Business Outlook 2010: Free-Fall Finished?By Kim Phelan
Article Date: 01-01-2010
Copyright(C) 2010 Associated Equipment Distributors. All Rights Reserved.
Citing misplaced priorities in Washington, construction equipment
distributors prepare for life on the floor – for many months more.
No one is happier to see the door closed on 2009 than construction equipment dealers, who saw their revenues plummet anywhere from 25 to 75 percent, even 100 percent in extreme-case regions such as Florida, California, Arizona and Georgia. And while, as some say, "each day you wake up is another day closer to the recovery," that longed-for event –tangible improvement for distributors – may not arrive till at least Q2 '10 and more likely into 2011, according to written dealer feedback on CED magazine's annual Business Outlook Survey conducted in November, as well as other industry sources.
It was no surprise that 87 percent of the 125 dealer executive respondents saw revenue declines in 2009. Among those, 29 percent reported their '09 revenues were down more than 40 percent over 2008; nearly 37 percent said revenues fell 26-40 percent year over year, and 24 percent said revenues declined 11-25 percent. Only 3.2 percent experienced minor drops of 1-10 percent, 3.2 percent had flat years, and 1.6 percent saw slight increases in both the 1-5 percent and more than 5 percent categories.
A large segment of survey-takers (45.38 percent) said they expect 2010 gross revenues to remain flat to 2009, with 24.37 percent expecting increase and 25.21 percent bracing for further decrease. Full survey results are displayed in charts on pages 30 and 31.
"We are in unprecedented times when the construction industry, and therefore the construction equipment industry, are going through a strategic inflection point that we've never seen before," said Ron Riecks, president of Wells Fargo Construction, in a December interview. "Almost since the invention of construction equipment there's been a general trend line in construction equipment distribution and construction, which is, there has been more business the next year than there was the previous year. That always dipped in recessions, but after each recession the amount of business available always reached a new high from the prior high."
He says that won't be the case this time, and based on the multiple indicators his company follows, Riecks says he does not anticipate a standard V-shaped recovery.
"If you look at the government's forecasts for where residential, nonresidential and highways are headed in the next five years, they forecast we'll hit bottom in 2010 and the lines begin to slope up in late 2010 and early 2011. While on the surface that may sound like good news, if you trace the dollar amount of their forecast activity, you have to go back to the late 1970s to find the same dollar value of construction activity that they're forecasting [for the next 12 to 16 months].
National Pulse Check
Indeed, Riecks' outlook assessment aligns perfectly with Wells Fargo economists' forecast mentioned in the bank's Q4 2009 "Construction Quarterly" newsletter, predicting a U.S. economic recovery that will be "agonizingly" slow. "Concerns persist about everything from jobs and construction to credit, interest rates and financial regulation," the newsletter stated. And few would dispute that whatever's cooking for the broad economy is bubbling many degrees higher in all things construction and construction equipment.
Many dealers would certainly agree.
One executive from North Carolina wrote on the survey: "There are highly negative trends in private commercial construction spending. Banks are incredibly tight and tough on commercial RE loans. Housing is only slightly improved. I saw increases in new lot sales to builders in the second half of 2009, though much lower than in the past few years," he said. "There's no new subdivision construction. And infrastructure spending via ‘stimulus' is a joke – not much that we can see except for asphalt/resurfacing. Contractors are not making money, and they're taking new jobs at breakeven pricing."
In Iowa, a distributor wrote: "We see no improvement in 2010 over 2009. All construction markets are very depressed except paving and overlay. We foresee many contractors going out of business before the 2010 season gets going. Credit is very tight and we have seen no effect from the stimulus package."
The invisible stimulus syndrome is echoed in Ohio, where another distributor wrote in all uppercase: "The stimulus dollars have had no effect on job creation in our area. Hopefully 2010 will bring more work to contractors. Contractors must get healthy before dealers have the slightest chance of becoming financially stronger." Likewise, in Massachusetts a dealer said: "A very low percentage of stimulus money has come out. Hopefully we will see some impact as these stimulus jobs are awarded." Another remarked: "In our 20 locations across the Eastern U.S., to date, we can attribute only one order to ARRA stimulus money."
Another respondent base in Georgia wrote: "The Southeast has been disproportionately affected in construction equipment – worse housing than most except Florida and California; and higher unemployment."
In Pennsylvania, another said: "My biggest concern is how long it will take to get rental rates back to a profitable number once they have deteriorated 30-40 percent. Plus, I see no cure for housing in the near term, meaning probably we are two years away from housing recovery, and we are tied heavily to residential housing."
