Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Thank you for assisting us with our survey and the work we've been doing. We're still working on it and will send you the results when it's finished. I've been studying Ashtead for years and am always looking to learn more about the industry. I'm interested in your time at Nickell and would like to discuss their clustering strategy. I think a good starting point would be for you to provide some context about Nickell just before you sold it to Sunbelt. Could you discuss the size, scale, equipment mix, and the locations?

When we were acquired, we had four locations. One of them was brand new and had been open for maybe nine months, so it was quite small. The other three were more established, having been open for at least two years. In terms of fleet size, we had around $10 million to $12 million worth, most of which was spread across the three older locations. The new location had probably less than a million dollars in fleet.

Our product mix was focused on non-CDL contractor equipment, such as mini excavators, skid steers, scissor lifts, and boom lifts. We did have CDL equipment over 10,000 pounds, but it wasn't a core rental asset. We had larger booms and larger shooting boom forklifts, but given our contractor focus, larger equipment wasn't a good fit for us.

80% of our business was contractor-based, and 20% was DIY. Our contractor focus varied slightly depending on the market, but generally, we focused on small to mid-sized contractors, particularly subcontractors like electricians and plumbers, as well as some general contractors and some industrial contractors.

We were often a secondary supplier for large contractors. For instance, we would never be the primary supplier for a company like Skanska building a hospital near us. They have national contracts with one or more of the national rental companies. However, we were a great secondary supplier. If they needed something quickly, or something small, or if their primary supplier was out of stock, we would often fill in.

A good example of this was our new location, which was strategically placed near a Kia plant in suburban Atlanta. All our locations were suburban, and that was by design. The town around the Kia plant was relatively new, having been built around the plant, which had only been there for about five years.

So, you intentionally built your locations close to large projects? When you say a Kia plant, do you mean a new plant they were constructing?

The plant was not new, it had been there for around three to five years when we entered the market. The town was largely built around the Kia plant, which was the biggest employer. Most of the businesses there either supported the Kia plant or served Kia staff members. Restaurants and part suppliers for Kia manufacturers were common. The town revolved around this massive plant. Herc and United were already present when we moved into the market. There was also an independent there, but they were not good. Herc and United were mainly there to compete for the Kia plant's business. That was the golden goose for most sales representatives. When the account holder ran out of equipment, they had nowhere to send their customer. When we entered the market, we knew we couldn't serve an account as large as a full-size Kia plant, but we could be a secondary supplier. We were not a threat to Herc or United. The sales representatives from Herc and United separately introduced our sales representative to their customers, including the Kia plant.

You wouldn't directly deal with Kia, but rather with the rental company as a secondary supplier?

Sometimes we would deal directly with their customer. They didn't mind. For instance, if United ran out of something, they wouldn't want to send their customer to Herc. However, they would be more than willing to send them to a smaller rental company like Nickell. We were never going to take that account from them, and their customer knew that. Kia knew that Nickell wouldn't be their primary supplier, but if United was out of stock, they could refer you to Nickell, or you could call Nickell directly. We were a non-threatening secondary supplier. We used this strategy in many markets because of our setup. I mention this because I believe it aligns well with Sunbelt's post-acquisition strategy, and it's one of the reasons we were so attractive. Compared to the average independent rental company, we were much more contractor-focused. We were already a secondary supplier for larger contractors, and our stores, buildings, and operations were designed for larger operations.

You mentioned earlier that you didn't focus on CDL equipment. Why is that?

We had CDL equipment, drivers, and a CDL truck at every location, except for the new one. But CDL equipment made up a small percentage of our equipment. In contrast, for Sunbelt or United, it's a large percentage of their fleet. For us, it was an afterthought.

Roughly, what percentage of their fleet is CDL equipment, in terms of dollar value?

If we consider an $8 million United store, I would estimate that around half of its value is in CDL equipment.

The revenue you're referring to, rental, is approximately 50% from the larger CDL equipment, correct?

Yes, CDL stands for Commercial Driver's License, which refers to any equipment over 10,000 pounds in capacity. When you visit most United Sunbelt locations, you'll find that all their fleet and drivers are CDL certified. This means they operate larger, more expensive trucks with more skilled drivers.

So, the CDL is solely based on the weight and size of the equipment?

Precisely. However, it does represent a different class of equipment because it requires a larger truck. This makes it more expensive from a transportation perspective, and it's usually more costly to purchase. When you're dealing with equipment over 10,000 pounds, you're looking at large rough terrain forklifts, big boom lifts, and similar items. These are significant investments, which often have good time utilization on many job sites but much lower dollar utilization. If you were to compare a skid steer loader or mini excavator with a reach forklift on a job site, the return on investment is much higher for the skid steer loader and mini excavator. However, the reach forklift is likely to be on the job site for the entire duration, while the mini excavator might only be required for specific tasks like plumbing or electrical work. So, this type of equipment is more competitive, more expensive to buy and transport, and offers lower profitability in our terms.

