Working smart: interview with Coates Hire’s Leigh Ainsworth

Australia’s Coates Hire is retrenching in the face of a slowdown in the country’s natural resources sector, as company CEO Leigh Ainsworth tells Murray Pollok.

There may be vast differences in how economies are performing around the world, but at this moment Coates Hire – the largest rental business in Australia and wider Asia – has a lot in common with its European counterparts, with a shared focus on operational efficiency and cost control.

In the European case it is about succeeding in a sluggish economy. For Coates, it is adjusting to a more difficult environment after years of growth on the back of a major boom in the mining and oil and gas sectors.

“The economy is unsettled”, says Leigh Ainsworth, Coates Hire’s no-nonsense CEO, speaking to IRN in Las Vegas during a hectic visit to Conexpo, “Investment has slowed considerably. At the moment we are in a transition period between natural resources projects and the start of major infrastructure projects.

“The new government is trying to expedite significant transport projects, and we’re in that lull in the middle. We probably have 12 to 18 months until the biggest infrastructure projects start.”

That lull is expected to lead to lower revenues this financial year, following a 4% decline in the previous year (to 30 June 2013) when sales were A$1241 million (€831 million). This has required the company to concentrate on efficiency and be more selective on fleet investment. It is probably no coincidence that this focus on its core operations has coincided with the decision in December to sell its Aberdeen-based oil and gas rental subsidiary, Coates Offshore, to a US private equity firm, SCF Partners (see box story below).

“It was not core – just 2% of our revenues”, he says, “So I guess if the right deal comes along it is the right thing to do”.

Mr Ainsworth points out that commodity prices can change quickly – with the prospect of a return to investment in natural resources – but the reality is that “at the moment we have more fleet than we have revenue for.”

Some of the larger construction equipment used in the mining sector can be redirected for construction work, but older fleet is being sold off and any investment is being channelled into areas where there is demand.

He mentions LED lighting towers – very popular in the mining sector - as an example of where Coates is investing; “Hybrid booms [aerial platforms] have been popular, and we will have more and more of these, and dual fuel generators is an opportunity to exploit for some of the gas field operations in Australia. We’re still investing, but putting more into specialist products, growing these areas.”

These include shoring equipment – such as large hydraulic struts that it is buying from UK rental company Groundforce – traffic control, pumps and environmental equipment, such as water recycling products. There is also still demand for Coates’ power rental fleet, which is focused on mid-sized units rather than the 1 MW plus sector.

Coates remains one of the largest owners of aerial platforms in Australia: asked if the company is interested in buying the massive new JLG 185 ft booms, Mr Ainsworth is positive; “I think we will. We bought the 1500s as soon as they were available, so it would be a natural thing. They are expensive machines, so will never be a big part of the fleet. We need to talk to customers and make sure there is a demand first.” He says the 185 ft units would potentially be very useful for some of the LNG plants that are currently being completed.

Capital expenditure may be more selective than in the past, but Coates has still managed to invest heavily in various projects to become more efficient.

“During any period when revenue is constrained, attention turns to cost and efficiency, that’s a natural shift in focus”, he says. “We’ve really invested in business improvement projects over the past four years [around A$30 million]. We do expect to get returns – some are yielding quite well already.”

These include a shift to paperless working, using bar codes on products to digitise service records and the like. Around 70-80% of the fleet is now barcoded and Mr Ainsworth says the company is still only getting 20% of the benefits; “We’ll get to 75-80% next year.”

Coates has also invested in the PROS price optimisation system. “That’s the same. We’ve done a lot of work over the past few years and we are now rolling it out. We hope to see yield from that over the next few years. It’s really about giving guidance to the branches, the ability to change prices quickly.” He says it also makes it easier to review pricing on annual contracts.

As at other big rental companies, Coates is also aiming to provide more data to customers, particularly its major accounts, which is in part a reflection of a more mature relationship. “We have told customers in some cases that it is better to buy than hire”, explains Mr Ainsworth, “It’s a strange thing for a rental company to say, but if you get their trust, you benefit over the longer term. Of course we can also say it’s better to rent than own.”

