Regional Pulse ChecksBy Matt Phair
Article Date: 08-01-2009
Copyright(C) 2009 Associated Equipment Distributors. All Rights Reserved.
A glance at four markets through the eyes of dealers who are adapting to a changed construction industry.
California Dealers in Survival Mode
In the measure of gross domestic product (GDP), the state of California ranks higher than Spain, Canada, Brazil, and Russia. The state’s GDP ranks seventh in the world.
“We can’t let the seventh largest GDP go bankrupt,” said Michael Allen, Jr. president of Balzer Pacific Equipment Co., Portland, Ore. “If California goes bankrupt, it will affect the whole country…and will have damaging repercussions around the world.” Balzer Pacific has two branch locations in California and their business reaches into Washington, Alaska, and Hawaii with its aggregate, concrete, and asphalt processing facility designs and equipment.
“Of all the states we work in, California has been hit the hardest by the economic slump,” Allen said. “We began to see the rug slipping out from us in August 2008.”
Balzer Pacific Equipment Co. has taken steps to adapt to the economic downturn. According to Allen, they’ve cut staff about 40 percent since last fall and implemented salary rollbacks for those remaining. Some employees participate in the Oregon Work Share program in which employees work reduced hours and receive reduced unemployment insurance benefits to help fill in the gap.
Stephen J. Nixon, president of Nixon-Egli Equipment Co., Ontario, Calif., says his company
has reduced staffing by 15 percent – bringing their total employment count down to about 85.
“Our business is down 35 percent over last year’s banner performance,” Nixon said. “The market is bad and customers are more aggressive in their demands than ever before.”
Because Nixon-Egli Equipment sells quite a bit to municipalities, they were able to delay the impact of the economic downturn. “[They] had money in their budgets that they needed to spend, so we were able to move some of our core products – truck cranes, grinders, pavers, rollers and street sweepers. We sell a lot of street sweepers because California has tight laws regarding dirt and debris on the street,” Nixon said. Currently, all state and city contracts are stalled, according to Nixon.
“I’m expecting that we’ve got another year or two of this recession,” Nixon stated. “I think next year our business will be down another 30 percent. Nobody is making a lot of money these days.”
A California heavy equipment distributor, speaking under the condition of anonymity “because our investors don’t like to be associated with bad news,” doesn’t expect full recovery in California until 2011 as well.
“Things are horrible now,” he said. “It’s very slow. About all I can do is go to mass and pray that things will get better.” He added, however, that one strategy now is to keep their good customers happy, so “we’ll have a base to build upon when the economy recovers.”
“We’re seeing opportunities in our rental market,” Allen said, “In fact, we’re in the final stages of setting up a separate rent/lease company. Balzer Pacific Equipment has always rented equipment, but it was based on a rent-to-sell model. Our new company will be a rent-to-rent business.”
Allen also sees opportunities in designing systems and selling equipment for the emerging green waste market.
“When money becomes available for infrastructure rebuilding, there will be plenty of unsafe bridges and roads that can be recycled,” Allen said. “There hopefully will be stimulus money becoming available in 2010-11.”
“I’m not holding my breath waiting for stimulus money,” Nixon stated. “The stimulus money is a one-shot deal, so I don’t see how it will help us over the long term. We need to realize that the economy, and the construction business particularly, are cyclical. We’re at the bottom of a cycle, but we’ll eventually move out of it.”
Southeast ‘Treads Water’ with Used and Rental Business
There’s a sense in the Southeast construction market that just breaking even by year’s end will constitute success.
“We’re anticipating rough fall and winter seasons, with a slow rebuild in the spring of 2010, and maybe by then, the stimulus money will be hitting the market,” said John Shearer, vice president of Product Support for James River Equipment, Inc., Richmond, Va. James River Equipment distributes John Deere machines and other construction equipment to North and South Carolina. “The sales of cranes, rough terrain cranes, and dirt-moving equipment have been very, very slow.”
“Recently, we’ve been writing more equipment quotes,” said Stephen Moody, sales manager with M. D. Moody & Sons, Inc., Jacksonville, Fla., “but no one is pulling the trigger.” Moody is watching the Terex distributor’s quotation activity in their Florida and Georgia territories, hoping to identify signs of market recovery. The crystal ball remains foggy.
David Erkelens, vice president of sales, heavy equipment, for Kelly Tractor, Miami, Fla., stated: “Florida is one of the most competitive states. We’re about 60 percent down in sales over last year, which was a banner year. And the west coast of Florida… is about 80 percent down.”