You're referring to lower dollar utilization?

Yes, the dollar utilization was lower, and I would say our profitability was also lower. We didn't have the buying power. It required better mechanics, larger equipment, more expensive drivers, and larger customers who needed it more frequently. We weren't well-equipped to serve that market, and it's a market that national rental companies compete over more fiercely. If you consider a highly commissioned sales rep, they would prefer to rent out the reach forklift for three months rather than the mini excavator for a week.

If you have United and Sunbelt in a market serving a Kia plant, for example, they have the same equipment and buy from the same OEMs. If they're going to place a large $10,000 to $20,000 unit on site for a year, how does the selection process work? Is it a race to the bottom, or how does the contractor choose between these players?

I don't believe we're in a race to the bottom, not anymore at least. Rouse has essentially standardized a lot of the price competition in the industry. Since their involvement, rates have significantly increased. The larger rental companies, in particular, have become more stable in their pricing and show a desire to increase prices. There was a time when the full-size backhoe, a staple on job sites, doubled in price, but the rental rates didn't double over the same 20-year period. Now, we're seeing a closer correlation where an increase in equipment costs equals an increase in rental rates.

While I've discussed this with several analysts, it's important to note that the industry isn't solely based on supply and demand. There's a significant service and relationship component that prevents it from being completely supply and demand based. Simply adding more excavators to the market doesn't necessarily reduce the price or rental rate on excavators.

It does have an impact, but rental companies usually adjust the size of their fleet to meet demand. We can discuss examples where this has worked and where it hasn't. Generally, they're quite diligent about maintaining prices. It's more about the relationship they have with customers. They might reduce prices on larger or key items, but they'll try to recoup the loss on other items like cut-off saws or jumping jack tamps.

But wouldn't an increase in the supply of equipment in the market impact the rental rate, especially if everyone is buying the same equipment?

If you have an excess of fleet sitting idle, you're going to sell off that fleet. Let me approach this from a few different angles. I believe the industry will eventually become more supply and demand based than it currently is.

The worst shock we've experienced was in 2008-2009. For instance, my business lost 60% of our revenue in 12 months. It was a terrible time. All rental companies drastically reduced their rates to whatever it took to get the equipment out on a job site. Sunbelt, for example, rented a track loader for $90 for the weekend, including delivery and pickup. The cost of delivery and pickup alone was more than $90. It was an insane period.

Supply was high, demand was low, and prices plummeted. What was unique about that time, and something we haven't seen since and likely won't see often, is that used equipment values also dropped significantly. This was due to a depression in the construction industry, with many companies going out of business. The supply of used and rental equipment was so high that it devastated both markets.

Normally, a rental company, including us, would sell the used equipment, decreasing our own supply to manage the situation. But that wasn't possible at that time. We weren't going to give it away for the used values. The only option was to hold onto it and try to make some money from it.

Why can't that situation occur again?

It's uncommon. For instance, during the dot-com bust or even throughout most of Covid, we didn't experience the same constraints. This is largely because we currently have many tailwinds in the industry. Uncertainty, for example, is good for rental. When contractors are unsure about the state of job sites in six or 12 months, or what their pipeline looks like, they are more likely to rent than buy.

Higher interest rates, increased complexity of equipment, and other factors encourage customers to rent rather than buy. A decade ago, a worker who had experience with cars could likely diagnose a problem with a skid steer loader. Now, you need a computer just to change a spark plug. These tailwinds have supported the industry through peaks and troughs. As long as there isn't a severe shock to the system and used equipment values don't vanish simultaneously, rental companies are likely to adapt to the demands and relocate their equipment, especially the larger rental companies.

For instance, if the oil and gas industry in Canada is underperforming, these companies will move their fleet from Canada to Texas or South Florida. They adjust their fleet to meet demand. And demand continues to rise, as does rental penetration. We might max out at some point, but for now, it continues to increase.

There was a unique case where demand dropped drastically in a very specific market that I think you'll find interesting, and it's the production and movie industry. So we had that huge strike here in the US. I live across the street from the largest studio in the United States that does all the Marvel movies and stuff. There is a Herc rental location inside the movie studio that is for the movie studio. All they do is production rentals. They have the same things in LA and Toronto, some of the major movie areas. When the writer strike and actor strike happened, the rental business for the movie industry disappeared; there just was no business, there was no need for equipment. But it was unique in that it also didn't make sense to defleet the equipment or ship it anywhere else because on some level it's specialty. It's painted black so that you can cut it out of movies easily. And it also, at any point in time was going to pick back up. So it was this blip in demand where you had this store, which is going to be great again in three months, one month, 30 days whenever the strike ends.

This temporary decrease in demand did affect pricing in the areas around those production locations. I remember contacting some colleagues about the surplus Herc equipment, and they said there was nothing they could do. They didn't want to sell the equipment because they would need it any day, and they didn't want to ship it out of the area for the same reason.

