United Rentals Inc., the Stamford, Conn.-based supplier of construction equipment, tools and industrial machinery, each year turns over about $1 billion of its total equipment fleet, valued today at an original equipment cost of $8.44 billion. This allows United's branches to dispose of used iron, introduce the latest models into the mix and command competitive rental rates. As a result, United, which booked $5.7 billion in gross revenue last year, is sometimes referred to as the largest used-equipment manufacturer in the world.
As construction continues its recovery in North America, large fleet owners like United Rentals are getting smarter about how they track the value of their assets; the objective is to get the highest possible utilization and rental rates out of the equipment but also to enjoy higher residual values and margins when it is time to replace the machinery. Last year, United turned a street value of $544 million in used equipment into cash at a gross margin of 48.5%, an improvement from the prior year's proceeds of $490 million and a margin of 44.9%. Part of United's success with its used equipment sales is knowing when to take those machines to auction and when to sell them directly to buyers.
"We want to drive as much as we can to retail," Michael Kneeland, United's president and chief executive officer, told ENR in a 2013 interview during the company's annual management meeting in Indianapolis. "Auctions are always a viable channel for us, but it's also at a lower margin."
More data is becoming available to help contractors predict the outcome of such transactions and get more money out of their own used equipment, just as United has found ways to keep more meat on the bone. "We enable them to sell more efficiently," says Gary McArdle, executive vice president and chief operating officer of Rouse Asset Services, which operates the website www.used.unitedrentals.com, United's online portal for pre-owned equipment. Other clients taking advantage of Rouse's retail expertise include Hertz Equipment Rental Corp. and BlueLine Rental.
With its panoramic views of the Hollywood Hills, Rouse's main office in Beverly Hills, Calif., is an unlikely place for a 90-year-old appraisal and analytics firm specializing in heavy equipment. But during a visit there earlier this year, McArdle explained to ENR that Rouse has cultivated a deep understanding of how equipment is bought and sold.
What began as a valuation database—McArdle calls Rouse's flagship appraisal service the Kelley Blue Book of construction equipment—has now evolved into an analytics suite that tracks rental equipment on a nightly basis down to the zip code where it is operating. And although Rouse markets primarily to rental companies—it estimates that its appraisal service now covers the fleets of two-thirds of the top 100 rental companies in the U.S.—other types of equipment owners have started to take interest in Rouse's data as well. "Some contractors are coming to us and asking for our help," McArdle says.
Selling used iron is part art and part science. Auctioneers are experts at marketing used equipment, so they are an attractive venue for sales. Contractors often look up and use auction results as a proxy for their own machinery values, notes Thad Pirtle, vice president and equipment manager of Evansville, Ind.-based general contractor Traylor Bros. Pirtle says he typically searches the top 25% of the auction results for any given machinery model, because those machines, likely to be well maintained, "are representative of our fleet."
However, auction results may vary. For example, Ritchie Bros. currently generates 10% higher prices on average than IronPlanet, according to Rouse's auction sales data. "It hasn't always been the case," McArdle says. "They got it compressed down to 6% a few years ago, and for whatever reason, the delta has increased."
Naturally, private sales also are an effective way to convert iron into cash. However, they may require more work and time to close the deal. It's a matter of risk versus reward. According to Rouse, average used-machine prices resulting from private sales last year were 26% higher than the same models sold at auction. Interestingly, as demand heats up for good-quality used equipment, the difference between the price of iron sold at auctions and private deals gets smaller. In 2006, there was about a 16% variance in these prices; by 2009, when the economy was reeling from recession, it was up to 35%.
While values for used equipment have, on average, returned to pre-recession levels, new equipment has likewise become more expensive to acquire. Since December 2010, the purchase cost of new construction equipment has grown 9.7%, a figure that McArdle attributes largely to so-called Tier-4 clean-diesel technology that will finish phasing in this year under federal Environmental Protection Agency regulations for off-highway vehicles.
"I think the big driver for this is Tier 4," he says. "It's manufacturers passing on the cost of higher production." Sensitive to the price inflation and operating costs, manufacturers this year have introduced new models that meet 2015 emissions requirements with as few aftertreatment systems as possible.
For example, Case Construction Equipment launched large-frame skid and track loaders that it claimed were the first such machines to use selective catalytic reduction, or SCR, at this year's World of Concrete, held Feb. 3-6 in Las Vegas. The Racine, Wis.-based company recommends simply topping off an SCR-equipped loader's urea tank during each diesel fuel fill-up, with no other intervention needed to make the emissions controls run properly.
"We tried to make it easy for someone to get out of a Tier-3 unit and get into a Tier-4 unit," says Warren Anderson, Case brand marketing manager. "I think we got there as humanly as possible." With no diesel particulate filter to maintain, Case's large-frame skid and track loaders would likely appeal to contractors and rental companies looking to reduce long-term owning and operating costs, he says.
Rental rates have risen in lock step with new equipment prices. "Today, average rental rates are 26% higher than they were in January 2011," says McArdle, pointing to rental rate data for September 2014, the latest month for which rate trends are available. Generators, which lead the pack with a nearly 35% rate inflation over the past three years, have been hit the hardest with clean-diesel costs, as the engine is the most expensive component on the machine, he says.