Although not everyone sees it, many rental people expect an uptick in 2011. Has the industry turned the corner?
The economy has reached a turning point and is getting better. That's the consensus of most North American economists. In terms of the construction market, most manufacturers that supply the rental industry are selling more equipment to the rental channel, and the profit/loss statements, stock prices and sales numbers of most manufacturers are far more encouraging than a year ago.
Some in the rental business are saying the same thing. The second half of 2010 provided a glimmer of hope for many rental companies, many of whom expect improvements in 2011. For the most part, most rental companies saw 2010 as an improvement compared with 2009, but that improvement brings to mind the title of a novel from the 1960s called “Been Down So Long it Looks Like Up to Me.” For many it was up, but still far from pre-recession levels, and many discussed the need to get accustomed to a “new normal.” Rick Dahl, of Sugar Grove, Ill.-based Metrolift, perhaps said it best: “We started out the first half of the year by digging a huge hole of losses with an excavator and finished the second half of the year backfilling that deep hole with spoonfuls of profits.”
While many economic indicators are looking up, the economy is still risky business and the soft housing market, the glut of homes and office space, massive unemployment, and a still-muddled credit market, are making rental people and their customers cautious and nervous.
A sense of recovery is still far from universal. A recent informal RER survey of readers reveals that while most had improved results in 2010 and expect continuing improvement in 2011, not all have seen a turning point. Some say 2010 was ‘more of the same,’ expecting the softness to continue into 2011. Still, more than half of the respondents noted an improvement in 2010 with about a third of respondents reporting 2010 as essentially flat. About 10 percent reported 2010 as actually worse than 2009.
But, for the most part, the consensus is an improving trend. As Bob Kendall of Seattle-based Star Rentals said, in a comment whose tone was echoed by a number of people: “As I look back over the past year nothing seems a lot different and looking forward nothing looks overly encouraging but for whatever reason things just feel better.” Customers tend to at least be inquiring more and expecting better things to come.
Rental companies generally are saying that 2010 was, as RSC Rentals CEO Erik Olsson puts it, “a tale of two halves” with the second half of 2010 being what many see as a turning point.
“Our business began the year very weak, but began improving in March and has stayed strong ever since,” says Howard Hicks of San Antonio-based Holt Cat.
“We project an overall increase in revenue, year over year, of about 8 percent,” adds Bill Thompson of Thompson Pump. “Our rental-related revenue showed the greatest improvement and may come in at 35 percent over 2009. Sales of pumps and equipment, although higher than 2009, were disappointing and the increases were minor. I attribute the languishing of sales to the continued limited availability of financing for contractors, their lack of confidence in economic improvement in the short-term and the general decline in construction activity.”
Part of the 2010 improvement, on the part of many rental companies, was not so much that business improved but that the austerity measures and enhanced efficiencies they found themselves forced into helped bring about better results. “Overall, our volume between 2009 and 2010 has not really changed,” says Joel Theros of Theros Equipment. “But we have been able to derive more profitability and better cash flow as a result of further streamlining of our operations and continued pay-down of pre-existing debt from equipment notes.”
Others are less positive in their reports about 2010.
“2010 has been the worst year for us rental revenue-wise,” says Ron Pikulik of Patten Industries, Chicago. “We are down significantly year over year. The biggest reason is on the heavy side — there has been no large dirt site work and the road work has been patching. The smaller products' rental revenue has remained flat.”
With accelerating momentum for some in the second half of 2010, there is heightened optimism for 2011. In fact, 75 percent of respondents to RER's survey predict 2011 will be a better year than 2010, with projections varying from 1 or 2 percent to double digits, with most on the cautious side.
“We expect markets to continue to improve slowly,” says Marty Moore of Caterpillar dealer Nebraska Rents. “[But] high unemployment, housing inventory, and state and municipal financial conditions as well as federal government debt continue to be worrisome.”
“We expect business to improve slowly in all markets,” adds Sarah Rothenbuhler of Bellingham, Wash.-based Birch Equipment Rental and Sales. “Home improvement has shown the first signs. We're still prepped and ready for the turnaround in the construction, manufacturing and industrial markets that we serve. We are however actively hiring for yard reps, sales staff and mechanics and drivers now as it takes about a year to begin to really get knowledgeable for all facets of our industry and the industries we support.”
Holt Cat's Hicks was among the most optimistic. “We expect business to be up around 20 percent over 2010,” he said. “New sales, rental, used, parts and service are all improving.”
More typical was the cautious optimism expressed by Joe Zimmerman of Briggs Equipment who said his company expects “continued improvement, though likely to be only moderate.” Others, such as Steve Barnhardt of Coble Trench Safety predict a more flat scenario. “We expect to see much of the same as 2010,” he says. “We are hoping to continue to see moderate growth, although we're planning for stability in revenues.”