That's quite a niche situation. Let's consider the Great Financial Crisis as an anomaly. There will likely be a recession-like event in the next 10 to 20 years, although it might not be as severe since it was so closely tied to construction. If we experience half the impact of 2008, how do you think prices would look in a core construction downturn?  

For now, I don't think there would be much change because there's still significant growth opportunity in the industry. A good example of stability is the onset of Covid in the first and second quarters of 2020. Rental did relatively poorly in those quarters. If you were a contractor, your business likely slowed down and projects were put on hold temporarily. The first thing you would do is not sell off your own fleet, but return your rented fleet when capacity decreases. We saw a significant decrease in capacity or demand in late Q1 and certainly Q2 of 2020. However, there was not a drastic reduction in prices by United and Sunbelt in 2020. They were much more disciplined about it, knowing that going to the lowest price was not the best strategy, and they used Rouse and others.

Was that because Covid isn't really a true recession in that sense? It was a huge shock, of course. But would you say that it's a valid data point? Do you think the situation would be different if there was a real construction downturn for two or three years, rather than for six months to a year?

I believe that in the event of a real construction downturn, national rental companies would defleet or move fleet to other markets. I don't think they would be willing to drop prices. While it's clear in hindsight why things improved, and they did improve significantly, at the time it wasn't certain how long this would last. We didn't know if construction job sites would eventually be considered essential, allowing work to continue. There was real pressure to get all the fleets coming back to get fleet on rent. These companies were willing, at least in the short term, to endure lower time utilization rather than go too low on dollar utilization. I know that they use Rouse as a factor in making decisions in markets where they're struggling or seeing something. A similar situation can be seen with EquipmentShare, although I don't recall if you asked about them.

EquipmentShare, from my understanding, caused some annoyance among larger and regional rental companies when they joined Rouse. This is because they brought down the rental rates in every market as soon as they went live on Rouse. EquipmentShare is the low price leader. They're not the best rental company for a variety of reasons, which we can delve into later. Essentially, EquipmentShare is trying to drive down prices to get their fleet rented out, as they have a large new fleet that isn't performing well. However, national rental companies aren't taking the bait and trying to compete with EquipmentShare's rates.

There are a few factors contributing to why EquipmentShare isn't performing well. If you were to ask them, they'd tell you they're a technology company aiming to revolutionize the construction job site. They view equipment rental as an afterthought, akin to the iPhone in Apple's ecosystem. Their main focus is on building software for construction job sites.

Looking at their financials, they've received over a billion dollars from Silicon Valley, most of which they've spent on buying equipment and opening traditional branches. I personally liken them to WeWork in the rental industry. They call themselves a technology company, but all WeWork was, was a fancy Regus. Once people realized this, it became a problem.

I believe EquipmentShare is in a similar position. They have third-rate staff, secondary suppliers, and a lot of fleet, but they don't know what to do with it. They lack process and operations, and they're not built for scale. They're simply spending the money Silicon Valley has given them as quickly as possible, without a clear understanding of what they're doing.

Returning to the topic of pricing, you mentioned that for years, pricing didn't keep up with equipment price inflation. Now, you're saying that these national players are very price disciplined. What has changed over the last decade that has made them so price disciplined?

They've become more mature and data-driven. Tools like Rouse provide them with a safety net when their sales reps claim that prices are falling.

When did Rouse become live?

People started using it properly around the late 2000s, early 2010s. However, it probably didn't take off and get used consistently by the top 100 companies until the mid-2010s. Over the last few years, its use has become pretty ubiquitous. If you're a mid-size or larger company, you're using Rouse. Although the data is 90 days old, it still gives them a directional understanding of where they're going.

They've become more professional, using more data tools. They have shareholders who care about keeping the price higher. Both United and Sunbelt have consistently led in saying, "We're going to raise prices, we're going to get prices higher." So, everyone knows what United is doing.

Are they pricing above Rouse? For example, if you have an excavator and Rouse is pricing it at $100, how do national players approach pricing?

In most cases, they aim to stay within the band. I'm not sure if that's a standard deviation or Rouse's band, but they strive to stay within it. They usually have goals to remain above or at the average, depending on their position. One factor that has been beneficial, especially in recent years, is the sticker shock that contractors experience with other expenses. It has been relatively easy to raise rates over the past few years. When a contractor receives a lumber bill that's 300% higher than they're accustomed to, a rental bill that's 7% higher doesn't seem significant. Additionally, there was a shortage of supply, which made it even easier to increase prices. Thus, we've managed to implement numerous price increases over the past few years. Even independent companies that aren't data-driven, and perhaps review their pricing annually or biennially, have been raising their prices multiple times a year recently.

How much has the cost of CDL equipment increased? How has it changed since 2020? Are we looking at a 30% to 40% increase?

Are you asking about the rental rates of larger equipment?

Yes.

