It's hard to believe but it has only been four years since United Rentals began as a rental player with a half dozen acquisitions. When Brad Jacobs told the rental industry of his plans to grow his new company into a multi-billion dollar operation within a few years nobody quite believed it. It wasn't that people thought him a liar. It was just that the industry had never witnessed such a phenomenon before.
In 1997, the year that United burst onto the scene, the industry's top volume company was Hertz Equipment Rental Corp. with $459 million in rental revenue. United nearly doubled that in its first year alone.
What followed turned the rental industry upside down and nothing has been the same since. United quickly gathered steam, raising capital and, with a team led by president and chief acquisitions officer John Milne, acquiring companies at a dizzying pace, with each step inspiring more amazement than the last. The first few purchases were relatively small companies, of one to three or four locations, but in the ensuing months it acquired progressively larger firms. Its initial public offering raised about $100 million, followed by a secondary offering that brought in $207 million. After less than nine months of existence, United acquired U.S. Rentals, making it the largest rental company in North America.
United followed its acquisition of U.S. with a whirlwind series of transactions, buying many of the industry's top regional powerhouses as well as a number of substantial smaller companies. It also carved out a niche in the traffic safety market, becoming the leader in that burgeoning segment.
For a long time the biggest issue industry observers would point to was the challenge of integrating nearly 250 different rental cultures, computer systems and ways of doing business into a unified whole. Many thought the integration challenge would be too much for United to pull off and predicted that the company would fall victim to chaos. However, the opposite has occurred. United now is not only the industry's largest company by far, but is setting standards in systems and organization that few expected.
While United has surprised many, it has not surprised its founders. The company is doing exactly what its management team said it would do. From the beginning, United management said that sharing equipment among branches would be a major benefit of consolidation and an important revenue-producer. Through the first two quarters of 2001, United has grossed more than $100 million of revenue simply by sharing equipment among branches.
From the beginning, United talked about being conservative, not allowing debt to outpace equity and not becoming over-leveraged. Now while other public rental companies are either penny stocks or hovering below the $3 level, United is trading in the $20 to $25 range and — even in this flat year of 2001 — enjoying same-store growth of close to 8 percent through the first two quarters.
Also from the beginning, United talked about its information management systems and how it would be able to integrate its far-flung and disparate facilities through the power of IT. It followed through by acquiring the Rentalman system from Wynne Systems, the industry's most powerful operating system and developing its own software based on 81 key performance indicators that enable the company to analyze performance companywide down to the branch level. The detailed analysis enables United to immediately spot problem areas and discover growth trends.
But the pundits of Wall Street doubted. Sure, you're doing well in 1999 and 2000, they asked, but how will you do when the economy slows as it eventually will? Sure rental is a great industry in boom times, but how will it fare in a recession? Such concerns caused the very Wall Street analysts that initially were infatuated with United and other emerging public rental companies to desert the industry in droves, to bow to the altar of the dotcoms.
United outlasted the dotcom craze by sticking to its game plan, showing real earning power and doing what it said it would do from the beginning — when the economy slows down, stop the capital expenditures. After spending more than $900 million on equipment last year, United plans to spend about a third of that amount this year, aging a fleet that had become one of the industry's youngest during its 1998-2000 spending spree.
And yet, while purchasing less, United maximized what it spent because of its purchasing power. During the past three years, United has negotiated a series of strategic supplier agreements with key vendors, two to three in each equipment area, reducing its suppliers from more than 1,100 to 28. Reducing its vendor base has allowed United to take advantage of consolidation by allowing its service staff to concentrate on fewer lines, and to maximize those vendor relationships by cutting down on training costs and parts inventory.
In short, United has lived up to its promises and done exactly what it said it would. Still a relative newcomer to the industry, it has nonetheless obtained management personnel from the companies it has acquired — particularly U.S. Rentals — that has given it experience, knowledge and vision. Concentrating on growth in areas that have yet to mature — such as national corporate accounts and industrial users — United's potential for growth seems almost limitless.
The backbone
United Rentals' key performance indicator system can evaluate information from a companywide perspective down to analysis of a single branch. The KPI system can look at each region, district and branch and measure its performance from a variety of views, breaking down revenue from cleaning charges, damage waiver, delivery, fuel pickup, environmental, merchandise sales and other ancillary revenue. It also appraises the performance of each type of equipment United carries, and tracks results in each region, district and branch.