A dealer near Oakland, Calif., said: "We have seen a 70 percent drop in sales and rental revenue from 2006 levels. Our market starting turning in August 2007 and has remained weak since. We are hoping for a slight turnaround in spring/summer of 2010."
From the Midwest, one wrote: "Our region is very soft. Missouri highway work will fall off after stimulus money runs its course." On the up side, "Illinois has passed a much needed capital bill," however, "new commercial and residential construction is nonexistent."
Word from Montana is that "Oil and gas business has stopped. Housing has stopped. Highway construction is level, and city and county business is up."
Meanwhile, aftermarket is in jeopardy according to another North Carolina distributor, who says: "The tremendous number of repossessions has significantly hurt parts and service revenues. You cannot sell aftermarket parts and service to machines that have left the local market!"
In south Texas a dealer reports: "Contractor backlogs are low, their margins are very low, and their need for equipment is very low. No improvement is in view until at least Q2 2010 and perhaps later."
Getting through the early months of '10 won't be easy in Tennessee, where a dealer commented, "I anticipate this coming winter will be extremely slow and a challenge to get through. We hope the spring of 2010 will show some modest improvement across all areas of our business."
A Virginian reported, "Our region does not have much in construction or road building. Virginia needs some new people in government."
Deep concerns about government policy and priorities, particularly at the federal level, are very evident among the AED membership. Another survey respondent from Tennessee wrote: "Our coal industry is struggling and is under attack from Washington and from several different environmental extremist groups; our highway program is comatose, and our commercial and residential markets have come to a standstill. Other than that, things are just great."
"Despite recent news regarding some positive trends," said an Alabama dealer, "we are not seeing evidence of any work or activity for our customers. The unemployment rate has continued to rise and housing starts continue to decline. Government is focused on too many wrong issues instead of infrastructure that would create jobs and work for our industry. And from Wisconsin still another dealer adds, "Without Congress and the administration passing legislation to fund a new six-year transportation program and a multi-year revolving fund program for water, 2010 will be another very difficult year for the industry." Similar frustrations were also submitted from two different West Virginia dealers and another from Ontario, Canada. A dealer near Dallas, Texas said, "I do not expect any significant recovery in our industry until there is an administration change in D.C."
Not all survey respondents were experiencing completely sour conditions. An Iowa distributor commented that, "We seem to be holding our own, [but] our outlook varies from day to day…our road work customers are doing well." And an executive in North Dakota indicated that, "generally conditions are fair but certainly down in the rolling stock like loaders, dozers and excavators, but pretty good in the specialty equipment like rock crushers and conveyors. There are no tax incentives to buy, just more pressure on rental."
A distribution newcomer in the MidAtlantic Region said, "We feel very fortunate based on the construction and renovation currently on the books for 2010." And in the Dallas/Fortworth area, another dealer observes that "work for our contractor customers is starting to pick up. This was not the case at the end of the first quarter in 2009. However, many projects have multiple bidders, driving the price down."
From Illinois, a dealer respondent called 2009 flat in all his markets. "Late third quarter and early fourth quarter we are seeing some activity in the roofing, pipelines, utility and railroad markets in regards to purchasing new or used equipment, service and rentals."
A flat 2010 is expected by a dealer in New Mexico, who wrote: "Energy (oil and gas) prices are down, commercial real estate is overbuilt, there's the housing glut, and almost 20 percent unemployment in the construction trades – 2010 is going to look a lot like 2009 in this market.
Frequently optimistic, AED dealers are being brutally realistic, and many would largely agree with the summary from this Tennessee dealer: "We think the free fall has bottomed out – we're hoping next year will not be any worse. However, there is not great expectation of a significant recovery, either. We think the market will be bouncing along the bottom for a few years!"
Downsizing was a natural and obvious response to the economic downturn. Twenty percent of survey respondents indicated they had closed branches, in some cases several. More than 70 percent had to lay off employees in 2009; 28.24 percent reduced their workforce numbers between 26 and 40 percent; 43.53 percent cut 11-25 percent of employees off the payroll; 20 percent made workforce cuts of 10 percent or less, and 3.53 percent laid off 41-50 percent of their employees. Only one survey respondent indicated a 2009 staff reduction of more than 50 percent. About 75 percent of survey-takers said they expect no staffing changes for 2010, or will only replace employees who leave. Near equal numbers of respondents plan to either hire new staff or lay off staff in 2010, 9.6 percent and 11.4 percent respectively.
As distributor principals weighed their survey responses with regards to projecting 2010 sales for their used equipment rental operations, parts business and service, their collective opinions did not tally as negatively as one may have feared.
