We are all in the rental business. And what we rent is being rented from OEM’s direct, independent rental companies, OEM dealers and the national equipment rental companies. I myself spend a big chuck of my time in the equipment rental business.
What I see in the construction equipment rental business is annual equipment cost increases but rental rates or overall $ utilization not able to keep up with these cost increases. This got me thinking about how rental metrics measure performance, and when you stop to think about it the one BIG RENTAL METRIC we spend the least amount time on is the COST of the rental unit.
We study time utilization. We study $ utilization, but mostly related to rental rates. We promote long-term rental programs with maintenance, or without if that is what the customer wants. We also measure maintenance performed and charge for pick-up and delivery.
I have to agree that the lift truck market is coming back, but is still not to where it was before the Great Recession. I am not predicting any big growth increase in this industry because our economy is in stagflation mode with the GMO predicting very small or negative real returns over the next seven years.
Your customers are going to feel this pinch and be looking for ways to improve profits and overall ROI. I have to believe they will be applying these criteria to any lift truck purchases they make and that these changes are already moving into your markets. I know of customers not willing to sign long-term contracts, those who only want to pay as you go re maintenance, those expecting you to make the equipment last longer through a planned maintenance and refurbishment program.
URI and other rental companies are already taking steps to increase the time a unit spends in the rental fleet. Add three more years of rental and watch your ROI on the unit increase by 33% (per URI shareholder data.) Adding time in the fleet works but requires a different approach to maintenance…you may have to adopt the program to account for the additional hours being put on the unit and at the same provide the same uptime as you expect from a five-year program. Can it be done? Of course it can be done.
We all know ROI increases if we add additional rental income into the equation. But if you want to stick to a five-year plan the way to increase ROI is to reduce the COST of the unit in the rental fleet. You can buy used units to put into the fleet and lower the cost of the unit, or you can develop a two-tiered refurbishment program to prepare units for the rental fleet or the used equipment inventory. OEM’s that sell to the rental market are already developing these type of programs.
The OEM’s are taking in core units and running them back through the production department and selling them at a substantial discount to new including a warranty and financing availability. Studies are also being done to establish how the end user market will react to these type of programs. It appears that a 30% discount will attract a lot of customers. These are for OEM units including the warranty and financing, and I have to assume the OEM’s are doing ok as far as margins go.
Dealers can provide similar programs but probably will not provide the same type of warranty or financing. Consequently, at this point in time, additional discount would have to be offered to get significant customer support, and it appears that discount would have to be in the range of 50% of new. Doable? Yes, if you plan to do this from the time you get your new units into the fleet. Keep up with the maintenance and be prepared with tech staff and parts availability and plan to make it an eight-year unit. After eight years you can perform the stage two upgrade to either sell the unit or put it back into the fleet for another five years and maybe longer.
I know some dealers who went through their reclaimed rental units. They didn’t replace the engine but you couldn’t tell the difference between this unit and a new unit. The paint was perfect and they replaced just about everything you could see….seats, chrome, tires, etc. and had no trouble getting these units out on rent for a very competitive rental rate that delivered above average ROI.
The rental company where I work recently went through four customer units (cost about $100,000 ea.) and replaced all hoses, electronics, tires, etc. We billed them about $30,000 each and they have machines that will last at least another five years if not more. Cost was well below new cost. Rentals would have cost them $25,000 per year per unit. This process just made this customer a lot more profitable.
We are also refurbishing our rental units to add to their life in the fleet. We inspected the units, estimated time and materials, and are turning these over in our own shop. I have to confess we have techs that all rate a “10” and our results so far are costing between 5-10% of cost. Heck that is a couple months rental to get another three years out of the unit. Based on these results we are cutting back on new unit purchases.
If the market still sucks a few years from now we can also initiate tier two refurbishment where we could get another five years out of the unit or sell it for a nice margin.
With both the digital equipment and telematics now available the maintenance portion of the problem should be solved. We should be able to keep machines running longer because they are being maintained better.
But if you adopt this program you have to deal with the management issues that go along with it.
· There will be accounting problems
· There will more techs required
· There will be technology requirements
· You will be buying more parts
· You will have cash going out that may not be financeable
· And, of course, there are tax issues
Thought it was going to be easy…..well, think again.
I suggest for accounting purposes that this type of program requires a solid “capitalization program” to help determine what expenses get expensed and what expenses add to the life of the equipment. If you don’t do this you stand a chance of murdering your bottom line which will make the bankers nervous.
The IRS wants you to capitalize as much as you can but will live with a formal capitalization policy that you stick with. In fact, this type of document is now required. Ask your CPA for some examples if you don’t have one. There may also be state and local tax issues related to use taxes etc.
Techs will be key. Techs at all levels to spread out the work to the right experience level. You will have to find them, train them and keep them. If you can’t do that it will be tough to refurbish equipment and care for the fleet at the same time. You could, of course, send out the units to a repair facility to do the work, but that would increase your costs, or maybe not if they are better at it than you are.
Technology primarily means telematics…..having a system that really works, and knowing what to do with it. Extending the life of rental unit’s demands telematics capability to keep machines running.
The big issue in the room is financing the program and getting your bank to re-load a unit from five-year-old status with a value of 30-40% of cost, to one where you can finance your rehab cost for another three or four years. This will also require that you discuss this program with an appraisal firm that will properly value a unit you made a significant investment in. With proper maintenance records and unit history you should be able make the necessary adjustments to satisfy the banks.
I believe this is where the entire equipment industry is heading. Rental is getting more popular, but it is also changing with customers wanting to avoid fixed costs. So dealers can offer less costly rental options if they extend the life of current rental units and/or refurbish rental units to extend the life for another ten years. They can also offer refurbished used units at a substantial discount from new and hopefully can provide both a warranty and find a bank for financing. And, of course, dealers can offer refurbishment services for customer owned equipment.
The used airplane market is a perfect example of this type of scenario. I owned a very nice plane for 25 years and sold it for three times what I paid for it. Because of FAA requirements the plane had to be inspected and repaired once a year, have the engine replaced when the “numbers” said it was required and had updated technology installed to fly in FAA airspace. Know what? If I bought that plane back I could climb right back in it again and head for the hills without much work required to make it safe. There are thousands of these planes out there being used on a daily basis, many of them build from the 1930’s on. If your lift trucks were maintained in similar fashion your need for new units would drop dramatically and your ROI’s would be off the chart.
The evolution continues.
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail firstname.lastname@example.org to contact Garry.