Q4 Update to the 2022 Economic Outlook forecasts 5.9% expansion in Equipment and Software investment and 1.8% GDP growth this year
Despite early indicators of a modest rebound in equipment and software investment growth in Q3, demand may soften in several end-user markets over the remainder of the year due to high-interest rates and expectations for further rate hikes, according to the Q4 update to the 2022 Equipment Leasing & Finance U.S. Economic Outlook. The report released today by the Equipment Leasing & Finance Foundation forecasts equipment and software investment growth of 5.9% in 2022, while U.S. GDP growth of 1.8% is expected. The Foundation’s report is focused on the $1.16 trillion equipment leasing and finance industry and highlights key trends in equipment investment, placing them in the context of the broader U.S. economic climate. Nancy Pistorio, Foundation Chair and President of Madison Capital LLC, said, “While many of the factors highlighted in the Foundation’s Q4 Economic Outlook have worsened in recent months, including the U.S. housing sector, the global economic backdrop, and Fed actions to control inflation, there are bright spots. The industrial core of the economy continued to hum along in the late summer and early fall, and demand for equipment remains strong despite concerns of a looming recession.” Highlights from the Q4 update to the 2022 Outlook include: Equipment and software investment grew just 1.9 percent (annualized) in Q2, a notable slowdown from strong growth in Q1. The effects of Fed interest rate hikes appear to be filtering through the economy, but most verticals are not showing cause for serious concern. However, demand is expected to soften late this year and in early 2023 as the Fed continues to address inflation. The U.S. economy contracted through the first six months of 2022, amplifying recession concerns. The labor market remains a bright spot, but higher interest rates are increasingly taking a toll on the U.S. housing market and the global economy, which is struggling under the weight of the strongest dollar in decades. Still, a recession is unlikely to occur in 2022. In the manufacturing sector, loosening supply chains have allowed the industrial activity to continue expanding despite rising interest rates and high inflation weighing on business confidence. The recent passage of multiple infrastructure-related bills should provide a modest tailwind for the equipment finance industry in 2023. The outlook for Main Street businesses over the remainder of the year has worsened. While small and medium-sized businesses are starting from a position of relative strength, the dual impacts of high inflation and surging interest rates are likely to impact smaller firms first and hardest. With borrowing more expensive and sales expectations weak, small business owners are likely to feel pressure to slow or pause expansion and hiring plans. Despite rapidly increasing interest rates, the Fed’s actions to quell inflation seem to have had little effect. Fed officials have repeatedly emphasized the importance of reining in inflation, even if it means sending the U.S. economy into a recession. The Foundation-Keybridge U.S. Equipment & Software Investment Momentum Monitor, which is released in conjunction with the Economic Outlook, tracks 12 equipment and software investment verticals. In addition, the Momentum Monitor Sector Matrix provides a customized data visualization of current values of each of the 12 verticals based on recent momentum and historical strength. This month four verticals are expanding/thriving, four are peaking/slowing, and four are weakening/struggling. Over the next three to six months, year over year: Agriculture machinery investment growth is unlikely to improve. Construction machinery investment growth is likely to slow. Materials handling equipment investment growth is likely to remain soft. All other industrial equipment investment growth may continue to decelerate. Medical equipment investment growth will likely hold steady. Mining and oilfield machinery investment growth may have peaked, though growth is expected to remain positive. Aircraft investment growth may begin to rebound. Ships and boats investment growth are unlikely to accelerate. Railroad equipment investment growth will likely remain strong. Trucks investment growth may improve. Computers investment growth will likely continue to sidewind. Software investment growth will likely decelerate further. The Foundation produces the Equipment Leasing & Finance U.S. Economic Outlook report in partnership with economic and public policy consulting firm Keybridge Research. The annual economic forecast provides the U.S. macroeconomic outlook, credit market conditions, and key economic indicators. The Q4 report is the third update to the 2022 Economic Outlook and the final quarterly update before the publication of the 2023 Economic Outlook in December. Download the full report at https://www.leasefoundation.org/industry-resources/u-s-economic-outlook/. Download the Momentum Monitor at https://www.leasefoundation.org/industry-resources/momentum-monitor/. All Foundation studies are available for free download from the Foundation’s online library at http://store.leasefoundation.org/.
The fork in the road
If you have been keeping up with our wonderful economic news you came across comments about Boomers leaving the workforce in droves because they feel they have enough of a nest egg to live on. Hope they are right. As a result of these retirements, however, there are thousands of businesses for sale, with sellers not really aware of what they have to sell. Some do not even know that what they have is sellable. They will just unload any equipment they own and call it quits. This scenario is especially prevalent in the construction business because if you are a contractor to whom can you sell? Not many people are not your direct competitors. And if you do that, you can guess what the pricing will be. Many of these business owners came to that fork in the road. Either to stay the course and do what they must do to grow the business with existing as well as new customers. Or covert assets to cash and move south to warmer climates because as an owner they were not prepared nor interested in doing what you had to be done, nor able to spend the money to upgrade their operation to remain competitive. In other words, upgrading your business is no longer an option. The digital world is taking over, your customers today grew up in the digital world and they expect to do business via the digital world. Is it any wonder why there are so many family businesses for sale? Look how some young entrepreneurs are taking advantage of this situation can be found on YouTube. Look up a young lady named Codie Sanchez and see what she is doing to make herself rich. Right now, she owns 26 companies that she converted from their historical business practices into modern money makers. It is quite an interesting story, and every one of you could duplicate it if you wanted to. It is about an hour presentation but worth your time and your son’s or daughter’s time if they are having a tough time figuring out how to make a living so they can move out of your basement. Why am I discussing this topic with material handling OEMs, part distributors, and dealers? Because I believe dealer networks in the good old USA will find themselves at that fork in the road sooner rather than later. If you recall, I recently mentioned Ford and its move to sell online direct to customers. They were doing this to stop the gouging taking place concerning their new line of EV Ford 150s. And I said “here we go” with OEMs moving to sell direct. Guess what. AED, working with McKinsey & Company prepared a paper titled THE FUTURE OF SALES AND SERVICE FOR EQUIPMENT DEALERS. McKinsey sent out surveys to dealers regarding this topic and those responding are most concerned about the interest in OEMs in direct-to-consumer sales models. They were also concerned about NEW COMPETITIVE THREATS and THE INVESTMENTS REQUIRED TO ENABLE NEW SALES MODELS. The survey also asked what customers were currently doing and what was expected five years from now. Participants answered that currently 14-25% of new, used, and rental transactions originated online, with an expectation five years from now to be between 36- 48%. A meaningful uptick I would say. In terms of completing the purchase, online the current % is 7-15% with an expectation of 29-36 % five years from now. Back to the fork in the road, because it seems that 57% of the survey participants responded said they made no or minimal progress on building a sales and service model for the future. Which fork will these dealers take? My guess is they will not have a choice. Digitalization is where this is going and you will either have a program to modernize your operation to use the value of data and analytics to build a digitalized, customer-centric business. Or you will find yourself behind the eight-ball with only the option of selling your dealership to your OEM or another dealer selling similar lines. You would think OEMs would be pushing this process, and even funding such a program since having their dealers highly digitalized would be to their own benefit. As you can imagine this will be both a time-consuming and expensive program to develop and initiate. Only certain dealers will have the power to create a working sales and service model. The only way I see this working is for OEMs to lead the charge as is happening in the auto and truck industry where OEMs integrate digital sales programs into existing dealer management software. The other option is for a group of dealers to produce the sales and service platforms for their group. And I have to bring up those Codie Sanchez dealers who will buy today’s dealer and transform it into a dealer of the future, and in the process become a giant in the industry. OEMs…..wake up. About the Columnist: Garry Bartecki is a CPA MBA with GB Financial Services LLC and a Wholesaler columnist since August 1993. E-mail editorial@mhwmag.com to contact Garry.
