you about something that's very near and dear to me and that's the rental industry. I have been in it since the late 70s and have watched quite an evolution in this industry and it still is an exciting business to be in. Today's subject matter is talking about rental fleets and sometimes I hear dealers talk about what's the least amount of money I should put into a rental fleet or how do I decide how many machines and that kind of thing and so today's program is designed for those that are maybe beginning a rental fleet or maybe are struggling with the performance of their existing rental fleet and trying to decide how they could do better. So briefly about Scripton International, what I discovered after 25 years in the equipment rental business is that rental is actually a key delivery system for manufacturers that traditionally they went to market through dealer distributors like yourself. Dealers had protected territories and they had new inventory and they primarily sold that way and the rental business was just kind of a industry over to itself. Actually in the early 70s it sort of looked like Sanford and Son, a mixed bag of products, the facilities were not very pretentious and so no one really took it very serious but the customers did and so over time what seemed to develop is that rental companies really started focusing on customers. They weren't constrained by products, they weren't constrained by territories and so they got to know the customers quite well and they knew what the customers desires were for owning equipment or renting equipment and so it really became the service business that people talk about it today. So after selling two different rental companies I started working with some manufacturers and helping them and their dealer networks and so I've had the opportunity to work in about 30 foreign countries in many developing markets and then a lot here in the US with domestic dealers and the struggles that they have in trying to be profitable and so Script International works with manufacturers, trade associations and dealer networks trying to help them be more effective in the rental channel. So what we hope to try to accomplish today is deal with your rental company whether you're trying to develop a rental department or whether you're trying to make the one that you have more profitable and so we're going to talk a little bit about the characteristics of the machines and their earning potential because they're not all created equal and so to do that we also have to understand some basics about measurement and then the last thing we really need to understand the impact of the fleet mix to whether you actually can make money with your rental fleet or not. So I want to start with the rent to sell. Most of the dealers that I come in contact with have this program in place. For instance they may have a six-month, nine-month, maybe even a 12-month floor plan with their manufacturer and they have some liberty to rent these items while they're still on floor plan with the hopes of consummating a sale and that's been around a long time and most dealers are active in that business. The rent to rent RTR is slightly different because in this case a dealer has intentionally decided to purchase machine and put it in a fleet with the idea of earning profits on that. The third item, basic terms, is ROI. Most of the dealers recognize that you buy a machine and the difference that you make between buying and selling, that's the margin that you make. In the rental business, you're buying a machine, you're operating it for some period of time, you've got maintenance and carrying costs and then you wash it out on the backside and at that point you can actually determine the total amount of money that you made on the machine. So that's ROI. I'm sorry for that, we just had a crash here in the office, so keep going. The original equipment cost, very straightforward in our measurement of trying to determine how effective your rental fleet is, we don't really want to talk about depreciation in the context of revenue against book value because different strategies are employed for depreciation. So the baseline that we like to use in the industry is called original equipment cost. So whatever you originally paid for the equipment, that's going to be our baseline for evaluating your revenue. And then utilization measurements. A lot of people talk about utilization and they like to throw numbers around out there. And so for instance, time. If you are operating your rental fleet on a four-week cycle, instead of a 30-day billing period, you do the four-week, then your maximum number of days that it could be out would be 28 days. Whereas on a monthly basis, you'd be talking about 30 or 31. And then financial utilization, which I believe is the best measurement because it is measuring your pricing and it's measuring your time efficiency out against what your cost was. So when we talk about utilization, I believe that financial utilization is the best benchmark to compare one fleet efficiency in terms of earnings versus another one. So let's dig into a rent-to-sell fleet. So most of the time, the focus of an RTS fleet is to consummate a sale. And in most cases, the money that we're trying to earn through renting this item is to try to help create a down payment so that the customer can flow right into some type of retail financing. And it also helps the dealers be able to gain more market share. They can move equipment easier into the market. Now here's the key. Point number four, the monthly rates in a rent-to-sell, they really are not constrained by whatever the current rental market rate is for that particular item. Because from a dealer's perspective, he is really just