Dump It And Run - for 2010 - Business Conditions
Construction Equipment Distribution magazine is published by the Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada. AED membership also includes equipment manufacturers and industry-service firms. CED magazine has been published continuously since 1920. Associated Equipment Distributors
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SECTION: Business Conditions

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Contact Kim Phelan at (800) 388-0650 ext. 340.

Dump It And Run - for 2010

By Kim Phelan

Article Date: 01-01-2009
Copyright(C) 2009 Associated Equipment Distributors. All Rights Reserved.

It's hard to deny that most equipment dealers will have a rough go of 2009 - but before you call it a wash, hang on till mid-year and create opportunities to help customers make money.

To say that North American construction equipment dealers widely anticipate decreased sales and sales margins in 2009 is about as profoundly insightful as the mid-December news media report that affirmed the U.S. is indeed in a recession.

“No kidding,” retorted the president of one AED-member dealership in a telephone interview. “I don’t think there’s any news in that report – who doesn’t know that? My forecast is that [the recession] will become old news within the next three months and [the media] will have moved on to a new topic – they’ll want to be reporting that it is getting better, and then that self-fulfilled prophecy will come true, too!”

In November, CED magazine conducted its annual Business Outlook survey, asking its 712 dealer members (U.S. and Canadian) to assess their business status as they closed out 2008 and identify their expectations for 2009. The survey received a 13.3 response as 95 dealer executives completed an online questionnaire, many of whom also added written remarks about their regional conditions.

Summing up the year they were ending in comparison to year-end 2007, 36.4 percent of dealers indicated that their 2008 total revenues would finish at more than 10 percent below the previous year’s; 20.5 percent said 2008 would end at an increase of more than 5 percent, while 20.5 percent also said the year would tally at a 6 to 10 percent decrease in revenues. A 1 to 5 percent decrease was reported by 11.4 percent of dealers, and 4.5 said ’08 revenues would end flat compared to ’07.
As they looked into the future, dealers predicted the following 2009 outcome for the various divisions of their companies:

  • New equipment sales: 72.3 percent of respondents expect a decrease, 19.1 percent expect no change, and 8.5 percent forecast an increase.
  • Used equipment sales: 62.4 percent said decrease, 26.9 percent said flat, and 10.8 percent anticipate increase.
  • Rental revenue: 44 percent said decrease, 39.6 percent expect flat, and 17.6 percent look for increase.
  • Parts sales: 45.2 percent expect flat sales, 29 percent expect decrease, and 26.9 percent see an increase on the horizon.
  • Service sales: 45.7 percent said flat, and the rest were nearly tied for their positive and negative predictions on repair and maintenance: 28.3 percent expect a decrease and 27.2 percent said they’ll see an increase.
Regionally, the predictions of dealer executives are illustrated in Figures A to D with the following points of interest:

  • All regions universally indicated heavy majorities of expected new equipment sales declines for 2009, though notably the Southeast region offered some contrast with a 40 percent prediction of flat sales.
  • For rental, the regions expecting biggest decreases were Rocky Mountain and the West, tied at 66.7 percent, while the South Central region had the most responses for rental revenue increases – 41.7 percent.
  • Dealers appear to be broadly optimistic for flat product support sales in 2009, though clearly many still anticipate declines. Nevertheless, 60 percent of Canadian dealers said parts sales will increase, followed by 50 percent of South Central dealers making a similar forecast. Those two regions also lead in predictions for increased service sales. A majority of dealers from the West (66.7 percent) and 50 percent from the Northeast predict flat service business.

Winds Changed Quickly
Dealers, along with the rest of the country, certainly recognized the economic foul weather back in September and even as early as July, but conditions for many continued to spiral downward even after the CED survey data was collected late in November.

“I think it’s changed quite a bit, although I still feel fortunate to be in the Mid-South region,” said Dennis Vander Molen, president of Vermeer MidSouth Inc., based in Jackson, Miss. His territory has a number of construction sectors that are expected to remain stable in 2009.