Equipment Leasing and Finance Association’s Survey of Economic Activity: Monthly Leasing and Finance Index
August New Business Volume Up 4 Percent Year-over-year, Down 13 Percent Month-to-month, Up 5 Percent Year-to-date The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross-section of the $900 billion equipment finance sector, showed their overall new business volume for August was $8.8 billion, up 4 percent year-over-year from new business volume in August 2021. Volume was down 13 percent from $10.1 billion in July. Year-to-date, cumulative new business volume was up 5 percent compared to 2021. Receivables over 30 days were 1.5 percent, down from 1.6 percent the previous month and down from 1.8 percent in the same period in 2021. Charge-offs were 0.17 percent, down from 0.18 percent the previous month and down from 0.23 percent in the year-earlier period. Credit approvals totaled 75.2 percent, down from 78 percent in July. The total headcount for equipment finance companies was down 2.9 percent year-over-year. Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) in September is 48.7, a decrease from 50 in August. ELFA President and CEO Ralph Petta said, “August origination volume reflects an equipment finance industry that is fueling continued growth and expansion of businesses throughout the U.S. Up to this point at least, steadily rising interest rates do not appear to dampen the enthusiasm of businesses that prefer the utilization of productive assets versus their ownership, which is the essence of the equipment finance sector. With the Fed’s most recent 75-basis point jump in short-term interest rates and the prospect of a hard landing, time will tell whether—and to what extent—these same business owners continue to grow and invest in equipment.” Thomas Sbordone, Managing Director and National Sales Manager, BMO Harris Equipment Finance, said, “While the economic data may be construed in any number of ways and can feel, at times, unsettling, the fundamentals of our equipment finance business remain strong. Companies invest in capital equipment, throughout all cycles, for a myriad of reasons, and equipment obsolescence is certainly real. Productivity gains require capital and business owners are always seeking an edge over the competition. Once decision-makers get past the initial ‘sticker shock’ of seeing how their financing rates have climbed over the past year they make rational choices based on their individual circumstances. The August MLFI results look positive, generally, given the market environment with continued high inflation, supply chain issues, and other challenges. It will be interesting to see the September end-of-quarter MLFI results when the effects of the Fed’s latest interest rate hike are clearer. A ‘wait and see’ approach never feels great, but we’re reminded that patience is a virtue.”
Something Old—Something New
Last month I was preparing the September article just before Mr. Powell informed us of the rate change coming. He made that announcement right after I finished my creation for the month. Duplicating that process again for the October issue, on August 26, just before Mr. Powell announced they were taking the hawkish route. My guess is another .75% rise in rates. Let us see what happens. But before we get started, I want to thank Dave Baiocchi for his contributions to our readers. Always a great review of dealer operations and issues brought up to date to current market conditions along with insights of future challenges facing dealers. GOOD LUCK DAVE! AND MAKE MONEY! So, let us get caught up to date on where we stand today. The OLD news. The economy and inflation in particular will continue to be a problem longer than we think. The EAU issues will help keep inflation rates high, especially in the areas of fuel and food costs. Although the supply chain issues are reversing, they still add to the cost of doing business. The bottom line here is do not expect any return to normal in 2022 and not in 2023 (unless the Fed really tightens up the screws). Personnel issues will also remain a problem and as of now add to our inflation woes. The Gordon Report expects wages to increase by 4 to 5 percent in 2023. (The Gordon Report can be found on the MHW website). What you are going to hear about in this issue is we do not spend enough on training people to work in this current environment. I guess we can consider Taxes as old news. The Inflation Reduction Act contained a new AMT tax for companies showing $1 billion in profits on their income statement. The tax is based on book income and not taxable income. Those guidelines leave most of you out of paying the new tax, but I am sure they will get you somehow to contribute a bit more to offset the spending for climate change, etc. The IRA does, however, provide tax credits for any number of New Energy materials, manufacturing, and power. You may want to follow up on the credits and rebates to see if any make sense for you or your customers. A helpful review of the tax portion of IRA can be found in the Journal of Accountancy in the August 18, 2022, issue; a transcript of a podcast featuring Adam Schrom, CPA from Bloomberg Tax. So, what is NEW news? The biggest change I am just thrilled about is the reversal of the 30 years of Globalization where we became more interconnected and interdependent than ever. It worked, reduced production costs, lowered prices, provided more access to goods and services, and brought up the standard of living for many people. But as with all things, it works until it does not. And then it highlights the security and defense problems we have as a result of globalization. The good news is that the $52 billion CHIPS Act is geared toward incentivizing the manufacturing of semiconductors using the latest technology available. A big deal for all of us including the material handling industry. In short, high-tech manufacturing is coming back to the US of A. And then we have the Inflation Reduction Act which focuses on energy security and climate change investments. This is in addition to the Infrastructure Act passed last November to encourage clean energy, EVs, power grid upgrades clean water, and funding for technology related to the supply chain. No matter how you look at this, there is a ton of money out there to deal with rebuilding and upgrading our manufacturing and supply chain activities. There appears to be an opportunity for the material handling business in all this. Don’t you agree? If you do, then the question becomes do we have the technology presence to participate in this work on the manufacturing and distribution sides. Two issues are attached to this work. #1 is this work requires high-tech design and construction methods. #2 is most of the contracts for this work contain a minority interest requirement. Are you prepared to deal with either of these issues? Maybe it is time to take Dave B’s advice to conduct a SWOT analysis regarding the new “market” showing up on your doorstep. From all of my reading covering many different industries, PRODUCTIVITY improvement is the issue that should be on every management agenda you prepare. Productivity means doing more with less to reduce cost, which in turn makes you more competitive when it comes to winning and completing new work. Everybody is thinking about it. If they do not, they will find themselves losing sales opportunities and thus adequate cash flow to keep the doors open. Material Handling Dealers have to embrace technology themselves as well as provide technology upgrades to customers. Expanding offerings to provide maintenance services on the technology employed should also be considered. There is a new business world out there. Find what profitable niches work for you. About the Columnist: Garry Bartecki is a CPA MBA with GB Financial Services LLC and a Wholesaler columnist since August 1993. E-mail editorial@mhwmag.com to contact Garry.
