United Rentals poised for more growth
Editor’s note: Later this month, on April 27, 2013, to be exact, it will be one year since shareholders of United Rentals, Greenwich, Conn., and RSC Holdings, Scottsdale, Ariz., approved the merger of the two companies, creating the largest equipment rental company in North America when the deal closed on April 30. As the one-year anniversary of this landmark deal neared, Michael Kneeland, United Rentals president and CEO, spoke with Rental Management about the highlights of the integration process, the company’s progress and his outlook for the future. While merging with RSC was the company’s largest acquisition to date, Kneeland says the company’s integration experience with other acquisitions and similar cultures between United Rentals and RSC has set the stage to take advantage of today’s marketplace. “I sometimes say we were lucky because we did this when our primary markets were relatively flat. Now we’re poised and ready as our demand from our end markets grow,” Kneeland says. An edited version of the interview follows.
RM: Has the merger with RSC been what you had hoped it would be?
Michael Kneeland: The integration process has gone extremely well. When we first made the announcement of the merger, we stated that there would be more than $200 million in cost-saving synergies. We are now on track for $230 million to $250 million in cost synergies by 2014. It’s the same story for revenue. We expect $50 million of incremental EBITDA dollars to be fully developed in 2014. The merger has not all been easy. We closed about 200 branches. At the same time, the size of our fleet grew by 12 percent to a value of $7.2 billion at the end of 2012. I would say my expectations were met and then some.
RM: What surprised you during the integration process?
Kneeland: United Rentals has had a lot of experience in integrating acquisitions. This was by far the largest and most critical, especially for me as CEO, during this era. We were working on many fronts and we wanted to have the same IT platform up and running quickly. Dale Asplund and his team finished that work in less than six weeks. It was a Herculean task. We also had to make some hard decisions, but we didn’t wake up one day and say, “Let’s merge with RSC.” We have had a team for quite some time working on integration plans and how to frame it without a real acquisition target. We were doing exercises on what would have to be true to have a certain outcome, so we reverse engineered the integration.
RM: Why did United Rentals sell its interest in Wynne Systems?
Kneeland: The sale was part of a longer-term strategy. We also were a hindrance owning Wynne as a software company. Competitors would say, “Why should I put money in my competitor’s pocket?” We unleashed it because strategically it did not make sense for us in the long term.
RM: How has the United Rentals business model changed as a result of the merger?
Kneeland: Personally, I’ve been impressed by similarity of the two cultures. Management teams met with employees during integration because we wanted a face to go with the name. I found the companies to be more similar than different with people committed to outstanding service. You have to avoid being a commodity. The rental business is about people and expanded services. We went through the process and framed it as the best of both worlds because RSC did a lot of good as did United Rentals. We didn’t want to choose one or the other. Our teams were made up of people who had been from each company prior to the merger and they looked at all processes to determine which was better for long-term growth. We have changed. The demands from industrial customers are different. United Rentals was very good in private nonresidential business and now we’re trying to bring some knowledge from industrial to the commercial side. Both companies had some of the same products and had real estate. You look for synergies for revenue. United Rentals did things in trench, power and HVAC that RSC did not, so we’ve been working on how you cross-pollenate and cross-sell. I sometimes say we were lucky because we did this when our primary markets were relatively flat. Now we’re poised and ready as our demand from our end markets grow.
RM: It seems you are targeting more of a specific customer base, including long-term rentals, and growing industrial rental. Does this allow independents and general rental stores to find other niches to serve?
Kneeland: I think there always will be opportunities for niche marketing in any industry. This is true for ours as well. We want to leverage our size. To be a national account player, you have to be national. We can’t be regional and local. We have to be in all Canadian provinces. That plays for and against you. We look at it through our target customer’s eyes and focus on how we go about serving that customer. We think we are well positioned for that.
RM: How have you been able to raise rates? How important is raising rates to United Rentals and to the future of the equipment rental industry?
Kneeland: It is a key factor. For this industry, historically there is the fundamental belief that you have to have a return on your cost of capital. There are several ways of measuring that. We are a leveraged industry. We have assets and we borrow money for leverage to get returns. Over time, you have to have a return over that number. The equipment rental industry hasn’t done a particularly good job of this. We go through cycles and have structural fallout where you are not getting the cost of capital recovered. It is important for United Rentals and the industry to get our return over that number if we want investments to continue to come into the industry, whether you are a small, medium or large company. How do you do that? It is based on how you utilize the equipment and the pricing you put out there. There are inflationary factors you have to deal with, too. Equipment is not cheaper today. If you sell a piece of equipment
that is 80 months old, even with single-digit inflation, the new equipment costs more and you have to absorb it and overcome it. Then there are wages, health care costs and rising fuel costs. All those factors have to be taken into account when you set rates. For me, rental rates are very important and the industry needs to march in that direction. We have to go back to the school of return on investment. We firmly believe that there also has to be a standard metric of measurements, which the American Rental Association (ARA) has developed as ARA Rental Market Metrics™. Other industries have that and it is important that our industry talks the same language or it is confusing to investors and banks.
