Interview: Sérgio Kariya of Mills Rental on expanding beyond aerials
17 May 2023
IRN’s Murray Pollok caught up with Sérgio Kariya, the CEO of Mills Rental, Brazil’s largest rental company, at the recent IPAF Summit and IAPA awards in Berlin. Top of the agenda was Mills’ expansion into earthmoving equipment.
IRN: A big change for Mills in recent years has been the move into ‘yellow line’, earthmoving equipment, to expand beyond your traditional focus on aerial platforms and telehandlers. What is the strategy?
Sérgio Kariya, Mills: We made some acquisitions over the past 18 months - six different acquisitions - and we decided to enter the ‘yellow line’ business. So, in September last year we acquired Triengel Locações e Serviços (Triengel). Seventy percent of its turnover comes from agriculture. The yellow line is larger equipment, but in this case it’s not used in construction, it’s for agriculture. What we do is we move sugar cane inside facilities for our customers.
It’s part of our strategy for long-term contracts inside industries. Mainly focused on agribusiness, because what happens in Brazil is that we have a lot of ups and downs [in the market] and we want to reduce this and increase the cash flow forecast and so on.
In doing that, we were looking for more long-term contracts. That’s the reason why we acquired the company.
But also with our CapEx, we are aiming at construction equipment as well, and mining, in the more conventional yellow line applications. We do have excavators - mini excavators and ski steers - but we are just starting, like baby steps.
IRN: With your fleet CapEx, what will be the mix this year?
SK: The base case – and of course we can change it, lower it a little bit - is Real 700 million, which give us €150 million, or something like that. That’s the base case, half for aerials and half for earthmoving equipment.
IRN: Aerial platforms and telehandlers still represent around 90% of your business, what will the split be in five years’ time
SK: We’re going to balance it a little bit more. So, something 30 to 40% of total revenue in the yellow line equipment.
IRN: Will you need to make more acquisitions for that?
SK: Probably, that’s the goal. We’ve got a team that is 100% focused on doing mergers and acquisitions. I think there’s a window of opportunity in Brazil right now because interest rates - just like everywhere in the world - are very high. Some companies will probably start struggling with that, so there can be some opportunities to acquire them.
IRN: You have the funds to do that?
SK: It’s not that common for a rental company, which is a capital intensive business, that we have more cash than debt. So, we still got a lot of room financing, to issue bonds, and so on. So that’s the plan. We are more cautious as well, because of the high interest rates. But the idea is to keep investing and keep growing, doing M&As.
IRN: You don’t have many other big players to acquire that can transform the business overnight. You have already bought Solaris.
SK: When you look in terms of regular rental, there are a lot of small ‘mom and pop’ companies. We have a 30% market share [in aerial platform rentals] right now. And when you look at the second largest player, they are around five times smaller than we are: they have a 5% to 6% share.
The yellow line is a pretty interesting market in Brazil, because the addressable market is 9 to 10 times larger than aerials, and there is no single player dominating the market. The largest one right now reaches 3% of the total. So that’s where we are aiming to consolidate the market, to be a big player.
IRN: That means a lot of acquisitions.
SK: We started studying the market and we know about more than 2000 small rental players in the yellow line. I would say that we have met around 30% of them.
IRN: It’s amazing that it’s such a fragmented market. That must be the few markets in the world where that’s the case.
SK: And the reason why that happened is that the market was growing, and then in 2014-15 we had the Petrobras scandals, and the corruption with general contractors. Before that, earthmoving equipment wasn’t in the hands of rental companies. They were owned by these major contractors.
After that, they struggled with cash, their balance sheets. They started focusing on what they’re good at, on jobsites. So there started to appear, by the end of 2018 and 2019, more rental companies offering yellow line equipment. That’s the reason we believe it’s a very good opportunity for us.
IRN: What kind of size of equipment are you looking at?
SK: The majority is up to 20 tonnes. But we have a mining in Brazil and huge equipment. We want some contracts with machines up to 36 or 45 tonnes, but not bigger than that. Two or three year contracts, usually.
IRN: You are still focused on the aerial platform sector, of course. Do you still see opportunities to grow that, and would that be more organic growth?
SK: We look both ways, but the opportunity, in our view, is to further penetrate the access concept, change the mindset. Brazil is a very huge country, and to cover all the cities is very difficult. The concept [of using aerials] is not always there. The safety concern is not there yet.
So, we try to change the mindset, and then we open a branch. We believe that there’s a lot of room to grow organically, but we still keep looking for M&A opportunities. The opportunities are usually small, local companies, with a good share of the local market.
IRN: Mills still has its shoring, formwork and scaffolding businesses, but these are now a much smaller part of the company. Are you committed to these business areas?
SK: We changed the brand just after the merger with Solaris [from Mills Estruturas e Serviços de Engenharia to Mills Locação, Serviços e Logística], because we want to have to show what we are aiming for in the future. We want to be more of a rental company than we were in the past, because we were very much concentrated on formwork and shoring.
And when you look today, the company is 10% formwork and shoring and 90% rentals and were going to increase much more on rental. We’re going to lower CapEx investment on formwork and shoring. We already have a 50% share of that market.
