ASSET MANAGEMENT NEWSSpecial Edition, December 2019

Equipment Market TrendsWelcome to this special edition of the Alta Asset Management Newsletter. You will find some of the market changes obvious while others may surprise you. Interest in equipment valuations is strong, as we have appraised over 30 aircraft and rotorcraft, and 20,000 railcars and locomotives, in the past 90 days alone.

As we approach 2020, this newsletter will serve as prologue to my What’s Hot and What’s Not in Equipment Leasing for 2020 that will be published by the ELFA in February.

Please let me know if you have any appraisal or remarketing needs that we can assist you with in the coming year.

On behalf of the Staff and Management of The Alta Group, LLC, I wish you a terrific 2020.

The overview follows.

Best regards,

Carl

Carl Chrappa, A.S.A., M.R.I.C.S., I.F.A. The Alta Group Senior Managing Director - Asset Management Practice Leader

cchrappa@thealtagroup.com

© 2019 The Alta Group

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Scores range from a possible:

AGRICULTURE

Despite difficult conditions, 2019 is turning out much better than expected. A combination of severe flooding, torrential rains and tariffs negatively impacted the market. However, as the year went on, conditions started to improve. The USDA projects farm income to reach $88 billion this year, the highest since 2014’s $92 billion. However, farm debt has also risen to the record height of $416 billion ($159 billion in non-real estate debt). This record high debt has given way to a 24% rise in 2019 bankruptcies, to 580, the highest since 2011’s 676. Year-to-date through October, 2WD new tractor sales increased by 3.9%, and 4WD tractor sales by 6.6%. Also, combine sales increased by 2.5%. Most ag equipment makers are forecasting a “soft market” in 2020. They will be relying more on leasing to aid sluggish sales. In the used ag equipment market, auction volumes increased by over 20%, while prices declined around 10%. Meanwhile, retail sales of used equipment fell slightly, and volume declined by around 20%. Overall the outlook for 2020 is improved.

AIRCRAFT

COMMERCIAL

Wide-body aircraft remain out of favor as production continues to be driven by narrow-bodies, in particular the Boeing 737 and Airbus A320. Boeing’s deliveries have suffered since two 737 MAX crashes and the subsequent halt on deliveries and grounding of the fleet. With just 302 total deliveries through Q3, Boeing is 266 shipments behind last year’s total. Airbus delivered 571 jets for the period, compared to 503 last year. Airbus is well on track to win the annual deliveries competition with Boeing for the first time since 2011. Additionally, Airbus’ gross orders of 603 planes dwarfs Boeing’s 170 orders. Forecasts for global airline profits in 2019 are $28 billion, down from $30 billion in 2018. N.A. airline profits are forecast to be $15 billion, up from $14.5 billion in 2018.

CORPORATE

According to GAMA, business jet deliveries rose by 15.4% for the first nine months to 516. Turboprop deliveries declined by 11.6% while piston airplanes increased by 12.3%. Compared to last year, the secondary market for business jets and turboprops has seen a drop in sale transactions (-16.9% and -12.2%, respectively). The trend toward falling fleet “For Sale” percentages has somewhat reversed, with business jets increasing to 9.8% (up from 8.9% in 2018) and turboprops stabilizing at 6.7% (down slightly from 6.8%). Jets are selling quicker (-9 days) and turboprops are taking longer to sell (+1 day), respectively averaging 276 days and 291 days on the market.

HELICOPTERS

The helicopter market continues to struggle toward recovery as conditions remain tough. Shipments and billings data showed promising signs of growth in 2018 but have since faltered and are on the decline again year-over-year. Piston rotorcraft deliveries through 3Q decreased by -38.2% (to 136 units) while turbine deliveries decreased by -15.4% (to 434 units). YTD pre-owned sale transactions are down for turbine (-9.7%) and stable for piston (+0.6%) helicopters.

COMPUTERS

Although global PC shipments for the first three quarters of 2019 fell slightly from 2018 (-0.5%), annual shipments for 2019 are expected to increase (about +2%) for the first time since 2011. They are forecast to decline again in 2020 (-2.4% to -4.5%) as they did in 2018 (-1.3%) and each quarter in 2017. Top global brands by market share for the first three quarters include: Lenovo (22.8%) keeping the lead on HP (22%), followed by Dell, Apple, and Acer. Global server shipments grew more than 17.8% in 2018, and revenues grew more than 30%; however, they decreased 7.6% in the first and 12.1% in the second quarter of 2019. Dell EMC (18.7%) remained ahead of HPE (13.1%) in market share, with all others trailing far behind. Intel introduced its 2nd generation Xeon Scalable processors, code-named Cascade Lake. They were announced in April and are now making their way into servers. Cascade Lake is built on a 14nm process. Meanwhile, AMD has announced 10nm and 7nm processors. Used computer sales are being pummeled by phablets and smart phones; business as usual in this market. As one would expect, laptops bring better prices than desktops and sell quicker.

