Jeff Eisenberg looks at the financial performance of IRN-100 companies

The equipment rental industry in general had a great year in 2007, both in terms of growth and profitability. Revenue for the top 100 rental companies (the IRN-100) was up just under 12%, profitability was up by 29.3%, although great care needs to be taken when comparing ‘apples with apples'. So far, we have seen only a few examples of things slowing down in interim financials this year, although share prices have really suffered big declines.

Growth by acquisition

The biggest acquisition of the last year was Algeco's purchase of Williams Scotsman, previously traded on the NASDAQ exchange in New York. GAM and HUNE continued to acquire in Spain; Cramo and Ramirent in Scandinavia, the Baltics and Eastern Europe. Speedy acquired several rental competitors in the UK, which are showing healthy results after integration. In access equipment, Lavendon acquired multiple competitors in and outside the UK, while Riwal (my own employer) has grown by acquisition and organically.

An important merger/acquisition in Australia means that Coates is now part of the top 10, and promises great things; I'll bet their long term growth plans will see them appearing in other markets. In general, however, little growth has been funded by new issues of shares.

Profitability increases

The IRN-100 grew its total bottom line from €1.7 to €2.2 billion over the past year. The profit margin of the top five has increased to 6.5% from just over 7.5%. EBITDA, which is earnings before taking depreciation, tax and interest into consideration, is up significantly, from 34.9% of revenue to 38.6%.

In the top five, the only company to make a loss in the previous year was Ashtead, which was related to integration costs of its NationsRent acquisition. Ashtead has now turned this around to make an annual profit of £109m (€87m), plus it has disposed of its Ashtead Technology division for another £96m (€77m).

Like many companies in the IRN-100, Ashtead is paying down debt, although its share price has also suffered over the past year, losing half its value. Ashtead's chief executive Geoff Drabble has said "although market conditions continued to be good in the UK and the US, Ashtead was ‘as ready as we can be' to face further deterioration in the construction sector."

United Rentals

United Rentals announced a loss in quarter two of 2008; but this perhaps sounds worse than it really is. Underlying profits fell for the quarter from US$67m (€45m) to $37m (€25m), before taking into account charges relating to the repurchase of certain classes of shares. United has reduced costs and increased EBITDA over the last year - including the shedding of over 9% of its workforce, which is now 10900.

When it has finished repurchasing its shares, it will have decreased the amount of its shares in circulation by almost 40%. The company is paying for these shares by a combination of internally generated cash and new debt facilities. In the last 12 months, the company has ‘only' spent $100m (€68m) on net fleet additions, although when the original cost of its fleet is $4.3 billion (€2.93bn), then $100m starts to sound like a small amount.

Debt and Equity ratios

As many had predicted the combination of low to moderate acquisition activity, good cash generation and restrained capital expenditure mean that balance sheets are stronger than last year. This is particularly comforting for the banks, as the economic situation becomes more worrying in many countries, but is much more frightening for the manufacturers of equipment.

Despite adding fleet, the top five has less total debt than last year, with the exception of the €2.8 billion brought to the party by Algeco, much of which was used to finance its acquisition of Williams Scotsman. Cash generation is likely to overtake capital expenditure (capex) as companies prepare balance sheets for what may be rough waters ahead.

More and more companies are announcing cuts to capex plans. Ramirent has specifically told investors it will cut capex in some markets, such as the Baltics, where its business has slowed. Ramirent's August 08 press release says "As the majority of the investments for 2008 have been completed, we will delimit our investments and expect cash flow to be positive for the second half of the year and gearing to improve". In Spain, GAM has reported record earnings, but went out of its way to explain that its capex plans for this year will be entirely funded by this year's cash generation

Contrary to some pessimistic forecasts, there is still debt available for solid companies with good plans. Even companies such as United Rentals, Ramirent, Terex and others are finding cash and debt available for share repurchases. In the event of a sharp downturn, there will be acquisition opportunities as some rental companies become weaker, and investors will likely still make debt and equity available, but will be selective and will want a good return.

Comparing apples with apples

The composition of this year's IRN-100 makes it harder than ever to compare similar companies, and the weak dollar doesn't help either. As a group, the IRN top five produces most of its revenue in North America. Ashtead, Hertz and Algeco are a mix of North America and international, while United and RSC are North American-only businesses. Their ‘like for like' revenue is up nearly 12% but the dollar has lost over 17% against the Euro. So has the industry shrunk in the last year?

Different year ends, private companies that hide their numbers, and different accounting policies all mean that the ‘apples with apples' numbers are very difficult to produce.

Perhaps the best indicator of how the IRN-100 companies are doing is to compare the same companies at the 2007 exchange rates, as per the Table (See 'Linked Article' text in red above right).

Rental company financial efficiency and what this means for manufacturers

If no rental company adds any fleet next year, rental companies can still have a good year. They can even increase profitability, if they become more efficient. However, this would be a disaster for the manufacturers, who depend on fleet additions and replacements for their business. Publicly traded company after company continues to state that they are reducing capex.

Bad news on the horizon?

In its interim report, United Rentals announced a drop in profits for the second quarter of 2008, as stated previously, due to "declines of 1.4% in rental rates and 0.8% in time utilization." Even good interim report news, such as RSC's latest earnings beating the analyst estimates, were accompanied by a reduced forecast for the rest of the year, and a share price that is less than half of last year's peak.

To summarize, it has been another record year for the IRN-100 rental companies, for growth and profitability. Companies are keeping a close eye on their balance sheets, they are producing cash, and some are repurchasing their own shares. Share prices have declined for most rental companies, often by more than 65%.

The very clear message that rental company managers are giving their investors is that generating and managing cash will be the top priority, and most capex plans will have to wait.

THE AUTHOR
Jeff Eisenberg has spent 12 years in the rental industry. He started and led Genie Financial Services in Europe, providing finance for large and small rental companies all over the world. Since 2000 he has held senior positions in a number of European rental companies, as well as his own consultancy for rental companies, financial institutions and equipment manufacturers. In July 2008 he joined Netherlands based Riwal working specifically on acquisitions. Contacts, Tel: +44 (0)7900 916933; E-mail j.eisenberg@riwal.com