What to do in the current Finance, Rental and Leasing world
This should be fun! Here I sit putting my thoughts together on July 27 waiting on Mr. Powell to announce how much Fed Fund rates are increasing this month. I will assume a .75% increase which should make some people happy and others looking for a window ledge to climb out on. Obviously, those that leveraged up to take advantage of the super low rates are trying to figure out how to make the next debt service payment. On the other hand, those that kept their balance sheet in decent shape with adequate cushion to deal with a recession or AR problems caused by customers that leveraged up will continue to move on ready to take advantage of competitors running out of gas (I assume they have no EV’s). So, what is going on? Prime Libor Fed Funds Dec 31 rate 3.25 .583 .250 July 5 rate 4.75 3.57 1.75 % increase 46% A A A = stupid numbers but you get the idea… increase in interest expense (if you have a floating rate deal), which will eat up your cash flow as well as call for higher EBITDA numbers to meet your Debt Service bank covenants. And these numbers do not have the July 27 rate hike included. You may want to check with your banker to see how this will work out for you. If you have a fixed rate deal with a rate lower than what a current rate deal would cost, you want to do whatever it takes to keep that contract in place. If you have a deal in place that is steadily increasing, you can investigate a swap that provides a “cap” on the rate you pay. The swap can get a little complicated and expensive if the rate you agree to is never reached. So, talk to multiple sources to make sure you understand what is happening. Just to make things clear the rates shown above are the base rates on which the bank adds another 2-3%. For example, it is Libor plus 2 or Prime plus 3. In either case, you encounter a material increase in interest expense. Lenders that finance dealers, customer purchases, and lessors have to change their outlook on their operations as well. The rates, as well as collateral values, are moving around on them which has made them nervous. And when you add the recession factor into the equation that scares them even more due to potential defaults and reductions in collateral value should they be required to liquidate collateral. We have not mentioned the rental segment of the market, but for dealers, this could be a win or a loss depending on your ability to finance an increase in the rental activity. Looking at the June 2022 Small Biz Optimism Index? ….it does not look good at all. They posted a sixth consecutive drop in June with all 10 components declining. Owners expect better business conditions in the next six months at the lowest level in 48 years. 69% report significant impact from supply chain issues. Labor top business problem. These business owners have been paying low-interest rates up until now. They are in a tricky situation. This Index leads me to believe that the equipment rental business is going to soar because businesses will not be able to fund Cap-x transactions, and at the same time will want to avoid fixed costs, additional debt, and the high-interest rates associated with the debt. It will pay to keep what they have to avoid the inflation-inspired unit cost increases which also adds to their debt burden without any additional benefit. So, dealers who can provide parts and service for multiple brands, perform refurb work to lower the cost of replacing units, and have the capital to carry a short-term fleet for customers that only need units on a seasonal basis or an up and down work-flow schedule. As you have figured out already your balance sheet is going to be the determinant factor in how you work your way through this economic scenario you are facing. There are opportunities out there, but do you have the capital to make profitable things happen? Better figure out where you stand because all the noise about prices falling, and a recession that will lower prices and interest rates are all wondering if you have the cushion to make it through the recession. A review of the MHEDA 3-year forecast does not support robust growth for the balance of this year and most of 2023, which supports finding programs to make money without taking on any long-term debt service. What I would do is: Dig out all your financing and dealer agreements to make sure you are following the contract terms. Your auditors probably do this as part of their yearly work. So, ask them to provide what they have in their files, and if necessary, ask them to review your covenant calculations to make sure they are correct and in the ballpark. Along these same lines, you should have a template to calculate your EBITDA number. EBITDA is normally part of the covenant process but is easily misused for “one-time” expenses that should be removed from the calculation as well as monthly non-cash charges over and above depreciation that should also be added back into EBITDA. You may also have “not normal” expenses that could also be added back. For example, if you engage in a lawsuit and incur a substantial amount of legal fees, I would want to add those back since they have nothing to do with operating the business. Personally, a company I worked with closed existing locations and added new locations, incurring a big cost to move the equipment around. That cost was added back. Calculate EBITDA on a TTM (trailing twelve months) cycle and keep updating the annual EBITDA you projected. And what you really do not need in 2022 is for the new lease accounting rules to appear on your 2022 financials. Making
June 2022 reaches levels in New Industrial Manufacturing Planned Industrial Projects not seen since March 2022
SalesLeads has announced the June 2022 results for the newly planned capital project spending report for the Industrial Manufacturing industry. The Firm tracks North American planned industrial capital project activity; including facility expansions, new plant construction, and significant equipment modernization projects. Research confirms 150 new projects in June 2022 as compared to March 2022 with 152 planned projects in the Industrial Manufacturing sector. The following are selected highlights on new Industrial Manufacturing industry construction news. Industrial Manufacturing – By Project Type Manufacturing/Production Facilities – 129 New Projects Distribution and Industrial Warehouse – 71 New Projects Industrial Manufacturing – By Project Scope/Activity New Construction – 44 New Projects Expansion – 55 New Projects Renovations/Equipment Upgrades – 72 New Projects Plant Closings – 9 New Projects Industrial Manufacturing – By Project Location (Top 10 States) Michigan – 15 Indiana – 13 Ohio – 12 Texas – 9 California – 8 South Carolina – 7 Kentucky – 5 North Carolina – 5 Virginia – 5 Wisconsin – 5 Largest Planned Project During the month of May, our research team identified 16 new Industrial Manufacturing facility construction projects with an estimated value of $100 million or more. The largest project is owned by GlobiTech, Inc., which is planning to invest $5 billion in the construction of a manufacturing facility in SHERMAN, TX. Construction is expected to start in late 2022. Completion is slated for 2025. Top 10 Tracked Industrial Manufacturing Projects OHIO: Automotive mfr. is planning to invest $1.5 billion for expansion and equipment upgrades on their manufacturing facility in AVON LAKE, OH. They are currently seeking approval for the project. OREGON: Lithium battery mfr. is planning to invest $450 million in the construction of a manufacturing facility in REDMOND, OR. They are currently seeking approval for the project. CONNECTICUT: Semiconductor components mfr. is planning to invest $250 million for an expansion of its manufacturing facility in WILTON, CT. They are currently seeking approval for the project. TENNESSEE: Specialty food packaging products mfr. is planning to invest $200 million for expansion and equipment upgrades on their manufacturing facility in VONORE, TN. Completion is slated for late 2023. OHIO: A biotechnology company is expanding and planning to invest $150 million in the construction of a 350,000 SF laboratory and processing facility at 9885 Innovation Campus Way in NEW ALBANY, OH. They are currently seeking approval for the project. GEORGIA: Industrial equipment mfr. is planning to invest $140 million in the construction of a 650,000 SF warehouse and manufacturing facility in GAINESVILLE, GA. They are currently seeking approval for the project. Construction is expected to start in 2022. Completion is slated for late Summer 2024. ARKANSAS: A lumber company is expanding and planning to invest $131 million for the renovation and equipment upgrades on their manufacturing facility in WALDO, AR. Completion is slated for late 2024. MONTANA: A food production company is planning for the construction of meat, dairy, poultry processing, and warehouse complex in GREAT FALLS, MT. The project also includes the construction of a 20,000 distillery and production facility at the site. They are currently seeking approval for the project. MISSOURI: Automotive mfr. is planning to invest $95 million for expansion and equipment upgrades at their manufacturing facility in KANSAS CITY, MO. They have recently received approval for the project. MICHIGAN: Food safety products mfr. is planning to invest $70 million in the construction of a 175,000 SF manufacturing facility in LANSING, MI. Construction is expected to start in Fall 2022. About SalesLeads, Inc. Since 1959, SalesLeads, based in Jacksonville, FL is a leader in delivering industrial capital project intelligence and prospecting services for sales and marketing teams to ensure a predictable and scalable pipeline. Our Industrial Market Intelligence, IMI identifies timely insights on companies planning significant capital investments such as new construction, expansion, relocation, equipment modernization, and plant closings in industrial facilities. The Outsourced Prospecting Services, an extension to your sales team, is designed to drive growth with qualified meetings and appointments for your internal sales team.
