Up Close with JLG
Lift & Access had the pleasure of conducting an exclusive interview with William Lasky, chairman of the board, president and CEO of JLG Industries, at ConExpo 2005 in
William Lasky
June 15, 2005 —
360: What do you attribute strong sales to in the first and second quarters of fiscal 2005?
Lasky: The strong sales are from the pent-up demand for construction projects, and no doubt that's fueling the utilization of our customers' rental fleets. Rental companies aged their fleets so long that they needed to replenish them. They would've had to refresh them without the demand being as great as it was, but they wouldn't have to refresh them at the rate that they did.
The driver of our aerial business is non-residential construction and, for telehandlers, non-residential and residential construction. Both of those markets are very strong. It's sort of coming together in a positive way — the opposite of three years ago when negative things were coming together.
360: Do you see a cycle of how long companies are aging their fleets, or does it depend on the economy?
Lasky: When I joined the industry over five years ago, some rental companies were saying they were turning over their fleets every 24 months. I'd say that's unrealistic. It certainly didn't work with their depreciation curve. On the other hand, we also saw fleets aging out to 58 months, which I think is too long. There's probably an optimal age somewhere in the middle — between 36 to 42 months. We're in the early part of the current cycle, and our business should continue to be strong, absent any major geo-political events.
360: Do you think this spike from pent-up demand has created a false bubble?
Lasky: I don't think so because, if you take aerials, there's a lot less competition for today's fleet refreshment demand than there was in 2000. The good news about the price war between rental houses was if they compressed the prices of the products that they rented, it made the product more affordable for the end-user, resulting in a fundamental shift toward the rental equation. Therefore, the build-up of rental fleets in the late 1990s proliferated the use of the products.
Secondly, we're not going through what we did during the last cycle. At that time, the rental companies grew by acquiring locations. Some larger companies had 300 to 800 locations with seven different brands of aerial work platforms. Now they've brought it down to roughly two brands. It's part of a natural consolidation cycle that every industry goes through. They had to do that to extract the efficiencies to pay for the acquisitions. That was a bubble that had very little to do with demand — it had to do with their business model, which had to be less complicated. We don't have that happening now. I think it's a more solid, wholesome base of business today than it was in the end of the 1990s.
360: How is production capacity looking for JLG?
Lasky: Our capacity's great. We've eliminated about 1.5 million square feet of brick and mortar over the last three years, but at the same time we've increased our capacity by changing our design and manufacturing process. For the fiscal year ended July 31, 2003, we did $751 million in sales. In 2004, we ended with about $1.2 billion in sales. The 2005 revenue guidance we've given Wall Street is for an increase of 40% to 45% over 2004. That's more than twice the sales level as two years ago. Our supply base has invested capital in expanding production capacity. Despite this type of ramp up in demand, our suppliers are getting better and better each week. Overall, in the next six to eight months we'll see a return to a better balance of supply and demand from our suppliers. Our production is currently constrained only by our supply chain, which we share with everyone else — whether it's hydraulics, engines, or axles.
360: With the latest price increase due to high steel costs, how hard have your customers pushed back?
Lasky: Do our customers push back? That's their job — and we push back too. Did the rental companies try to avoid having a price increase? Without a doubt. Did they accept a price increase? Without a doubt. When your steel cost goes from $300 a ton to $1,000 a ton, and steel represents 80% of your equipment by weight, everyone has had to deal with it. Steel is a big challenge, so our customers have accepted the price increases.
But it wasn't that hard for rental companies to pass on the charge. They've raised their rates about 8%, according to them. Every 1% rental rate increase for a rental company is equivalent to something like 10% reduction of the cost of the product. They've finally started raising the rates, and we're happy because it makes our customer base healthier and more profitable.
360: Has the cost of your raw material been disproportionate in regards to the actual cost you've passed on?
Lasky: I can tell you that we haven't recovered all the steel costs. We had $48 million worth of net unrecovered steel costs in our first half of our fiscal year. The 6% price increase we implemented on January 1 of this year will not fully cover the high costs of steel for Q3 and Q4. We'll still be a bit short, but we do have other cost-saving initiatives going on.
360: Aside from steel, what are some of the other big issues you see the industry facing?
Lasky: I think that the biggest issue really gets down to the economy. Even though gasoline is higher than we are used to, I don't think we're in trouble. I think interest rates are going to go up, but I don't think they will get into the double digits. If the cost of building or the cost of money gets prohibitive, I think those would be bigger issues.
360: At this point, are Omniquip products fully integrated in JLG?
Lasky: Phase 1 is complete. It involved moving production to our McConnellsburg facility in Pennsylvania. The second phase of our integration plan, commonization of the supply base, is well underway and will represent additional savings. Also, we have begun evaluating standardization of design, which is phase three of the plan. Details of this phase will depend for the most part on customer input regarding the critical characteristics of each of our brands, but we think that this is also an area for substantial standardization with significant resulting savings • which will require some significant engineering time.
360: Related to Manlift/Liftlux/Toucan products, we've heard rumors that Liftlux will be reintroduced?
Lasky: We bought it to manufacture and sell, but if you line up all the things we've been doing and all of the new products we've been introducing, such as European telehandlers, we need to prioritize. Liftlux is high on the list, but it's not the top item. It's a niche product, with stronger demand in Europe right now than in
360: How is the Six Sigma program coming?
Lasky: We're very bullish and excited about Six Sigma. Anytime you try to introduce a cultural change into a corporation, you can't expect it to happen overnight. This is not a flavor of the month. It's part of a longer-term strategic plan. We started our first green belt and black belt candidate projects this fiscal year. At the six-month mark, I was absolutely excited about the results because they show what Six Sigma is supposed to do. It gets you deeper in the company and gets your arms around things you typically don't do.
For example, we talk about wanting to have less hydraulic leaks in the machines we produce. How do you find them? It's not like you have holes in your pumps, lines, or valves, so we assigned two different individuals and distinctly different project candidates to research the cause of hydraulic leaks. It was absolutely amazing. We finally got to the root cause of the leaks. One of the teams determined that although we use torque wrenches, people don't necessarily grab the handle at the right position. So you could be getting different torque readings. An erratic, jerky use of the torque wrench will give you a false reading. We also found out that a 1% twist on a hydraulic line will reduce the life of the hose by 50%. This program gave us the vehicle to go back and teach proper uses of torque wrenches to our production employees. The program is going to be a wonderful success for us.
360: What do you see in the years to come?
Lasky: We had some false good things at the end of the 1990s, with Y2K, dotcoms, and companies misreporting revenues, so there were a lot of things that fueled a prolonged upswing. With Sep. 11, 2001, all projects were stopped. I think we're really just getting some of those projects going again, so we think 2005, 2006, 2007 will all be good years — but there will be a slowdown. Our crystal ball's not perfect, but in 2008, 2009, we could see a softening. But I don't think the slowdown will be as deep or as long as it was in this past recession.