The system is created for ease of use, requiring nothing more than a mouse. “It gives us the information in terms of percentages,” says chief information officer George Cinquegrana, who played a major role in the creation and evolution of the KPI system. “If the Northwest regional manager is looking to see what's happening in the Northwest, for example, he can click on his particular region and it will break out all his districts for him so he can see how they're performing. Maybe one district is doing very well with damage waiver and another isn't. One district is doing well with a particular category class, but another isn't. One branch is selling a lot of merchandise but rental utilization is low. With this kind of information, we can help each branch improve performance. It's easy to find out the branches that need attention in particular areas.”
The system can measure how much business is being done hourly, daily, weekly or monthly and also tell managers at a given moment how much revenue is being earned even if it is not yet billed. “Our branches can know, on a day to day basis, even when they haven't generated an invoice yet, how much revenue they have banked based on the equipment they have out, the rates and the open contracts. We break that out for them as rental, merchandise, used equipment, new equipment, service, re-rent and earned-not-billed. They can look at where they are year-to-date at any moment.”
United analyzes its utilization, on a branch, region and district level, as well as the performance of particular pieces of equipment. “We have a whole series of ways of looking at utilization,” adds Cinquegrana. “In addition to time and dollar utilization, we like to look at physical utilization for particular categories of products. How many do we have in the company and how many are out on rent at a given moment? I can look at those numbers as of this very moment.”
The system also tracks maintenance history on equipment, enabling managers to view parts and labor costs on the most recent repairs as well as the complete maintenance history from the moment it became part of United's fleet. The analysis enables United to track costs versus benefits of each of its assets.
United has assembled a team of research specialists to analyze its data, looking at issues such as average time of pickup, rates per category class by region, cost control and utilization analysis. The data reporting systems are set up so that they update automatically and the amount of time that managers have to spend in filling out reports is dramatically reduced. When upper management prepares to do an operating review of a branch, it has a variety of data at its fingertips without those branch managers having to spend huge amounts of time preparing them.
“A lot of times we look at a forecast and we'll see that a branch is tracking right on budget, and now in the fourth quarter all of a sudden, we see they're going to beat their budget by 20 percent,” says Ken Mettel, vice president of research and analysis. “That doesn't make sense after looking at the first six months of the year. We might go back and look at 1999 versus 2000 and see how that tracked, and look at year over year and then say, ‘It didn't happen last year, why is it going to happen this year? Is the branch getting more market share, is it raising rates, is it getting higher rates on certain category classes, is it time utilization, is it dollar utilization?’ The numbers were always there, but getting them out easily was always the trick. Now we're making them easier to get to.”
Mettel also breaks down branch performance based on type. “For example, rather than ‘let's compare all branches in the Southeast,’ we'll say ‘Let's look at all branches that serve the homeowner market, do a lot of small invoices, do a lot of credit card transactions, have original equipment cost values of $4,000 per piece of equipment rather than larger.’ So let's look at the branches that look like that and compare a branch in the Southeast that has that make-up to a branch in the Northwest that has that makeup. If you just analyze by region, one branch might be an aerial specialist, one might be homeowner-oriented, another might be mostly earthmoving.
“So instead, let's look at the branches that have a similar customer base, similar type of equipment mix, similar type of paying. What does their labor cost look like, what's their revenue per employee? If you find somebody much higher or lower, you ask ‘What do you guys do that makes it look like you have fewer people, or what do you do that your revenue is so much greater on the same capital base?’ Obviously, there are geographic differences, but with all this data, we try to look at branches across regions and see how we can learn from each other.”
United has applied its IT systems to customer service as well. Its UR-data system allows United customers to access their accounts. Each customer has a password to log onto United's system so they can review their open contracts, see how many pieces of equipment they've rented and at what cost.
“It's becoming a driving force with the big companies we're dealing with where they have many different locations renting equipment from us and they want to see from a company perspective how much business they are doing with us, how many open contracts they have and what they are renting,” Cinquegrana adds. “We also allow them to manage their own fleet on our system, so they get on our system readily, look at the last check they sent us and see which invoice they applied it to — they can do a full analysis. The customers love it.”
SIZE DOES MATTER
From the beginning, United management made it clear that they intended to grow quickly. But the goal was not just size for its own sake. Becoming big had definite competitive advantages.
With about 740 locations in 47 states and seven Canadian provinces, United has the ability to service customers almost anywhere in North America quickly. And it is this ability to cover ground that has made it attractive to its more than 1,500 national accounts customers. Not only is it able to offer those customers consistency of fleet, but the size of its fleet ensures that it can cover just about any need. And if the nearby branch doesn't have it, its IT system ensures that it will be able to find it fast and at a manageable distance.