Risk Assessment
As you well know there are quite a few issues facing dealers for the balance of 2022 and into 2023. We have Inflation with many factors pointing to Stagflation. We have interest rate risk (which is scary). We have credit risk from your OEM down to your customer level. We have increased transportation costs. We have pending EV interest and requirements. We have consolidation on many equipment fronts. We have staffing problems. We have supply chain problems. We have the retail sector stuck with bloated inventories. You can add a few more. On the positive side a recent BDO newsletter I received states that industrial real estate is staged to almost double the volume of five years ago. With many companies needing to put products closer to customers and the trend to produce more products in the US, lift truck dealers have a tremendous opportunity to add market share. Sounds good so far, but there is no free lunch because owners of these properties plan to become digitally aware looking to digitally connect systems to work together and deliver more productivity. Sounds great as long as you can participate in this digital process. If you cannot, do not expect to be at the top of the list when they need equipment. ( I suggest you sign up for those BDO emails because they contain a lot of practical material). The next item on the list will require a strong balance sheet along with meaningful EBITDA. A year ago, you have a Fed Fund Rate of about “0” to which the bank adds, let us say, 2.5% to 3.0%. as your rate to receive working capital and Cap-X loans. When you think about this your costs are increasing, and vendors who experience a similar fate will be passing on their higher interest costs to you as well. A lose-lose situation because the reality of this situation is you incur higher interest costs without a source of revenue to offset them. You obviously will have to increase margins to cover this higher rate, but it may take a year to catch up to the cost increase, with the higher interest passed on by vendors making it even tougher to catch up. For example, you now have a 2.5% loan. With the Fed rate changes, the base rate is now 2.5% (and will probably go higher) to which you add on the bank rate of 2.5%, with the new rate being 5%. That’s a 100% increase! To see the impact of these changes, take a look at your 2021 annual financials to see what your interest cost was. Now double it to compile what your new annual interest dollars will be.YIKES. Where is cash coming from to cover this expense? Where you find yourself after these higher rates are executed is in front of your banker who says, “ Looks like you missed your covenants, and we will have to see what needs to be done to correct the situation.” I hate to pile on like this but ’22 is the year of the new lease accounting rules which will add lease debt to your balance sheet which could create additional covenant problems. All the more reason to take a HARD look at your balance sheet now to give you time to prepare your defense when the loan renewal comes up. Dealers with unit inventory and a rental fleet might see debt covenants as follows. Debt/Equity. Debt/EBITDA-Cap X. EBITDA/ Interest. EBITDA / Total Debt Service. I am sure that a lot of you are familiar with these calculations. Hopefully, you have examples of how the bank calculates these results. If you do not have those examples, get them, and keep them handy. Since EBITDA shows up in more of these covenant calculations make sure you have an outline for adjustments to make to the EBITDA. For example, one-time charges and personal expenditures could be used to adjust the EBITDA to a higher positive result. It will pay to study how you are accounting for revenues and expenses to insure you have the right figures in the right period. And remember the “I” in EBITDA stands for interest. Make sure you are using the correct amounts for interest expenses. Obviously, the lease debt will increase the debt amount on the balance sheet resulting in a material adjustment if you lease a lot of equipment or have long-term contracts (not equipment related). Bankers have been saying that you do not have to worry about the lease debt, as long as you are in good standing with the bank. Get a bit out of sync and you may find that suddenly the lease debt is more important than anticipated. One last point. Your customers and vendors will find themselves also having problems with increasing rates. So now is the time to see how the financials of your slow players look. These rates are sure to generate a lot of Zombies (Wall St. term for a company not able to make their next bank note payments) who borrowed too much because the rates were low. Thus, the question becomes “How many Zombies are in your AR schedule?” Is not owning a lift truck dealer fun? Most times yes. For the next eight months probably not. About the Columnist: Garry Bartecki is a CPA MBA with GB Financial Services LLC and a Wholesaler columnist since August 1993. E-mail editorial@mhwmag.com to contact Garry.
Rental Revenue jumps 14.3 percent in Q2, Baird/RER Survey respondents say
Sixty-one percent of respondents said second-quarter revenue exceeded expectations, while 34 percent reported revenue in line with their initial expectations. Average rental revenue increased 14.3 percent year over year in the second quarter, according to respondents to the 2Q Baird/RER rental equipment industry survey. The increase was mostly in line with last quarter’s 14.8-percent hike. This marks the fourth consecutive quarter of double-digit growth. Sixty-one percent of respondents said second-quarter revenue exceeded expectations, while 34 percent reported revenue in line with their initial expectations. Overall commentary on rental revenue was more cautious compared to recent surveys. “Our web inquiries have seen a dramatic decrease over the last two weeks, so we think the interest rate hikes have slowed some markets on new equipment purchases already,” said one respondent. “The next rate hike in July may tip the scales and have us revisit our stock sales inventory forecasting for 2023.” “Unless energy costs stabilize, inflation will persist,” said another. “Workforce is a much more severe problem to the growth of the industry and will significantly negatively impact value of infrastructure bill,” added another respondent. “Bit of a slowdown, not sure if it is weather or slowdowns caused by labor shortages,” said a third respondent. Another respondent said this spring was slower than 2021, and that his company’s revenue increase is from rate and price increases rather than organic growth. Fleet utilization was 62.3 percent for the second quarter, up from 61.8 percent in the first quarter and a full percentage point from the second quarter of 2021 when it was 61.3 percent. The utilization was better for earthmoving equipment than it was for access machinery. Earthmoving utilization increased to 65 percent in the second quarter compared to 63.5 percent in the second quarter of 2021. However, access utilization declined year over year from 64.5 percent a year ago to 62.1 percent this year. Small iron improved from 52.2 percent a year ago to 53.3 percent this year. Average rental rates were up 4.5 percent year over year, basically the same as last quarter when they rose 4.4 percent. Improvement in rental demand helped provide pricing flexibility. There was, relatively speaking, little commentary regarding rental rate pressure from larger competitors. Rental rates still to rise in 2022 Respondents said they expect rental rates to be up 5 percent for the year, which is similar to last quarter’s forecast when respondents predicted a 5.1 percent for the year. However, rental companies did express concerns. “Competitors are not raising their rental rates in line with the price increases we are having to pay for new machines,” said one. “Expenses are superseding income increases,” added another. “The cost of doing business is rising dramatically, and rental rates do not seem to be keeping up with the pace.” Respondents are expecting a 9.7-percent revenue hike in 3Q22 with 27 percent expecting a 1 to 5 percent increase year over year. 25 percent expected 5 to 10 percent and 24 percent expected a 10 to 15 percent leap. Respondents still expect an 11.7 percent increase in 2022, up from an expected 9.2 percent increase last quarter. Steady demand from end markets is still expected to continue but is partially offset by equipment and labor shortages. However, respondent optimism is not as high for 2023. “An economic slowdown in 2023 seems more likely all the time,” said one. “A modest slowdown would seem to be an appropriate tonic that might improve the labor market, manufacturing lead times, and improve supply chain restraints.” “With all the uncertainty in the economy we have major concerns for 2023,” said another. “Extremely busy today but not sure if things will slow down creating a glut of equipment.” Growth in the cost of new equipment continues to be high. Respondents placed the increase at 6.6 percent, down a bit from the previous two quarters, which were increases of 7.2 percent and 6.8 percent. OEMs are still aggressively raising prices to offset their own costs, including elevated steel prices. The May Construction Machinery Manufacturing PPI hit a record high (back to 2004) of 11.4 percent year over year. Extended lead times, or uncertainty over lead times, remain a major concern because of the difficulty of fleet planning. Fleet sizes still increasing Respondents’ average fleet size in a number of units increased 6.6 percent year over year in 2Q22, which was the strongest growth since 1Q18. Respondents expect to increase fleet purchases by 9.7 percent year over year compared to 8.5 percent last quarter. Access equipment spending is expected to rise 7.5 percent over the next six months, with earthmoving expected to up 10.2 percent, small iron at 4.6 percent, and “other” 20.3 percent. Thirty-nine percent of respondents expect labor costs to increase 5 to 10 percent in 2022, versus 52 percent last quarter, while 35 percent expect labor costs to top 10 percent. Respondents also expressed concern regarding higher interest rates impacting the housing market and equipment financing rates, with 28 percent expecting a potential residential construction slowdown. With six months remaining in 2022, respondents expect 6.3 percent revenue growth in 2023, compared to 11.7 percent growth in 2022, and 6 percent fleet spending growth compared to 9.7 percent growth in the second half of 2022.
