2013 Aerial Industry Report: Will Replacement Turn to Real Growth?

Dave Smith: Snorkel focuses on the small to medium independent rental companies. At this point, we have none of the six nationals in our order book. Obviously, we're interested in those companies at some point in the future, but at this point, with the limited build that we have, we're still focused on those small to medium independent rental companies.

Q: Where do you see these markets headed over the next year/next five years?

Fearon: We are off to a great start to 2013 and feel this is the third year of a five- to seven-year growth cycle for North America. EMEAR is starting to look up too, and by the time North America starts to feel another cyclical downturn, I feel that we will be buoyed by the EMEAR market and newer markets like China, Brazil, India and Southeast Asia.

Boehler: We think the next five years offer positive prospects for North America. As stated above, we expect the European market will be flat in the near term, but beyond 2013 we see Europe improving.

Asian AWP markets that are not currently as significant, compared to the mature European and North American markets, but should begin to emerge in the next 5 to 10 years.

Smith: I honestly think the second half of this year could be a slow down. The national rental companies have placed orders for the first half of the year and they're speculating that the second half of the year is going to be more of the same, but as I understand it, they have not been firming up those orders and demand as of yet. Because of the amount of supply that Snorkel's competitors are going to be producing on a flat basis throughout the year, I think in mid third quarter and fourth quarter, there could be an excess of supply and demand will start to taper off from what we saw at the beginning of the year. Excess inventories will result in discounts and longer payment terms and flood some of the other coutnries - like South America and Australia - with equipment and start discounting it. This will end up affecting the profitablity of the rental companies because the companies that buy equipment later in the year will be able to acquire the equipment for less and erode the rental rates.

There are six players, the national accounts, that represent 60 percent of the volume of equipment. They all buy the same way. They negotiate in the fourth quarter and they place orders in January and spread out their damand through March, April, May, June, July and August. They don't buy anything in the first two months of the year and they don't buy anything in the fourth quarter. They negotiate a very strong price for that large volume of business and then they buy in those spring and summer months.

To fix this problem, they would have to start buying equipment in a different cycle and we, as manufacturers, need to be more flexible and agile in how we build equipment. For the most part, it's a flat build plan but manufacturers know their demand is only for seven months. You have a risk of five months of fluff. If the market softens, there's all kinds of equipment out there. I think there could be a slowdown in the second half and there'll be an excess of equipment.

Nerenhausen: We've made clear what our intentions are for planing horizons to 2015: a solid growth cycle for JLG and the access group. I would hesitate to predict beyond our current planning horizon.

Q: What is the outlook for sales to the U.S. rental market in the near future?

Fearon: We see the outlook continuing to be strong. Signs of life in housing will produce a greater effect on the rental industry. As the economy improves, this will lead to an improved construction market overall. We are very optimistic about future growth.

Boehler: We touched upon fleet age previously and that represents market growth due to re-fleeting. There are signs the trend will continue and extend into fleet expansion. One of the questions often raised is the role of consolidation in the market. I think one of the positive results of this process is the degree to which efforts to keep rental rates up have been successful. In turn, this has created a positive business environment for smaller companies and as a result, we are seeing more ‘independent’ sales, which should continue.

Smith: In North America, 90 percent of our sales go to rental. In units, it's about 80 percent. Anything above the AD-38, it's just not something that goes very much to retail. If anything, that will increase. Rental companies are very good and continue to get better at logistics. As they get better, there's even less of a proposition for [end users] to buy this type of equipment.

Nerenhausen: What the industry is seeing in general is more growth in the rental channel. In terms of utilization of equipment, there's more of a move to utilize the equipment through rental rather than ownership. It's safe to say, rental is the dominatnt sale for us.

Dacve Smith 

I think the biggest issue is the general health of our economy as it relates to our govermment: the "fiscal cliff" and the "trillion-dollar gold coin," and just the fact that we don't seem to be able to pass a budget. There's so much media, on both sides, that say if we don't put these spending cuts in place, it's like the world ends. In Europe, they're very aware of the effect that a failed government can have on an economy and the business that we're in. There's much more of an awareness of how government turmoil can affect the rest of the economy. They look at our government very closely.

Quite honestly, the business people that are running our country and keeping this thing going don't worry about it. The rest of the world does. There is some false hysteria there and there's a perception around the world that there's so much more turmoil than there actually really is.

Dave Smith Our big-deck rough-terrain scissor - other than something bigger than our 126-foot boom - is really the only thing we didn't have to be a real, full-line manufacturer. We're starting the development phase of a big boom, but we don't see that as totally necessary to be a full-line manufacturer. It's a pretty niche market. There's not a huge level of volume there, but we are starting to develop it.

Q: How is Tier 4 Final technology affecting product design and development?

Fearon: Genie is fully committed to embracing the new Tier 4 technology. The implementation is staggered over the next several years and requires significant reengineering to fit the larger engines. These new engines do require significant resources but we are using it as an opportunity to make other improvements to each of the models that are affected.

We will continue building Tier 3 equipment for the rest of the world since the low sulphur fuel in less regulated countries will not work with Tier 4 engines.

Pricing will be available as new Tier 4 models are released. Tier 4 will be more expensive, and Tier 4 final will be more expense yet. Manufacturers will simply not be able to absorb this cost. It's a significant change for the industry, but we need to remember the positive impact it will have on both emissions and the environment we all live in.

Boehler: As we have journeyed through the requirements of Tier 3 and Tier 4i, the overall impact is additional product development time and ultimately product development cost. The extent to which it is right to pass on those costs to the customer is a battle we fight every day. One could argue that a focus on emission regulations has diverted activity that otherwise would have led to newer designs specific to end user needs. This is especially pertinent in the aftermath of the recent financial crisis and subsequent weakening of the availability of development funds.

