ALH reports on the state of the rental industry, including positive third quarter results

If two words could summarize how rental companies are feeling about 2011, they would be "cautiously optimistic." North American rental houses have been weathering one of the worst economic downturns in history, and despite most major players posting financial gains in the third quarter of 2010, companies remain guarded.

Take, for instance, United Rentals, which posted a 2 percent increase in revenues to $605 million for the three months leading to Sept. 30. United's rental revenues increased by 6 percent to $507 million, propping a profit of $23 million (compared to break-even in the same quarter for '09.)

"Rental is a very attractive alternative to buying equipment right now, aided by tight credit markets and cautious consumer behavior," says Michael Kneeland, United's chief executive officer. "As a result, we are seeing increased demand despite the weakness in construction spending. We view record time utilization and sequential quarterly rate improvement as two very positive indicators of profitable growth."

When reporting its third quarter figures, United says it is increasing its planned net fleet investment this year to $180 to $200 million, up from its previously announced $160 to $180 million figure. "We increased our fleet investment to better meet demand and to further strengthen relationships with our key customers," Kneeland says. United says the increase was necessary to meet rising demand and service key accounts.

Matthew Flannery, senior vice president of operations for United Rentals, says United's 71.3 percent time utilization for the third quarter was a record high for the company and some of that demand comes from access equipment. Despite the increased utilization of access equipment, United doesn't have major capital expenditure (CapEx) plans for aerials in 2011.

"Our CapEx plans for 2011 will undoubtedly include some aerial purchases, but in general we are very satisfied with the current position of our aerial fleet," Flannery says. "So, we would expect aerial to decline slightly both as a percentage of total fleet by year-end 2011, and as a percentage of 2011 rental CapEx."

Aerial work platforms account for a big chunk of rental company revenues, with large players reliant on access equipment to keep figures buoyant.

Flannery says that over the course of a year, United has noticed pronounced improvement in demand for 60-foot booms. "Large boom lifts in general are in demand, as well as scissors that are 24-foot and larger," he says. "The higher demand for large machines suggests that we may be seeing the very early edge of the transition in the construction cycle - first dirt, then aerial - which is encouraging after more than two years of slow project starts."

But John Patterson, JCB Inc.'s chairman and chief executive officer, told ALH at the start of November that this particular construction cycle is different from what has occurred in the past. JCB is one of the world's largest construction equipment manufacturers, with a big portion of its product range focusing on backhoe loaders, mini excavators, telehandlers and skid steers.

Patterson says during this construction and economic cycle, rental houses first sold off dirt equipment and are now investing more in aerials. Patterson also noted telehandler demand could see a slight increase in 2011 as rental companies replace aging fleets.

Chicago-based NES Rentals believes the worst of the recession is over, telling ALH that 2011 and 2012 will see modest growths. The company recently signed a letter of intent to acquire Ballard Equipment in Chattanooga, TN. Ballard is an aerial platform rental company with 11 employees and 300 pieces of equipment.

NES has a current utilization rate sitting at 72 percent and the company tells ALH it will invest $40 to $50 million in its fleet next year while predicting rental rate increases, though the company didn't say by how much.

"Clearly, we would like to see the economy improving in our space faster than it is and 2011 is going to be challenging," says Chris Bowers, NES senior vice president. "[But] units on rent are improving and rates are improving. We continue to be cautiously optimistic."

Middle ground

Last year, the American Rental Association (ARA) and its consultant, IHS Global Insight, says the US rental market peaked at $36 billion in 2007 and 2008 before falling back to $30 billion in 2009. At the time of its announcement, it predicted a further fall in 2010 to $27.5 billion.

For 2011, the ARA is forecasting a market return with modest growth before accelerating in 2012, with 2014 seeing levels comparable to 2007. The ARA projects that CapEx plans will also increase slightly in 2011, but major growth, again, won't occur until 2014. Slight increases in 2011 will be mostly due to fleet replacement because of age and not fleet growth.