trying to create a down payment. Or he's trying to get any kind of revenue that he can so that he can write the piece of equipment down faster. So for instance, if the market rate was $1,500 a month for a particular item, a dealer may choose to, in his rent-to-sell fleet, he could potentially do $1,100 a month. Because he's really not taking into consideration the owning and operating costs associated with holding that piece of equipment because he's not intending to do that. His real purpose is in a short window of time, let's say six months, he's trying to accumulate enough down payment or drive the price down to hit a target, which is engineering a lower sales point. So if you've got inventory that maybe is on the high side in the market pricing, rent-to-sell is a very effective strategy to drive down the book price on the piece of equipment so that you can sell it effectively in the market. So rent-to-sell has completely different objectives than rent-to-rent. So rent-to-rent, why should we do this? Well, there's some pretty significant trends in the industry that have been growing over time that some customers, believe it or not, do not want to own equipment. And so dealers need to have this as an option. One of the objectives in creating a rent-to-rent fleet is creating good used equipment. So oftentimes when I go to see a dealer and they're trying to develop a rental fleet, we need to look at the used equipment history, the sales history for used machines, and find out what price point or how many hours are people looking at a machine, what's the appetite in the local market for a used backhoe or a used telehandler or a used excavator. What point could we engineer a machine so that we roll it out at three or four years at a particular price point? Rent-to-rent is also something that helps create cash flow in a dealership or a rental operation. The concept is to finance a piece of equipment potentially for four or five years, and you set your payment structure such that it's probably at 40 or 50 percent less than what your intended revenue is, and you can actually generate cash. So for a new dealership or one that is struggling with cash, rental can really prop that up. It also, rental, RTR, should probably be bringing you somewhere north of 30 to 35 percent gross profit. You may even do better. So RTR fleets can actually rival your parts department. It'll probably be at least two to three times more than you're going to get in profits out of your sales on new machines. So rent-to-rent also creates cash, and it can create profitability in the dealership. And one of the things that I find, again, in working with dealers is when they go back around and survey their existing customer base, they discover that their customers are renting all kinds of machines. They're not renting it from them because maybe they don't have the offering, but they're usually surprised at how much these contractors are spending in rental every month with their competitors. So there's an opportunity to do more business with your existing customer base. And then also, the newer customers that are coming along, that are just getting started, rental is a great way for your dealership to get connected with these customers that are probably not in the market to be able to buy a new machine at this point, maybe not even a used machine. But it's an opportunity for you to begin a relationship with them and probably be the first one to know when they are in the market for buying a new or used machine. And rental is a tremendous opportunity to get new products into the marketplace. Instead of just getting that new machine and parking it by the fence and everybody driving by and waiting for a sale to take place, you can have this machine available in your rental fleet and get it out there and get people using it, sitting on it, experiencing the functionality and the features with very low risk to them. So in working with AED, I've had a chance to go back through some of the cost of doing business surveys. And I'd like you to see what the trend has been over the last four years relative to financial utilization. And so as you can see, they almost mirror each other. The RTS, Rent to Sell, is on the lower line and the RTR on the top. And so you may ask yourself, why would those lines be different? Why wouldn't they be the same? Because in many cases, it's the same product. Well, part of the deal is in a RTR fleet, we have an intentionality. We bought that machine, put it in a fleet so that we can make money with it. And so our goal every day, every week, every month is to keep that piece of equipment busy. Whereas in a Rent to Sell environment, we would like to sell it, but we don't have the same compelling reason to have somebody using that machine each and every day. So you can see the gap in 2010 that for every dollar that was in a Rent to Sell business or fleet, the dealer got about 30 cents on the dollar of revenue. Whereas in the Rent to Rent fleet, they got about 45 cents. Pretty significant. That's 50% more revenue out of the RTR fleet. And so to give you an idea, if you look at any of the industry information for national rental companies, most of those guys are in the next level up. They're probably between 55 and 60. And a few of them may even be over 60. So because that's the business they're in. So Rent to Rent, it's got a good trend going there from 2012. And I believe that's because the industry, the customers, I believe today want to push as much risk about owning and operating equipment as they can back towards a dealer or a rental company. So I believe that trend will continue to grow. It's a very positive view for a dealer to see that the utilization, that means they're making money. And