Heavy shift

25 March 2008

If you are growing a rental business, it helpsif there is a market to grow into. That d t seem to be a problem for Emeco, the Australian company that is pioneering the rental of extremely large machines used in the open cast mining sector. The company estimates that the ‘rental rate in its markets currently ranges from a very modest 13% in Australia to an opportunity-grabbing 0% in both Europe and the US.

“We think that 60% of the total market is available for outsourcing by the mining houses”, says Laurie Freedman, who joined the 35 year-old business as managing director in 1999. “A 50% share of that would be good.”

The company currently has a fleet of around 977 units in Australia, Indonesia, Canada, the US and Europe, although two-thirds of these are in Australia and Indonesia. It buys good condition, used machines – typically with 3000 hours on the clock - in what Mr Freedman describes as “mid-range”sizes, although in any industry other than mining they would be considered gigantic: that means dump trucks up to 185 t, dozers up to D11 size, wheeled loaders such as Cat 966 and the 95 t 992 models, and motor graders such as the 30 t 12G. All are rented ‘dry operators.

Mr Freedman says the company is confident that the rental model it has pioneered in Australia and Indonesia can be applied globally; “It the midrange of gear that we can handle – the key is that it is redeployable equipment. Our experience in Australia and Indonesia gives us confidence that we can do it globally.”

One interesting aspect of the comp model is that it needs to operate with equipment at very high utilisation levels – 6000 hours a year is typical for a mining unit, says Mr Freedman. This kind of utilisation is what allows Emeco to charge a price that gives a decent return on equipment that several million dollars new.

Part of the strategy is to grow through acquisitions, with deals made in recent years in Canada on the oil sands project, in the Kentucky coal fields in the US, and, most recently, the acquisition of Netherlands heavy equipment trading company Euro Machinery.

The European acquisition is “hugely significant”, says Mr Freedman, because it gives the company a global procurement network – the ability to source good quality used equipment from anywhere in the world. Emeco currently has only eight machines on rent in Europe – compared to over 250 in Canada and 56 in the US – but says the new base there will help it develop that.

Mr Freedman tells IRN that the company is now targeting rental revenues in Europe and North America of between A$300 and A$500 million (approximately 180- 300 million) within three years. These regions currently account for around 12% of group revenues, which totaled A$382,8 million (233 million) in its 2006 financial year.

Longer term, Mr Freedman says Emeco will move into other markets, such as Chile, South Africa and India, although the first priority is to boost the European and North American businesses.

One interesting part of the strategy is to branch out into large civil engineering works – major dams, bridges and the like – where there is a definite long-term need for large equipment. This type of business currently accounts for just 15% of revenues, but Mr Freedman sees opportunities for this to grow; “If you want to build a dam and it will take 18 months, you d t always want to buy a fleet for A$18 million.”

Emeco is the company making the running in the mining market – and in the large civil projects sector – but it is isn'tquite alone, at least in Australia. Austral biggest rental company, Coates Hire, operates a heavy earthmoving division called Allied Equipment that was boosted last November with the acquisition of Allplant Hire, a specialist renter of large equipment to civil engineering and mining companies. Allplant added 130 machines to existing 220+ fleet. Like Emeco, these are'dry' rented.

Malcolm Jackman, Coates director, tells IRN that the business is in “growth mode”, and will continue to focus on machines in the 50 to 200 t range - “We are not into 350 t dump trucks”. He says the current focus is on “re-jigging the fleet to change both the age and size profile so that it better meets emerging customer needs.”This will mean, on balance, a slightly smaller fleet, but more importantly, says Mr Jackman, a younger one. Coates is targeting three customers types – mining and resources, civil contractors servicing the mining sector, and civil construction contractors.

The size of equipment operated by Emeco and Coates-Allied Equipment is bigger than the heavy equipment fleets operated by general rental companies such as MVS Zeppelin, Cramo and Loxam in Europe. But there are signs that here, too, the demand for rental services for bigger, so-called 'production machines' is rising.

MVS Zeppelin in Germany tells IRN that it sees “a shift towards rental even in the sector of larger machines. Contractors are faced, for example, with projectrequirementstheycannot realize with their own fleet. Rental offers a reasonable option because customers can assemble exactly the machines they need. Moreover, due to the increasing incoming orders, the contractors lack machines. They have to find an alternative to cover their demand, which rental definitely offers.”

The company is putting its money where its mouth is, and will add 225 new machines to its heavy equipment fleet this year. “For 2007 we assume a double digit growth rate. In the long run we forecast a yearly rate of growth of 3-4%”, says the company.

Part of MVS trategy is to supply operators with these machines. The company first started offering operators in 2004, but is making a special effort this year to add additional operators. Hartmut Ehrhardt, head of the department that rents large machines with drivers, says; “Due to the declining development in the construction sector in the last 10 years and the massive cutback of machinery and employees [in Germany], companies lack their own capacities for the now increasing incoming orders.”