Midwest Aerials & Equipment based out of St. Louis, MO is a mid-sized aerial rental house that focuses mostly on telehandlers and aerial lift rentals. The company has four locations - Kansas City, Springfield, Bloomington and St. Louis - and will be opening a fifth in Columbia, MO in 2011. Even though Midwest shed 450 pieces of equipment in 2010, bringing its total number of aerials down to 2,000, it looks to spend $3 to $4 million on CapEx in 2011 and says 2010 has been steady.

"It's not like all our scissor are sitting or all our booms are sitting [in our yard]," says Dan Tumminello, owner of Midwest Aerials & Equipment. "Utilization is finally back to where it was a couple years ago. All things are hitting all cylinders right now."

Like some cautious companies, though, Tumminello is keen to keep quiet on what jobs his company has undertaken in the last year. "There was a lot [of work] going on everywhere. It all died. Now it's coming back slowly," he says. "Generally, we are working on a lot of infrastructure projects, especially bridge work."

Tumminello won't say what Midwest's exact utilization rates are, either, but that they're "pretty good". He says that "as long as interest rates stay down, the economy will continue to go upwards. They say there's going to be another slowdown, but I don't think it's going to be like it was last year. If you listen to the economists, the bankers and the media - you'll want to shoot yourself. I was told from the [start] that I couldn't do this thing," Tumminello says. "We started [Midwest Aerials] with 30 pieces of equipment and grew it to 2,500 [at its peak], so we must be doing something right."

Major league

For two of North America's largest rental houses, 'industrial' was a key word for third quarter growth.

RSC Equipment Rental reported increases in revenues for the third quarter - a 5.7 percent increase to $334 million, with rental revenues up 7.3 percent to $292 million. Describing the industrial market as a primary end-market, it was that sector that improved in the third quarter and will continue to improve during the fourth, RSC says.

"Market demand has steadily improved during the year and we expect favorable year-over-year comparisons in the fourth quarter as we have seen the momentum from the third quarter continue in October," says Erik Olsson, president and chief executive officer of RSC.

RSC saw an average fleet utilization rate of 68.7 percent in the third quarter and that overall fleet levels continue to exceed demand and as a result, rental rates remain under pressure and will be a challenge for the fourth quarter.

Hertz Equipment Rental Corp. (HERC) was also an industrial player for the third quarter - reporting a 0.2 percent increase in revenue to $281.2 million. This is the first time in two years the company has posted growth in the third quarter - including its 20.6 percent increase in rentals to the industrial sector.

This means that HERC as a whole increased industrial rentals to 25.6 percent of its North American business compared to 21.5 percent a year ago.

"Our strategy to shift more of our equipment mix to this category is benefiting us as facility maintenance, petrochem refining, energy services and oil and natural gas exploration continue to add new products and restart deferred projects," says Elyse Douglas, chief financial officer and executive vice president.

Mark Frissora, executive chairman and chief executive officer of HERC, says the company saw increases across all boards, and due to the steadying of the economy in the third quarter, HERC bode well compared to 2009.

"We benefited from a stabilizing environment, a favorable year-over-year comparison and a continued growth of the industrial market driving higher utilization," he says. "The trend is definitely moving in the right direction."

Echoing the growth sentiment, too, was H&E Equipment Services, which increased both overall rental capacity and its fleet utilization, says John Engquist, H&E's president and chief executive officer.

While H&E saw a 12.4 percent fall in total revenues to $153.8 million for the third quarter, its rental revenues increased 7 percent to $48.3 million. Also declining for the company were rental rates, which saw a 5.9 percent drop.

"Market conditions continued to improve during the third quarter and as a result, areas of our business delivered solid sequential gains," Engquist says. "In October, our rental business performed at levels we have no experienced since early 2009, at which time we were maintaining $100 million more in rental assets. However, while we are very encouraged by the current activity, we remain cautious regarding the balance of this year due to potential seasonality issues and ongoing economic challenges in several of our markets."

So while it seems 2011 is poised for growth, even if minimal, steady eyes across the world will be watching.