Having said that, we have to deal with the fiscal realities and at Skyjack, we see our customers as partners. We therefore feel obliged to apply significant resources toward cost reduction to mitigate the upward trend. However, holding pricing is not always possible. I think the other lesson we as an industry need to address is that of the overall timing of Tier implementation throughout the supply base. In our experience with Tier 3 and 4i, the availability of qualified components has sometimes been lacking, making meeting the deadlines extremely challenging.

Smith: We've been looking at Tier 4 for quite some time now. One of the difficulties we have is the engine manufacturers haven't really gone all the way to the end to officially tell us how the engine is going to look. But in most of our machines, our air flow is going to be okay, we don't need to worry about changing cowling. We're doing some different things with hybrids and derating of engines to circumvent the tier change. Between some engine modifications and some hydraulic modifications, we can get to where we need to be and get almost the same performance in the machine. It's there, it's affecting our resources, but we're not changing machines, we're not totally redsigning things in order to meet Tier 4.

Nerenhausen: It consumes recources but utlimately it's the best for the environment and it takes a stategy to pull these things off. We have a significant focus on our strategy to bring Tier 4 to the customer in the least impactful way. Our goal is to make it transparent to the customer in their operation of the vehicle as much as possible. We're spending a lot of time with the packaging and bringing the right products to the market at the right time.

Q: There is much talk among manufacturers about equipment price increases. What do you see coming?

Fearon: The most significant price increases over the next few years will be on diesel-powered machines which are affected by Tier 4. Engine costs are increasing depending on the horsepower and there are additional costs associated with engine installations and heat mitigation. These costs will be passed on as the new engines are implemented.

The rate of price increases for the most part will be directly related to the cost of steel. There is a lag between steel price increases and manufacturing cost increases, but they are very interconnected. But rather than just passing cost on to our customers we have had an enterprise-wide focus on cost reduction. Our customers have done a good job of raising rates, but we realize that we need to do our part to control costs so they can remain healthy as well.

Boehler: As mentioned above, we see our customers as partners and feel duty bound to mitigate the upward trend in material cost or costs associated with regulations, but again, that’s not always possible.

Smith: With fuel prices, outside of Tier 4 (which will be a whole other situation with pricing), everything that's out there is going up, no matter what commodity you look at. Prices are definitely on the rise. This is one of the reasons why we're introducing the models we are, including the Polaris line, to make sure we're staying competitive and offering the acquisition price that hopefully holds rental profitability. Whether we like it or not, with any product under 60 feet, we're basically dealing with commodities. The majority of customers know there's no secret about acquisition cost.

Prices could increase 5 to 8 percent this year. We did a price increase in October that took effect in Jaunary. That was about 5 percent. I don't foresee us doing anything for the second half of the year. It has a lot to do with the fact that we've limited our build to be conservative. It's allowed us to have better control over our costs coming in and there's not nearly as much exposure for us in the upper commodity markets because it's a lower amount of volume.

Nerenhausen: We certainly try and mitigate the impact to the customer as much as possible, but as technology warrants a price increase for pure cost abatement, that's something we'll look at. We have in the past and we'll have to in the future.

There's some expectation of what Tier 4 components will cost but even that, I'm not exactly sure what the end tally will be. We'll just continue to try to drive costs down in other areas to try and mitigate the impact of the component upcharge and try to deliver the best value we can to our customers.

In today's business climate, the cost of doing busines is becoming very hard to project. Whether its health care or other types of things, more and more is being added to the pile of things we have to work very hard to offset. It goes beyond product.

Studdert:

We're having a very good start to the year. We're up in both units on rent and pricing for the first quarter, which is not a normal occurence, since more than half of our business comes from what I call the Deep north, where they get a lot of snow.

The low cost of natural gas and energy is allowing our customers to winterize their projects and work through the winter.

We think we'll have a strong full year. Pricing continues to be on an upward trajectory. Industry needs to recapture its pricing position because we're actually renting our equipment as an industry for less than it costs to replace it, and that's unsustainable. During the recession, we all did it for cash flow, but at some time in the economic cycle we need to stop supplementing our customers' profitability and bring it back to our shareholders.

We educate our salesmen and how much a piece f equipment costs and what it costs to maintain it over its life cycle. and then we workign with them from a market standpoint and a practical standpoint, we stet a price target and then we incrementally move that price up until we get there. and that price target gives us a fair return on nvestment. You have to movie it an condition the custoers. Four years ago, you couuldn't pay retail on anything. The cost of everythign has gone back up to more normal level and the rental industry shouldn't be any different.

We eduate the customer...if we can't get that pricing from you, we need to deploy this asset somewhere else. SOmetimes you have to fire the customer.

It's not all about price. We have a standard in our company: we have a two-hour response if equipment goes down. When your customer knows that if the inevitable happens, our standard is two hours. That gives them great comfort. As we all know, the price of rental equipment is a very small piece of the overall cost going on on the jobsite. When you have 10 people waiting around for a forklift to get the material to the second floor, he doesn't really care if he got it for $50 less. We talk about the whole package, the customer satisfaction, the safety and the level of service and with that, you should pay a fair price.

There's some growth, but I would say the vast majority of our investments this year have been for replacement. As a whole, the industry is still a bit over capacitated. Some further consolidating and some modest growth would be something I would envision. I don't see large growth. We still have some upside in our capacity. We're getting more efficient, we're handling our equipment better, making the turns faster so we should be able to get more out of our assets. I came out of the airlines, where an airplane would fly for 14 hours a day. That's pretty good utilization. I'd like to get more out of our fleet.