Over the last three years, I would estimate an increase of about 30% to 40%.

What about smaller excavators or aerial platforms?

The increase is probably similar in most cases. From what I've heard, our average member increased prices by about 10% to 17% in 2021 and 2022. In 2023, many planned to do the same, likely resulting in a 7% to 10% price increase. However, we did notice a slowdown in price increases towards the end of the year, which was unexpected. The market is certainly returning to what I would consider normal after a couple of unusually easy years.

You're discussing the overall pricing of the market, but how does this differ for national and small contractors? I assume your members primarily work with small contractors. How do you think pricing is changing for larger companies like Skanska?

Both types of contractors are members. Sunbelt and United are active members, just like individual rental companies. They represent a larger percentage of our membership by count, but in terms of location count, our larger members account for 30% of our locations. It seems that everyone was able to raise prices. Skanska, like a local contractor, had to deal with increased prices for lumber and materials. The economies of scale and previous pricing were different. I'm not suggesting that Skanska now pays the same price for a reach forklift as a local, single-crew contractor. However, both saw comparable price increases. Skanska had to pay, say, 30% to 40% more, as did the local contractor.

Why can't a smaller, local rental company service Skanska at that Kia location?

Theoretically, they could. However, in most cases, it's inefficient for large contractors to work with local rental companies. These local companies would need to manage accounts in various places and they may even have a dedicated rental manager working directly with the rental company. So, from an efficiency standpoint, it's more beneficial for large companies to work with other large companies that can serve extensive areas.

When it comes to localized large companies like a Kia plant or the movie studio across the street, the local rental company needs to reach a certain size to serve them. For instance, my friend who runs the operations for the movie studio would love to rent from the local guy down the street. However, that local person only has one 45-foot boom and he might need five some days and one another day. It would be inconvenient for him to give that person business.

If the local rental company grew big enough to serve the movie studio or the Kia plant in the area, they would risk having too much of their business tied up with one single customer. If, for example, the Kia plant manager's son becomes the sales rep at Sunbelt, your business could disappear overnight. Or if Kia closes the plant or pulls back, or the movie studios shut down, you've built your business around one customer, which is incredibly risky.

United, on the other hand, could come in and say, "I want to take the Kia plant from you. I'll drop prices for a short period of time to get the Kia plant." But in the grand scheme of things, it's not going to cause me any trouble. Or I can weather the storm of the Kia plant backing off because I'll just ship inventory out or I'll go after a different type of customer. A local rental company without the ability to move around in multiple locations would really struggle in a situation like that.

Is it mainly the scale of the equipment available, or the amount of it, or also the mix? You mentioned five booms, for example.

It depends, but it's usually going to be both. It's going to be about access.

For instance, let's say the Kia plant. If Skanska is building a new plant for someone, do they demand that United or Sunbelt build a greenfield plant close by to serve them, or do they just move equipment around and transport it?

They can operate in both ways. It depends on the market they're in. Often, when dealing with a large national contractor, they're not usually building in remote areas unless it's a unique situation. In such cases, the national rental companies will move to that area if it's projected to grow, either by purchasing a local company or opening a new branch. They're also known for setting up temporary locations. They'll find a large empty lot, place an office trailer there, and stock it with fleet specifically for that job. It's like a satellite location of a major branch that's further away. This happens fairly frequently on mega projects.

On these mega projects, which is a term that's being used quite fluidly at the moment, you'll often see on-site rental companies. Sunbelt and United, for example, might have trailers on the site. They'll have some fleet in a fenced area, ready for rent. So, even if they have a location that's relatively close, they'll have some fleet on-site.

How would you compare the demands of a large national contractor, like Skanska or Kia, to those of smaller contractors, like you would have at Nickell? What do they care about?  

The demand can be characterized in many ways. Large national contractors tend to be more technology and data savvy. They'll want more access to things like telematics, negotiated pricing, and possibly different billing processes. They'll demand better pricing, which will result in a lower rental rate. However, I don't think this necessarily translates to a lower margin because there are fewer touches. Deliveries and pickups don't usually generate profit and sometimes even result in losses. Every time a mechanic, service technician, or sales rep has to interact with a piece of equipment, it costs money.

If you rent out a piece of equipment for one month versus 12 months, there's a different operational cost associated with that. Even though you still have to service the equipment in between, if I'm renting out the same piece of equipment every time, I have to completely service it, wash it, check it, and arrange for a delivery truck to pick it up and deliver it back. This requires a driver and mechanics. However, if it just goes out for 12 months, I might charge a lower rental rate, but it's also going to require less operational cost to have that unit out there.

What's the risk associated with increasing the amount of national contractor work for big players like Sunbelt?