that should continue. So one of the other things we find in the AED survey is that the financial utilization actually fluctuates according to the kind of equipment you have in your inventory, which you might expect. So if you look at the typical AED dealer, and this is from last year's survey, they averaged about 43% financial utilization on their RTR, which is good. My experience in the industry is anything north of 40%, you're probably making money. If you're doing less than 40%, you're probably not. So you can see the rent-to-sell fleet was at 28%. Again, almost a 50% difference between the financial utilization of an RTS and an RTR. I think the interesting thing here is the one in the middle. So the smaller dealers tend to do better with the RTR. With some of the smaller customers, they may be dealing with smaller inventories, and they're more committed, I believe, to rental. So that's a pretty astounding number, the 66.9. That's very high financial utilization. So generally, those folks are going to be in a good profitable position. So I want to talk about the characteristics of equipment, and I've kind of put it into three or four categories. I'm going to start with heavy equipment. Arguably, we could say those items that are $75,000 or maybe even $100,000 and more. Usually, these items are longer-term rental because of the nature of the equipment, and so people, they're very price-sensitive in the marketplace. Because of the high density of equipment we have here in the U.S., it's very difficult to get more than 5% a month. You may have a unique machine that would allow you that, but my experience is oftentimes the rental rates are in the 4% to 4.5% of equipment cost per month. I'll talk about these particular items being a shopping good. The contractor's doing a project, and he knows he's going to need these three or four large pieces of equipment. They will usually spend considerable time shopping around trying to get the best price they can on those particular items because they know they're going to need them a long time, and as far as they are concerned, that's where the big money is going to be spent. So in a RTR fleet, these are price-sensitive products, and you're not going to get a very high ROI. For instance, if we go up to the 5% a month, if you were able to do that, and if you were able to keep that machine busy for 12 months, 100% utilization, then technically you could get 60% financial utilization. However, that's not reality. Most of the time, it is a struggle for dealers to keep that equipment out, let's just say 60% to 70% of the time. So if I did 60% of the time, my yield on that would be 0.6 times 60, I'd have 36% financial utilization. And if you recall, I said usually if you're under 40, you're not making money. However, look at the last point here. It has good potential resale value, and so when you get rid of this machine in a three- or four- or five-year period, you're going to have good equity in that. And so that actually becomes back into the equation of whether you made money having that particular machine in your fleet. So here's an example, basically just what I said, $65,000 machine. I hope you folks in your RTR fleets, I hope that you are using a four-week billing cycle. If you're not, here's what you're missing. Probably somewhere in the neighborhood of about close to 20 years ago, at least 15, Hertz Equipment, I believe, was one of the first ones to initiate this idea of a four-week rate instead of a 30-day rate. And I can tell you in competing against them, I didn't quite understand what their strategy was. But once I learned about it, it was brilliant, because if you take the four-week periods in a year, four into 52 yields 13 billing cycles instead of 12. And so if you take 112th of your revenue, that's another 8% of billing that just basically falls to the bottom line. So actually, more often than not, when I work with someone that is just getting started in rental, they are using the traditional monthly billing cycle. I would encourage you to look at your software and make a decision to move to a four-week rate, because that's what the industry is doing, and it'll yield you more money. So you can see through the math problem there, the heavier equipment, it's very difficult to get anything north of 40% financial utilization. Even if you're really good at it, it's very difficult. So this has to do with the... There, I do have a couple of questions for you. Okay, okay. How do we keep the rental fleet from being the last resort strategy for machines that we couldn't sell? That's the first one. Okay, that's a great question. Again, so this is about intentionality. So dealers oftentimes have machines on their floor plan, and it comes time to have to move that off the floor plan, so they just decide, we'll just stick this in the RTR fleet. And that's like kicking the can down the road. So the reason that it didn't sell could be a lot of different reasons. Maybe we just haven't targeted the customer base that really uses that. Maybe we have a functionality issue with the machine. Maybe it's our price point. So the RTR fleet can be a very good place. However, the RTR fleet should not be the place that we just kind of kick the can, slide eight machines in there, and all of a sudden, our rental fleet has way more machines or machines that really are not targeted for the market. And so then what a dealer's perception will be over time is, boy, this RTR business, it doesn't work very well. I'm not making money over there. Well, that's because we have allowed it to be, if you will, somewhat of a dumping ground for the sales department. And so the mistake that they made in either overordering or underperforming just gets moved over