CONSTRUCTION

The U.S. Census Bureau announced that during the first nine months of this year, construction spending amounted to $968.7 billion, 2.2 % (±1.2%) below the $990.2 billion for the same period in 2018. The U.S. general construction equipment market is currently experiencing a flattening largely because contractors have steady work and are generally purchasing low-hour units for replacement purposes, rather than expansion. In conversations with a large auction company, supply and demand for most general equipment types seem to be in balance. Auction volumes for general construction equipment (wheel loaders, loader backhoes, skid steer loaders, small excavators, etc.) have remained level, and auction price results for late-model, well-maintained top tier equipment are generally flat, with some downward price pressure on types with high supply. Auction prices for lower tier equipment have decreased as end-users have experienced issues with parts unavailability and insufficient mechanical support. Buyers continue to express little interest in older equipment with high hours or poor maintenance. Auction prices for heavy duty construction equipment such as rough terrain cranes and large hydraulic excavators are under pressure. Mining equipment auction prices in 2019 have been weak due to the strong dollar, tariffs discouraging overseas buyers, and bank lending restrictions for domestic buyers.

FOOD PROCESSING/PACKAGING

The food processing and restaurant industry continues to prosper in a strong economy buoyed by low unemployment and high consumer confidence. U.S. restaurant industry sales will reach a record high of $863 billion this year, up 3.6% over last year, according to the National Restaurant Association. The association’s State of the Industry report found operators were allocating more resources toward technology. Of those surveyed, as many as 70% of quick-service operators were looking to make more investments in customer-facing technology — including digital ordering and payment and delivery models — this year. In fast casual, 62% planned to make such investments, with 59% in casual dining, 54% in family dining and 49% in fine dining saying the same. Good restaurant used equipment categories include ovens, stoves, mixers, slicers, rotisserie ovens, and dishwashers. Not so good categories: large walk-ins, deep fat fryers, and display cases. According to an October 2019 Food Engineering survey of U.S. food processors, the top trend is efficiency/maintenance/new equipment (37%), followed by automation (30%). For the food processing category, sales are good for packaging & labeling equipment, fillers, extruders, grinders, formers, SS bins, etc. Most of this equipment have long useful lives. Sales in the dairy segment are dismal, as consumer demand has shifted. Dean Foods, the largest U.S. dairy producer, has filed for Chapter 11 bankruptcy.

MACHINE TOOLS

U.S. metal cutting and fabricating tool consumption has decreased 18.2% YTD as of September, and September sales themselves were down 41.3% compared to September 2018. For October, Gardner’s metalworking business index registered the fifth consecutive month of mild contraction with a reading of 48.3. However, contraction from the recent spectacular growth leaves sales that remain historically high. Spending by the auto industry was up about 10%, despite the decline in orders by the power transmission segment. Sales of machine tools are expected to continue to contract for the rest of the year and overall for 2020, while remaining above the long-term average. Grand View Research forecasts long term growth in global sales of CNC machine tools at CAGR of 7% to a market size of $100.86 billion by 2025, with milling tools emerging as the fastest growing segment. In the primary market, desirable brands include Mazak, Mori Seiki (now DMG Mori), Okuma, Haas, and the like. Early 2000s and older machinery are difficult to sell.

MARINE

BLUE WATER

Some tightness in the market has resulted from ships entering the shipyards to be fit with scrubbers in preparation for IMO 2020 regulations. In spite of heightened activity in H2, sales and purchases continue to cool from the record-breaking numbers of 2017. Shrinking order books (-13%) have been a challenge for shipyards. Overall secondhand values have remained stable with some firming in the tanker segment. Bulkers staged a late-summer rally, yet bearish sentiment has returned along with softer prices. BDI is trending weaker and demolitions have accelerated mostly in the capesize segment, yet the bulker fleet continues to expand. Container shipping continues to feel the impact of the trade war and slowdown of the world’s economies. Capacity expansion has slowed and scrappings have nearly doubled. The tanker market is expected to remain stronger than 2018 overall, supported by U.S. crude exports and lower newbuild deliveries. Tanker demos are significantly down (-81%).

