THE GLOWING ENIGMA
that is equipment management burned brighter and hotter than ever in 2018. Changes in tax laws, rising interest rates and volatility in equity markets caused equipment finance companies to rely still more heavily on their equipment managers for residual values that could win new business within risk parameters amid tough competition.
Meanwhile, the globalization of markets and sprint of technology continued to shorten industry cycles and produce even faster shifts in asset values. At the same time, complying with bank-related regulatory procedures became so common that it morphed into a new norm. Granted, the thought of so many technical developments is less than spell-binding. But to keep so many balls in the air, some kind of equipment-management magic seems increasingly necessary.
Kevin Sensenbrenner, Senior Vice President and Head of Asset Management at Stonebriar Commercial Finance in Plano, Texas, and Chair of ELFA’s Equipment Management Committee, gleans a bit of wizardry from field inspections. “For a leading indicator of the state of equipment management, I often look at our inspections to see if customers are taking care of their equipment, how capex spending is trending, whether equipment utilization levels are stable or becoming more difficult to predict, and whether the lessee is returning or buying equipment off-lease,” he says. “All these metrics tell me something about the health of a customer company and its industry segment, and so far, we’ve found very few cases showing signs of stress. Values across most industry segments are stable to strong, and demand for most new and used equipment is good.”
Sensenbrenner says Stonebriar had “a very strong” 2018 and continues to see opportunities for itself as an independent, diversified commercial finance company. “Our level of activity last year was elevated over prior years across all of our general-equipment, rail, aircraft, real estate and marine platforms,” he says. “The market has significant demand for non-bank finance solutions that are a good match for their essential-use and long-lived assets.”
Joe Santora, President of Irontrax, a machinery and equipment appraisal company in Cleveland, tells of similar success. “For us, 2018 was quite good,” he says. “Two years ago, we expanded our offerings into the industrial sector, and we’ve seen increased demand for our services there. We’ve also noticed that deal sizes in construction and transportation have increased. The crane segment particularly has seen an uptick, and appraisals within that market have been heavy. Each year continues to build on the last.”
Tom Harford, Senior Vice President-Equipment Management Group of Wells Fargo Equipment Finance in Chicago, also says business volume was strong across most equipment sectors for 2018. The company has a large and diverse portfolio supporting numerous lines of business. And while Harford lauds the expertise of the company’s equipment management team, he acknowledges market pressures. “Competition remains very stiff,” he says. “Many equipment markets have been in expansion mode for years, and we face a significant challenge to remain competitive as other finance companies reduce margins and increase residuals while knowing we’re likely nearing the peak of the economic expansion cycle.”
Top 5 Reasons to Attend the Equipment Management Conference
There’s a lot in store for you at the 2019 Equipment Management Conference, Feb. 24-26. Here are just a few highlights you won’t want to miss:
1. Network on the West Coast! We’re excited to reach our West Coast audience in a new location. The Omni La Costa Resort & Spa, located just north of San Diego in Carlsbad, California, is accessible and offers a perfect setting for connecting with your peers. From asset managers to equipment appraisers to remarketers, everyone you need to see will be under one roof!
2. Tour a Solar Turbines Facility. You will have a chance to tour Solar Turbines Inc., a subsidiary of Caterpillar and a leading producer of industrial gas turbines and turbomachinery products. Tour participants will visit the Kearny Mesa Packaging and Test facility, the main site for packaging and compressor design engineering, project management, engine and package manufacturing and testing. This is just one of several exciting off-site tours offered.
3. Ramp Up Your Sales. Keynote speaker and sales training specialist Rochelle Carrington is considered one of the most entertaining trainers around—just ask her! She is a lifelong student of sales and human behavior and skillfully applies that knowledge to enable clients to transform their beliefs and attain their ultimate success.
4. Stretch Your Mind. Evaluate hot topics and new opportunities in the marketplace. Examine current market conditions, portfolio quality and residual values for key equipment segments. See how technology is transforming equipment management. Get ready to learn new strategies to position your business for success.
5. Discover New Solutions. Don’t miss the exhibit hall with the latest products and services to help your business thrive. Stop by and see what’s new—and test your luck at the exhibit hall game.
Learn more at www.elfaonline.org/events.