He identifies strong investment in pipeline work/infrastructure over the next three to four years, as well as significant oil field activity in northwest Louisiana and north central Arkansas – all of which have been generating a fair amount of construction dollars, according to Vander Molen, but also a sizeable flow of money circulating back into those regions’ economies in general. He says that spending is also strong for water, sewer and road infrastructure in the Mississippi Gulf Coast region, but because contractors from all over the country are attracted to these projects they may or may not actually benefit local contractors in the area.

Additionally, “There are still some pipeline projects and gas field work that’s kind of keeping things alive,” said Vander Molen. “But the business has definitely taken a nose dive since October and November. It’s as if the faucet has been shut off.”

How long the faucet will be dripping or dry is the million-dollar question to which everyone would like a clear answer. Adam Fein, principal of Pembroke Consulting, Inc., predicts a deep U.S. recession “lasting at least through mid-2009,” in his “2009 Economic Forecast for Wholesale Distribution,” an IBM-sponsored webcast he presented in November.

He told CED in early December, “Unfortunately, my prediction for major sub-prime mortgage related problems came true, although it’s happened much faster and has been much worse than I (or almost anyone else) expected.”

He notes in his forecast materials that “the excesses of the 2004-2006 housing boom will take years to be resolved.” Fein also affirms what dealers and their customers are already poignantly feeling: “The balance sheets of commercial banks have been weakened due to housing-led slowdown due to mortgage defaults and losses from mortgage-backed securities. As a result, banks are tightening lending standards and increasing spreads, reducing the availability of credit to firms and consumers throughout the economy.”

CED reported in November that record demand for mining equipment, supported by high commodity pricing, would be a bright spot for some dealers, but of course even that scenario has altered significantly in a very short span of time, and mining firms are reportedly canceling multimillion-dollar orders in the Rocky Mountain region. “The commodity price bubble appears to be over,” writes Fein.“While good news for the economy, there will be some painful after-effects for wholesaler-distributors and manufacturers.”

Dealer Snapshot 1: Kansas
Even as commodities pricing dissipates, an area that is expected to buoy some states in the southern midsection of the country is oil, gas and wind. According to John Rogers, owner of Ditch Witch of Kansas, a regional corridor encompassing Oklahoma, Kansas, the Dakotas, parts of Nebraska and Texas were experiencing healthy conditions through the end of 2008, and Rogers himself said he’d achieved the best year ever in the company’s history, 22 years of which have been under his direction.

“My business has been up 20 percent this year, and everybody to the east and west of me seems to be down,” he said. “I don’t expect another year like this – I mean it was just like knocking it out of the park.”
A deteriorating factor for ’09 will be the aircraft manufacturing industry, a staple of the Wichita, Kan., local economy, which is on the decline, according to Rogers. He says it’s the resulting layoffs there that will have a negative trickle-down effect on his business. “When people are laid off, they’re not building new homes, you don’t put a new sprinkler system in, you don’t need a gas line, telephone lines, water lines, or cable TV lines. It will not touch us directly, but indirectly,” he said.

Rogers says oil and gas will remain stable in his region. He expects 2009 to bring decreases in new equipment sales and rental revenues compared to the extraordinary ’08 he witnessed, flat parts and services, but an increase in used equipment sales.

“If [the federal government] doesn’t continue the stimulus package, I can see where people who need equipment will not opt to buy new,” he said.

How Congress constructs its federal funding package for infrastructure projects is obviously the other 800-pound gorilla that could tip the scale in either direction for the equipment industry.

“It depends on what the federal government does in the bailout – how much they take away from the highway funding,” Rogers said. “I’ve already seen some municipalities that aren’t going to get as much money, and things that they had budgeted for [2009] they may not be able to purchase. I’m concerned that the highway budgets and municipalities and counties aren’t going to have some of the money [they expected] – if you have federal money coming and you don’t have it in your hands, you might not get it.”

Dealer Snapshot 2: Pennsylvania & New York
Highway work has been good in parts of the Northeast, specifically Pennsylvania and New York, where Dennis Heller’s Stephenson Equipment did so well in 2008 that it was finalizing an agreement to acquire a small dealership in Philadelphia as the year came to a close. Heller’s company, not a typical AED dealership, primarily sells cranes and paving equipment. He says 2008 was a great year, as was 2007, and he deliberately reinvested his profits into the company when times were very good.
Now that times are less than idyllic, Heller is implementing some innovative marketing strategies, the success of which lie in one fundamental principle: Helping contractor customers find new ways to make money.