I don't believe there's a significant risk to them. Large contractors are beneficial for national rental companies as independent rental companies often struggle to provide adequate service. This also applies to some regional rental companies. This situation supports the trend towards larger rental companies. Last year, 5% of our membership was acquired, and 4% was acquired the year before. Rental scales efficiently. The buying power, operational efficiency, and the ability to move equipment around are more efficient on a larger scale. Larger customers facilitate this process. Small customers pose a challenge due to their shorter rental periods and the need for more sales interactions. Despite charging higher rental rates, it also involves more work. They can't just visit one job site and rent out 30 items.

If we project 10 years into the future, where the industry is consolidating, larger players are taking on more significant projects with national contractors, leaving smaller contractor DIY jobs to Home Depot and the like. How does this affect the competition between Sunbelt, United, and Herc, who are all vying for these large national contracts?

Let me share my opinion on United and Sunbelt before discussing the 10-year forecast. United and Sunbelt have established themselves as dominant forces in the industry, akin to the Walmart and Target of the rental industry. United is the largest and focuses on defensive acquisitions. They aim to have the biggest fleet and the most access, and they are likely a bit cheaper.

Do you know the difference in the national contractor mix between United and Sunbelt?

I believe that Sunbelt leans a bit smaller than United. I'm uncertain about the exact amount, but I don't believe it's substantial. Herc is a distant third. The question always arises whether someone will acquire them or if they will make a significant acquisition and become a key player. Currently, we have Walmart and Target, and they are well-positioned for the future. However, in 10 years, the situation could be quite different because rental penetration can only reach a certain level. The number of locations, as you mentioned earlier, can only increase so much. We have some categories where we track rental penetration, which is the percentage of equipment on a construction job site that's rented versus owned. We don't do this categorically, but we estimate that mobile, elevated work platforms, or MEWPs, have around 80% rental penetration. This means that 80% of all MEWPs on a construction job site are rented, not owned. You can't exceed 100%. There is a limit to how much can be rented. For the average construction job site, I think we're around 56%, 54%.

What's the maximum achievable, though? Theoretically, you can reach 100%, but considering a typical construction site that has around 53% or 58% rental penetration, what do you think is the ceiling in the next 10 years?

I believe it's likely to be around 80% or 90%. I don't think you can exceed 80% as it's been steadily increasing for the last 20 years.

And that excludes specialty. That's just general tools.

Yes, that's general construction job sites, general equipment. We've seen an increase almost every year, except for recessionary years when people return their rented items. Then it rises higher the following year, for the last 20 years. The younger generation, like my friend from across the street, grew up with Airbnb and Uber. They grew up with the concept of access over ownership. He called me the other day and asked if he really needed to own everything or if he could just rent everything. I told him that he was asking the wrong person, as I would always recommend renting. But the point is, there's a limit, and you mentioned it. Maybe it's 80%, as with MEWPs, or perhaps it's 90%, or even 70%. It probably depends on the category, but we're going to reach it. We're not there yet.

Where is the rental penetration really low?  

Flooring solutions, which is a specialty for Sunbelt. I would estimate that it has about 5% rental penetration.

Why is it so low?

It's because these are traditionally owned or leased and it's not a typical rental market.

But why not?

Rental companies have not traditionally sold to entities like Amazon warehouses. These warehouses typically lease or own their floor care equipment rather than renting. This presents a new niche for the rental industry. When a rental company tries to sell flooring solutions to an Amazon warehouse, their salespeople are competing against ownership, not other rental companies, because rental penetration is so low. However, I believe that in 10 years, we will reach a point where rental penetration is at its highest and the market will become more of a supply and demand scenario. At that point, competition will likely increase. Rental margins are currently quite healthy compared to other industries. EBITDA margins are also robust. These companies are cash machines, but this will inevitably decrease. Technology can be used to increase efficiency, and rental companies have satisfied stock market growth expectations through continued expansion of rental penetration and geographic expansion. But this will eventually plateau. They could expand globally, considering rental penetration is low in regions like South America and certain parts of Europe. I predict that in 10 years, the top three rental companies will account for 50% of all revenues, and competition will be much higher.

How will this impact the underlying unit economics? Also, if we assume that as these companies grow, they will be serving the same customers repeatedly. For instance, Skanska will have these companies competing for their business even more.

I agree, margins will likely diminish once this happens. Currently, it's easy to maintain discipline. Companies can decide not to rent at a certain rate and instead open a new branch, acquire a company, or enter a new area or specialty. There's still so much growth opportunity that this is the chosen path. However, when business slows down, when there are no more locations to open or companies to acquire, that's when rates will face pressure.

This growth opportunity is largely due to the rental penetration rate, which still has a lot of runway left. How long do you think this runway is?

I have a tendency to underestimate. I thought the rental industry and the number of rental companies were already shrinking. However, since I've been at the association, we have grown every year for the past three years, reaching a record number of general member count. I had thought we were already at the point where we were going to start to diminish, but we're not there yet. Personally, I believe we have about 10 years before they reach a size where they can't grow anymore, at least in North America. But I've been wrong with this prediction before.

