CED

August 2014

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August 2014 | Construction Equipment Distribution | www.cedmag.com | 33 Midyear Business Report (continued on pnext age) Savannah and Charleston has been a positive influence for the dealership. What's Up? Results for all dealer profit centers were up over last year including new equipment sales, used equipment sales, rental, parts sales and service sales. According to CED's survey, gross revenues from new equipment sales increased for 77 percent of equipment deal- ers in the first half, with 54 percent reporting an increase of more than 10 percent. Gross revenues from rental increased for 65 percent of dealers, with 45 percent experiencing an increase of more than 10 percent. In 2013, 62 percent of dealers saw rental revenue increase. Similar to 2013, about a third of dealers reported parts revenues increasing 1-10 percent, but in 2014 nearly 39 percent reported increases of 10 percent or more. Service sales were increased for more than 7 in 10 dealers, up from just over six in 10 last year. Used equipment sales were on par with 2013. Fifty-four percent or dealers surveyed reported an increase, compared to 52 percent in 2013. Margins Show Overall Improvement Increasing sales contributed to larger margins for many dealers. More than 51 percent of dealers surveyed cited improving margins in the 2014 study, compared to 42 percent in 2013. Still, more than 23 percent of dealers cited declining margins in 2014, an increase from 19 percent in 2013. "Rental rates are still a problem," reported Stimmel. "It is still a very competitive market in certain types of machines. The rental rates eroded and are not returning with the upturn." Stimmel is wary of book values that are too high and lower prices for used Tier-4 machines down the road. Forecast For Balance of 2014 With the exception of used equipment sales, about 60 percent of dealers are looking for their new equipment, rental, parts and services sales to increase in the second half, despite some looming obstacles (at the time of this writing) such Highway Trust Fund uncertainty and a lack of tax incen- tives to boost capital spending. Even those dealers whose business doesn't necessarily depend on highway contractors fear the ripple effects of a highway market shutdown. "If you don't keep the highway contractors busy, they drift down to other work that smaller contractors do," said Stimmel. "If that were to stop it would have a huge impact, not just on the highway market." "Absent highway funding and any change to Section 179, we think the second half of 2014 is going to be challenged," said Dennis Heller, president and CEO of Stephenson Equip- ment, based in Harrisburg, Pa. Buying Trends One trend noted by more than one dealer we interviewed is a transition from rentals to leasing. Some dealers are offering 12-month lease agreements to end-users. "While a lot of contractors are renting, they are looking harder at lease options," said Shearer." Without accelerated depreciation, purchases are somewhat flat." More Inventory Adjustments To Come Our study showed quite a bit of adjustment planned in the second half for new equipment inventories. While 58 percent of dealers surveyed planned to increase their investment in new equipment inventory in the second half compared to 48 percent in 2013, reductions in inventory were also on the rise. In 2013, 15 percent of respondents planned to reduce their inventory of new equipment in the second half. In 2014, that number grew to 26 percent. Meanwhile, the percent of dealers increasing their invest- ment in rental fleet outnumbered the number of dealers decreasing their rental fleet by a margin of more than 7:1. And of those who plan to increase their rental fleet, nearly 30 percent plan to increase their investment by 10 percent or more. Last year, only 8 percent of respondents indicated a rental inventory increase of that magnitude. Nineteen percent of dealers plan an increase of 1-5 percent, while 13 percent expect an increase of 6-10 percent. "The rental fleet is as big as it has ever been," said John Shearer, general manager, Construction Division at 4 Rivers Equipment. "But I think we are still going to add to it." While most dealers didn't indicate a change in rental strategy, several mentioned they are renting more specialized machines to drive higher return on investment. The majority of AED dealers (50 percent) responding to our survey described their rental operations as half RPO (Rental Purchase Option) and half RTR (Rent-to-Rent). Approximately 27 percent of those surveyed indicated that they were involved in mostly rental purchase, while 23 percent replied that their business was mostly rent-to-rent. Seventy percent of responding dealers say rental represents less than 20 percent of their business, while 30 percent say it represents 20-40 percent. Moving machines with Tier-4 engines out of the rental fleet and onto the used market is starting to weigh on dealers. More than one dealer interviewed expressed concern about resale values with limited ability to export machines. They aren't sure that the solutions available to de-tier equip- ment will be workable. De-tiering kits, as well as an under- standing of EPA regulations and the paperwork required will be needed before dealers can decide if they can economically sell into markets without low-sulfur diesel fuel. Labor Issues About 65 percent of dealers surveyed hired staff in the first half of the year, on par with last year. But there was another story. The percentage of dealers who had to lay off employees

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