Digitalization-Proficiency-Resilience
What a week. Just finished listening to Jim Cramer summarize the Q1 results from the major retailers. Worse than expected, with their stock prices taking a hit. The main reasons for these results are: Unexpectedly high costs throughout Q1 Inventory impairments Sales mix changes Supply chain disruptions Freight Costs Revenues may have been close to expectations. The gross margin and the operating margin, however, both missed. Foot traffic was up but sales patterns changed to more essentials as opposed to big-ticket items. The freight and transportation cost increases were staggering. About $1 billion for Target was not expected. I would expect any distributor of pre-packaged goods to fall under this array of disruption. Most will be taking hits unless they fall under the “Discount Store” umbrella which is doing better at hitting numbers. The important thing here is that “higher cost,” “inflation,” and “supply chain problems” are now only becoming known in the public sector. Consequently, dealers can expect to be exposed to these issues through their distributor customers and hopefully have courses of action planned out to assist customers and avoid collection problems. Are pre-packaged distributors the only customers to worry about? I doubt it. Every business with a significant distribution function will also have to deal with the five “reasons” noted above. And as far as manufacturers are concerned, they are also subject to the five “reasons,” different from the distributor level of disruption, but still disruption that will eat up both time and dollars. One of the major problems deals with the cost and timing of deliveries. Not much you can do about transportation costs unless you move your warehouses closer to both your receiving and customer’s locations. It seems that both manufacturers and distributors are analyzing these options to build or rent more warehouses where a high concentration of customers is located. Another show I was listening to discussed how companies are “handling” the cost increases. They are: Do not pass them on yet. Do so when they really need to. Pass on 100% of the increases as incurred. Pass a % of them on for as many years as it takes to recover 100%. Let us assume many of your customers find themselves dealing with the five “reasons,” which of course could cause cash flow problems for them, and then cash flow problems for you. Consequently, tighter customer credit reviews and a weekly review of AR to spot problems before they get out of hand should be considered. To aid in this process you may want to calculate your Days Sales Outstanding at least weekly to see how the trend is tracking, and which customers are causing any increase. After tracking all that is going on in the lift truck industry, the construction equipment industry, the rental industry, and the construction industry, I believe we are in this trick-bag for many years, and no matter what industry you are in there is a need to get more resilient if you hope to maintain your influence in your market area. Let us face it. Customers will be in a state of flux financially, either because of customer problems or the direct impact of the five “reasons” or some combo of the two. Add on to that the price increases in equipment yet to come plus the higher financing costs lead me to believe dealers can expect pushback going forward when it comes to long-term leases with maintenance. Thus, my title for this month’s column: Digitalization The construction industry and related dealer networks are diving in to cut the time and cost to plan, manage, bill, and complete the work in a timely fashion. These technology cap-X expenditures are making contractors more competitive and profitable compared to how they operated ten years ago. The same should apply to lift truck dealers. Proficiency Upgrading your technology package will allow you to reduce the time it takes to complete a project or daily work requirements. And any reduction in clerical work provides the opportunity to move employees into more meaningful jobs or to just adjust the number of employees. The sales, parts, service, and rental departments will also become more accountable to management to help cut costs or speed up production, which also helps offset pay increases given to employees to keep talent and offset inflation-related adjustments. Resilience Planning and taking steps to manage a new set of business metrics and customer needs ensures that you will be one of the last men/women standing. From what I see OEMs are reducing the number of dealers they have. Why do they do that? To do more with less using their best operators to get the product into the market. If you can take your metrics into the HI-Profit status in the Disc Report, then I would consider your company to be one of the consolidators working with the OEM. And we did not even start on the future of EV of forklifts. One last comment about how banks are dealing this these five “reasons.” Not very well as far as I can tell. Meaning every dealer has to be prepared to comply with bank requirements and any current bank covenants. To walk into a bank meeting and get nailed for violations is not a good place to be. And if your balance sheet and/or free cash flow has deteriorated keep in mind that the new Least Accounting rules will add debt to the balance sheet which could put you in violation of covenants. More on this later. And since costs are bouncing around so much, I thought I would include this formula for calculating selling price based on the cost of the units under consideration. COST/ 100% – PERCENT GROSS PROFIT REQUIRED Cost = $10,000 Required GP = 35% 100-35 = 65 the divisor $10,000/65= $15,384 sell price $15,384 sell price – $10,000 cost =$ 5,385 GP $5,384 /$15,384 = 35% margin Stay in touch with customers and see where they are headed. About the Columnist: Garry Bartecki is
Equipment Finance Industry confidence lower in May
The Equipment Leasing & Finance Foundation (the Foundation) releases the May 2022 Monthly Confidence Index for the Equipment Finance Industry (MCI-EFI) today. The index reports a qualitative assessment of both the prevailing business conditions and expectations for the future as reported by key executives from the $900 billion equipment finance sector. Overall, confidence in the equipment finance market is 49.6, a decrease from the April index of 56.1. When asked about the outlook for the future, MCI-EFI survey respondent David Normandin, CLFP, President and CEO, Wintrust Specialty Finance, said, “Adapting to change is what the equipment leasing industry is all about. Our current rising rate environment will be good for the overall financial health of equipment finance companies as obligors adapt to the new world rate order and margin is built back into the business. I do think this will create challenges for many who may not have a long-term stable capital structure.” May 2022 Survey Results: The overall MCI-EFI is 49.6, a decrease from the April index of 56.1. • When asked to assess their business conditions over the next four months, 6.9% of executives responding said they believe business conditions will improve over the next four months, a decrease from 14.8% in April. 62.1% believe business conditions will remain the same over the next four months, down from 63% the previous month. 31% believe business conditions will worsen, an increase from 22.2% in April. • 10.3% of the survey respondents believe demand for leases and loans to fund capital expenditures (capex) will increase over the next four months, down from 29.6% in April. 65.5% believe demand will “remain the same” during the same four-month time period, an increase from 55.6% the previous month. 24.1% believe demand will decline, up from 14.8% in April. • 13.8% of the respondents expect more access to capital to fund equipment acquisitions over the next four months, down from 22.2% in April. 86.2% of executives indicate they expect the “same” access to capital to fund business, an increase from 77.8% last month. None expect “less” access to capital, unchanged from the previous month. • When asked, 48.3% of the executives report they expect to hire more employees over the next four months, up from 40.7% in April. 44.8% expect no change in headcount over the next four months, a decrease from 59.3% last month. 6.9% expect to hire fewer employees, up from none in April. • 3.5% of the leadership evaluate the current U.S. economy as “excellent,” a decrease from 14.8% the previous month. 79.3% of the leadership evaluate the current U.S. economy as “fair,” up from 74.1% in April. 17.2% evaluate it as “poor,” an increase from 11.1% last month. • 3.5% of the survey respondents believe that U.S. economic conditions will get “better” over the next six months, a decrease from 7.4% in April. 27.6% indicate they believe the U.S. economy will “stay the same” over the next six months, a decrease from 51.9% last month. 69% believe economic conditions in the U.S. will worsen over the next six months, an increase from 40.7% the previous month. • In May 34.5% of respondents indicate they believe their company will increase spending on business development activities during the next six months, up from 29.6% the previous month. 65.5% believe there will be “no change” in business development spending, down from 66.7% in April. None believe there will be a decrease in spending, down from 3.7% last month. May 2021 MCI-EFI Survey Comments from Industry Executive Leadership: Independent, Small Ticket “Inflation, inflation, inflation!” James D. Jenks, CEO, Global Finance and Leasing Services, LLC Bank, Middle Ticket “Supply chain issues continue to have an impact on lease commencements with dates getting pushed with delivery delays. We are seeing an increase in renewals and over-term rentals.” Michael Romanowski, President, Farm Credit Leasing
Equipment Leasing and Finance Association’s survey of economic activity: Monthly Leasing and Finance Index
April new business volume up 7 percent Year-over-Year, relatively unchanged month-to-month, up nearly 6 percent Year-to-Date The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross-section of the $900 billion equipment finance sector, showed their overall new business volume for April was $10.5 billion, up 7 percent year-over-year from new business volume in April 2021. Volume was relatively unchanged from $10.6 billion in March. Year-to-date, cumulative new business volume was up nearly 6 percent compared to 2021. Receivables over 30 days were 2.1 percent, up from 1.5 percent the previous month and up from 1.8 percent in the same period in 2021. Charge-offs were 0.05 percent, down from 0.10 percent the previous month and down from 0.30 percent in the year-earlier period. Credit approvals totaled 77.4 percent, down from 78.3 percent in March. The total headcount for equipment finance companies was down 1.0 percent year-over-year. Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) in May is 49.6, a decrease from 56.1 in April. ELFA President and CEO Ralph Petta said, “New business volume for a subset of the ELFA membership shows stable growth in April amidst a somewhat slowing economy and rising interest rate environment. Anecdotal information from a number of ELFA member organizations indicates that equipment deliveries continue to be a problem as supply chain disruptions continue. Soaring energy prices and inflation are headwinds confronting the industry as we move into the summer months.” Eric Bunnell, CLFP, President, Arvest Equipment Finance, said, “The recent results from the MLFI-25 mirror what we are seeing every day. Volume continues to be steady even with rising interest rates. The portfolio is performing well, with below-average delinquency rates, but we continue to monitor this closely. We continue to be optimistic for the rest of 2022, especially if the supply chain continues to improve.”