For 2010 used equipment sales outlook, AED dealers were largely optimistic, with 37.82 expecting increased gross sales and 33.61 percent looking for a flat year compared to 2009. Just over 23 percent predict decreases in used. Forty percent expect flat margins on used equipment sales in 2010, with near-equal numbers of the remaining respondents saying those margins will either increase or decrease (26.9 and 29.5 percent respectively).
On the rental side, 43.7 percent say 2010 gross revenues will increase, while 36.9 expect a flat year and 13.4 predict decline. The majority (48.7) expect rental margins to be flat, and therefore 35.6 say they will not alter their investment in the 2010 rental fleet. About 41 percent will decrease their rental investment and about 19 percent will actually invest more this year than they did in 2009.
Gross parts revenues are predicted to climb in 2010 by more than 43 percent of the survey respondents, and 61.7 percent said parts margins will be flat. Most dealers who took the survey expect either flat or increased service gross revenues, 39.5 and 42 percent respectively, with gross margins largely forecasted as flat (57.3 percent)
Glimmer of Growth
Without question, says Riecks at Wells Fargo, the key takeaway he hopes distributors apply to their businesses in 2010 is the idea of right-sizing their operations proportionately for exactly more of what they experienced in 2009. On an anecdotal basis, CED learned of one dealership that lost 50 percent of its revenues year over year, and consequently laid off half of its employees – but in so doing, remained profitable. "I had the choice of laying off half of them now or potentially not being able to employ any of them a year from now," the owner reportedly shared.
While adhering to a slimming-down mindset, the heavy equipment industry could feel some trickle effect from a potential 11 percent uptick in construction starts, which is predicted by McGraw-Hill's 2010 Construction Outlook. Vice President of Economic Affairs Robert Murray attributes that projection to improvement for housing off extremely low levels and broader expansion for public works.
"The U.S construction market in 2010 will be helped by growth for several sectors, following three straight years of decline that brought total construction activity down 30 percent from its mid-decade peak," he said. "The benefits from the stimulus act will broaden in scope, lifting not just highway construction but also environmental public works and several institutional structure types. With continued improvement expected for single family housing, after reaching bottom earlier [in 2009], the overall level of construction activity should see moderate expansion in 2010."
Three AED Directors contribute personal perspectives on the economy and
their regional conditions.
Hoping for the Best, Preparing for the Worst
By Craig Burkert,CFO, ROMCO, Dallas, Texas
Director, AED South Central Region
As I begin writing only 25 minutes before the deadline for submitting this summary, I realize that there is more than my personal penchant for procrastination at work this time. Having maintained that this region has held up better than most, I wanted to continue to be optimistic. However, there is very little I can point to that would provide solid support for my feeling.
There have been some indications that the overall economy may have turned, but any good news has not yet visited our industry. While I believe that we have bottomed, I can't be confident of that, and I certainly have not seen things turn in a positive direction. More worrisome is the growing chorus from those who foresee a "double dip."
I can think of three reasons to be somewhat optimistic about next year. First, according to projections I have seen, the bulk of the "stimulus" spending will not actually hit the market until the first two quarters of 2010. Second, there seems to be some awakening in Washington to the fact that something is going to have to be done to address unemployment and that highway reauthorization could be an important part of that. Finally, the contrarian in me knows that it is darkest before dawn and that a strong consensus pointing to further decline may be an indication that there won't be further decline.
Unfortunately, the reasons to be less optimistic are more concrete. Our government is without two of its traditional tools for stimulating the economy: The Fed can't lower interest rates any further and Congress won't cut taxes because of the ballooning deficit. Friends in the commercial real estate business warn of impending doom that could further delay any recovery in private work for contractors. While the credit crisis has not been prominent in the news, tight and tightening credit standards for our customers seem to be the rule.
So as I prepare for 2010 I think I am doing what most of us are doing: Hoping for good things while preparing for bad things.
Much Hinges on the Action in Washington
By Mike Soley, Jr.president, Miller-Bradford & Risberg, Sussex, Wis.
AED At-Large Director
The best comment I heard from one of my peers recently was, "I am glad this year is almost over." I am sure that sentiment is shared by many in our industry. One part of me agrees with this assessment and another part of me says, "Be careful what you wish for."
ARRA funding (weak as it was for construction) will begin to wane in 2010. At the time of this writing we do not know if or when a newly minted transportation bill will be forthcoming. Sewer and water infrastructure funding is another area that is currently in limbo in Congress. Homebuilding continues to slog through low ebb and commercial construction activity is deteriorating. Bank financing for projects is tight to nonexistent. Many contractors never reached full employment in 2009 (many reduced employment) and I heard from several that wrapped up the year earlier than normal due to lack of work. From my point of view, none of these indicators make 2010 a year to look forward to.
