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Lessors Show Determination to Prosper Despite Uncertainties

It was clear in San Antonio at the ELFA’s 50th Annual Convention last month that lessors and service providers that survived the past few years of economic turmoil are poised and determined to prosper in the near future. The mood was surprisingly upbeat among the nearly 1,000 convention attendees this year, despite the economy’s sluggish recovery.

While attendees could not ignore the overseas debt crisis, and such lingering issues from the recession as high unemployment, most executives appeared to have adopted a refreshing focus on moving forward with business.

This positive outlook was buoyed by recent data, including the recent Thomson Reuters PayNet Small Business Lending Index reports. The index measures the amount of borrowing taking place by the small-business sector, which accounts for more than $800 billion in loan value annually. According to PayNet, spending in this sector has rapidly expanded, rising 28 percent in May and 25 percent in June of this year, compared to the same months in 2010. Given the uncertainty due to economic pressures and anticipated regulatory changes, this seemed to be encouraging news. Most of us last month were saying a double dip recession is behind us, but that was before the dramatic political and financial news in Italy. What’s going on in Europe now and within our own government continue to add to a sense of uncertainty.

However, The Alta Group’s individual conversations with lessors at the convention revealed that most are tired of waiting to see what our federal government is or is not going to do to address the economy, and they are expressing a growing need to replace their own worn out and obsolete equipment as well.

There are equipment sectors that hold some promise. It was reported by PayNet that the agricultural sector, according to research, is an area primed for growth due to strong demand overseas and high prices for commodities that are fueling equipment demand — up 20 percent year over year. The transportation sector is up 16 percent from last year and demand for construction equipment is up seven percent. Office equipment acquisitions are expected to reach pre-recession levels.

The Alta Group’s new consultant, Bob Neptune, reports that the municipal and government markets are actually better than some predicted, and there are lessors that are looking to enter this market or potentially expand their presence here.

And Alta Managing Director Valerie L. Gerard said that while the official numbers aren’t in yet, “there is plenty of evidence to suggest that business capital expenditure (CAPEX) levels will be higher in the coming year. Based on recent earnings announcements, companies as diverse as Apple, Sprint, Alliant Energy and Continental Resources are raising their CAPEX investments for 2012. In the case of Apple, 2012 CAPEX rises to 4.9% of revenue versus just 3.79% in 2011. That amounts to $8 billion Apple plans to spend on product tooling, manufacturing process equipment, information systems (hardware and software), retail stores and corporate facilities.”

In yet another sign that the economy may be moving in the right direction, another PayNet tool shows defaults are likely to improve overall by 2.9 percent at the end of this year across all industry sectors.

Most of us who are exclusively focused on equipment leasing and finance would agree, however, that we are not out of the woods yet. Even if the economy does improve, lessors wonder what will be the next thing to come out of Washington. There is the Dodd-Frank legislation that we think will result in such significant cost burdens that it makes Sarbanes-Oxley compliance seem like a mere nuisance. Then there are the proposed accounting rules that will undoubtedly create unintended accounting and operational consequences for lessors and their customers. There is genuine concern about the impact of these regulations, but most at the convention seemed to be resigned to the fact that this will be the price of doing business.

What people are more concerned about now is finding opportunities for growth amid current conditions. Given what appears to be improving market conditions, they want ideas for growing top-line revenue, which is not always easy in this kind of economic environment. Companies also are seeking strategies for building closer ties to customers, including the development of captive finance programs, to retain customers and growth business. In addition, improving operational efficiencies to help drive profitability was at the top of the priority list for many lessors we talked to in San Antonio.

Current and prospective clients know that The Alta Group’s consultants around the world have hands-on operating experience in many vertical markets and that we have successfully managed financial and regulatory challenges in the past.

One of the greatest impacts of the economic slowdown was that it created a need for companies to trim headcount or at least stop hiring. Today, even with business growth a potential, convention attendees told us they still face hiring restrictions.

Recently, Alta consultants were asked to help a client evaluate its internal operations and make recommendations to enhance the profitability of the business. We were initially charged with helping the client map process steps to determine where costs and expenses should be allocated. The project quickly evolved into looking at the company’s overall costs and how full-time employees aligned with each function.

Once this was completed, we realized their costs were too high. So, our work expanded to identifying the nature of those high costs and to develop solutions. In addition to providing steps for improving efficiencies and containing costs, Alta helped the client launch a management reporting system to help them make such decisions much quicker than before and to better run the business.

A number of our clients this year wanted The Alta Group to help them evaluate vertical markets for potential expansion. Such projects involve determining a client’s key competencies in its existing markets. Then we align the strengths with the potential market candidates for expansion to see if there is a fit. Where there is a fit, a deeper analysis is performed. The deep dive includes determining the scope of the market, its competitors, as well as competitive factors to entry, approval rates, and other decision points. Such work often includes the evaluation of up to 10 vertical markets.

Based on what we heard in San Antonio and from what we learned in our client engagements this year, it indeed looks as though lessors are more than ready to move forward. The bunker mentality that some embraced to survive the past few difficult years has been replaced by a more determined outlook. Now the focus is on growing and flourishing even with high levels of uncertainty and an ever-changing marketplace.