INTERCOASTAL

Overall the sales market remains flat with fewer units on offer and firming utilization rates. Offshore continues to struggle with oil prices in the $55 range and E&Ps pressured to rein in capex. The market for OSVs remains challenging and plagued by overcapacity in spite of some reactivations and a shrinking number in layup. Global fleet utilization is around 65% and 74% for AHTS and PSVs, respectively. Secondhand sales are around 40%-50% of historical price levels or sometimes just above scrap levels, often 15%-20% pre-2014 levels. An estimated 1,517 tugs are to be scrapped this year, up 10.9% from last year. Number of tugs for sale is down 6.5% compared to a year ago, of which twin screw tugs make up 60%+ available. Floods and high water disrupted barge traffic through mid-year, and grain shipments are down 25%-50%. Number of inland tank barges for sale is down 26% with no change in coastal barges. Utilization shows some improvement (80%-90%).

MEDICAL

Sales for almost all imaging modalities increased slightly in the U.S. while growing worldwide. Emergence of the Smart Hospital is also hot, from integrated hospital operations to increasing connectivity between healthcare services (hospitals, clinics, ambulances) and between patients & professionals. Artificial intelligence is increasingly important in diagnostics and treatment plans. The Butterfly iQ portable ultrasound system allows each practitioner to carry an ultrasound in their pocket and costs under $2,000. Previous hand-held ultrasounds had been priced at more than $10,000. In response, GE lowered the price of its competitor product, the Vscan Extend, to $3,000. This technology is already very popular with medical staff.

Global diagnostic imaging sales were up 5% in 2018, with CTs accounting for the most growth (5.6%). These sales are expected to grow 5.3% again in 2019 (led by CTs with 5.8%), and then at a 6.6% CAGR until 2024, reaching $38.8 trillion. Healthcare spending in the U.S. was $3.65 trillion in 2018, an increase of 4.4%. As a percentage of GDP, healthcare spending is expected to expand from 18% in 2016 to nearly 20% (almost $6 trillion) by 2027. About 32% of this represents hospital care. Global healthcare spending is estimated to increase 5.4% annually through 2022, exceeding $10 trillion. Total U.S. hospital spending increased 4.6% in 2016 and 2.9% in 2017, but capex spending for the same period was flat, and for 2019 looks to be flat again. Staffing now accounts for almost 70% of hospital costs.

In demand are high-end MRI, CT and digital radiology systems; older analog and computerized RF systems are not in demand.

PRINTING

Year-to-date commercial printing shipments for 2019 are ahead of 2018 — January-to-September shipments for 2019 are at $60.90 billion compared to 2018’s $59.83, +1.76%, with an expected 2019 average total of +0.6%. Digital presses have made huge inroads with increased speeds and output, for less cost. Océ (Canon) recently announced its installation of 1,000+ Colorado Series roll-to-roll wide-format color digital presses. Fujifilm and Xerox are forming a joint venture. And Xerox is considering making a $27 billion offer to acquire HP, which could result in $2 billion in savings through decreasing redundancies. Printing Impressions has assembled a “Top 25 Hot Markets” list of Demand Sector/Category Rankings for Print Potential 2019-2020. Sectors with the highest printing-spend growth include packaged foods +3%, and medical/pharma +10%. Printing equipment used in those industries include automated digital color flexographic presses and automated digital inkjet label presses. “’General print markets’ are increasingly moving into wide-format printing, and signage shops and package printers are looking for complementary commercial opportunities,” according to Printing Impressions. Digital presses can now print on several substrates, including paper, plastic, paperboard, cardboard, and other materials.

Printing industry equipment types with strong demand include digital high-speed color presses, high-speed color web offset presses, corrugated and paperboard box presses, and automated inserters. Equipment with weak demand: traditional offset presses (except web offset), traditional bindery, and legacy pre-press (obsolete). High volume print products, including school books, newspapers, shopping catalogs, instruction guides, bank statements, annual stock reports, etc., have largely moved to digital/online media. As a result, many used traditional presses and bindery equipment continue to have machine oversupply. Automated label, paperboard box, and corrugated box printing presses are very desirable with continued growth in online shopping, which requires voluminous labels, packaging boxes, and shipping boxes.