Performance Brokerage Services, Inc.
LiuGong North America reveals LiuGong Finance
LiuGong North America has announced a new private label program to become a one-stop-shop for equipment and financing. The new LiuGong Finance program will serve customers and dealers with a multitude of benefits. “As we continue to help support, grow and develop our customers and dealer network, we’re delighted to introduce LiuGong Finance,” said LiuGong North America President Andrew Ryan. We’ve built the LiuGong Finance program to include several components that will benefit our customer and dealer network and their businesses.” LiuGong Finance will provide dealers with finance support for both LiuGong North America and non-competing products. Additionally, it will enable dealers to utilize competitive rates and flexible finance structures under a captive finance program. This helps to differentiate LiuGong from its competitors and creates customer loyalty that can lead to future sales. Dealers and end-users will have access to a dedicated finance team. LiuGong Finance offers both retail financing and dealer-owned rental fleet financing under the program. There are three types of retail financing included: FMV lease, equipment loan, and custom structures. There are two types of dealer-owned rental fleet financing offered: rental equipment loans and custom structures.
More distress plus
This month I was hoping to share some positive comments about inflation, supply chain issues, OEM delivery dates, improving sales numbers and margins. Unfortunately, I cannot do that. I cannot do that because the activities in Europe have changed from what we call a conventional recession (where we were headed before the shooting started in Europe) to a strange recession that will have more bite for a longer-term. Just what we needed. In addition, word on the street is this recession will become stagflation where prices continue to rise even though economic activity is shrinking. Conventional recession could last from six months to a year when events turn and it is a start back to business as usual, such as what happened in 2008 and 2009. Stagflation, on the other hand, is made up of long-term events that keep pushing up pricing even though the economy is in decline. Hence, we can do away with the transitory inflation speak. The war in Europe, the COVID in China, more supply chain problems, and especially the increase in oil prices will be here long term with little hope that monetary policy changes can produce a soft recovery any time soon. The long-term phase is the one that bothers me. It bothers me because if dealers and their customers were taking steps to offset the negative impacts of minor interest rate hikes, short-term price increases, and OEM lead time of six to 10 months, hoping that their strategy provides a return to normalcy within a year, that no longer may be a workable solution to the problem. This situation is no longer a minor change in the business plan and operating budget. Dealing with Stagflation requires a new set of planning skills few managers have had the pleasure of dealing with. Setting time aside to visit this unusual set of circumstances needs to take place ASAP to discuss how this scenario impacts every segment of your business, not to discuss recession but to discuss how you must operate and cash flow when prices are moving into a double-digit range while sales are falling. This is an entirely new ballgame. There are businesses out there that are capital-efficient or in other words have the flexibility to deal with stagflation because they have pricing power and are not bound by substantial amounts of debt and fixed costs. I wish I could say that an equipment dealer fits into this category, but you do not. Dealers will have to examine their revenue silos to see where they are making money. Have to pass on costs if they can, and if they cannot consider downsizing the operation or department, also be careful granting credit while stepping up the collection process. Large AR write-offs cannot be tolerated. After gaining insights about Stagflation your business model may require revisions if you hope to come out the other side of adventure. Challenging decisions may have to be made once your complete stress tests to see if the revised model cash flows. Spend as much time as necessary, using outsiders, if necessary, to do the projections resulting from the changes. The bottom line here is the need for a higher-than-normal return on equity. You know this. But what process to use to make it happen is another story. Return on equity means having control of the balance sheet and operating margins. And one way to find out what yours looks like is to use MHEDA’s Return on Investment Calculation found in the Disc Report. Remember this: Profit Margin X Asset Turnover = Return on Assets x Financial Leverage = Return on Equity. The definitions can be found in the report. The Profit Margin deals with pricing and cost controls. The inability to pass on the cost increases means cost reductions are in order. Asset Turnover is where the rubber meets the road. Asset costs are increasing while sales are decreasing. Something has to give sooner rather than later. Financial Leverage works as long as you can cover the debt covenants and debt service. Keep in mind that more costly inventory will require additional financing. In other words, Stagflation financials will look nothing like you normally expect. They will return to historical levels at some point, but in the meantime will look uncoordinated and require special and consistent management review. This process will be something like ZERO-BASED BUDGETING where you “start” the business from scratch and in the process find ways to reduce costs and increase cash flow. Financial gurus, I follow believe stagflation is in the cards because energy and food costs will stick around for quite some time. It cannot hurt to plan accordingly. If nothing else, you will have a more capital-efficient company earning higher than average returns. About the Columnist: Garry Bartecki is a CPA MBA with GB Financial Services LLC and a Wholesaler columnist since August 1993. E-mail editorial@mhwmag.com to contact Garry.
Manufacturing Technology Orders highest in two decades for first two months of 2022
Manufacturing technology orders totaled $479.3 million in February 2022 according to the latest U.S. Manufacturing Technology Orders Report published by AMT – The Association For Manufacturing Technology. February 2022 orders were up 9% from January 2022 and up 27% from February 2021. Year-to-date orders are just shy of $920 million, an increase of 30% from the same period in 2021 and only 11% down from the same period in 1998 when orders set a record by surpassing $1 billion in only two months. “The industry seems to be carrying the momentum of 2021 into the beginning of 2022, recording the best start to the year in over two decades,” said Douglas K. Woods, president of AMT. “As we have learned throughout the last two years and, especially the last few months, conditions can change quickly. We saw this in 2021 when order values during the first few months of the year performed only moderately well, but by the end of 2021, it was the best year on record. This can cut both ways so we may need to temper the early 2022 excitement as conditions on the ground change.” Strong consumer demand has been a key driving factor behind much of the recent capital investment from manufacturers. “Despite waning consumer sentiment and predictions that spending would soon shift back to services, demand for manufactured products remains at historic levels,” said Woods. However, several headwinds stand in the way of growth, most notably inflation. Persistent inflation, exacerbated by geopolitical events, threatens to undermine the base of consumer demand that has supported the manufacturing technology industry over the last twelve months. “Many of the issues such as worker shortages and supply chain troubles we have been highlighting the past few months are still present, but inflation is becoming the biggest threat the manufacturing industry has seen since the initial shutdowns two years ago,” said Woods. “The aggressive posture taken by the Federal Reserve in their last meeting is really telling. Inflation needs to be controlled, but for interest rate-sensitive activities like capital investment, the medicine may be a tough pill to swallow.”