The company may have sold its Aberdeen oil and gas business, but Mr Ainsworth says Coates is still on the acquisitions trail, only closer to home. “We’re always in the acquisitions market – sometimes a stressed market pops up some opportunities. The last time there was a downturn we made some acquisitions.” Last summer it acquired the non-access activities of Force Access, a small deal.

He says speciality rental businesses would be the preference – not least because they have no need for additional general fleet – and also says that opportunities are likely to be close to home rather than in wider Asia, for example; “When you have opportunities at home you drive past business getting there [to overseas markets].”

The depot network requires no overhaul, other than the usual opening and closures associated with changes in local activity levels, so no big hub-and spoke projects of the kind being seen at rental companies in the US and UK.

The size of the country means that a lot of depots are required to give national coverage, and Coates has many large generalist stores stocking pretty much everything because it might be 500 km to the next specialist store.

And in the tool and equipment business, the stores are pretty much essential; “Close to 70% of the work we have we didn’t know we were going to get the day before”, says Mr Ainsworth.

Coates ownership has also been on the agenda in recent years, with joint major shareholders Seven Group and Carlyle announcing last summer that they would retain ownership after a six month review of the business. The feeling is that this topic will reappear when they are able to attract a better price.

If this is unsettling, Mr Ainsworth’s demeanour suggests otherwise; “It doesn’t really make a big difference – we just run the business and the shareholders do the best they can.”

In any case, he has other concerns for a business that remains in a transitional period: waiting for payback on the efficiency projects, waiting too for major infrastructure contracts to start, and, of course, keeping a close eye on the prices of iron ore, natural gas and coal.

BOX STORY

Sale of Coates Offshore division

In late January US private equity form SCF Partners acquired Coates Offshore in partnership with its existing management, for an undisclosed price.

SCF, based in Houston, Texas, owns oil and gas service companies worldwide and its investment in Coates Offshore is its second in Aberdeen, having acquired Conserve Oilfield Services in 2012.

Coates Offshore is now being rebranded as Rentair Offshore, reflecting the Rentair name it carried when it was formed in 1970 and used until its acquisition by Coates in 1999. The US$30 million business rents Zone II diesel air compressors, steam generators, heat exchangers and sand filters to the worldwide offshore oil, gas and renewable energy industries.

Kieran White, who was executive director at Coates Offshore and is now CEO of both Rentair Offshore and Conserve Oilfield Services, said the acquisition represented a fantastic opportunity, with the new owners bringing “expertise and specialist knowledge of our industry on a global scale.”

Andy Waite, managing director of SCF, said; “We believe this will be an excellent platform for both organic and acquisition based growth opportunities. We also believe there may be excellent synergies to be realised with other companies in the SCF portfolio.”

BOX STORY

Safety culture payback

Leigh Ainsworth says Coates Hire’s successful campaign to improve its safety record has cut its worker compensation payments by as much as 40%, saving it millions of dollars and creating a better culture at the company.

“You do it by not having accidents”, he deadpans. “You have to be serious about safety and convince the leadership that we are serious about it...Ultimately a few people had to lose their jobs for doing things that were unsafe.”

He says a big part of the success is a different attitude to unsafe practices; “It takes a long time to change a culture. In the end, a company can do so much. People have to care about themselves and their friends and colleagues.

“We are seeing that people will report unsafe practices, and will go to friends and colleagues and say ‘that’s not safe’. Now, people believe that Coates cares about their safety. People accept absolutely that we don’t expect them to work if it means doing something unsafe.”

He says Coates looked at areas where there were safety risks, such as using lathes in the workshops; “We decided that if we can’t do it safely, we say we just don’t do it.”

Lathe work has now been outsourced to specialist engineering companies. “It’s not convenient”, says Mr Ainsworth, “but it’s safer.”