‘Fortunes’ and Trends for 2019
No one needs a crystal ball to predict that competition will remain stiff in 2019 and equipment sales will be strong, at least through midyear. But those interviewed for this story glimpse other situations that could affect equipment markets. Sensenbrenner thinks commodity-driven markets could be more sensitive due to changes in the economy. “This might mean more volatility in oil and gas sectors,” he says. “It might also mean continued challenges in agriculture segments and softening in certain technology and medical equipment-related markets that are highly dependent on global conditions.”
Santora sees changes in the secondary market that are making trends in used equipment values harder to spot. “A secular shift to rentals has occurred in the construction industry, because after the Recession, manufacturers such as Caterpillar came up with 24- to 36-month leases with high residuals, making it more attractive to re-lease a new machine rather than buy out the current lease,” he explains. “This created a huge inventory of equipment for captives, who sold the used equipment through the dealer network instead of at auction. And since dealer transactions are private, we’re unable to see prices. That’s why [valuation] trends are harder to spot.”
Kimberly Esposito, Managing Director, Asset Management Services, at The Alta Group in Clearwater, Florida, sees trends in finance terms and equipment risk. “We expect a continuation in shorter finance terms due to the digitization of historically long-lived equipment, including food-processing, construction, mining and materials-handling,” she says. In addition, she believes risks may rise for machines operated with digital controls that contain original-equipment-manufacturer software licenses, such as medical imaging devices. “We’ve seen legal arguments over the ownership of software ‘options,’ which are sometimes being treated as owned separately from the machine hardware,” she says. “This may have an impact on future equipment values.”
Esposito also sees the growing use of automation as significant. “Automated systems with machines remotely operated through a computer console have begun integration into certain construction, mining, materials-handling and food-processing equipment,” she notes. “Mining.com reported that an Australian company recently completed the remotely controlled mining of an entire location using automated equipment. No humans operated machines directly from control cabs, but from computer consoles outside the mine. This is likely the beginning of a large machinery autonomous-robotic trend.”
In a related development, more transport companies have begun using robots to load freight, and major retailers are using them in stores as well as warehouses to move merchandise, scan inventory and fulfill online orders. Bastion Solutions of Dallas is promoting its “Ultra” mobile robotic truck loader and unloader as the future of shipping-dock automation, and robots from Bossanova of San Francisco can be found roving the aisles in more than 50 Walmarts.
But examining trends and forecasting the future have their pitfalls, and Harford acknowledges them. “There’s always someone looking to build a better mouse trap, but predicting the future of equipment markets is far from an exact science,” he observes. “However, when you can combine data analytics with an experienced equipment-management team that has a deep understanding of market cycles, you put yourself in a very strong position.”
Harford’s technology reference is on point. The platform at Wells Fargo Equipment Finance helps the company manage its portfolio with real-time analytics. “It also improves our customer and partner engagement and satisfaction,” he says. “Unlike in the past, our systems have streamlined equipment-management activities that used to require weeks or days into days or hours.”
Sensenbrenner alludes to the need for state-of-the-art technology in managing equipment as well. “We must be more acute at catching those shorter industry cycles and faster shifts in asset values,” he says. “This requires not only additional resources and discipline to stay current, but robust systems and strategies to better collect, evaluate, communicate and execute on current information.”
Having equipment managers who are highly knowledgeable about structures, documentation and exit strategies is even more important, Sensenbrenner believes. “It’s all about having the expertise to understand the big picture,” he says. “Everything else is secondary.”
Business executives are losing faith that Washington can be effective and predictable. In response, CFOs and companies are being more thoughtful and selective in how they spend their capex, which they want to be immediately accretive to their business.
Kevin Sensenbrenner, Stonebriar Commercial Finance
Hot (or Not) Markets
So many markets were doing well in late 2018 that it’s probably more efficient to talk first about the few that were not. We’ve already cited commodity-driven markets as potentially vulnerable, and Santora says we can cite mining as still struggling and construction as steady or flat but susceptible to gyrating oil prices and the lack of an infrastructure bill. “Some mining companies are still operating, of course, but several coal mines recently filed for bankruptcy,” he says. “And while the housing market is doing well and we’re seeing small shopping centers go up, it takes really big projects to sustain the purchase of construction equipment, and there haven’t been many of them. That’s why many contractors are still renting equipment.”