United's national accounts department, consisting of 39 staffers, offers rental programs tailor-made for each customer. In addition to its online access, its willingness to customize its program to suit each individual customer's unique corporate requirements has helped its national accounts program to realize double-digit growth year over year, with the company expecting to gross close to $400 million in national account revenue in 2001. And United makes sure that each of its national account customers has a single account rep available to it.
“If a customer is based in Orlando, Fla., and he has a job in Anchorage, Ala., — and some of our customers do — he's going to call one guy to take care of his needs,” says George Collier, vice president of national accounts. “And if that guy is on vacation, he forwards the account to somebody else. We don't operate a cookie-cutter program. The ability to customize and tailor a program that will meet a company's specific requirements, whether it's in manufacturing, industrial, contracting, specialty or aerospace, we'll provide that.”
United CEO and chairman Brad Jacobs recognized the importance of developing national accounts as he began to research the rental industry about five years ago.
“National accounts is the fastest growing part of our business,” Jacobs says. “The construction contractor is about half of our business. About 25 percent is industrial — manufacturers, factories and plants. Those percentages are going to flip-flop over the next three to five years. The company will be more geared toward corporate and industrial customers because there almost nobody is renting. When you visit factory floors and see the equipment, little of it is rented and even more significantly, most of it is utilized a small fraction of the year. That's an enormous opportunity for the rental industry. I'm very confident that the wise but hidden hand of Adam Smith will force corporate America to embrace rental to take unnecessary costs out of their businesses, and we'll benefit from that. We have an intense focus on positioning ourselves to best serve those large customers that we think are a big part of our future.”
Not only does United want to add more national accounts, but also to increase the degree of rental activity from those accounts, some of which have as many as 150 field offices. By reaching out to the different divisions and subsidiaries of those companies, United can increase its penetration. And Jacobs points out, the industrial and corporate markets are less tied to economic cycles.
“Construction is entirely cyclical,” he says. “When the economy is growing, construction grows. When the economy isn't doing so well, construction contracts. Statistics show that 98 or 99 percent of the equipment in industrial sites is owned, less than 2 percent is rented. It's tiny. And the size of that market is much bigger than the construction market. We will still penetrate construction more, but the level of penetration in the industry is so small, the opportunity to grow there is much bigger.”
STILL ACQUIRING
Contrary to the popular perception that United has stopped its acquisition and growth plans, Jacobs makes it clear that when the time is right, United will once again gear up for further growth.
“Nothing has changed with respect to our philosophy,” Jacobs says. “This is an industry where size does matter, where every element of the business gets a competitive advantage with size. Sharing equipment in order to drive utilization is something that we pound away at every day, and as we get bigger and increase the density of our clusters around the country, we'll share equipment even more, and each of our corporate functions will be better as we get bigger. I see the company four to five years from now being more than double the size that it is right now.”
Does that mean that a new round of acquisitions is on the horizon for United?
“Basically we have four ways to grow the company — cold starts, acquisitions, by increasing sales and marketing or investing in our fleet,” Jacobs says. “We are not seeking to grow the top line so much as we are seeking to grow our margins and our returns on our investment capital. In due course, we want to raise equity at proper valuations in significant amounts and infuse that into our balance sheet and match it with debt. We will do strategic, accretive, credit-enhancing acquisitions that make sense, and are compelling. We will acquire companies that will be a meaningful addition to our network, that are complementary to our operations that bring good people, good equipment and good locations,” he adds.
“We will do cold starts in secondary and rural markets as well as raise more capital. I see enormous opportunities there. We're constrained now, not by management appetite or ability, but by our self-imposed discipline not to leverage the balance sheet in case we go into a deep, prolonged downturn.”
“Most of the companies of that middle market size, call it a little more than a billion of revenue to somewhere around $100 million of revenue or a little bit smaller, have a real issue where they are not able to find and sustain a competitive advantage,” says acquisitions chief Milne. “There will be exceptions to that, but as a general rule, that size company is having a hard time nailing down what their competitive advantage is if they're going head to head on the basic meat and potatoes of equipment rentals and don't have some other twist. That band will decrease. It's difficult for it to decrease now because many [companies] are so over-leveraged.
“There are easily a couple of billion dollars of revenue out there that we would want to buy. But, we do not want to get in an over-leveraged situation.
“It's not our style and it has never been our style.”