SEMICONDUCTOR

After increasing 2% in 2016, 22% in 2017, and 13.4% in 2018, setting a new record high, global semiconductor sales contracted in each of the first three quarters of 2019 for a total decline of -14.6% y/y in the third quarter. This decrease was sharpest in the Americas (-30.4%) and least in Europe (-6.4%). Total sales are forecast to remain flat for the fourth quarter. Semiconductor types with sales declines include microprocessors, and those continuing to grow include CMOS image sensors and chips with <10nm features. After expanding by 11% in 2016, 37% in 2017 and 9.7% in 2018 to another industry record high of $62.1 billion, the equipment market is still expected to contract 4% in 2019 but grow 20.7% in 2020 to reach $71.9 billion. About 43% of this capex will be for production of memory with the ramping up of 3D NAND flash capacity. KLA and Lam have already shown return to profitability. In the used market, 200mm and 300mm equipment is still hot, moving from leading edge to other markets, such as commodity devices used for the Internet of Things.

Desirable types of semiconductor equipment on the secondary market include ion implanters, physical vapor deposition (sputter), lithography (steppers), chemical vapor deposition (CVD), as well as several other types. Less popular pre-owned tools include furnaces, chemical mechanical polishers (CMPs), and all wet processing equipment.

TELECOM

Demand continues for VOIP, backbone and tailbone equipment, LTE and handsets. While smartphone sales decline (-2.5%), the race to bring 5G to market takes off this year. Hopeful providers are testing in isolated areas and are a few months away from launching a full-blown 5G network. However, this race could be a costly one, and consumer demand for 5G is less than it was for previous generations. 4G acceptably handles most consumer applications (e.g., streaming, gaming, browsing, etc.) so they are less excited about 5G’s increased capacity and speed than industrial customers are. Nonetheless, Gartner predicts that 5G-capable phones will restore growth to the market and that by 2023, 56% of new mobile phones will be 5G capable.

In the first half of 2019, industry leader Huawei prepared for the challenge of a U.S. ban on its equipment that took effect in mid-August. The ban covers direct purchases of telecom gear and video surveillance equipment and services, and was followed by the suspension of Huawei from an international security forum in September. The effect on Huawei’s 2018 market share of 28% is in question. Interestingly, the company also recently said it was prepared to sell a perpetual license to its 5G stack, effectively sharing its 5G knowledge and creating a potentially strong competitor.

Once implemented, manufacturers and some commercial businesses plan to employ “private 5G networks” rather than Wi-Fi. Users would have to invest in CBRS spectrum band, hardware + software, and systems management. 2019-2020 appear to be transitional years (4G to 5G) for the telecom equipment gear industry, as it starts to ramp for 5G implementation.

TRUCK/TRAILER

For September 2019 year-to-date, new Class 8 orders preliminarily totaled 118,200 units, a decrease of -69.85% from the same period in 2018, according to FTR. The truck industry is estimated to have reached record production levels in 2018. Don Ake, FTR vice president of commercial vehicles, commented, “Class 8 orders have been remarkedly consistent, unfortunately, they are stuck at the bottom of the cycle. It’s basically the same story as the last several months, all the orders needed for 2019 were placed months ago and fleets are now adjusting delivery dates and finalizing requirements.”

Regarding medium-duty trucks, ACT reported Classes 5-7 net orders also declined in response to slowing demand from industrial plants. Class 8 market share breakdown: Daimler Trucks 37.1% (incl. Freightliner, Western Star); Paccar 30.4% (incl. Peterbilt 15.1%, Kenworth 15.2%); Navistar 14%; and Volvo Group 18.5% (Volvo 11%, Mack 7.5%). In an October 2019 JD Power report, for the first 9 months of 2019, used truck market auctions saw a y/y average sale price decrease of -8.2% for benchmark 4–6 year-old sleeper tractors. For used retail sales, prices for newer, low-mileage units are softer but holding steady. Average to high-mileage units are seeing weaker demand and lower prices. Inventory levels of used trucks continue to grow in 2019 from high volumes of trade-ins, hurting used truck prices. FTR reports as fleets began placing 2020 orders, September trailer orders were up 81% m/m, but -66% y/y. As orders dip, trailer production is expected to follow suit the remainder of 2019. Trailer orders for the past 12 months now total 264,000 units.

Economic commentary compiled by the Secured Finance Network will help frame the various equipment markets previously discussed. Follow this link for the association’s commentary.

Conclusion

I hope you found this newsletter informative. Overall, I note that the continued good health of the economy is lifting almost all boats. As always, we stand ready to assist with any of your equipment management needs. We are your ‘one stop’ service provider that is just an email or phone call (727-796-7733) away. Thank you and Happy New Year!

Carl Chrappa, A.S.A., M.R.I.C.S., I.F.A.The Alta Group LLCSenior Managing Director – Asset Management Practice Leader2451 McMullen Booth Road, Suite 305Clearwater, FL 33759cchrappa@thealtagroup.comhttp://thealtagroup.com/asset-management/P: 727-796-7733F: 727-725-3757