So it looks like it may be challenging in 2010 to generate revenue and the bottom end of the income statement appears it could be worse off, as well. Health care reform is on the Congressional docket and it appears additional costs will need to be absorbed by businesses if the legislation passes in current form. There is discussion about adding taxes to employers to cover the staggering number of unemployed and it appears things may worsen with unemployment.
Infrastructure in the freeze/thaw zone of the upper Midwest will continue to deteriorate this winter. There have been many articles published in local papers this past winter about potholes that could swallow a subcompact in a single bite. I can only imagine what this winter will bring. The busiest highway interchange in Wisconsin was scheduled to begin to be rebuilt in 2014. However, three of the bridges on this interchange will not last that long so the DOT is going out on emergency contract to replace the bridges with an estimated cost of $22 million. The replacement bridges will be temporary until the entire interchange is rebuilt in 2014. Yet we continue to hear from local, state and national "leaders" about budget constraints.
"Don't tell me what you value; show me your budget, and I'll tell you what you value." – Joe Biden
What positives could happen in 2010? If Vice President Biden can convince President Obama to lead the American people and Congress to support strong transportation infrastructure and clean water legislation it will put people to work and provide us with opportunities.
Time will tell.
East Tennessee Conditions Dismal, Looking to Post 2010 Opportunity
By Wes Stowers, Chairman, Stowers Machinery Corp., Knoxville, Tenn.
AED At-Large Director
The construction industry in Tennessee is one of the hardest-hit sectors of our state's economy, and the demand for construction equipment of all kinds is at historic lows. According to data from the Association of Equipment Manufacturers (AEM), 2009 unit deliveries (all size classes) in our territory have fallen over 75 percent from the 2006 peak. I would bet that this plunge in equipment demand is typical for most other parts of the country. We anticipate a very tough winter ahead that will likely be even worse than last year.
Highway construction in Tennessee is significantly depressed due to historically low numbers of new projects. The Tennessee Department of Transportation (TDOT) has seen its buying power erode throughout the decade as its revenue stream from fuel taxes has stagnated, while environmental and materials costs have skyrocketed. Efforts to increase funding have been unsuccessful, resulting in very little new construction. Although TDOT did receive approximately $500 million from stimulus funding this year, the "shovel ready" constraints of the stimulus package resulted in most of these dollars going to a flurry of resurfacing and bridge projects. These stimulus-related projects required very little additional equipment and were of marginal benefit to most equipment dealerships. Revenue shortfalls continue to plague TDOT, especially for launching major multiyear projects. The failure of Congress to enact a new highway bill this year will result in a further $190 million rescission of matching federal funds to TDOT in 2010. Until we see increased transportation funding at the state and federal level, we do not anticipate much improvement in equipment demand from the road building industry in Tennessee.
Coal mining in Tennessee slowed abruptly last winter due to the decline in the price of coal. Additionally, increased environmental regulation has continued to increase mining costs and significantly delay permitting. Political animosity toward mining, especially at the federal level, continues to harm the industry. We do anticipate that the price of coal will increase some in 2010, but this rise in price will be driven by new regulatory obstacles that are blocking the permitting process, making it more difficult to open new mines or expand existing mining operations.
Like most areas of the United States, we have a glut of commercial and residential real estate. Commercial construction continues its steep decline, and residential construction remains at a standstill. There are a significant number of partially completed developments that will have to be absorbed before we can expect much new construction to begin. While it would appear that our housing market has bottomed out, it will likely be 2011 before we see commercial and residential construction begin to return to marginally healthy levels of activity.
Employment among most construction equipment distributors in our area is down 25 to 50 percent, depending upon the dealership. I know of no dealerships that are planning to add new people in 2010, and increased downsizing continues to be a real possibility.
Politically, most federal, state and local elected representatives acknowledge the importance of modern infrastructure and the need for more, including the economic benefits that increased infrastructure spending would create. Yet few have the political courage to support any new revenue enhancements if they involve raising taxes, such as an increase in the fuel tax. In Tennessee, our fuel tax is not indexed, and it was last increased in 1989. Our state's transportation funding mechanism continues to fall further behind our transportation needs, and we do not see any improvement in the coming months.
As gloomy as our near-term outlook appears, we remain confident of the long-term opportunities beyond 2010. Like most companies today, we have worked hard in 2009 to right-size our dealership for the reduced demand that we expect in the months ahead. However, we are hanging on to our top performers and will continue to provide the excellent support that our customers expect. In conclusion, we expect that 2010 will bring more of the same depressed conditions as 2009 for the construction equipment industry, but we remain cautiously optimistic that 2011 will be a turnaround year.
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