Equipment Finance Industry confidence eases again in March
The Equipment Leasing & Finance Foundation (the Foundation) has released the March 2022 Monthly Confidence Index for the Equipment Finance Industry (MCI-EFI). The index reports a qualitative assessment of both the prevailing business conditions and expectations for the future as reported by key executives from the $900 billion equipment finance sector. Overall, confidence in the equipment finance market is 58.2, easing from the February index of 61.8. When asked about the outlook for the future, MCI-EFI survey respondent Michael Romanowski, President, Farm Credit Leasing, said, “Supply chain issues continue to hamper equipment availability. The Ukraine conflict has enhanced volatility and is contributing to an already unsettled environment. We continue to work closely with our partners and customers to ensure we are advancing our mission in these uncertain times.” March 2022 Survey Results: The overall MCI-EFI is 58.2, easing from the February index of 61.8. • When asked to assess their business conditions over the next four months, 21.4% of executives responding said they believe business conditions will improve over the next four months, a decrease from 24.1% in February. 50% believe business conditions will remain the same over the next four months, down from 69% the previous month. 28.6% believe business conditions will worsen, an increase from 6.9% in February. • 25% of the survey respondents believe demand for leases and loans to fund capital expenditures (capex) will increase over the next four months, up from 24.1% in February. 75% believe demand will “remain the same” during the same four-month time period, an increase from 72.4% the previous month. None believe demand will decline, down from 3.5% in February. • 21.4% of the respondents expect more access to capital to fund equipment acquisitions over the next four months, up from 17.2% in February. 78.6% of executives indicate they expect the “same” access to capital to fund business, a decrease from 82.8% last month. None expect “less” access to capital, unchanged from the previous month. • When asked, 46.4% of the executives report they expect to hire more employees over the next four months, up from 44.8% in February. 50% expect no change in headcount over the next four months, a decrease from 55.2% last month. 3.6% expect to hire fewer employees, up from none in February. • 3.6% of the leadership evaluate the current U.S. economy as “excellent,” a decrease from 10.3% the previous month. 85.7% of the leadership evaluate the current U.S. economy as “fair,” down from 86.2% in February. 10.7% evaluate it as “poor,” an increase from 3.5% last month. • 7.1% of the survey respondents believe that U.S. economic conditions will get “better” over the next six months, a decrease from 24.1% in February. 57.1% indicate they believe the U.S. economy will “stay the same” over the next six months, a decrease from 58.6% last month. 35.7% believe economic conditions in the U.S. will worsen over the next six months, an increase from 17.2% the previous month. • In March 42.9% of respondents indicate they believe their company will increase spending on business development activities during the next six months, down from 44.8% the previous month. 57.1% believe there will be “no change” in business development spending, up from 51.7% in February. None believe there will be a decrease in spending, down from 3.5% last month. March 2021 MCI-EFI Survey Comments from Industry Executive Leadership: Bank, Middle Ticket “While equity markets, crude, supply chain and global industry trade have all been greatly impacted by the Russian invasion of Ukraine, it is the suffering and loss of life that is most disturbing. I am proud of Key’s immediate humanitarian efforts on behalf of the Ukrainian people.” Adam Warner, President, Key Equipment Finance Independent, Small Ticket “Through 2021, often businesses used their federal government stimulus money to purchase capital equipment and services. The deeper we get into 2022, increasingly, these businesses will return to financing their capital equipment purchases.” James D. Jenks, CEO, Global Finance and Leasing Services, LLC
March 2022 Logistics Manager’s Index Report®
Growth is INCREASING AT AN INCREASING RATE for Inventory Costs, Warehousing Utilization, Warehousing Prices, Transportation Utilization, and Transportation Prices. Growth is INCREASING AT A DECREASING RATE for Inventory Levels Warehousing Capacity and Transportation Capacity are CONTRACTING. March’s overall LMI reading of 76.2 is the highest in the history of the index, up (+1.0) from February’s reading of 75.2. The average over the first quarter of 2022 was 74.5, well above the all-time average of 65.2. The first three months of 2022 have been marked by high levels of inventory, and insufficient capacity to deal with it. This trend started at the end of 2021 when inventories increased by 2.4% in December 2021 – an all-time month-to-month record. This was driven particularly by downstream retailers, who saw inventories up by 4.5% in December, handily outgaining manufacturers and wholesalers[1] (U.S. Census Bureau, 2022). This influx, combined with a cool-down in consumer demand due to the move away from goods and back towards services with easing COVID restrictions, as well as price pressure due to burgeoning inflation, has left firms with more inventory than they know what to do with. Because of this, both Inventory Costs (91.0) and Warehousing Prices (90.5) reached all-time high levels in March. Warehousing Capacity also hit a record in March, reaching an all-time nadir of 36.1 this month. Transportation Prices remain high and Transportation Capacity is still contracting this month. However, it is important to note that in the Upstream portion of our respondent base we saw some loosening in the transportation market, with readings taken after March 15th averaging out to a 55.0 – indicating expansion for the first time in 18 months. Again, this positive reading was only for one piece of the data during a snapshot in time; but it could portend a coming shift in transportation as the impact of record diesel prices is more keenly felt throughout the supply chain. A contraction in the transportation market does not necessarily mean a freight recession is imminent – although that is a possibility. This could also mean that we are finally seeing a move away from the unsustainable supply/demand mismatch we have seen over the past 18 months and moving back towards a more viable market equilibrium. While we do observe signs of supply chains turning a corner, only time will tell what is on the other side. Researchers at Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University, and the University of Nevada, Reno, and in conjunction with the Council of Supply Chain Management Professionals (CSCMP) issued this report today. Results Overview The LMI score is a combination of eight unique components that make up the logistics industry, including inventory levels and costs, warehousing capacity, utilization, and prices, and transportation capacity, utilization, and prices. The LMI is calculated using a diffusion index, in which any reading above 50 percent indicates that logistics is expanding; a reading below 50 percent is indicative of a shrinking logistics industry. The latest results of the LMI summarize the responses of supply chain professionals collected in March 2022. Overall, the LMI is up (+1.0) from February’s reading of 75.2, reaching an all-time high of 76.2. The growth in this month’s index is fueled by metrics from across the index. Continued inventory congestion has driven Inventory Costs, Warehousing Prices, and overall aggregate logistics costs to all-time high levels. This is putting even more pressure on already-constrained capacity. Warehousing Capacity hit an all-time low in March. Transportation Capacity was headed in that direction too from March 1st to March 15th but seems to have changed course slightly in the back half of the month due to the rapidly increasing cost of fuel. In the last report, we remarked on the Russian invasion of Ukraine pushing diesel fuel prices up to $4.01 per gallon at the end of February, which was up $1.07 from 12 months prior. In the month since we’ve written that prices have increased even more than they did in those previous 12 months, with a gallon of diesel reaching an all-time high of $5.25 in mid-March before coming down to $5.185 per gallon at the end of the month[2]. The high price of fuel is being felt across the globe. Inflation in the U.S. was up 7.9% in February, the highest rate since the 8.4% experienced in January 1982. In mid-March, the national average for a gallon of regular gasoline surpassed $4 for the first time since 2008[3]. Similarly, we see prices in the Eurozone were up 7.5% from February to March (after a 5.9% jump in February). The high diesel prices will have an outsized effect on smaller fleets and independent operators. Smaller companies that have limited margins and cannot pay wholesale rates like larger firms will be particularly hard-hit by these costs. The high costs also make the imbalance of freight capacity we saw around Southern California ports relative to the rest of North America throughout 2021 more difficult to deal with. Deadhead loads are likely to increase by $2,000 – $3,000 per load given the high costs of fuel[4]. This will make it less attractive to drive empty trucks back to California, and could significantly impact the tender rejection rate. Some evidence of this already exists as tender volumes out of Ontario, California was down 6.5% in the last week of March[5]. Adding to the global supply chain upheaval are the ongoing COVID-related shutdowns happening across China, including in major economic hubs such as Shanghai, Shenzhen, and Suzhou. The Chinese PMI read in at 49.5 in March – registering economic contraction at a time when most of the economies around the world are growing[6]. The high costs of fuel may end up being the thing that finally slows down the runaway transportation market. The dramatic increase in fuel prices (diesel fuel is up approximately 44% in 2022) seem to have put a relative damper on the previously insatiable freight demand. Consumers had been willing to absorb some increase in costs through