What would the growth look like if we exclude these mega projects? How much do they contribute to the market boom?

Are you asking if the mega projects are artificially supporting the market?

Indeed, there are structural drivers in the industry, such as rental penetration rates and pricing discipline and power of the solution. Then there are what some might call artificial, though still real, factors like large-scale projects. If a new president comes in and changes that, it could have a significant impact. How much do you think the growth journey numbers around the bills that have been introduced are powering the rental market each year?

That's an excellent question. I wish I had more data on it. We expect an average growth of 7% next year, and then it drops to 5% the year after. Large-scale projects are certainly helping. They provide consistency and a focus for the large rental companies. Unlike in 2008 and 2009 when I was competing with large rental companies for the same contractors, these companies are now more focused on large-scale projects because they are the only ones that can serve them.

Historically, governmental shifts take some time to impact the rental market. Rental companies might serve highway contractors and benefit from the growth that comes with that, including restaurants, hotels, bars, housing. However, they're not necessarily building the roadway themselves.

The biggest boom in rental tends to come after some of the infrastructure spending has begun. This is slightly different with some large-scale projects because we're investing in data centers and onshoring. But I don't think a new president would have a significant short-term impact on where the rental companies would go. They could have a long-term impact if they did something really different with infrastructure, but I don't think you would see anything short term.

Let's go back to the story of you selling your business. How could Sunbelt afford to pay double what private equity offered you for your business?

I was looking at multiples the other day, and I believe United was at around 16 times earnings. They paid me seven times EBITDA, which is not anywhere near 16 times. 

So, Sunbelt offered you seven times, or United offered you seven?

Sunbelt offered us seven times.

And private equity offered you three and a half or four times?

Yes.

What was the private equity sponsor's plan?

Explaining the story of rental and its capital-intensive nature to private equity proved to be quite challenging. They seemed a bit too risk-averse when considering our plans. However, our goal was to grow the business two, three, or even five times its size through acquisitions and planned greenfields. I still see this trend today. When I speak to private equity firms, they aim to pay three to five times EBITDA when conducting roll-ups. In contrast, I believe Sunbelt would still pay five to eight times when looking to make an acquisition.

How did the fleet and equipment per branch change after the acquisition?

I would say the fleet was doubled or even tripled in total. This proved to be very efficient for them, especially with the larger equipment. However, they did lose some small contractors and DIY customers in the process. The staff in those branches remained almost the same, maybe with an additional person. It doesn't require many extra people to layer on the large contractor business.

Did they add CDL equipment? What type of equipment did they add?

Yes, they added a lot more CDL equipment to our mix. This included more booms, reach forklifts, full-size backhoes, and so on.

Did you have enough space to store all this?

We were under capacity in terms of space. Our lots were about two acres and were purposefully designed to accommodate a national if we ever wanted to sell. All they had to do was bring in more equipment and assign one sales rep per location instead of one per two locations. We were already secondary suppliers for all the larger contractors. So, they just had to approach them and offer to be their primary supplier. We were already serving these contractors, albeit poorly, from a location an hour away. Now, being in their backyard, we could provide better service. It was quite easy for them to take our small and mid-sized customers and layer on the larger contractors that we already had relationships with but couldn't fully serve.

Why did they increase the equipment quantity? What is the rationale behind this?

We were operating at about 70% utilization. Our equipment, which was small and mid-sized, was fully utilized. When they became the primary supplier for Skanska, who was building a hospital nearby, they needed more and particularly larger, long-term fleet to support that job site.

If the equipment is rented for a year, why can't they transport it from a distant branch? Why did they have to acquire your branch? What's the need for having the equipment close to the customer if it's going to be rented for a year?

Customers often prefer a full-service package. They want both long-term large equipment and short-term local equipment. They may not want to rent just a reach forklift from you if they can't also get the cut-off saw and the jumping jack tamp from you. In places where we didn't have locations, United and sometimes Herc did. In many of those cases, United would dominate that job site, not Sunbelt. Sunbelt, like us, would be a secondary supplier for that job site. However, when they entered the market, they were either able to serve the same job site more efficiently if they had sold it, or they now had the potential to become the primary supplier for that job site.

Does Skanska use all of United and Sunbelt when they have a hospital project, or do they just use one provider?

Most of them prefer to stick to one provider. It often leads to a lot of waste and complexity to have multiple rental providers.

Bidding for these large jobs, like a new hospital for Skanska, is a big deal for Sunbelt or United.

Yes, indeed. These are the honeypots that sales reps live and die for. That's why the Kia plant and other megaprojects matter so much. This is also why, especially in good times, they struggle with small and mid-sized contractors. A highly commissioned salesperson, knowing that they can make 90% of their paycheck from one job site, may neglect the other 100 job sites that make up the remaining 10%.

Let's go back to before you bought your business. You said your equipment value went from $10 million to $30 million, that's three times. If I gave you $10 million or $20 million to buy equipment and you brought it into your branches, could you then serve Skanska? Is it just a capital issue?