Don Bruner of Cincy Tool Rental, Cincinnati, is on the optimistic side. “I don't think we'll set any records, but I do see a trend upticking,” Bruner says. “We need to get the homebuilding industry going. No matter how good other industries are doing, if we don't have a good homebuilding industry, we're not going to have a good economy. A lot of things that I'm seeing, and what realtors are saying, suggest a lot of the surplus inventory of homes is being exhausted. There's starting to become a need to do some building again. Hopefully by March or April we'll see that.”
Back to black
One of the key responses to the downturn was for rental companies, universally, regardless of size, to downsize and age their fleets. In 2011, this trend is going to be reversed by the majority of rental companies for several reasons. Some are planning increased equipment expenditures because they expect better business conditions and will need new or like-new equipment to respond to customers' requests. For others, increased capex is more related to the necessity of replacing aging equipment. And, while reducing and aging fleet might boost utilization, it also increases maintenance costs.
Nearly 80 percent of survey respondents told RER they plan to increase fleet capex in 2011. Most plan increases in the 10-percent range, although some plan to double or even triple their equipment acquisitions.
“In 2011, we anticipate growing our rental fleet by approximately 15 percent, a little more than twice as much as in 2010,” says Wes Stowers of Stowers Rents, Knoxville, Tenn.
“Our business plan calls for a 25-percent increase in capex for fiscal 2011 in concert with keeping our average fleet age between 36-39 months,” adds Star Rentals' Kendall.
“We did buy fleet [in 2010] but mostly replacement and we will do twice that amount in 2011,” says Mike Watts of Sun-state Equipment.
There was less optimism regarding the thorny issue of rental rates. About half of survey respondents expect a degree of rate improvement in 2011, but expectations are far from high, with some expecting only a couple of percent increase. Among those that expect rate increases, many are more hopeful than certain — if business improves, hopefully utilization will as well and therefore rates along with it.
Kendall says that while rates have “stabilized” from historic lows, “with the market in essence still over-supplied, the likelihood of any measurable improvement is off in the distance.”
Bill Thompson of Thompson Pumps disagrees. “Rental rates continue to be under siege,” he says. “We have not seen any relief at all and I don't expect to see any until utilization rates improve substantially. I doubt that 2011 will see any significant upward trend.”
“Rental rates were depressed in all markets in 2010,” says Geoff Shorten of Vancouver, B.C., Canada-based WesternOne Rentals, which covers Canada's western provinces. “[There were] small improvements at the end of the year, which we expect to continue through 2011, but at a gradual pace. We feel it will take at least two years for rates to recover to ‘normal’ levels.”
RSC's Olsson expresses a similar view. “It will still take a while before we get back to everything that was lost, particularly the 2009 peak,” he says. “But I'm cautiously optimistic about 2011. I think the industry will start to be re-balanced, industry utilization will improve, and thus the pricing environment should be favorable to get some of that rental rate level back.”
Not standing pat
While the downturn obviously led to a far more cautious attitude from most rental companies, with many putting expansion and growth plans on hold, rental companies still made changes in 2010.
For example, Modern Equipment entered into a marketing alliance with Trico Lift, both multi-regional companies with headquarters near Philadelphia. Under the agreement, Modern will market Trico's large fleet of aerial equipment, while Trico will market Modern's large material handling inventory. “Challenging times demand creative solutions,” says Griffith in discussing its alliance with Trico. Modern also is re-structuring and adding a new ERP system, one of many companies using enhanced technology to improve company performance.
“We did all the legwork in 2010 to research business software, and we are investing in a new system in early 2011,” says Theros Equipment's Theros. “We feel that our new software will help us maximize our relationship with existing customers and make it easier to create and keep track of new ones. As far as new marketing techniques, we have been focused on streamlining our business and focusing on what we're good at and what we think the typical rental customer expects from his or her experience. To us, that ends up being a concentration on small contractors and homeowners, as opposed to larger jobsites and big contractors where there is a lot more competition and degradation of rates, as well as difficulty in forging a long-term, mutually-beneficial relationship like that, which can be created locally.”
Theros is not the only company to change its inventory mix, changing equipment focus to adjust to changing times.
“We changed marketing strategy from an equipment standpoint,” says Jeff Wearing of Decatur, Ga.-based Ready Rent-All. “You're not going to see a lot of big construction for a couple of years, at least two years in most cases. We're seeing guys building small buildings and renovating them, so we're catering towards renovation products. We've got a couple of those jobs coming up, customers renovating the building to suit their needs. So we got rid of most of our forklifts and reach equipment and invested in more compact equipment.”
“We're always changing inventory, kind of following the money trail,” says Cincy Tool's Bruner. “Right now we're doing real well with plumbers and landscapers.”
Patten Industries is adding field reps. Birch Equipment is investing in a central dispatching system and has embarked on a dealership relationship to diversify revenue sources. Sunstate Equipment is also revamping its dispatching system. Briggs Equipment plans to implement field sales force automation. Ken de Vries of All Star Rents, based in Fairfield, Calif., says his company will look for markets national companies are abandoning. WesternOne, RSC and Coble Trench Safety are all looking at geographic expansion opportunities.