Mike Holck, Vice President of Irontrax, says the motor coach market is beginning to decline. “We are starting to see a softening in this industry, as several companies filed bankruptcy in late 2018,” he says.
Esposito says printing presses continue their repose at the bottom of the market, but that high-speed, digital flexographic presses able to print on food-packaging materials, paperboard and corrugated boxes are in high demand. Corporate aircraft, meanwhile, “is cyclical,” she says, “with certain makes and models experiencing recent value increases due to high demand, while other makes and models experience price declines.”
One market that sizzled last year and is expected to remain robust for at least the first half of 2019 despite industry challenges is trucking. “Truck and trailer build rates have been rising, but freight rates haven’t risen at the same pace,” says Holck. “At the same time, there’s such a shortage of drivers that companies have an excess of equipment sitting idle.” Online sales are contributing to this shortage and increasing already high driver turnover, he adds. “But companies are already pre-ordering their 2020 units, so 2019 sales are looking promising,” he concludes.
Esposito sees similar demand for trailers, sales of which set records in 2018 and should continue in 2019 as manufacturers rush to keep up with orders. “However, this supply increase will eventually impact future values as it comes into the secondary market,” she cautions.
Esposito also names machine tools as a hot market for 2019. “Manufacturing production rose for five straight months in 2018 to the highest level since June 2008,” she says. “The sector continues to see strong growth overall, with manufacturing output up nearly 3% year over year and manufacturing capacity utilization at the best rate since July 2015.”
Harford believes the renewable energy market will remain active and soon become a growth area. But he adds a caveat: “Due to the prolonged economic expansion, further supported by tax incentives, many equipment markets are at or near their peak sales and secondary-market values,” he observes. “Much will depend on how the U.S. economy performs in general.”
Values and Perspectives
Others think similarly. “Business executives are losing faith that Washington can be effective and predictable,” says Sensenbrenner. “In response, CFOs and companies are being more thoughtful and selective in how they spend their capex, which they want to be immediately accretive to their business.” He believes markets may soften over the next 12-18 months, but he doesn’t expect a change in demand for the tailored lease products his company provides.
Santora shares his perspective. “People were excited after the presidential election and the construction industry was extremely optimistic, which boosted equipment sales,” he says. “But as time went on, excitement began to wane in the absence of a long-term infrastructure bill. And now, steel tariffs have caused uncertainty about future pricing, and only time will tell how that plays out. Short-term implications are that the cost to produce equipment will go up, due to increased prices of steel and freight.”
In the meantime, Esposito says railcar and locomotive prices are firming up with much attention centering on certain types of tank cars. And although heavy-duty truck sales and values almost certainly will remain strong, Santora notes that large electric trucks are taking their time reaching the market place. “The technology is here, but the number of electric trucks that would have to be sold to make an impact on the whole market is years away,” he says.
Autonomous vehicles, however, are advancing toward the mainstream. “Due to the aging demographics of the general U.S. population and the continued truck driver shortage, the trucking industry is very interested in autonomous driving technology,” says Esposito.
“All major automobile and commercial truck manufacturers are working on the technology, several in conjunction with the largest high-tech companies in the world. In anticipation, the Federal Department of Transportation has recently issued for public comment five preliminary automation categories, with rules governing each.”
Automated systems with machines remotely operated through a computer console have begun integration into certain construction, mining, materials-handling and food-processing equipment.
Kimberly Esposito, The Alta Group
For his part, Sensenbrenner places the inexorable push of technology in context with the needs of equipment management. “We continuously have access to greater amounts of data every year, which is a blessing and a curse,” he says. “Good asset managers need to know which sources to rely on, which are credible, and how to make good decisions on behalf of their companies by weighing the most relevant information. The ultimate goal is to have accurate, real-time information available and efficiently in the hands of decision makers throughout the process.”
To that end, he says Stonebriar is undergoing a technology and automation transformation to maximize the utility and efficiency of its people, processes, systems and analysis of data. “I believe most others in the industry also see this as an important tool moving forward,” he says, adding, “All economic conditions provide opportunities. CEOs just want to know the rules. Once tax rules and regulations are established, they can adjust accordingly and make decisions.”
Certainly technology, markets and regulations are important. But perhaps the real magic in equipment management comes from its people, who juggle a continually increasing array of trends and data points to conjure what all companies yearn for: genuine, consistent success.