For example, the state of Pennsylvania has passed a Prevailing Wage law that requires independent, nonunion contractors to bid road repair work using a scale wage formula that “levels the playing field with those high-priced union operations,” said Heller. But the increased price of asphalt, driven by high oil prices this summer, plus increased labor costs are making many repair projects unaffordable to towns and cities in Heller’s territory. His solution: Leapfrog the contractors in this instance and offer service direct to municipalities.

“We are promoting the rental of our equipment,” he said. “We say, ‘Look, you have the people, you just don’t have the equipment or the training – let us provide that solution for you. Do the work yourself.’ Every township has its own staff of road crew, but they don’t have the highway paver or the big roller, or maybe even the experience to do the repair work.

“We can provide the equipment on an as-needed basis via rental,” Heller continued, “and we can come out and train their people so they can stretch those dollars out and maybe do those five miles of road repair, or rent a milling machine and excavate that shoulder and widen the road without having to pay that prevailing wage.”

Municipalities are responding favorably to the package of equipment rental, training and solutions that Stephenson is marketing. And for all their customers the dealership is currently promoting a winter maintenance campaign that cuts equipment owners some slack on repair invoices.
“In the Northeast we have a shorter paving season and the cash machine turns off in the winter for these customers,” he said. “We’re giving them automatically 90-day terms, so they don’t have to pay for that winter rebuild or repair or servicing until they go back to work in April. It’s showing the customer that we’re interested in working with them; we understand their cashflow dilemmas.”

More Data from Dealers
Just prior to CED’s business outlook survey, Construction Equipment magazine, published by Reed Business Information, gathered additional information from dealers as part of its annual October report. Some noteworthy findings include:

  • Fluctuations in product lines are unlikely for most North American dealers. A large majority (87.2 percent) have neither dropped any of their major machine lines in favor of a competing line in 2008, nor are they considering doing so in 2009 (69 percent “not likely”). And more than 70 percent report they are unlikely to add a competing line of equipment to their offerings this year.
  • Not surprising, more dealers rated both 2008 and 2009 business conditions to be negative – 58.4 percent put ’08 in a mediocre to poor category, and 58.9 percent expected the same for ’09, compared to 25.3 percent who thought ’08 was “good,” and 34.1 percent who expect ’09 to be a “good” year.
  • Dealers ranked 2009 sales volume predictions as follows: 33.9 percent expect an increase, while 40.3 percent expect a decrease and 25.8 predict no change.
  • On new equipment sales in 2009, a slight majority (52.1 percent) anticipates significant decreases, while 31.2 percent expect flat results, and 16.7 percent say there will be significant increases.
  • Used equipment sales are expected to be flat in ’09 by a narrow majority of respondents, as are short-term rentals, equipment leasing and rent-to-buy contracts. Larger majorities (56.5 and 72.5 respectively), however, say that parts and service business will also remain flat compared to 2008.
Strategic Thinking
Dealers will have to approach 2009 both defensively and offensively, said Vander Molen, and he, Rogers and Heller offered clues about what and how they’ll be managing more tightly this year.
(1.) Manage inventory levels closely.
(2.) Watch overtime for hourly employees.
(3.) Keep an eye on the sales team – create accountabilities for their time and travels.
(4.) Cut expenses wherever possible, reinstitute all the little things you quit doing when business was good.
(5.) Get everyone in a company vehicle to drive slightly below the speed limit and save thousands in fuel costs.
(6.) Stay focused on how to help customers make money – their loyalty and business will follow.
Heller adds that he consistently makes retreat-style business planning
a top priority.
“I would advise every dealer to go spend a couple of days with your key personnel offsite and formulate a strategy,” he said. “I don’t think there’s any substitute for those couple of days that we go out to a mountain somewhere and just talk about our business strategy for the ensuing year and five years.
“If you don’t have a business plan,” he warned, “it’s going to be very difficult to operate from a reactionary standpoint.”

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