While rental companies are a bit more optimistic going into 2011, what's more important is whether or not their customers share that view, since customers' activity will drive the fortunes of rental companies. While some rental people are sensing more optimism, it is typically cautious and far from ebullient.
“Customers are mildly optimistic, but still struggling,” says Hicks. “The only strong markets are petroleum exploration, production and distribution in several areas of our territory. Highway construction is strong in a couple of our regions.”
Looking from a national perspective, RSC's Olsson sees more confidence. “Everybody is starting to see some more solid footing and saying ‘OK, this recovery seems to be for real,’ ” he says. “It is not a strong recovery but it's a steady recovery. A lot of customers, particularly on the industrial side, will release funding for projects. So we definitely hear more confidence.”
WesternOne's Shorten sees positive signs in Canada. “Modest growth everywhere except Alberta,” he says. “Construction is strong in a couple of our regions.”
The expectations of many, however, are more measured and uncertain. “Housing and commercial construction remain flat,” says Modern's Griffith. “We see improvement in industrial customers and the need for fleet improvements.”
“The attitude, expectations and confidence levels of our customers vary from ‘somewhat optimistic’ to ‘just shoot me,’” says Thompson Pump's Thompson. “I just hope we issue fewer bullets in 2011.”
“We don't find too many optimistic customers in most markets as their backlogs are less and the jobs they do have are for low margins,” says Sunstate's Watts.
“Our customers are not more optimistic, but we do think that the market will grow approximately 10 to 15 percent,” says Stowers of Stowers Rents.
Several rental companies say their customers believe that improvements in their industries will come in 2012 and beyond.
Hanging on by our fingernails
Slight improvement seems to be the predominant expectation regarding the overall and regional economies, according to rental people surveyed, with the economic recovery starting points varying. “We've seen improvements in the weakest markets like Florida, California, but they obviously have a little longer to go before they are back where we want them to be,” says Olsson. “Compared to, for example, Texas, which wasn't very long in recession, and came roaring back in the back half of 2010.”
California rental people are uncertain that an economic recovery has even begun. One California Caterpillar dealer says 2011 will be the worst year of the downturn, with another year before developers get serious about homebuilding, with very little private money for construction available and massive budget deficits, high unemployment and continued home foreclosures.
“California will be the last state out of the recession,” says All Star's de Vries.
Some see the Chicago area as lagging behind, but others, such as Metrolift's Dahl, see more hopeful signs there. “I believe that our Chicagoland area will be busy due to a few large hospital and university projects, but mostly because there is less equipment available because our competitors have sold off or liquidated large portions of their fleets.”
And while some, such as Patten's Pikulik, don't see immediate improvement on the horizon, he sees long-term benefits. “This economy has put us into a future position of strength. We have learned to do more with less and have really focused on operational improvements and efficiencies,” he says.
“The experts say the economy is improving,” says Ray Roland of Springfield, Ill.-based Roland Machinery. “I think the housing situation must get corrected before construction and development comes back.”
Nebraska Machinery's Moore expects “a slow but steady improvement in the local economy,” while Modern's Griffith projects a flat business environment with growth in 2012. Griffith sees continued margin challenges and “the need for rental fleet supply to catch up with demand and for acquisition cost and rental rates to come into line.”
Joel Theros is bullish about economic activity in the Washington D.C. area. “There is a lot of big work happening and planned in our area through the federal government and projects correlated to it,” he says. “In addition, we hope to see some improvement in the housing and commercial markets in our area, which will improve the position of many of our local customers.”
An upstate New York rental company says the economy in the state “will increase slowly in 2011 with 2012 even stronger.” Rental companies in the Carolinas say strong military spending will help their businesses get through continuing softness in construction spending.
“In our local area, the economy remains very sluggish, but we hope to see some slow improvement in the spring,” says Stowers. “Nationally, outside of a few pockets, we anticipate conditions to also remain very sluggish. Until housing starts begin to increase above the current depression levels, our economy — and especially our industry — will continue to languish.”
“We anticipate slow, but gradual improvement in the state and national picture,” says Hicks of Texas Cat dealer Holt Cat. “It appears that several MSAs in our territory are projected to be leading the recovery. [However,] if the state Legislature does not provide more funding for transportation, we will see a significant decline in highway construction beginning in 2012. Texas, like many other states is struggling to handle a significant deficit. This will mean significant reductions in state spending, which coupled with declining tax revenues in other levels of government will mean less governmental sales of equipment and services.”
While hope for improvement may be on the horizon, not many expect 2011 to be a return to glory days. More likely, rental companies will be doing what Cincy Tool's Bruner says: “We're hanging on by our fingernails. This is too much like work.”