Is the rental industry going to turn around? - Trendlines

Diesel Progress North American Edition, May, 2003 by Charles R. Yengst

This last year has been a tough one for everyone and the rental equipment industry has been no exception. I have studied the results for some of the major companies that derive a significant portion of their revenues from equipment rental. Most companies have lost money in the past year and life in the fast lane, as they knew it in the late '90s, is no longer any fun.

United Rentals' revenues from equipment rentals were down modestly in 2002, but not a lot. Rental equipment represents approximately 77 percent of the company's revenues, which totaled $2.8 billion in 2002. Revenues from the sales of equipment and other stuff, which accounts for about 16 percent of total revenues, fell more significantly. United attributed the slowdown to declining nonresidential construction spending, which has fallen 13 percent or more since 2001 and it is still weak.

United Rentals had a small profit before extraordinary charges and accounting changes, but when the accountants got done it was not pretty, as the bottom line was very red when counting all of the unspeakable accounting changes, restructurings and write-offs.

Atlas Copco's Rental Service business, RSC, also had a down year, but RSC saw its revenues drop like a rock (17 percent for the year), which attributed largely to currency translation from the dollar to the Swedish Krona. However, with or without the translation problem, Atlas took a hit in its rental equipment business in 2002. About 76 percent of the revenues for RSC come from rental equipment revenue. From what I can tell, Atlas Copco showed a profit for its rental activity in 2002, but operating profits were 45 percent lower than in the previous year.

NES, located in the Chicago area, is having a problem with its lenders and cannot get its fourth quarter and year-end results together. For the first nine months of 2002, the company's rental revenues increased, due primarily to the operations NES acquired in conjunction with its acquisition, in December 2001 of the North American equipment rental business of Brambles USA and Brambles Canada. I believe NES's rental revenues on a yearly basis are about $475 million based on results in recent quarters. Unfortunately, the company has lost money in both 2001 and 2002 and is not looking too good right now with its lender problems.

Neff Machinery has had four unprofitable years during the past five. Neff's rental revenues were $166 million in 2002, down about 10 percent from the 2001 level. Total revenues were $192 million, down 17 percent from 2001 revenues.

NationsRent hasn't been seen much in recent months, as the company is handling a bankruptcy problem, which makes it hard to operate competitively.

Let's talk about Caterpillar for a moment. Caterpillar does not own Cat Rental Stores other than through the dealers that the company owns directly. Dealers are responsible for the activities and include all revenues in their respective results, which for the most part are private and confidential. Still, Caterpillar has to be considered one of the leaders, because it has just opened another 102 locations globally in 2002 and currently has 373 locations in North America, third behind United and RSC. On a global basis, Caterpillar is the leader in locations with 1276 outlets. I would estimate that Cat Rental Stores worldwide are bringing in about $2 billion in revenues collectively, with about $900 million coming from North America alone.

The rental equipment industry has gone through some pretty hard changes during the past two years. Rental rates have declined, probably as much as 5 percent from what they were in 2001, possibly more in some areas. Increased competition and overcapacity are the biggest problems. Lowe's and Home Depot are now renting equipment and the overcapacity problem will not go away soon. Equipment utilization is another problem. United Rentals said that utilization of its equipment declined from about 61 percent in 2001 to 57 percent in 2002. This, I believe, is typical.

Today, most companies have fleets with average ages now running between 40 and 50 months, compared to 25 to 35 months two years ago. For the most part, companies were not able to sell equipment very well in 2001 or 2002. I think that fleet aging will continue to grow for a period of months, maybe all year, before stabilizing, then it will get turned around.

I think we'll have to wait for 2004 and 2005 to see much improvement in the rental industry, but there should be some light at the end of the tunnel this year. Margins will not return to the levels seen three and four years ago, which is too bad. But you can't have everything.