to the rental division, and now it's their problem. So I would suggest to you in this case that if you're going to develop an RTR fleet, you need to basically build a big wall around it and treat it as a profit center, and it will have its own objectives of what we buy to put in there and our rate strategy, the market that we are chasing, our rollout strategy, our maintenance and repair strategy. It's a separate deal. Did you say there was another one? Yes. Actually, now I have a couple more. One is just some clarification on a previous slide. Is the rent-to-rent profit stated 30 to 35 percent gross margin or after SG&A? It is a gross margin. So we haven't – it's a great question. We have not taken any of the maintenance costs out. This is just a top-line revenue earnings. Okay. And then I got – do you want the other one? I just got two more. Is the R&M shown at cost or internal markup? If so, how much? So the repair and maintenance, you haven't seen anything in here – oh, I guess maybe on the slide that we're looking at right now? Correct. I think that's what it relates to. Okay. So in this particular model, we're looking at cost of – generally speaking, in the rental arena, on newer fleets, you can expect a repair and maintenance cost of about 6 percent of your revenues. Okay. So again, it's a variable expense because if you're not renting it, you're not repairing it. But that is a parts-only number. That is not labor. And I realize within the dealerships, there is all kinds of things going on relative to how do we treat the rental fleet. Do we get full markup on parts? Do we give them a discount? Do we give them a discount on labor? So in this particular example, we're talking about at-cost parts. So that would get bigger. Okay. One more thing, just related back to what she said earlier. Does the 30 percent GP include rollout sale or just rental revenue GP? It was just rental revenue. It was not the rollout. This slide that I'm showing here is trying to indicate that on the larger equipment, you may not make the kind of great rental income over, let's say, the life of the three- or four-year period, but there is this tremendous backside to what I will call equity-rich equipment. And usually, that's the larger equipment that there still is tremendous life left in that piece of equipment. And you may be able to hit a number anywhere from, say, 40 to 60 percent of the original value of that machine. And so you made some money while you were renting it, less your repairs, and then the sweet spot is on the backside when you're selling this three- or four- or five-year-old machine. Okay. So we'll move along to the medium-sized equipment in terms of price. Skid steers, minis, generators, just a few examples. And so generally speaking, these pieces of equipment have a higher ROI potential because oftentimes these things aren't long-term rental. They're oftentimes rented by the week. And so customers in this case are oftentimes thinking about the work that they can get done with a piece of equipment. The market pricing is not so much focused on comparing what my monthly payment would be if I own one of these things. Just the whole view of the customer tends to be a little bit different about the price sensitivity on these things. So these products are very strong in weekly rental activity, and they're very good for your rental fleet in terms of helping drive profits. And they do have some resale value, but they're not going to have quite as much equity as the larger equipment. And I will say another seminar we will do later about pricing, rental rate pricing is very important. Once you have established what your fleet mix is going to be and the size of the fleet, if you miss the pricing aspect of the marketplace, your results are going to be poor. Even if you went through all the homework of getting the right amount of machines and the right models and mix, pricing is huge relative to driving financial utilization. So here's an example of a machine that would be in this medium. And so you can see the gross rental revenue opportunity. Most of these things are north of 50% real easy. So if you took a 50-50 split of medium equipment and heavy equipment and one of them is earning 40% utilization and the other, excuse me, let's say 30 or high 30s or low 40s and then you've got 50% in this medium equipment, then you could potentially drive a fleet that's yielding somewhere between 42 and 45%. And that would be outstanding for a dealer. Then we've got some smaller equipment. And sometimes dealers don't know what to think about some of these smaller items. And I will suggest to you that these are items that would be considered convenience items. So your customer is coming in. He's renting an excavator or a mini excavator, so you know he's going to dig a hole, there's a high probability that he's got to put the dirt back, he's got to compact the dirt, maybe he hits water when he digs the hole. This could be a utility contractor, electrical contractor, plumbing, anybody that's using your digging equipment, there's more going on there. So part of the solution to doing business with these folks in the sense of rental is having a complete solution or a more complete solution besides just the main machine that's going to do the digging. So these smaller items, if you have them available to rent, you can actually increase the satisfaction from the customer because you had it available and there's not much sensitivity to price in this thing, it's just do you have it available and I'd like to take it at the same time. And I'll tell you, these numbers may look, you may look and say, oh my gosh, how is that possible, 169% financial utilization, but these are real. Some of this smaller stuff