Erkelens is buckled in for the ride. And the ride for south Florida may be scarier for some than the state’s Tower of Terror at Disneyworld.
Kelly Tractor offers the 13 most southern counties of Florida a full range of Caterpillar products from articulated trucks to small skid-steer loaders. “Part of what will delay the recovery in Florida is the huge supply of available equipment,” Erkelens said. “But I think we’re at the bottom of this economic downturn, so we’ll be treading water for some time.”
For construction equipment distributors in the Southeast, treading water appears to include cost-cutting measures such as personnel cuts, less advertising and promotion, and, if possible, reducing inventory. Shearer said that his company has “knocked down expenses by 30 percent. We look for payoffs in every activity we pursue, including training of our own personnel and customers.”
Personnel cuts appear to be commonplace. “We currently have about 400 employees, down from 600 that we had before,” Erkelens said.
An upside to cutting back, according to Shearer, is: “We were a bit loose with our funds in good times, so not all cutting back is bad. High volume sales can hide a lot of sins.”
Equipment rentals appear to have not been hit as hard as new equipment sales in the Southeast market.
“We do better with our rental fees in Georgia than we can in Florida,” Moody said. “The glut of iron and intense competition in Florida has kept the pricing down.” Erkelens pointed out that south Florida has become mostly a rental market. “Our rental prices are down in the Carolinas,” Shearer stated. “There are just too many machines available.”
Shearer added: “Used equipment may be the only shining star – albeit a dim shining star.”
Contractors’ caution and sometimes the availability of reasonably priced credit have made new machine purchases less attractive than buying a used piece. Moody said that although there are few new equipment sales occurring, he is seeing a “somewhat healthy market for used equipment.”
There is optimism in the Southeast that conditions will improve –
eventually. “Look, this is probably one of the worst slowdowns we’ve been in, but we’ve been through them before,” said Erkelens.
“I keep telling my sales folks to keep at it,” Moody said. “It will turn around.”
Tough to be Optimistic About Northeast Construction
In the Northeast, sentiments are running along the lines of ‘keep hunkering down, but don’t take your eye off the future.’
“I started in this business in June, 1972, and this is the biggest and most sustained dip that I’ve ever seen,” says John Drobach, president of Peter A. Drobach Equipment Company, Union, N.J. “You swallow hard and say the bright spot is survival.”
“The overall equipment market is down between 50 and 70 percent in the last 18 months,” said Steven Boniface, CEO of Pine Bush Equipment (PBE), Pine Bush, N.Y. “You have to shrink to fit your current business and we’ve been doing that right along, with layoffs and cutting as many expenses as possible, right down to minute details. [But] we haven’t closed any branches yet.”
As a hangover of the recent heady days, some dealers are just stuck with the lack of buyers.
“There’s too much equipment out there,” said Drobach. “We’re top-heavy on equipment, as are the big rental firms, such as United. And everybody wants to put something into the auction, even new stuff, so it’s depressing the price. At the same time, rental yards are stacked with equipment that no one currently has a need for.”
Added to that is the continued tightness of financing. “The other issue on my mind is that financing is very tough on used equipment – it’s very hard to get,” saidys Boniface.
Concerning possible hope in the public sector, reports in the region are that the Obama Administration stimulus package isn’t quite taking hold yet. “I haven’t seen any help from the so-called stimulus package yet, said Boniface.
Drobach looks for opportunity in multiple areas of New Jersey – the country’s most densely populated state has had some neglected infrastructure that is up for funding.
“There are shovel-ready jobs they keep talking about, and I suppose the money is going to be released, but it’s being released slowly,” he said. “The [newspaper] Star-Ledger says we have the money in Trenton. The problem is that after a dollar is in Trenton for a while, it turns out to be 85 cents returned, 65 cents returned, 50 cents returned.”
Other New Jersey possible bright spots are from private industries known to have deep pockets. “A lot of the colleges and pharmaceuticals are well heeled enough to hopefully award out and start projects,” said Drobach.
In New York, however, private sector hope is bit harder to come by. “As far as residential, there’s very, very little right now, and it’s been that way for 18 months now,” said Boniface.
The on-hold status of a couple of significant projects has further compounded PBE’s struggle, including plans for major gas drilling in Sullivan County.
“The landsmen were out buying up leases everywhere, and they were going to drill,” said Boniface. “The recent drop in energy prices has made the project no longer feasible.”
In anticipation of PBE selling the excavators and bulldozers used to build the access roads and improve the sites where drill rigs would operate, “we bought a new location in Ferndale, N.Y., that we planned on opening. We did not open it because of what’s going on in the recession and with the economy.”
