Equipment Dealers Share Contractors’ Pain

The Association of Equipment Manufacturers, a global trade body comprising manufacturers of heavy equipment, paints a bleak picture of the U.S. and global heavy equipment markets. The overall economic slowdown, coupled with falling prices in the housing market and the collapse of major financial institutions, has affected sales of new construction equipment across all product categories. Local equipment dealers are doing what they can to help contractors survive these tough times. They see themselves as partners with their customers instead of competitors.

“We’re trying to think out of the box,” said Scott Clark, sales manager for Erb Equipment. “We’ve designated someone in house at each location to make personal phone calls to our customers. We’ve gotten a little liberal on payment terms and we’ll work on lowering someone’s interest rate.”

Contractors are not just scaling back equipment purchases, however, some are putting equipment back on the market. Anyone with a fleet of equipment and little work has a bunch of assets that aren’t making any money. If a contractor is still making payments on that equipment, he’ll have a negative cash flow and he will feel pressure to sell the equipment to remedy that cash flow problem. Clark said the result of that pressure is notable at equipment auctions, which had a 15 percent increase in volume in 2008, mostly from people who needed to unload their equipment.

“If a contractor wants out (of a contract to buy a piece of equipment), we’ll work with him on a case-by-case scenario,” Clark said. “We can advertise to sell it on our web site, or if we see a market for that piece of equipment, we will go ahead and buy it from him. Sometimes, when we talk to a contractor, we can show him that it makes more sense to sell an older piece of equipment or trade out for something less expensive than what he has, which reduces his payments but allows him to stay in a piece of equipment.

“We try to tailor our recommendation to a contractor’s own circumstances,” Clark said. “We’ve done quite a few trades and consignments.”

William Mitchell, general manager of Roland Machinery, said his company also was seeing some customers want to get out of the new equipment they had recently purchased. “We help them to try and sell it, but the big problem right now is finding a buyer,” he said. What they have to watch out for is selling their equipment for less than its value, he said.

More commonly, Mitchell said, he is seeing customers put off decisions to buy equipment while they wait to see if Congress approves a stimulus bill that gets projects going. In the meantime, they’ll rent what they need.

Ray Jost, branch manager for Kirby-Smith Machinery Inc., said he has seen some contractors cut their capital budgets, but he added that many others are waiting. “The U.S. has always recovered from recession, it is just a question of how quickly it will recover this time. Some contractors are delaying making decisions on their capital budgets until they see if something is going to happen with the stimulus package,” he said.

Kirby-Smith Machinery Inc. is a full-service equipment dealer that rents, sells, and repairs construction equipment. Business has slowed overall, but it was a needed respite for crane builders, Jost said. “Crane manufacturers had such a backlog of orders that they are now just getting caught up,” he said.

Jeff Budrovich, president of Budrovich Inc., agreed. “A year ago it was hard to get crane equipment. We still have some cranes back ordered,” he said.

Rentals are holding strong as some companies turn to long-term rentals as an alternative to buying, Mitchell said. “We’re seeing people lease at long-term rates, such as six months, because the rates are lower than for a 30-day rental,” he said.

When everything in the economy seemed to be growing, many contractors wanted to own whatever equipment they used because equipment was the only serious physical asset in their business. Acquiring equipment bumped up their borrowing and bonding capacity, so it not only added to their physical ability to take on jobs, it added to their financial ability to take on work, too.

Nowadays, smart contractors are evaluating their equipment in terms of what they historically used in order to determine what equipment and how big a fleet they absolutely need and how renting can help them through peaks and special needs – a strategy made possible by the great availability and quality of rental equipment.

Although such strategies maybe buoying the rental market, Dan Martino, St. Louis branch manager for Midwest Aerials, said, “I always think it is better to rent than to buy because there is so much you have to do to maintain equipment according to ANSI guidelines and the inspections and recordkeeping.”

Budrovich’s rental business is holding steady on the strength of heavy industrial work in the area. They have cranes at Holcim’s new cement plant in Ste. Genevieve, MO and at several energy projects, including ConocoPhillips in Wood River, IL and Peabody’s Prairie State Energy Campus in Washington County, IL. Budrovich said his company snags a lot of big industrial work because they can provide bigger cranes than their competitors, all with highly skilled operators.

“Last year was a record year for us and we’re looking to build on it for ’09,” Budrovich said. “Our fiscal year starts in September and our revenue in our first quarter was up 20 percent from last year,” he said.

While the rental business remains strong, Martino said he has seen a surge in service work, too. “We have a company called MAE Parts and Services that maintains customer-owned equipment and we have seen a big increase in customers’ wanting to make their equipment last longer, so much so that we don’t have a one-day turnaround anymore.

“People aren’t ready to toss a piece out and make it garbage over a few parts anymore,” he said.

Contractors have to be careful, however, that they don’t hold onto old, obsolete equipment simply because it is paid off. There comes a point where the maintenance can become more expensive than the equipment is worth. In today’s market one can get a great deal on a modern piece of equipment of similar size to an old piece, but which will be more efficient and will put a contractor in a better position to bid on a job with emissions criteria. Air pollution regulations here are not as strict as in California, but changes are coming.

“We’ve already seen some bid documents that require that the contractor’s equipment must be compliant with Tier III engines, mostly for indoor jobs,” Clark said. As tighter regulations and “green” construction practices spread, “we will see more of that,” he said. Indeed, contractors on Illinois projects could labor under California-like emissions rules in as little as four years from now.

Stricter national rules for new truck and equipment engines – called Tier IV rules – are due to take effect in 2011. “Deere is requiring us to learn Tier IV engines now,” Clark said. “Deere is ahead of the game and we’ll probably see certain models with Tier IV engines in a year. It will be a slow phase in, but Deere requires that all of a dealer’s sales, service, and parts people pass tests, and the dealer stock parts and tools, before it can sell Deere’s Tier IV equipment,” he said.

The big question for many companies is: what will happen as current big jobs end if the recession continues into 2010 or 2011?

“We’ve heard so much talk about infrastructure work, if they spend money on roads and bridges, that will help us,” said Budrovich. “But the biggest thing that would help our industry is getting home sales back on their feet. We have a lot of new competitors from people who used to do residential work. If we could re-inflate the housing market to keep them busy, it would help all of us,” he said.

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