will yield north of 100% and so hopefully what you'll see with this is the concept of literally almost like a grocery store. Everything in the store has a different margin and so the grocer is hoping by the time you go through the store and you check out that you've got enough that they're going to make about a 3.5% or 4% margin. The rental fleet and the rental industry is very much the same way. He needs my big items, the market prices are already set, there's not a whole lot I can do about that, but one of the ways that I can enhance my financial return is with some of these other items that have high yield and I also solve problems for my customers with that. Attachments are excellent. I have worked with a Bobcat dealer a few years ago and he had probably somewheres around $100,000 worth of attachments and he yielded usually about 105 to about 110% financial utilization on those attachments and this is only with something like 20% time utilization. They're just wonderful money makers. They help you make your machines more versatile to the customer and it keeps your fleet busy. There's not a whole lot of maintenance for these types of things so I would encourage you one of the ways to drive financial utilization in your fleet is to have more attachments. So here's some examples similar to, this is one that usually shocks people, but that gasoline cut-off saw has a retail price probably north of $1,000, but those are the types of things that you would ask yourself, why would somebody rent one of those and pay $35 or $40 or $45 a day? Well, one of the reasons they would do that is because, let's just say they're out in a pipe job and they're putting pipe in the ground and they've got a $100,000 wheel loader there and an excavator and they're waiting for the guy to cut the pipe so that those machines can go back to work. So if that saw doesn't work, then we've got potentially $150,000 to $200,000 of equipment sitting idle besides the manpower and the loss of production. So $40 a day to rent a saw that we know is going to work, it's got the right kind of fuel mix in it, the recoil is in good shape, the air filter is clean, that's almost like insurance for someone. So there's a lot of utility contractors, there are road crews, people that do demolition work, they start to recognize this type of...it's a convenience for them to get a saw that'll work and go about their business. So they're really not comparing what it is they're renting versus how much it would cost to own that. What they're conceding is they can't manage and maintain that piece of equipment as good as you can. So I want to look at...these are kind of typical averages for these types of equipment. And so as you can see, wheel loaders, again, it's in that high heavy equipment bracket. It's hard to make more than 40% financial utilization on an annual basis with wheel loaders. Mini excavators, to get north of 50 is pretty easy to do. This would be rubber tire tractors. It could be anything from 40 horsepower, 60 horsepower, that you might have a variety of implements on. Asphalt compactors, mobile excavators, as you can see, the bigger the equipment, then you're really falling back in that low 30 to mid-30 bracket. Larry, can you say what the average holding period for large equipment is? That's a great question. So one of the things that I mentioned earlier was about being intentional with this RTR fleet. So I believe one of the strategies that you should have is looking at your used equipment history to find out, do we have a market around us that wants 3,000-hour machines? Or do we have a market that wants 4,000-hour machines? Or is there a market that wants a machine like we have, but if we could sell it for 30% less, we could sell them all day? So the holding period has to do with your local or regional appetite for used equipment, or if you have some other strategy for selling used equipment besides just going to auction, that should be one of the significant drivers. I will tell you, though, in an RTR fleet that our strategy for depreciation is different. It is more of a straight-line depreciation as opposed to a depreciation based on revenue. Again, without getting too deep, on a rent-to-sell fleet, most of the time depreciation is taken down rapidly, and so dealers usually take anywhere from 70% to 80% of the rental revenue and they depreciate that. So it's quickly driving the price of that unit down on the books so that within that 6- to 12-month window, they could sell it to retail. That's not true in an RTR fleet. Generally, it's more a straight line. So honestly, it's difficult to try to retail a machine out of an RTR fleet any time during the first year to two years of ownership because the market value is dropping faster than you're taking depreciation down. So the margins get skinny. I hope that answered the question. So we'll move along here. So the non-earth-moving equipment. So you can see some of the types of things that have really high yield to them. I would note down in the bottom, the aerial work platforms. That is a highly competitive market. And same thing up at the top, telescopic handlers, 6,000-pound, 36-foot machines. They're not getting cheaper in terms of what it costs dealers to buy them, and rental rates are...they're very competitive. So how do you compete in that market or do you want to? Part of a strategy towards building a fleet is not having all new equipment. If there's highly competitive units or particular types of units out there, then maybe you need a blended age to be able to be competitive in the marketplace. So this is an example of the commitment that you may make in terms of mix, inventory mix being the blue. So in this case, if our fleet mix was 55% dirt