To some extent, yes. However, for our type of business, which wasn't even regional, it probably wouldn't have made sense to immediately compete against Sunbelt, United, and Herc. We should have opened more locations like we currently have and targeted small and mid-sized contractors who are often overlooked by the large rental companies. Many private equity-backed rental companies go upmarket and target these customers. The challenge is that Skanska not only wants a provider who can fully serve them on that job site, but also one who can cover all of their job sites in the Atlanta area. They would prefer a national contract for additional efficiency and buying power. I would still not be as competitive for that big job site as one of them would be.

How did the dollar utilization and margins change for your branches after the acquisition?

Time utilization remained roughly the same, which was their core measure. However, the average dollar utilization dropped.

So, they focus on time utilization.

They often refer to it as dollar utilization, but I wouldn't use that term. Let me provide two different definitions. Everything is a percentage of the OEC, or Original Equipment Cost. Time utilization, which you could also call dollar utilization, is typically the OEC on rent. However, what we in the industry and association specifically define as dollar utilization is the amount of revenue that you make on a piece of equipment in a 12-month period compared to its OEC.

That's what I was referring to.

Yes. They often use the term utilization or dollar utilization, but they're actually referring to time utilization.

Are you referring to Sunbelt?

Yes, Sunbelt.

Because when they say 70% on utilization, they're referring to the physical utilization of it.

Yes, they're more concerned about physical utilization than they are about dollar utilization. We, on the other hand, are more concerned about dollar utilization because we don't have access to unlimited amounts of cash.

How did both change post-acquisition?

Time utilization remained roughly the same. Dollar utilization, however, probably went from around 70% to somewhere in the 50s.

Due to the higher CDL equipment?

Yes, because the larger equipment came in, which has a lower rental rate per month per dollar of OEC. However, it goes out on long-term rentals, so the time utilization stays roughly the same, but the dollars per OEC decrease.

How does this affect the revenue and the actual net cash flow on the branch?

For the national rental companies, it seems to work pretty well because they have better buying power and a really good used sales machine, which is difficult for a small company to replicate. They can afford to wait seven years before they sell that piece of equipment. However, for an individual financier, cash is king and my cash is tied to the fleet. It's difficult for me to buy a really expensive piece of equipment, rent it for lower rates even if it's longer term with fewer touches, and then seven years from now make a lot of money on it when I sell it, especially when I'm buying it for a higher price.

They just put in triple the amount of equipment in a branch and because of the equipment mix of that higher value, higher CDL, it's basically going to the national contractors. So the dollar utilization will come down, the time utilization stays the same and the fixed cost to run the branch probably stays somewhat the same.

The number of people remained roughly the same, most of the staff stayed. I think they maybe had to add one person to each store with all the increase in fleet. I think they got rid of all the non-CDL trucks except for maybe one. While we had three drivers, those three drivers became CDL drivers instead of one or two CDL drivers and the others being rollback drivers. So they had to upskill a couple of their staff.

What's the biggest risk do you think Ashtead or Sunbelt make when buying businesses like yours?

United and Sunbelt approach acquisitions differently. United tends to make large defensive acquisitions, while Sunbelt opts for more targeted ones. Sunbelt seems to invest a lot of time in cultivating good relationships to acquire higher quality rental stores.

What did they tell you when they met you? Did they compliment your locations or your equipment? What sparked their interest in your company?

They began building a relationship with me four years before the acquisition. They were interested in most of our locations due to their quality. They were the right size and build. Sometimes, they have to acquire companies, even small ones with as little as $300,000 in annual revenue, simply because they need a location with the right zoning.

Could you elaborate on that?  

A rental store can't be located just anywhere. There are many places that have specific requirements for the type of business, or certain systems, fences, or walls that need to be in place. Zoning categories include light industrial, heavy industrial, light commercial, and heavy commercial. Not all of these can accommodate a rental company. Rental companies aren't always the most aesthetically pleasing businesses, even though they are relatively clean. There are many areas, like Philadelphia for instance, where finding a location with the right zoning, in this case light industrial, that can house equipment, provide service, and wash equipment can be incredibly difficult.

Is it just about zoning, or does the location need to be a certain distance from somewhere? What factors do they consider in terms of location? The population density?

Population density does matter, but zoning is a critical factor. Is the property zoned correctly?

That's crucial.

One of the questions, I think you're hinting at, is the distance between locations.

Precisely.

The distance between locations depends on population size, growth in the area, and construction activity. It's not just about physical distance. For instance, within the London perimeter, you'll find a higher density of rental stores than in an area like Reading. In a suburban market, which is where we operated and I'm most familiar with, you'd ideally want your locations to be between 30 minutes and an hour apart. This ensures that no customer has to drive more than 30 minutes to pick up an item. So, if a customer needs a cut-off saw or a jumping jack tamp for their job site, or if they need something delivered quickly, we're always within 30 minutes of them.

