As we begin Module 2, it is important for you to know why renting makes sense from a customer's perspective. You learned in the previous module that rental is growing at a rate of about 5 to 8 percent year over year. To be effective in this industry, you really need to understand what is causing the growth. Let's take a look. In the early days of rental, contractors primarily preferred to own their equipment. Back in the 60s and 70s, large contractors would have big yards of a lot of yellow iron. They boasted of owning most of their equipment. But from time to time, they would have a situation come up and they might need a piece of equipment in an emergency. Maybe one of their pieces of equipment broke down. There might be something that came up that was a project, something that they weren't used to doing, and so it wasn't something that was planned. Otherwise, they would try to figure out how to either buy a used one or maybe buy a new piece of equipment for a project. Occasionally, there was a situation where somebody couldn't get financing on something, and so maybe they decided to rent as an alternative. But it was primarily they would prefer to own the equipment and couldn't seem to come up with the money, so maybe they would rent for a short-term requirement. And then occasionally, you'd have a customer that, let's just say they had a big fleet of equipment, but they got a few more projects going on than they had equipment. So they might have a peak demand and they might need to rent something for, say, a few weeks or a few months to complete a few projects, and that's why they might need to resort to rental. In today's market, the contractors and the customers that we rent equipment to are much smarter than those from 30 years ago, and so there's a lot more reasons that cause business owners, small business owners, contractors to try to be wise with their money. So one of the things that tends to happen, let's just say interest rates go up. You probably know this being an equipment dealer that when there is a tick-up in interest rates, sales generally start to slow down, but conversely to that, when the interest rates go up, usually rentals start to increase. That's because economic uncertainty is in front of us, and so those of us that have been in the rental industry for a long time recognize that the more uncertain the economy is, it tends to drive customers towards renting. That's a big advantage for offering customers rental is they're asking, in so many words, they're asking you to take the risk because they're a little scared. Secondly, the projects that contractors get today, for the most part, are much shorter in duration, where before a contractor might get a two- or three-year project, and maybe that was fairly common for large jobs. Now many of those things are broken up, and there's multiple contractors get a portion of that, but it makes the cost justification for equipment a little bit more difficult because the projects are shorter, and no one knows what's beyond that project. Another driver for rental today is new technology that continues to come out. It's really fascinating the type of things that we're seeing on equipment that are GPS-related, that are changing the way that people do site development, layout on roads. A lot of the labor is being taken out of doing the survey work and putting down grade stakes and those types of things. Another reason that people want to rent equipment today is they have less capital budget. Think about some of your municipalities, some of your states. They've got less money to work with maybe than they've ever had, and they have many, many more demands for the use of that capital dollar. So they're looking to potentially rent equipment or outsource their work, where 30 years ago they were buying equipment almost every year. You could see it on the bid list. So customers have less and less capital budget to spend, and so they usually have more money to spend that they can allocate for rental out of, say, a general maintenance budget. Those of us that have been in small business before, it's all about preserving cash. And so if you're an undercapitalized company, you're going to try to preserve your cash to be able to make payroll and things of that nature. And so renting is a way that you can preserve your cash and just give the equipment you need when you need it and give it back, and that's a very smart way to use your resources. And then if you actually think about owning and operating equipment, it's highly unlikely that a contractor can buy that piece of equipment as cheap as you can and that he can get a skilled technician like you can, and that he can warehouse and maintain that piece of equipment like you can. So he's smart if he uses subcontractors and he stays to the things that he knows, and so renting is like finding an equipment partner, if you will, that you're outsourcing the sourcing, the maintenance, the logistics of the equipment that I need. So it's really a smart way, if I'm a contractor, to think about my rental supplier. And then ultimately, risk. As you can see in the graphic there, most small businesses are trying to figure out who they can push the risk towards, and so renting is one of the ways that you can avoid risk, both with managing fleet and then potentially if there is a downturn in the economy, which we saw with the recession a few years ago, that some of our customers got upside down in their equipment, and so they don't want any more of that risk. So these are some of the strongest drivers in our rental market today. So when we think about customers pushing risk towards you, the equipment dealer, or to a major rental company, exactly what are we talking about? What kind of risk? So first of all, we'll talk about the use of a capital dollar. They are choosing to preserve their capital dollar for maybe some other use, and they're allowing you to spend your capital dollar on the equipment. They decide that they may have other needs and they don't want to risk the capital that they could potentially spend on equipment. They might have other requirements for that. The maintenance and repair on fleet. They're pushing that towards you, the dealer, or you, the rental company, because they don't want to spend their time and effort and manpower maintaining and repairing equipment. They prefer that you do that. The storage and the warehousing. I mean, these are real costs, whether it's the cost of capital, money is not free, maintenance and repair, so we've got personnel costs. We've got real repair costs to equipment. Now we're talking about storage and warehousing. That's not free. We think about logistics, transportation, tractor trailers. We've got trucks and drivers, fuel costs. These are all real costs associated with