equipment, in terms of what it's actually going to produce for you is in the low 40s. You're non-earth-moving equipment, so that's some of the other things that we talked about. You could potentially have about 40% of your investment in that, but see that it's driving about 65% of your financial utilization. So the thing that I want you to understand here is the fleet mix is critical to being able to post profitable numbers and generate cash. So this is kind of a big rule of thumb. So I could potentially have an item that only yields 30% financial utilization, and you might say, well, why would I ever have something like that? Well, it's part of the bigger solution for someone, but this should be reasonable targets for you that as a distributor of construction equipment, I believe you should be shooting probably for 45% to 50% financial utilization as a whole for your particular fleet. Make that a target and work real hard to get there because it'll mean profitability for your business. If you're currently operating in the 35% to 38%, my feeling is that there's, in most cases, an opportunity to do better than that. And so depending on the type of equipment that you represent or the brands, you know, I just think that there's some opportunity to fix those things. So one of the questions, probably about 15 years ago, I got to work with a major manufacturer and their dealer organization, and there was a real push to get into rental. And so the question always came up, what's the least amount of money I can get in this rental business for? And so the way to answer that question was really, what is it you're trying to achieve? And so I'm going to use an example here of if you were...it has everything to do with the overhead, basically. So in this case, let's use $100,000 a month overhead for a particular branch operation. So that means that's $1,000,002 a year to keep the lights on, have the trucks, the personnel, everything that goes on there. So for us to break even, we'd have to...and this is just top-line revenue, we'd have to have $1,000,002 in revenue. So if I had a fleet that had the right mix to it and I could get 50% financial utilization, I would need to have about $2.4 million worth of fleet to even have a chance to make money. But if my mix of equipment was on the heavier side and I was only yielding 40% financial utilization, I would need $3 million worth of fleet to be able to have a chance to make money. And as you can see, this is gross revenue before maintenance and repair, just to break even. So there really is...revenue from a rental fleet is not by chance. It really is connected to what type of equipment is in your fleet and what is the mix of that equipment, and it will yield within a range, and that's it at the end of the day. There's nothing real magical about it, but you can predict what a fleet is going to yield based on the type of machines that are in there and the mix. So, Rebecca, do we have any more questions? Yes, we have a couple more. One was, how long should we hold the machines in a true rent-to-rent fleet before rolling them out? Okay. That sounds similar to the question we got before, but my feeling is that you probably would like to have an average age of the heavier equipment probably be in the three to four-year range. I think some of the national competitors in rental are trying to average their stuff somewhere around 42 months, maybe three and a half. So that means you may have some five- or six-year-old machines, and then you've got some two- and three-year-old machines. So, again, a dealer has a little bit different perspective than a true rental company, and I think that's a key piece, is knowing what that backside market is. Where are we going to sell this thing when we get ready to roll it out? Who is most likely to buy it? And at what price point am I trying to get to? So I think for a dealer, probably a three- to four-year rollout is probably a good thing. A couple more questions regarding heavy equipment. How do you deal with preventative maintenance costs? Are you including them or charging the customer? Well, I will say that typically in the rental market, a customer is expecting to have an all-inclusive price. So unless they're doing something that is just more than routine maintenance, so if they rent an excavator for a monthly basis, they really are expecting someone to come out there and periodically check things. And if filters need to be replaced just in the normal course of operating the machine, they're expecting that to be included in the rate. If it's something beyond that, then you may consider charging them. But I think that just because of the competitive nature of the market, that if you are sending someone a bill that has the rental rate and then you've got three or four line items on there that are not associated with damage or extra services that they requested, I think that probably would make you not as competitive. How much maintenance should be a percentage of revenue? Well, that has a lot to do with the age of your fleet. So earlier, I gave a number of somewhere around 6% for somebody that's got a fleet that's, let's just say, an average of, let's say, two years or less. I think 8% to 10% is the more common if you've got a fleet that's, let's say, three to five years old. If you've got equipment that's older than that, you may go north of 10% on your maintenance and repair. And again, the numbers that I'm using are parts only at cost. So if you're marking those up or you're adding the labor component, the number gets bigger. I have run into some fleets where the number was 12% to 14%. And I would say that there's a number of things wrong with that. It may be time to get rid of that equipment. It may