When you say "from a customer," do you mean from a densely populated area or a construction site? How do you define the customer's location?

The location of the customer is important. It could be where the population or construction is concentrated. Construction tends to evolve outwards. However, I believe drive time is a better indicator than distance. For instance, in downtown Atlanta or London, a 30-minute drive might only cover five or six miles. The area is also denser, so there are likely more job sites within that distance.

But there would also be more competition.

The density of competitors is likely to be the same. Realistically, it could vary, but a competitor would want the same density as you.

My question is more about Sunbelt building clusters of branches in certain markets. This is fine while the market is growing, but as it matures, you end up with many branches. You would need to have more dollar utilization, more rentals, more dollars on rent across the market. How do you see this as a risk in clustering markets today and how might it play out over the next 10 years when the market matures?

At the moment, they haven't encountered any problems because the market continues to grow. However, if the market were to decline or become fully saturated 10 years from now, that could change their traditional approach. From an acquisition standpoint, we're seeing this happen now with United and Ahern. There's a lot of expected overlap, but they're utilizing it effectively. They might close an Ahern general tool branch and consolidate it into the United general tool branch. But then the Ahern branch, which is zoned properly, becomes a specialty branch. The growth in the specialty business allows them to manage clustering or close proximity of acquisitions by turning one of them into a specialty or focus branch.

Let's say, for example, I'm Skanska and I have a United branch that's five or 10 minutes away and a Sunbelt branch that's 20 minutes away. How much does that really matter, assuming the equipment mix and the price are the same?

It matters less to a company like Skanska and more to a single crew local plumber who picks up the equipment.

Why does it matter less to Skanska?

Skanska is more concerned about larger equipment that's on their job site for longer periods of time. The cost of running out and getting a cut-off saw is less frequent for them than for a local plumber. Skanska will have all they need on the job site most of the time. They're always going to have equipment coming and going, so they can always call and add a cut-off saw with another piece of equipment that's being delivered or picked up. So, the focus and the levers are different.

How does Skanska typically order their CDL, the expensive equipment? Do they usually order that really expensive equipment, like a chainsaw or something, within a day? Or do they plan much further ahead?

The approach varies depending on the contractor. Even the larger ones aren't always very efficient. As you pointed out, the average order is for 48 hours. Contractors need equipment when they need it and often don't plan far ahead. Many sales representatives aim to be the first on a job site and then dominate it. For instance, a conversation with a Skanska superintendent might go something like this. "Listen, I'll hook you up with that reach forklift that I know that you're going to need. I'm going to give it to you for 12 months at an amazing rate. Here's donuts. We've got a great relationship. We go to church together. And I'd love to be the first call on this job site for you. We've already got your national account set up. And can I have a list of all of your subcontractors? And will you recommend them to me?" And your goal is to own that job site and be the primary supplier for that job site so that most of the people on the job site, whether they're running through the GC or whether they're running individually, are going to come to you as the first supplier.

How would you rate Skanska's demands in terms of what they prioritize? If proximity isn't their main concern, what is? For plumbers, time is of the essence, so proximity is crucial. How do you view large contractors in this regard?

This is a difficult question. When we conduct contractor surveys and ask what's most important in their rental relationship or what could be improved, they invariably choose price. It seems that in most surveys of this kind, if you give people the option of price, they will always choose it.

Does that not suggest it's a commodity?

It does, but it also suggests that price is the easiest answer and the other options are harder to quantify. Of course, everyone wants a lower price.

If the price is the same, what happens then?

When we remove price from the equation, the focus shifts to service metrics, which tend to be more evenly distributed. Without price, all other factors become more important. These include delivery speed, fleet availability and variety, downtime, and billing procedures. These are probably the top five concerns for people. If you don't have a large enough fleet, for instance, if you run out of excavators, that's a problem. If you don't have a variety of equipment types, such as an electric excavator when I need one, not just diesel ones, that can also be an issue. Delivery and the other factors I mentioned are self-explanatory.

You mentioned that there are very low barriers to entry, which might have been a factor during Covid due to the availability of equipment. People could easily rent anything. But if EquipmentShare raised a billion dollars, or if you had $500 million to a billion dollars, could you compete with these national players? How would you approach that?

I must acknowledge my bias. I believe that Home Depot and Lowe's do not serve small contractors well, even though that's where their strength should lie. National rental companies often provide inferior service to small and mid-sized contractors compared to large and national contractors. My strategy would be to deviate from this trend and build a business around serving small contractors.

I believe I could succeed in this market and be more competitive. However, trying to build a company to directly compete with Sunbelt and United, at this stage, seems unfeasible. Perhaps Herc could become a competitor through strategic partnerships or mergers, but United and Sunbelt have solidified their positions, with United being the largest and Sunbelt closely following. Sunbelt focuses more on branding, cachet, and marketing. They are the Target of the rental world.