CED

October 2012

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On the Numbers The New Gorilla in the Room Rental is an amiable – and permanent – giant in the marketplace, and will perform best when dealers and manufacturers work together. BY GARRY BARTECKI The 2012 Executive Forum, which took place the first week of September, was, from my perspective, one of the best in terms of provid- ing timely information. As you can imagine, the planning information was presented using two scenarios depending on who wins the election and what Congress gets done regard- ing the Fiscal Cliff. Ed Sullivan, the chief economist at Portland Cement Association, presented a clear picture about projected construction work. Ed was the first speaker and he basically concluded that it is all about jobs and building consumer confidence and getting the Fiscal Cliff addressed. He also concluded that recovery in the construction industry will continue to be a slow process with a meaningful recovery in 2014-'15 if the Fiscal Cliff issue is resolved before the end of the year; he bumps recovery out till 2015-'16 if Congress again kicks the can down the road. David Raso was the last speaker at the event, and as a Wall Street industry analyst covering our industry, he basi- cally arrived at the same conclusions that Ed Sullivan did. David, however, noted that inventory levels for both OEMs and dealers are creeping upward and that 2013 sales projec- tions are far from spectacular. On the plus side, many dealers are saying, "My rentals are exploding!," which I guess is a good thing – but could be a bad thing. This issue is what creates the new "gorilla in the room." Actually, I think there are two gorillas. One has to do with how deal- ers profitably transition into the rental business, and the other has to do with how OEMs react to what I believe is going to be a permanent change in the dealer landscape. What's interest- ing is that after hearing about the expansion of dealers' rental business, their next comment was about OEMs complaining that dealers aren't order- ing enough new equipment. Let's take a reality check here: If the rental business is up, it is because contractors are not buying. Again, I believe this is a permanent change in the marketplace, and I have been saying it for years. And if this is even a short-term phenomenon, dealers have to add two issues or topics to their risk review profile: (1.) Rental Risk (2.) OEM Risk The rental risk is very real. It can cause problems with OEMs, banks, auditors and the IRS. Especially important is the amount of capital required to be in the rental business. While rental activities can reflect better profits and EBITDA numbers, the cash flow changes resulting from the rental business have to be carefully and properly projected and monitored. In short, this is a high-risk time to get more involved in the rental business. Obviously, OEMs are in the manu- facturing business and they need a certain amount of volume to be able to spread their fixed costs to an extent where they have a competitively priced product. Cutting 20-30 percent of their business permanently, above and beyond the normal business cycle, will create significant scheduling issues for them. They will have to find ways to move product (sell into rental markets for example) or bring other value- added products or services to the market. If they do nothing, however, they may have to raise prices, which will then create problems for dealers. If there was ever a time when dealers and OEMs should be working together to maintain market share it is now, and it revolves around the rental business. There is going to be a lot of discussion and training required to do this properly and deliver outstanding customer service, because there is no denying the fact that if you lose a rental customer to another source you may lose them for good. Equipment dealers and rental companies have been a lifelong passion of mine. I started out as a young CPA working with lift truck dealers, and have since worked in auto leasing, auto rental, auto and power- sports dealerships, equipment leasing and equipment rental. I think I can safely say I know both the dealer and rental businesses and what needs to be done to make them work together. In case you didn't know, I put together an AED CFO/Rental Conference this year, which covered the issues above along with operations, pricing, tax issues, rental contracts, insurance and systems required to properly manage the rental fleet. If you missed the conference and cannot attend the repeat performance Oct. 11-12, please contact me, especially if your account- ing or tax vendors are not intimately familiar with equipment rental. I will save you some dollars and reduce the aggravation factor with your banker. (www.aedu.org/715) GARRY BARTECKI (gbartecki@ aednet.org) is AED's vice president of Finance. October 2012 | Construction Equipment Distribution | www.cedmag.com | 53

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