be that our routine maintenance procedures aren't what they should be. And so then we're getting into bigger maintenance repair. It could be that we're not catching some of the things that customers are doing to the machines. And so we're eating the cost instead of passenger. So a couple of questions about depreciation. I think they kind of all blend into each other. So the first one is, if you have enough data to actually compute market depreciation rates, is it advisable to keep going with a straight line or a sum of years to stay compatible with your accounting teams? Could you ask that one more time because I'm not sure I get the essence of it. So if you actually have enough data to compute market depreciation rates, is it advisable to keep going with a straight line or sum of years to stay compatible with your accounting teams? Okay. Ultimately, if I'm advising someone on how to deal with depreciation on their fleet, I'm hoping that they're going to be in at least a 10 to 15 percent under current market value with their book value. So that if you had to have a fire sale for any particular reason with your fleet, you could probably get out and be okay. So I have seen some dealers that were very sophisticated in the way that they looked at market pricing. And so they would routinely, every quarter, look at the sales history from options. And they would see prices that were indicators of market pricing. And they would then go back into their fleet and make some adjustments. And that's probably the best I've ever seen done. I don't know of anybody that's got a outside market pricing that somehow can integrate with their ERP system. I haven't seen that. So ultimately, you don't want to be upside down in whatever information you can get from the outside world and then go in and make adjustment. But then I would just do that as a journal entry, if you will, and then keep going with the straight line. Also, what's the different depreciation schedules for different types of equipment? Well, what's most common in the industry today on larger equipment is to understand that at the backside of this piece of equipment, it's really easy for me to say I'm going to have 10% value, or in some cases, you may even go 20%. So that means in the straight line strategy, you'd only be taking it down 80% or potentially 90%. So then depending on, again, when you expect to roll things out, you might choose a five-year period, a six-year period, or maybe even seven. I wouldn't do anything over seven. Five is obviously more conservative. And then on your small and medium equipment, I'd probably be looking at... On the medium-sized equipment, I'd probably be doing four to five. And then on smaller equipment, I'd probably be doing three. So, Larry, back to one of the other questions you discussed earlier regarding maintenance. I have a couple of people asking why you're ignoring labor costs when discussing maintenance and how much labor should be for a typical three- to five-year fleet. Well, the purpose of this particular discussion and webinar was about fleet mix and driving revenue and financial utilization. We really... Because in a dealer environment, there are so many things that go into consideration, it's been brought up. Do we treat the parts transfer from the parts department into the rental? Do we do that at cost? Do we mark it up 10%, 25% about labor? Do we have our own technicians that are assigned to the rental department? And so we are charging them at $15 an hour or $18 an hour, or are we having to go through the service department and we're getting a discounted service rate of $50 an hour? So there are so many variables within a dealer organization associated with the parts and labor piece. Right now, we are just talking about the top line. We'll have to dig into those things at a different time. So for a traditional AED dealer with a large CE equipment, what are the cautions of adding nontraditional smaller equipment, I'm guessing, to the rental line? Okay, great question. One of the things that I would encourage you to do first before you spend a nickel or you even decide some assumption is I would have the sales staff talk to those customers that are renting your larger equipment and find out what are the other types of equipment that they are either owning or renting on a regular basis to go along with the work that they do. So once you understand what that is, then you can make a more educated decision about, should we move into that type of equipment? Are we organized well enough in our shop? Do we have that kind of technician that could actually maintain and repair that? Could we have access to a brand or how am I even going to acquire that equipment? So I would just suggest that you stay... When you start talking about bringing in this other equipment, I would stay as close to my current customer base as possible because you want to solve problems for them. And if you make a mistake, they're likely to be a little more forgiving, as opposed to going out and selecting something that may be considered popular equipment, but you don't know anything about the equipment, nor do you know anything about the user of that equipment. That's when dealers can get in a real mess. So Larry, just back to the question you had on the labor. So when you began discussing ROI of the fleet, if not accounting for some expense for labor, how do you actually come up with that ROI? So what assumptions do you make regarding labor when calculating that ROI? Well, at least what I tried to show in the slides was return on investment. The only way you could really calculate that is you'll have to know what I spent for it, the item to acquire it. During the three or four years it was in my rental