees to make the concept work. Stone has 220 employees.

Looking at the rental industry as a whole, are there any particular trends you expect to see over the next couple of years?

The national chains will begin to hit their groove and become a little more steady stated in the operational side of the business. They will have their important niches, but will not dominate the industry as first thought. Independent rental houses will come back in larger numbers than perhaps expected. Internet business-to-business transactions will accelerate dramatically.

A YEAR OF CONTINUED IMPROVEMENT

RER: I believe you are close to 780 tool rental departments now? How many more do you plan to roll out over the next few years?

Dixon: We're going to end our fiscal year January 31 with more than 800 stores. We'll probably open close to 200 this year.

Is your plan to retrofit the existing Home Depot stores that don't have tool rental so that all stores will have them?

We are doing that today — adding rental departments to new stores as we open them — and in existing stores we are adding rental departments where it is feasible, depending on space. There may be a few that will be hard to do, but our goal is to add rental departments in as many stores as feasible.

Is Home Depot's rental department looking to attract larger contractors than in the past?

We have a broad mix of customers because of the breadth of product in our stores and the convenience of our store hours. Although the core customer is more small- to medium-size contractors, we do have all sizes of customers. Although we want to service all customers, we are trying to enhance services and product offerings where it is feasible to attract more pro-related rental items that larger contractors might request.

Home Depot currently has a deal with Hertz for larger items such as backhoes, is that correct? Can you explain how the relationship works and what types of equipment are available for Home Depot rentals from Hertz?

We use Hertz on referral basis. If a customer needs a product we don't carry in our inventory, we have a good relationship with Hertz and we would refer them to the nearest Hertz.

Some rental operators say that Home Depot has several major shortcomings. Those would be: not providing quick, on-time delivery; not being able to service and maintain equipment; not having staff with sufficient rental knowledge and experience; and too much turnover of staff between rental and other store departments. Are these valid criticisms and, if so, do you have plans to address them and improve in those areas?

We do not offer delivery service on rental items today. As far as service and maintenance, we feel we have the best-maintained equipment in the industry. As far as field service is concerned on larger equipment, we have service agreements with our vendors and their dealers that will provide on-site repair work. I think we're in pretty good shape in those areas, but obviously there is always room for improvement.

We have consistent metrics that measure our associate training monthly. As we operate in a retail business we do experience turnover and churnover due to our size and the opportunities our associates are given to move into other departments, as well as our growth of new tool rental centers. We are confident with the knowledgeable associates we have, but it is a major focus of ours to continue to improve in this area. Our associates are given opportunities and we want to promote from within and give opportunities to the associates who have done well for us.

Another area is rental rates. Some people say Home Depot has made its mark with cheap rates. How do they compare overall with rental companies offering comparable equipment?

We do market shop quite often to make sure our pricing is competitive. It is our position to have best possible price; that doesn't mean the lowest price. We try to make sure our equipment is priced competitively in the market.

On the subject of staff, is Home Depot looking to hire more people with rental experience?

In the past year and a half, we have hired more people who have previously worked for other rental companies and will continue to do so.

Do you plan to offer larger equipment — larger earthmoving machines, bigger scissors and boom lifts, bigger generators, welders, air compressors, air tools, pumps?

We are testing some programs with utility-sized equipment, mini-excavators, skid-steer loaders and so forth.

What kind of economy do you expect for 2004? What kind of economic environment do you predict for Home Depot and rentals as a whole?

I think it will be a strong year with continued improvement, and we anticipate our business will continue to grow. I anticipate a strong year in tool rental.

PROFITS OUTWEIGH REVENUE

ER: What are the trends in the used equipment market?

Davis: People are going to be more willing to sell under-utilized equipment in order to maintain a good return on investment. There should be great opportunities to exchange assets and improve bottom lines.

What do you expect to see in the used equipment market over the next few years?

Better equipment and more of the form meeting function. In other words, a better exchange of used assets for the benefit of the rental company owner.

If prices are indeed high, if business and demand is strong for used equipment, are those also implications of strong tendencies in demand for rental?

Yes, it is a good time for making good decisions on long- and short-term strategy. Don't forget, if you never miss a rental, you have too much inventory. Strengthen your inventories where it makes the most sense. Return on investment should be considered on the short and long term.

What are the strengths of the most successful rental companies? What are some of the weaknesses you see that concern you?

Quite a few lessons have been learned. We should have a more mature market this year. Profit might outweigh revenue as a strategy this year. Flexibility is the strength. Have a plan but don't be afraid to deviate. Situations change.

Tell me about your rebuild centers? What kind of equipment? How much capacity do you have? Who are your customers?