Boniface adds that indirectly the project would also have lifted the housing market, created a need for many more gas stations and hotels, and would generally have benefited the Catskills region.
In New Jersey, some hopeful signs include the Trans Hudson Express tunnel and the East Rutherford-based Xanadu entertainment complex, which continue to move forward.
Low real estate pricing is also fueling slight signs of life in New Jersey retail. “Up and down the Route 22 corridor where we’re located,” said Drobach, “they’re knocking down and putting up new commercial buildings. They’re anticipating that hopefully in 18 to 24 months we’re going to be out of this mess.”
Compared to six months ago, Drobach reports a slight increase in rental equipment leaving the yard.
“The first six months of ’09 were flat, on average, versus the first six months of ’08, at best,” he said. “There may be an uptick for the third and fourth quarters of 2009. If you look at a one-year graph, you could say we hit bottom, but if you look at a three-year graph, it’s going to be a long bottom.”
For Northeast equipment dealers, optimism is hard to come by. “I believe the present administration is doing everything wrong to get us out of this recession,” said Boniface. “I don’t believe you can tax your way to prosperity on small business’ backs.”
Drobach, however, sees promise in a more local approach to the market dilemma: “It’s an election year, so hopefully whoever gets in will be rewarding their supporters.”
Texas Market Finally Feeling Pinched
“If you had contacted me during the first quarter of the year, it almost felt like we were avoiding the worse of this economic down cycle,” said Craig Burkert, vice president and CFO, ROMCO Equipment Co., L.P., Dallas, Texas. “It felt a bit eerie hearing about the rest of the country.” The distributor for Volvo Construction Equipment, Hitachi Construction and Mining Equipment, Eagle Iron Works and GOMACO knew the economic perfect storm was on its way so it began cutting inventory, watching every expense, and increasing its rental fleet.
“A few years ago, we recognized the importance of the rental segment of our business and started building our rental business and reorienting our sales staff toward rental,” stated Burkert.
Burkert recognizes that this is not a “normal” recession where machine rentals and the parts and service activity hold steady, or even increase a bit. “This time around,” Burkert said, “everything is down. The fact that even our rentals have bottomed out, to me, indicates that contractors aren’t working.”
Jim Anderson, president of Corpus Christi, Texas-based Anderson Machinery Company stated: “Obviously things are not very good – we have no machine sales and rentals to speak of.” With five branches throughout Texas, Anderson’s company offers everything from 300-ton cranes to small skid-steer loaders. He reported that their business is down 20 percent over last year.
A frustration for Anderson and other construction equipment distributors is the inventory of iron sitting in their yards. “Because of the manufacturers’ required lead time, we have orders arriving from two years ago that contractors can’t pay for and don’t want,” he continued. “We’re trying to find anyone who might be interested in machines.”
Anderson and his 35-some local employees keep hoping that something will break. “Basically, we’re looking for the light at the end of a long tunnel.” He doesn’t anticipate seeing that light until next year.
“Things are very challenging,” said G. Bennett Closner, president/CEO of Closner Equipment Co., San Antonio, Texas, and 2009 AED Chairman, “but the oft-repeated refrain I hear in Texas is ‘thank goodness we’re not living anywhere else.’” The feeling is that the rest of the country is being hit harder by the downturn than Texas.
Closner cautiously cited several “upticks” in construction business segments that indicate that the bottom of the economic well has been found.
“We’re seeing activity in the governmental sector,” he said. “Any projects associated with the state’s many military bases or hospitals seem to be moving along.” These government jobs appear to be where the federal stimulus money is flowing, Closner says.
“On the whole we can say that the Texas construction market is down,” said Closner, “but to be accurate you need to look at individual sectors. The residential housing market has not recovered and may take another year or more to rebound. The commercial building sector started slowing in the fourth quarter of last year, but has remained relatively strong. There’s been an uptick in road building and highway work.”
The actions that Burkert took – or, more accurately, did not take – at ROMCO Equipment seem to underscore Closner’s optimism. Anticipating the market downturn, Burkert cut inventory but not employees. Burkert’s operation has always been lean.
His 200 employees at eight branch locations help the company cover the eastern two-thirds of Texas. That territory encompasses three of the largest cities in the country.
“We’ve got to remember that we’re coming off of the mother of all economic buying cycles,” Burkert said, “which is making this down cycle that much more painful.”
“Our future is bright,” Closner said, “even though it may take until 2011 until we’ll need to wear sunglasses again.”
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