fleet, what did I earn with that? Then I need to take out my direct expenses associated with that. And then when I rolled it out of my fleet, what kind of margin did I make? And then you add all those numbers up, and then you get your plus or minus, and you can determine what your total ROI was. The whole purpose of this discussion was to focus on the topside revenue only. We really weren't dealing with any of these backside, the three or four year position of what did I pay in labor, what did I pay in parts, what was the percentage of markup, and then did I sell it for 15% or did I sell it for 30% on the backside. So I didn't mean to confuse folks, but financial utilization is really what we were trying to get an understanding of is the mix of equipment and certain types of equipment has certain characteristics. And if you blend the right things, you can get a more profitable rental fleet for the same amount of money than some other items that don't yield as well. Thanks, Larry. A couple more questions. As a dealer that rents, we have to compete with IRCs that have lower acquisition costs on equipment. How would you address this challenge being that rental is 30 to 35% of the industry? Well, I will tell you that, again, this is from a perspective of a dealer. Most of the time, a dealer is very, very aggressive about negotiating prices with the manufacturer. And so a half a point here or 2% or any type of programs, they feel very confident in the fact that I made a really good buy on that, and when I sell it, I'm going to make a lot of money. I will not dispute the fact that original cost has something to do with your ability to compete, but I will suggest to you that you can spend a lot of time trying to negotiate or feel like you can't negotiate that extra 3% to 5%. But that 3% to 5% does not constrain you from having a high time and financial utilization in your fleet. So over the next three or four years of renting this piece of equipment, that additional discount that you weren't eligible for, a 5% or 6%, it's almost going to be immaterial to the way that your investment works. So at the end of the day, it is what it is. The market prices are already defined, and what you are able to buy stuff from on the new retail side, that's already defined. But I will tell you that this is the person that asked the question. This is a growing trend in the industry. There's more margins to be made in rent RTR than there is in sales. Sales is going to continue to have pressure. Customers are continuing to move slightly away from owning and operating. So I believe very strongly that dealers need to get in this game and figure out how they're going to find their little niche. One additional question on depreciation. How does larger rental houses depreciate equipment over longer terms, greater than five years, have a salvage value? That's a good question. My experience in watching some of these folks is that they are taking a longer term. But again, these are typically publicly traded companies, so oftentimes dealers think that there's a lot of funny accounting going on. I will suggest to you that that's not true. They have high accountability. And so they may take things and push it to the top edge, but that's the business that they're in. They are asset managers, so their goal is to show how much revenue they can drive against a pool of assets. And so they have a different perspective than a dealer. But so they are not trying to write things down on their books as fast as a dealer typically thinks about it. Okay, one additional question. I apologize if you kind of covered this on some of the other questions. As the rent-to-rent fleet ages, do you still use the original cost or net depreciated value to figure your returns and ratios? I still use the OEC, original equipment cost. And that's just so that we can have a common denominator when we are talking, well, even with the AED survey. You couldn't conduct a survey if you used net book value because you have no idea what a dealer did to get to that number. You don't know what their strategy was or whatever. So the only way that we can do comparative analysis between fleets is using this original equipment cost, even if the thing has depreciated on your books to zero. Because in some cases, I will suggest to you that if you did that, then you might be comfortable with lower revenue generation because your idea would be, I don't have that much invested in it. Well, that may be true, but it's still holding a place in your fleet. And using the OEC, it will continue to drive the right behavior by your sales staff as well as your department manager. That's all the questions I have. Okay. Well, I would like to thank everyone for your attendance. We've got a couple of other webinars coming up, one in September, dealing with rental maintenance. And then in December, we're going to be talking about sales staff and how they promote and deliver rental. And then I'm doing a live presentation in October that's a day and a half program, digging deeper into the numbers associated with operating a profitable rental fleet. And you can sign up for those programs at aed.net.org. Thank you very much for your attendance. I also just want to... Some people said that they didn't get to receive the PowerPoint slides, so I will resend those to everybody. And thank you, Larry, for a great presentation. And again, if anyone has any questions afterwards, I encourage you to follow up with Larry or to contact AED, and we'll put you in touch with Larry. Great. I'll be glad to answer everything. Thank you, Rebecca.

Larry Neuber

equipment rental industry

rental fleets

profitability

rental departments

customer needs

revenue

rent-to-sell

rent-to-rent

ROI