What is the evaluation policy you use for the replacement of short-term rental assets? Does your company have a policy where the customer participates in the guarantee of Long-Term Rentals (LTRs), in order to lessen your debt exposure? What percentages of your LTRs are supported in this way?
— David Griffin, Vice President, K-Lift Service Co. Inc. (Salinas, CA)
Loren Swakow: Short-term rental fleet needs to be replaced, there is no doubt about it. Our payments to lenders were budgeted and when one truck would get paid off, it was generally replaced. The budget was increased greatly in the late nineties, though, and the revenue in rental justified it. In the good old days, when a truck was paid off, it was sold through the used equipment department. We generally kept our trucks for five to six years, depending on hours or application.
That system is on the shelf right now. In our area during the past couple of years, not only has the rental business waned, but used equipment sales have also. Consequently, our short-term fleet is not being replaced on a regular basis. We are fortunate that our manufacturer has not changed models or color schemes lately so the age can be somewhat transparent.
We are trying to reduce our inventory level, which precludes our company from buying new rentals at the rate of years past. The DiSC Report most of us just received shows our company’s inventory level still to be too high. In the current economic climate of our APR, we are standing fast on rental fleet replacement.
LTR is another story altogether. This is another great source of used equipment. Before Citicorp, Associates, Sanwa, etc., we found we could not compete against Clark Credit, the leader in long-term rental at the time. We saw a market with a barrier of entry, as we were a White Lift Truck dealer at the time. To overcome this, we developed a separate company to handle the financing. The lease company we formed would buy the truck from sales. We would sign the customer to a long-term contract including maintenance, and we’d take the contract to a bank and finance it to pay off the truck. The lease company would collect the payments from the customer and make payments to the bank. As time moved on, the lease company would build up reserves to pay the sales company to maintain the truck on a time and material basis with a discounted rate.
The lease company carried the residuals. In essence, we guaranteed them, as we were the lease company. Our contract called for the trucks to be returned in a predetermined condition with predetermined hours. You would be surprised how much overtime charge you will give away to get the next contract. Did we make some mistakes? Sure, but in the long run, it has proven to be a great decision to be in control from start to finish. As time goes on, we have learned a great deal and our mistakes have become few and far between. Now we determine the residuals, not the customer or the lease company.
Dave Griffith: With respect to short-term rental fleet, we look at several factors. Utilization by class of truck—both dollar and unit, rental rate as a percent of acquisition, current maintenance expense, life-to-date income, replacement cost, available capital. We also look at customer satisfaction in a given situation and available alternatives. We look to roll 1/7 of our fleet annually and use the above factors to pick the units. This is budgeted and planned at the start of the fiscal year.
We do not as a rule ask customers to take a residual position on a long-term rental. That’s not to say we wouldn’t entertain it as a creative solution if the facts were right. We anticipate the hours and conditions we would expect at the end of the rental and, if appropriate, charge for over hours or abuse. Typically, the residual is held by the OEM or finance house we use in a given transaction. Only rarely do we hold a