Owning the Industry

Sept. 9, 2004

The “promise to return” in the rental industry is not necessarily a given.

Oh sure, there are some experts who are seeing—off in the distance—a repeat of some of the success of the late 1990s. But then there is the leader—United Rentals—who isn’t quite ready to say the industry is ready for its second launch.

The “promise to return” in the rental industry is not necessarily a given.

Oh sure, there are some experts who are seeing—off in the distance—a repeat of some of the success of the late 1990s. But then there is the leader—United Rentals—who isn’t quite ready to say the industry is ready for its second launch.

“It’s only very recently that we’ve seen what appears to be the bottom or maybe a slight upward trend,” Wayland Hicks, vice chairman and CEO of United Rentals, told Roads & Bridges. “We’re now looking at 3-4% GDP growth in the economy and there’s a lot of uncertainty. Cement, oil and steel prices are up. Until that uncertainty is removed and until the economy stabilizes at stronger levels we will not benefit as much.”

The new days of rental

Daniel Kaplan, however, sees the potential. The former president of Hertz Equipment Rental Corp. (1982-97) who now leads Daniel Kaplan Associates, Morristown, N.J., has been documenting positive signs of growth for almost 15 years. According to him, the rental industry has leaped from a $6.6 billion outfit in 1990 to a $24 billion operation in 2003—and there will be another upswing in 2004.

“It’s going to grow by at least 8%,” Kaplan told Roads & Bridges. “A combination of pricing is probably going to drive it 6%, then there are the larger fleets and improved equipment utilization. It’s a combination of better efficiency in the rental companies and this movement from ownership to rental.”

That movement is approaching 35%, which is still a far cry from the 70-80% rental readings in Europe and Asia. Kaplan, however, believes the transition is firmly in place.

“In the old days a contractor kicked the tire and said, ‘I’m a successful contractor. I own the equipment,’” he said. “Today’s successful contractor is looking at their balance sheet.”

The big players in the rental industry also are making the decision a simple one through service and fleet size. For example, United Rentals (a $3 billion company) has 730 locations in North America alone, while Rental Service Corp. (RSC) ($1.35 billion) carries 475 stores.

“Today you’re finding companies like United Rental which carries every type of equipment you could imagine. In the old days if a contractor wanted a big hydraulic excavator or an articulated truck he had to own it. Today there is a wide range of modern equipment available from all the large rental companies,” said Kaplan.

Efficiency has kicked in, along with the need to increase rental rates. After a modest slump rental companies have increased rates 6-8% over the last year in an effort to boost profitability.

Consolidation, which was an active term in the rental market a few years ago, has slowed as more companies attempted to revamp their operations. Kaplan, however, sees more mergers in the future.

“I wouldn’t be surprised to see in the short term rental companies $5 billion in size, and as they go more global they could be $10 billion by 2010,” he said.

Equipment manufacturers may indeed drive this trend. Caterpillar, through its Cat Rental operation, recognized the appeal years ago and is now cranking out $1 billion a year in the rental business. Atlas Copco, through Rental Service, and Volvo also have their foot in the door. “In the years to come I think you’ll see the manufacturers owning these rental companies,” said Kaplan. “I think they’re going to have to. There are a lot of people who have the potential if they see the need to do it.

“Caterpillar is unique because it has these dealers with high net worth that are capable of making the investment. That’s the difference. To make an investment in rental for a dealer is significant, and I think Cat intelligently, but strongly, urged their dealers to go into rental globally.”

Currently, Caterpillar has a killer 1,388 rental stores worldwide. There are 373 in North America.

“The strength of the Cat dealer network is the single greatest reason for Caterpillar’s success in the rental business,” Chris Gustafson, rental national accounts manager for NACD’s rental and used equipment services at Caterpillar, told Roads & Bridges. “The Cat Rental Store is a perfect extension of the traditional dealer rental fleets and dealer sales organizations.”

On its own

Despite continued success, United Rentals insists on attacking the rental market alone.

“It’s hard to speak for the rest of the industry, but we do not have any desire to be acquired by anybody else,” said Hicks. “Cat decided to build a string of franchises. I think it’s a defensive move on their part, but an intelligent move.”

According to Hicks, United Rentals’ revenues are up about 7.6% during the first six months of 2004, but actual growth has been soft. Its biggest division, private non-residential (all commercial construction, hospitals, office buildings, banks, educational and religious institutions) has experienced a 2% increase this year. The public sector, which includes equipment used for highway and bridge construction, continued to produce mixed signals. United Rentals has not seen an increase in this area, but it does represent just a small part of the company’s business.

“Even though spending may be up a little it’s not helping our business,” said Hicks. “The rest of the business will see a gradual improvement. I think the key word here is ‘gradual.’ I don’t think it’s going to come back sharply. There’s still too much uncertainty around the economy. Over the next 12 months I wouldn’t expect to see more than 2-3% growth in that end market.”

Still, United Rentals plans on gaining market share, which now stands at about 10%. Service will play a big part. Currently, the rental giant has more than 500,000 units of equipment in its fleet, which calculates to a $3.7 billion investment.

“We back the equipment up with around-the-clock service,” said Hicks.

Beating the storm

Two companies—Rental Service and NES Rental Holdings Inc.—have tilted their worlds back to the bright side of the rental market. The dark ages for RSC came in 2001. On top of trying to reorganize through a merger which involved Atlas Copco, the market was down and rental rates essentially collapsed.

“They were 20-25% less, so it was very difficult to make money,” Freek Nijdam, CEO of Rental Service, told Roads & Bridges. “The stormy years are behind us, but I don’t know how long it will take to forget them.”

According to Nijdam, top line rental revenue at Rental Service is 6-8% higher than it was during the first six months of 2003, and a lot of the improvement has to do with the increase in rental rates.

Rental Service also is in the process of renewing its fleet and have “dramatically reduced our unavailable fleet.”

“That means we have more fleet available to our customers,” said Nijdam.

After emerging from bankruptcy in February, NES, which has 141 branches throughout North America, recently completed a $300 million, five-year, asset-based senior credit facility and a $275 million, six-year, second-lien loan.

“We’re looking at ourselves as the new NES,” Andrew Studdert, CEO at NES, told Roads & Bridges.

Total consolidated revenues for NES during the second quarter, including general rental and traffic safety divisions, were $147.4 million. That exceeds the company’s forecast but is below the $150.6 million reported in the second quarter of 2003. According to NES, the difference can be attributed to the company’s decision to streamline both its branch operations and improve its rental fleet mix in order to maximize equipment utilization.

NES also has increased rental rates 6-8% compared to 2003 which has resulted in better revenue utilization.

“Utilization was flat during the second quarter, but when rates are up 6-8% traditionally you would see a deterioration in utilization,” said Studdert.

Studdert sees some positive trends in the rental industry, but sees commodity prices—coal, fuel, steel—affecting the recovery process. “That is a red flag for me in terms of the strength of the recovery,” he said. “But I don’t see anything that’s warning me yet that the positive growth trends are slowing down.”

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