We currently have both rebuild and clearance centers. I do believe rebuilds are a good thing with the factories' involvement. We are currently rebuilding aerials. Our customers are the factories. Rebuilds are more cost effectively achieved when several like units are done at the same time.

What other services do you provide?

Fleet management. We try to help our customers sell their under-utilized fleet and trade them out with good respectable units that can make them money. We take pride in the long-term success of our customers. Sometimes, the best way to help a rental company starting out is not selling them everything they want in their fleet. We would rather sell them everything they need.

Looking at rental companies, what are some of the services you think rental companies should develop to be successful? What are some of the services you expect to see evolve?

Service what you can. Find out how you can best service your customer base and be the best at it. You want to make sure that you have the ability to service what you are renting. Some of the largest ROI items are that way because they are some of the items that don't retain much residual value and cost more to maintain.

What is the relationship between the demand for rental and the demand by contractors for used equipment? Is it best for contractors to utilize a mix of purchased used equipment and rented equipment?

We stress to the contractor that ownership comes with responsibility. Some contractors have no business owning machines. There is a place for contractors to utilize both ownership and rentals. It varies on a case-by-case basis.

How would you describe the Houston market compared to some others?

What is unique about it?

Petrochemical plants allow for many long-term agreements. There are many opportunities in such a diverse market. The uniqueness of the Houston market is its diversity.

Are you selling a lot of used equipment to petrochemical facilities, industrial plants, to the ship channel area? Do those segments look good for rental in the coming years?

The outlook is better for rental than sales. Many of the larger places are getting rid of owned equipment and renting everything. There are some real opportunities that a rental company could team up with us to trade the petrochemical companies out of their owned equipment for rental equipment. Many of these places might have the agenda to get out of ownership and would give you a contract if you could solve all the problems, by helping them sell their used equipment and replace it with rental units. This is something I feel on the larger revenue deals that our expertise makes good sense for all involved.

Any other advice for rental companies?

We know what it's like to do your best for a rental customer and then when he is 90 days behind on his payment, he is asking about rain days and how you might be able to give him a credit because your truck showed up an hour late. We know what makes sense in this business and what doesn't. We would rather not make a sale if it is not in our customers' best interest. I am sure we are going to have the same need to eat in 10 years as we have today. Building a successful customer base is building a successful business.

LOOKIN' GOOD?

RER: Your product has had a strong impact on the rental market in a fairly short time. Why do you think it has been so successful?

Odland: We created and are offering a product that has not been out there before. It allows rental stores a chance to recreate the looks of most of their equipment that has lost its curb appeal at a fraction of the cost of new paint. It can be done in one day and put back to work the next. Most equipment can be done with about two hours of labor and $50 worth of our material. Most everyone realizes that the better-looking piece of equipment rents first, but until now it has not always been affordable to maintain the equipment this way or to take it out of service to have it repainted.

You are fairly new to the rental market. What do you perceive to be the strengths of this industry?

We have had the opportunity to work with equipment sales, manufacturers, construction and rental companies. Looking at all sides, I believe that the rental industry has the best of all worlds in most cases. The rental companies can furnish equipment in all aspects of the economy change. It just takes a different style of selling their services for the different phase of the economy swing. This allows them a chance to help make their equipment revenue. I don't believe other industries can do this as well.

What is your impression of the efficiency, or lack thereof, of the service departments of most of the rental companies you visit?

We have been very lucky to have been invited into a lot of large and small rental service departments to demonstrate the need of our products. It is very noticeable when you are in a shop that doesn't have very good communication between the sales-service and technicians.

I believe most shops have very good help and when they understand the importance of getting a machine finished and back out to create revenue, they seem to work together better and the results are a faster turnaround on equipment.

Having said this I will say that the rental service departments understand this more than the dealership shops we have visited.

What should rental companies do to market themselves better?

If possible try to remember that the equipment that is either on their lot or out in the field working is also their calling card. It needs to leave a good impression that will help send in another customer or at least give their current renter a reason to take a little better care of the equipment.

I also strongly believe there is a larger market among weekend urban dwellers that are in a good income bracket and want to do more of their own work on their homes. Equipment appearance and a friendly salesman might help keep equipment working more on the weekends. This group of people may not understand mechanical condition, but they understand appearance. They will come to the rental store, which can help explain what equipment they need to possibly rent or buy.

What kind of economy do you expect for rental in 2004 and beyond?

Our business also takes us into the transportation industry. What we are seeing and being told is that the movement of raw materials is increasing with the help of the trucking companies. When this starts showing up, it is just a matter of time and I think we will see more need for rental equipment being used for industrial construction and residential housing growth and remodeling.

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