Equipment Leasing and Finance Association’s Survey of Economic Activity: Monthly Leasing and Finance Index
February new business volume down 4 Percent year-over-year, 14 percent month-to-month, nearly 1 percent year-to-date The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross-section of the $900 billion equipment finance sector, showed their overall new business volume for February was $7.1 billion, down 4 percent year-over-year from new business volume in February 2021. Volume was down 14 percent month-to-month from $8.3 billion in January. Year-to-date, cumulative new business volume was down nearly 1 percent compared to 2021. Receivables over 30 days were 1.7 percent, down from 1.8 percent the previous month and down from 2.1 percent in the same period in 2021. Charge-offs were 0.09 percent, down from 0.17 percent the previous month and down from 0.55 percent in the year-earlier period. Credit approvals totaled 78.2 percent, down from 78.4 percent in January. Total headcount for equipment finance companies was down 12.2 percent year-over-year, a decrease due to significant downsizing at an MLFI reporting company. Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) in March is 58.2, a decrease from 61.8 in February. ELFA President and CEO Ralph Petta said, “New business volume at MLFI 25 companies has grown modestly in 2022, as it typically does in the early months. What is eye-catching, however, is the extremely high credit quality reported by respondents. Geopolitical unrest, increasing interest rates, inflation, and continuing supply disruptions all pose headwinds that bear monitoring. But, equipment finance companies always find ways to stay relevant, resilient, and reliable in helping American businesses acquire the assets they need to thrive.” Kris Foster, President of Equipment Finance, Pinnacle Financial Partners, Inc., said, “With a quarter of the year nearly complete, we remain cautiously optimistic with steady deal flow and a strong pipeline. Supply chain constraints continue to be a major issue as we see equipment delivery delays for the foreseeable future. Positively, we see these delivery delays coupled with strong demand across most asset classes being a tailwind for future financing opportunities. Competition continues to be very strong with continued pressure on loan yield spreads. Credit quality and credit metrics are at historically strong levels; however, we are closely monitoring current geopolitical events, future Fed rate hikes, growing inflationary pressures on the broader economy, yield curve inversion, and record-high costs for many asset classes.”
Everyone needs a guy
Or a Gal. Or a Person. Take your pick. All of them if you have enough problems to solve. This concept is one of the conclusions reached that the independent equipment dealer convention I attended a couple of weeks ago. What was interesting is how all the speakers wound up drawing the same conclusions about the construction industry and the dealers that serve that industry. If I did not know better, I would have concluded that the speakers got together before hand to arrive at the “Guy” conclusion noted above. At the end of the day the audience was presented with these facts: Inflation is real and here to stay Supply chain issues are also here to stay Interest rates will increase the cost of business Productivity increases are necessary to offset inflation and supply issues Your dealerships need to become the “# 1” source for what customers need. Growing your business with existing customers is the way to go. A cap-x spend on technology is a must once you decide what needs to be corrected. CRM systems must connect with, Boomers, Gen X, and Millennials. Whether you are a car dealer, lift truck dealer, construction equipment dealer, or rental company, this list applies to you. These changes or adjustments to the way you run your business are going to result from customer requests and expectations for the balance of 2022 and beyond, for they to find themselves dealing with the same issues of finding ways to improve or maintain profitability without generating a cash or liquidity problem. And they will be looking for answers from you, which in turn will solidify your relationship with that customer, which is the goal you are striving for in any event. So, after going through these sessions and spending time with the vendors at the show I started asking them what technology they had to offer to address dealer issues. Most had state-of-the-art products and services available which, to me, appeared worthy of further review and a demo to see if the results could solve any of the recognized problems listed above. Vendors mentioned they have competitive solutions available but found a lack of technical expertise or time devoted to the product or system to fully generate the available results. Further discussion with attendees seemed to indicate that the vendors were correct. And this is where the discussions started to focus on what can be done to correct for this lack of expertise. The problem is a lack of ability to work with technology, thus creating a spend without an adequate return. The solution to this problem as you can guess is you need a GUY, a GAL, or a PERSON to learn the system, install the system and use the data the system provides to make better decisions regarding profits and costs. Does this person have to be an employee? Not necessarily, because today companies are hiring off-site folks or independent contractors to assist with these types of endeavors. I am absolutely amazed how many companies are using this approach. I do not know about you folks, but I use outsiders all the time because I am not comfortable working with current levels of technology. Now look in the mirror and tell me you do not feel this way as well. Me, I am looking for data to tell me what I can do better internally to better serve customers, knowing I do not have the time nor patience to learn how to process data and work with it to find the answers I am looking for. But, on the other hand, once your staff spends some time on a new system with a Guy to guide and learn from, most will become proficient with the process to produce the returns you hoped for in the first place. In the end, your goal, in this timeframe, should be to better manage costs, better understand your costs on a real-time basis while finding ways to better serve customers, keeping in mind the need to effectively manage the balance sheet. One thing we all agreed on at the meeting and that was ……you are going to have to do more with less. Plan to work with fewer sales, lower margins, and increased costs. And on top of that find the money to spend to improve productivity and at the same time interact at new levels with current customers. About the Columnist: Garry Bartecki is a CPA MBA with GB Financial Services LLC and a Wholesaler columnist since August 1993. E-mail editorial@mhwmag.com to contact Garry.
ELFA reports January new business volume up 2 percent year-over-year
The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross-section of the $900 billion equipment finance sector, showed their overall new business volume for January was $8.3 billion, up 2 percent year-over-year from new business volume in January 2021. Volume was down 30 percent month-to-month from $11.8 billion in December following the typical end-of-quarter, end-of-year spike in new business activity. Receivables over 30 days were 1.8 percent, down from 2.0 percent the previous month and down from 2.2 percent in the same period in 2021. Charge-offs were 0.17 percent, down from 0.25 percent the previous month and down from 0.47 percent in the year-earlier period. Credit approvals totaled 78.4 percent, down from 78.6 percent in December. Total headcount for equipment finance companies was down 11 percent year-over-year, a decrease due to significant downsizing at an MLFI reporting company. Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) in February is 61.8, a decrease from 63.9 in January. ELFA President and CEO Ralph Petta said, “Despite persistent supply chain disruptions in several collateral categories and nagging inflation, the equipment finance industry picks up in January where it left off last year: new business volume is robust and portfolios continue to perform. The impact of impending higher interest rates on industry performance in the coming weeks and months bears watching, however.” Eric Gross, Chief Operating Officer, Dext Capital, said, “As we end February and look forward, we have conflicting pressures on the market. The pandemic subsiding and the prospect of a return to some sense of normalcy, as well as a robust backlog, raises optimism. These positives are countered with the ongoing supply chain disruptions, inflation, a rising interest rate environment, and international tensions. With that said, overall, we think the headwinds are manageable and are bullish on market growth through 2022.”