Profitable renting

24 April 2008

Individual RSC depots are responsible for selling their own used equipment and only get new machines

Individual RSC depots are responsible for selling their own used equipment and only get new machines when old ones have been sold.

Today at RSC return on investment (RoI) is growing very rapidly; time utilisation is approaching 70%; and our EBITDA margin is approaching 40%, a level we have never seen before in the equipment rental business.

Back in 2002/3, however, the picture was very different. Between 2000 and 2003 we saw a 25% reduction in revenues; the market outlook in 2002 was flat; and rental rates were falling.

I came into the business in 2002, and it was clear then that we had to take a couple of short-term measures very quickly, because we were losing money every day. Non-rental revenue projects were all put on hold, and we immediately dropped the size of the fleet. At that time we had 30% of our fleet not available - it was in the yard, in the repair shop, or in transit. Thirty per cent of US$2.2 billion is a lot of money, so we stopped buying more equipment.

We said let's put more salesmen on the road to get more revenue. This turned out to be a bit of a mistake on my part - we didn't need more salesmen, we needed better salesmen. Today, we have 20% less salesmen that we had, but the performance is better.

Long-term solutions

We then started to focus on the important, long-term solutions for the business. We had to focus on growth. Significant growth was required to provide a return on capital employed (ROCE) greater than the weighted average cost of capital (WACC). We didn't expect that by 2005 we would have achieved that, but we needed to if the business was going to stay with Atlas Copco.

First of all, we started to manage the nine geographical regions as companies, and inside the regions there were districts that were also managed as companies. And in the districts, we began to treat stores as individual companies, with their own balance sheet and their own income statement. This meant that depot managers were effectively running their own businesses.

We also decided not to purse the acquisition trail too much.

Fundamentally, however, we needed another business model. In every company I have worked we have preached business basics. It is very simple: you increase the revenue, and you decrease the costs. In the case of a rental company you have to increase time utilisation and you have to increase the price.

We trained all our people in this, and, as management and myself of a company with 6000 employees, we did it. We would go to the store, have a training day with the people, including the counter staff and the sales team, and we talked about these basics.

Our success has been to a great extent based on price. We have been renewing the fleet in a rapid way, and if you have new equipment you can get a better price, and that is the driver for profits.

As well as raising prices we have changed the way that we buy equipment. All the managers said to me, give me more fleet and I will give you more revenue. And I am sure in your companies you have heard the same thing.

But this is not market driven. With individual stores, the districts, the regions or the company, it is always the same. When you have too much fleet, and a customer walks in and he wants to rent something but says you are too expensive, it is natural for any human being to want to lower the price.

So we changed the way that we add equipment to the fleet. Our forecast system had been based on fleet additions, which, when coupled to rental prices, gave us a new revenue target.

Now, instead of asking the managers for their fleet requirements, we ask them to give us the revenue targets for the next quarter. It is then very easy - using the price and utilisation - to see how much fleet he needs in order to get the revenue.

So, every manager has to give, by the middle of the quarter, the forecast for the next quarter. Instead of fleet driving the revenue, we have now turned this 180 degrees into the revenue driving the fleet.

Meanwhile, our new equipment sales business began to slide and continues to slide, because I'm a believer in focusing on rent-to-rent. Another element in this is sales of used equipment. Instead of having a centralised used equipment department, branches are now responsible for selling their own used equipment. If a branch manager wants to have new equipment, he has to sell off the old unit. It was difficult at the beginning but it changed when they realised that they got a new one when they sold a used one.

We are also more discriminating about when we add fleet. In the old days, people said buy more equipment when time utilisation reached 60%. Now, if its not at 70%, we don't buy.

We need high time utilisation to be efficient, but I would never go for high utilisation without maintaining the price. We need to balance the need for higher rates versus utilisation by offering a high level of customer service and well-maintained equipment. If you deliver on time, and you are offering new equipment, you can get a higher price.

Another key factor in the success of RSC has been minimising the non-available fleet. I have already said that we are down to 10%. I think that manufacturers - and now I am on the side of rental companies - should do a much better job in serving their rental customers.

The problem for rental companies is that the workshop engineer has to be a mechanical engineer, an electrical engineer, and a specialist in electronics and hydraulics. We have called a couple of universities in the US and asked them if they could create such an engineer - we haven't had any positive responses, because those mechanics don't exist. A mechanic has to be a specialist in all these fields and he has to cope with 500 different types of equipment. He can do preventative maintenance - change the filter, change the oil - but as soon as he has to make a repair, as good as he is, he gets into trouble.

Outsourcing repairs

So what I want the manufacturers to do is to take over the repair and big maintenance - not the small things, because that is the responsibility of the rental company. Unfortunately, in the US there are only two companies who can do that. One is Atlas Copco and the other is Hilti. All the rest of the major suppliers have so far failed. But that is key in order to reduce your capital spend on rental equipment.

Today at RSC, equipment servicing costs, excluding labour and facility costs, are running at approximately 9% of rental revenues. Around half of this is for repair work that could be outsourced. The market for construction equipment rental in North America is around $18 billion: 5% of that is $900 million. That means there is enormous potential out there for the manufacturers. Any significant supplier should make a serious attempt to get his share.

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