RM: In what continues to be a slow growing economy, how is it possible to raise rates?
Kneeland: There has been a secular shift in demand. Rental companies also need to have rate discipline and focus on services. It’s one thing to get a price, but you also have to offset that with the services you provide. It’s no different than going to a restaurant. You pay for the service and quality you get as well as the experience you go through. It is no different for the rental industry. Customers want response time, on-time pickup and more. Time is money and it is important that we measure what we do and improve on it. Availability also is important. I’ve used this analogy several times. If you go to a steak restaurant and they are out of steak, you will likely order something else. If you go back a second time and they don’t have steak, you probably won’t ever go back there for a steak. It’s no different for our customers with equipment. It’s all about service to drive the business and rates.
RM: One thing RSC brought to the merger is a service called Total Control. What does this bring to the company?
Kneeland: Total Control is one service among other technical investments we’re putting in place to better serve the customer. We’re trying to utilize Total Control on a broader footprint. We can go back to customers in areas they weren’t serving with Total Control to help our customers better manage their fleet. These larger national and multi-regional companies are sophisticated on safety, metrics and measurements, and things like Total Control are what can help differentiate us from the niche players. It sounds simple, but it is difficult to execute. As the technology evolves, however, this will be more universal and help us build a deeper relationship with our customers.
RM: Do you see more synergies or cost savings happening this year?
Kneeland: We do plan to implement systems and processes using 5S lean manufacturing techniques by the middle of the second quarter to drive efficiencies and standardize workflow to yield better productivity. For example, collectively United Rentals had roughly $2 to 3 billion in rental revenue and 12,000 people at our peak. Today, our revenue is close to $5 billion and we have 11,000 people. It shows how you can drive productivity while offering better services for customers. You will see more of that. We also like to think some of things we do, the industry will adopt over time. We are not trying to keep secrets. We told people how we went about pricing. We think it only helps improve the industry.
RM: United Rentals also opened a few new branches over the past year, particularly those in specialty divisions. Why do you see that area growing?
Kneeland: RSC would outsource things like trenching, power and HVAC. Now we have that in-house, so we are doing a lot of greenfield expansion. We don’t think we’ll need a lot because this isn’t the same as general rental. When it is a specialty, you can serve a larger market area, but we think those areas have potential for growth.
RM: Do you believe the secular shift to rental can continue? Why will those who now opt for renting continue to rent?
Kneeland: I’ve been in the business for 35 years and I think there is more room to grow. Construction markets are further along the curve than industrial companies that own these assets. It’s harder to get them to change. However, over time, they see the benefits of renting and by all indications the shift is happening. When you look at the rental penetration rates in Japan and the U.K., it suggests there is clearly more upside here.
RM: How important is the establishment of best practices within the industry via ARA for companies like United Rentals and other rental companies of all sizes? For example, the development of ARA’s Rental Market Metrics™ and the new ARA Rental Market Penetration Index™?
Kneeland: I think it’s done a lot, but we still have a lot more to do. I am an advocate for the industry and ARA. Because of our company’s size and stature, it behooves us to be good stewards. A lot of us in the industry came up through family-owned businesses or smaller ownership. What the industry has to do is attract people. Rental is a people business. We have to bring in the next generation. That’s why something like standard metrics is very important. It shows whether an industry is organized or haphazard. It helps identify the opportunities. We can show college graduates that there is a viable career here over time. Another important aspect is showing professionalism and diversity. The industry can do all these things, enhance its image and appeal to the next generation. Otherwise, people can get confused. That’s why the industry needs to continue to polish itself. If you want to be an ARA member, don’t just pay dues. There are things to conform to as an industry to move forward.
RM: You also continue to travel the world for speaking engagements. What do you see as the global outlook for the equipment rental industry?
Kneeland: I’m trying to be an ambassador to the industry speaking about the rental concept and growth out there. It is going global. There are other levels of penetration similar to where we were 20 or 30 years ago. Those emerging markets will evolve and can learn from what we went through. You learn by others’ mistakes and then do it better. Going out, I also learn about new products, cultures and people. We bring a lot of people in to visit us here and show them what we do and how we do it. As an industry participant, it behooves us to do that. Don’t forget, we also have international customers.
RM: Do you see United Rentals expanding beyond North America?
Kneeland: At some point, yes, but there is a of opportunity here in North America. Our market share is in the teens and it can grow. North American is still the largest market on the planet with a lot of opportunities, but down the road, it will be prudent to look at other areas.