MVS isn't the only European renter finding a demand for heavy machines with operators. Alan Huddart, Hewden'sgeneral manager for product and pricing, says the company already employs around 300 operators but could easily take on another 100 given the demand. “We cannot get enough operators – that the limiting factor. partnering with an agency looking to place ex-armed forces employees.”(As an aside, Mr Huddart says that although its operators are most commonly used on larger machines, there is also a demand now for operators on 1,5 t excavators and telehandlers as well.)

If employing operators is sometimes seen as an unnecessary complication for a rental business, Mr Huddart points to some advantages as well; “It pain when they are not working, but when th working, they tend to extend the hire period.”In other words, if an operator impresses the customer, the chances are he (and his machine) will be kept on longer. It'sget rental rate increases on operated plant. As he says; “A good plant operator is our best salesman.”

In addition to adding more operators to the fleet, Mr Huddart says Hewden plans to grow the operated plant division in the south of the UK; “That a very strong Northern business, mostly in Northern England and Scotland. best-kept secret.”The heavy equipment fleet is marketed through Hewd plant hire depots, with very big specialist machines being rented from a division of Caterpillar dealer Finning UK.

Hewden in general is noticing a rising demand for bigger machines. Mr Huddart reports, for example, that an order for 100 12 t Cat excavators has been changed to 200 20 t models.

In Sweden, meanwhile, Cramo takes its own approach to large equipment rental. Magnus Rosen, dent for Scandinavia, says the company runs a separate division for large machines – such as 15 to 30 t excavators – which currently employs 25 to 30 operators. However, it also has a close working relationship with around 100 owner-operators of similar equipment. These owners do their own equipment maintenance and operate as a kind of floating ‘releet for Cramo.

“For us d combination”, says Mr Rosen, “we can have our own business, but d t take on too much risk. Also, during a recession, we feed the owner-operators – we try to level it out with our own business. If we had 125 of our own operators, that would be a huge risk.”

This business is run mainly in the Stockholm area, although is now also being built up in Gothenburg, where Cramo now has around 6 or 7 of its own operators plus a small network of independent ‘ent dering offering a similar service in some other areas, although it is not a major priority.

Strongly against renting equipment with operators is Chiel Brandenburg, managing director of Rental Force, a Netherlands heavy equipment specialist based in Amsterdam and with a depot in Rotterdam. The company was founded in 2002 by Mr Brandenburg – an ex-DAF Trucks sales manager in the country – and boosted by a merger in 2005 with a competitor, Big Rental. “We rent without operators”, says Mr Brandenburg, “Otherwise we get into competition with our customers. You get asked for two quotes for two different angles on the same job [with or without labour]. I never mix up my interest in rental and labour.”

Rental Force is growing pretty strongly. It currently has around 150 machines – a mix of Komatsu, Hitachi, Cat and Volvo – and isgrowing its turnover by around 30% every year, although that will be difficult to achieve this year.

The company rents rollers, excavators, dozers, dump trucks and material handlers to contractors and demolition specialists, and Mr Brandenburg says he sees a growing demand for rental of larger equipment; “Thus starting to accept it. In The Netherlands, they always like to own their equipment, but now they have found that in many cases it makes sense to rent.”He says the company is renting a lot of equipment for sewer projects in The Netherlands, and also as replacement machines for break-downs.

One of the advantages of having a fleet of 150 machines is that it is a manageable number. For example, he says he d t need software to track utilisation –company in Europe that d t measure utilisation”, he jokes, beforea goo revealing that, in fact, he started measuring it rather more scientifically from January this year.

It will become more complicated still, because the company will invest around 10 million in 70 to 80 new machines this year. “If you gave me 100 more machines today, I would rent them tomorrow”, he says.

As you might expect from an ex-commercial truck salesman, he takes a very hard-nosed approach to the fleet. He keeps machines for. Mr betweensays Cramo two and seven years, but says that Cat equipment, for example, gets great residual values after just one year. He has also starting buying Hitachi machines; “I expect residual values to be very good.”

This year and next will also see some product innovations. He has ordered four Cat 385 excavators f – the company'sggest yet – as well as two Soilmec the only rental 416 piling rigs and two Sennebogen 835 material handlers. It will also soon take delivery of the first Hitachi, based on a Zaxis 330 excavator, and with a 25 m telescoping arm. “That'shine – there are only two in Europe, and we'veght the third”, says Mr Brandenburg.

Longer term, he is looking outside the Benelux area where the company is currently focused. A move to Germany is unlikely because of the number of competitors there – MVZ, Liebherr and HKL among consi them – but there are other options; about Scandinavia. We like stable countries.”It certainly a growth opportunity, although – unlike the case of Emeco - not without competitors.

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