maintaining, owning, and operating equipment. Just the overall asset utilization. So a customer buys a piece of equipment. He really only has his particular jobs to try to spread the use of that equipment over and try to get a return. You, as a dealer or a major rental company, you've got all the projects within a particular region to try to keep that piece of equipment busy. So you would do a much better job of utilizing that asset than, say, a particular contractor might. The disposal strategy. Let's just face it. A contractor is not in the same business that you are in buying and selling used equipment, and so he clearly is not in a position to do well to try to make money on selling a used piece of equipment. And future values. So think about this. Anybody that is buying a capital good today, they are real and they're going to make any kind of payments on this. Let's just say they're going to finance this thing for five to seven years. They are really making a pretty optimistic statement about how they view the future. They're really suggesting that they see a pipeline of work, the same type of work, because they're going to buy a machine and they're expecting that machine to be able to do the work that they have lined up over the next five to seven years. They are also expecting the economy to be favorable. And they're also talking about what they think the backside value of that piece of equipment is should they decide to sell it or trade it in. So when someone buys equipment today, they're really making a very optimistic statement about how they see the future. And then lastly, the balance sheet impact. So renting is something that does not show up on a balance sheet. And smaller, undercapitalized companies get into a debt to equity mismatch. And so renting can be very favorable to companies that are undercapitalized because it does not impact their balance sheet. So let's face it. Renting is a smarter way to work. It reduces the financial risk and controls equipment costs. It reduces and eliminates investment in non-core activities. And how many times have you seen a contractor that he owns one piece of equipment and he's trying to do everything with that one piece of equipment? He thinks it's the Swiss Army knife. But in fact, if he actually used the right equipment to do the job, he would end up being able to have a better finished product. So renting enables you to use the right equipment to do the right job and end up with a better finished product. Your accounting for job costs. When I talk to large contractors and they own their own equipment and I ask them how do you spread the cost of the equipment appropriately across the job sites, generally speaking, they put some type of allocation to that. Well, I can tell you allocation may be close, but it's not exact relative to how much usage did a piece of equipment actually spend on a particular job. And so that's where actually when someone rents equipment, they are able to get an invoice from a rental company or a dealer that is very specific. This piece of equipment was on this job and it was used this many days, and therefore there is accurate accounting for the equipment that was used on this particular project. That will also help them in the estimating for future projects. But if they're just taking the cost of their equipment and spreading it and saying 3% here and 2% there, that is inaccurate and will lead to them not being as accurate in their future job estimates. And lastly, in most places, your rental expenses can be expensed in that same year that the expenses occur. When you buy a piece of equipment, you are only allowed to depreciate at a particular rate, and so in many cases it's more favorable tax treatment for a customer to use rental invoices than it is to depreciate an asset. So let's consider some of the best customer benefits about renting equipment. We've stated in so many words before that it's a short-term financial obligation. So the customer doesn't have to really sit down with a CPA and try to figure out how much money he should spend next year on capital goods. It's a much easier decision for them to decide because it's for a few days, few weeks, maybe even six months. And from a customer's perspective, he can consider doing different types of projects. I mean, he actually can bid work that he doesn't own the equipment for because he has confidence that he can get a hold of the right equipment to do a particular task. So it actually opens up more avenues for your existing customers when you begin renting equipment to them. They'll have more options to drive revenue. And the overall convenience, I mean, for a contractor to be able to basically understand what the rates are in his community for a, let's just say a monthly rental on a wheel loader and an excavator and a dump truck, he's got those numbers in his head. Someone offers him an opportunity to do a project. He can do the math real quickly. He can quote somebody because everything is down to lowest terms, basically. He doesn't have to go sit down with someone, try to figure out what would it cost him to buy or lease all of this equipment, and then try to work the math all the way down into what should I charge per day. The idea that you can call someone, give them a request for literally a few hundred thousand dollars worth of capital goods, and it shows up 24 hours later and all they had to do is make a phone call and sign a document. Rental has tremendous convenience at the end of the day. It really enables contractors to work more effectively. And then with the equipment that's out there, we mentioned newer technology, better product support than they could create themselves. They don't have to have a warehouse and a couple of technicians and then, oh, my gosh, the equipment breaks on the job and they've got to get the guy in the warehouse to go out and try to fix the equipment, and then they don't have another one in case he can't get it going. So the product support being offered by major rental companies and equipment dealers is far superior than what a contractor could do. And then the application expertise. Again, rental companies and dealers have product-trained staff, and so for a contractor to get in a situation and not know exactly what it is he should use, he's got a trade partner that his rental supplier, he can contact them, explain the situation to them, or maybe even have the rep come out in the field and take a look at what the task is and make a recommendation. So from a contractor's perspective, this helps them with manpower. It helps them with finance. It helps them with logistics. It helps them with expertise. So it's win-win-win for customers.

renting equipment

customer perspective

economic uncertainty

limited capital budgets

financial benefits