IRN: Does it make sense to keep it?
SK: Well, for now it’s a very good business because we have a lot of relationships with contractors with formwork and shoring. This relationship is going to help us start up the construction earthmoving rentals. Probably in the future we can rethink it, but it’s a business which is growing. We expanded the EBITDA generation of this business, cashflow generation and so on, and it’s helping us strategically to get into earthmoving equipment rentals with construction companies.
IRN: On earthmoving equipment, are there any particular brands that you are focusing on?
SK: Today, 70% of our fleet is Caterpillar. The other 30% is split between John Deere and Volvo.
IRN: It’s interesting that you’re choosing Caterpillar, because they have a dealer in Brazil, Sotreq, which has a rental business.
SK: They have a Cat Rental Store, yes, but the value proposition of the company will always deliver the best uptime, the best equipment, tier one equipment. That’s the reason we choose between Caterpillar, Volvo and others. And we decided to go more for Caterpillar because the company that we bought focused on agribusiness, a hundred percent of their equipment was Caterpillar.
IRN: And in terms of aerials?
SK: Last year we bought 40% of the total Brazilian aerials platform market in terms of number of machines. Half of that was JLG and the other half Genie, and some small numbers of Haulotte. The majority is still split between JLG and Genie.
IRN: Are you considering Chinese suppliers?
SK: Well, we are studying them a lot. We see that they’re growing very fast.
IRN: And some now looking at manufacturing in Mexico.
SK: Manufacturing in Mexico, and they’re increasing and going worldwide, being aggressive, very competitive. And the quality is coming. We’ve bought some very small numbers just to test and see the quality of the equipment, to analyse deeply the total cost of ownership.
And one thing that we still don’t have the answer to is about the residual value of their equipment. That, for us, is very key in making the decision. So, we’re still analysing to see what is going to be the picture for the future. But right now, as long as we know the total cost of ownership, the residual value of the equipment, we are still keeping JLG and Genie in place. I’m not saying that I’m never going to buy Chinese, but we are looking at what’s going to happen.
IRN: What about the energy transition, and electric equipment. We see that focus here in Europe and sometimes we just assume it’s exactly the same in Brazil. Is it the same?
SK: I would say, probably here [in Europe], the mindset change is faster than in Brazil, but we want to push this, as long as we are on this ESG journey, and we want to make a difference in the future to our investments.
The CapEx last year was electric or hybrids, every single piece of equipment. Of course, we did buy some diesels for the big, big access machines, where that’s the only option. But where we do have hybrids or electric, we invested in electric and hybrid.
One of the things that we struggle with in Brazil is when you go to a job site, there is not that infrastructure for energy to recharge the batteries on sites. That’s one of the things that we face right now. But we want to push it. We want to be the leader in this movement. We don’t see customers, or just a small number, asking for this equipment. The majority, still, don’t care so much.
IRN: How is the Brazilian market at the moment, the economy and construction?
SK: We started recovering, but by the end of 2022 for this year, we changed our president [Luiz Inácio Lula da Silva, or Lula, became president on 1 January this year. He was also president from 2003 to 2010.] And what we are seeing is a more politically left president than everyone in Brazil thought, more focused on social programmes and redistribution.
When Brazil is struggling on the fiscal side, we don’t see space or room for them to keep spending money on that, or they won’t have money to spend on infrastructure and so on. So, we don’t know yet which way it is going to go. And that’s making the market a little bit stressed. That’s the reason the interest rate is 13.75%, almost 14%.
Our customers, the market, are quite stressed and not able to do the CapEx to expand their businesses. The market will probably contract if the President keeps going in this political direction.
IRN: I remember a few years ago there was speculation that some of the big US rental companies were interested in acquiring Mills, but it never happened. What is the long-term aim for your owners?
SK: I would say that the Nacht family, [the majority owners] which founded Mills, they are perpetual owners. They want to be in this business forever, I would say. Which means that there is no plan for them to sell, not even to a finance company or a fund. They want to keep the business.
We’re focusing on the strategy of growing in Brazil, increasing our footprint, and diversifying to be a more generalist rental company.
IRN: Yesterday at the IPAF Summit, we were hearing all about diversity and opportunity. Is that something that is playing in your strategy?
SK: Yes, a lot. We were one of the finalists in the diversity award for the IAPAs. This is one thing that’s we are trying to push a lot in the company. Until two years ago in my board of directors we didn’t have any woman. We pushed that, and now we have three women out of eight on the board. We are in the top 10 of public traded companies in Brazil in terms of representation at board level. And my managing director, CFO and CTO, they are women as well. And we didn’t have that two years ago.
We are trying to become a more diverse company, but it’s a long journey. When I was looking for the CFO and CTO, we asked for women candidates, but all the CVs were men. I said, ‘no, let’s change the mindset a hundred percent.’ Even the headhunters wouldn’t bring in women to the table.
IRN: And at the branch level, I guess there’s a very traditional way of doing business with the contractors and the branch staff. Is it easy to make changes there?
SK: 30% of my branch managers are women, right now. It’s not easy because they go to the job sites, and it’s still a male environment. We work a lot on trying to help them, help them at the job site.