THE RENTAL MESSAGE
Wayland Hicks brought nearly 30 years as a business manager to the table as a co-founder of United Rentals, including more than 20 years with Xerox Corp., where he ran worldwide operations. RER met with Hicks, United's chief operations officer, at the company's Greenwich office.
RER: What have been the keys to managing United through this downturn?
HICKS: We said we would plan the business to do 6 to 8 percent same store revenue growth, and we would also cut back on the amount of used equipment we were to sell, which is another way of conserving capital. It costs us about a dollar and a half to replace every dollar's worth of revenue that we sell in used equipment. So if we age the fleet slightly, we can conserve capital. And that was the game plan that we laid out as far back as I can remember.
When we went on the initial road show [for the initial public offering] in December 1997, people would ask us: “How would you manage the business through an economic slowdown?” And we basically said we would do a lot to conserve capital. We would slow down the growth and if we do that right, the business should generate cash. We said our objective is to generate $390 million worth of cash from operation, and that we'll use about $350 million of that to pay down debt.
RER: What do you expect for 2002?
HICKS: There's growing optimism that the environment will turn up as we go through the back half of the year. It's too early to make a call for next year, but my sense is that we will probably look at the first six months of next year similarly to the way we're looking at business this year. And that is, 6 to 8 percent same-store growth is not a disaster, particularly in an economic downturn.
RER: What are the biggest challenges you face right now?
HICKS: If you look at that from a very macro perspective, growing quality people to manage the business is and will always be the main challenge. In my entire business career, that's the thing I've had to concentrate on the most. Others in the industry, Hertz in particular, have done a very nice job of that.
More intensive sales training will be our next major undertaking. We want our sales people to understand how to negotiate better, to understand how to present the rental picture better. A lot of education needs to take place with customers within the industry. That 80 percent that still owns equipment should be renting a lot more, and our challenge is to educate our people to help get that message across.
RER: You've concentrated a lot on increasing your purchasing power.
HICKS: If you go back to the early days of the company, you can pick almost any area and find too many suppliers. They were effectively the suppliers that the companies that we acquired were using. We had, for lines of equipment, some 1,100 different suppliers and we've whittled that down to 28 primary suppliers. For most of our suppliers, we are their number one commercial customer.
So we've been able to take advantage of our aggregate purchasing power, but we get some side benefits as well. If you have fewer suppliers, you have fewer parts in your system. You have to train fewer people on fewer types of products from a maintenance standpoint. You can rely on vendors to help train your employees, so you get more efficiency in that respect. So it's more than just purchasing.
We've also been able to get the industry to help us with some things that were alien thoughts when we first came into the industry — extended warranties in some cases, getting discounts on parts and the ability to sell new equipment without having to hold it in the fleet for 12 months.
RER: You've been here almost four years. How do you see United long-term?
HICKS: We're roughly a $3 billion company today. I would hope that we could take the business up to $5 to $6 billion. For a longer term, in 10 years, there is no reason why this business should not be a $10 billion to $15 billion business. The business is growing to do that. And we, and the whole industry, continue to benefit from a greater proclivity to rent equipment every year. If you look at the industry over the past 11 years, it has a compounded growth rate of about 14.5 percent. There are very few industries that can show you that kind of sustained growth.
PLAYING IT SAFE
United Rentals is famous for raising money from Wall Street. But it has taken steps to ensure it deserves capital support by its own internal programs and cost-consciousness. And one of the ways United has cut costs is its careful attention to safety and risk management through its own inhouse insurance and risk management unit, headed by former U.S. Rentals risk management specialist Grace Crickette.
Crickette's department, housed in U.S.'s former office in Modesto, Calif., handles all United liability and workers compensation claims as well as managing the company's employee benefits.
“Most of the companies we purchased were buying very low levels of insurance, with low deductibles and low coverage,” Crickette says. “They would have losses and just turn them over to their insurance companies and forget about them and if the rates went up, they went up. But we're completely different. We manage our risk. So we pay relatively little in insurance premiums.”
Each United Rentals branch has a loss allocation system where they have to pay a small deductible of any claim that occurs, which motivates branch managers to avoid losses. The same applies for workers' compensation losses. Because employees benefit from profit-sharing, losses affect their earnings directly.
United diligently promotes safety practices with extensive training.
“Ours is a bottoms-up approach, because we feel safety has to happen every day,” Crickette says. “Each branch has a safety manager that may have other duties depending on the size of the branch. But all branch employees go through the 10-hour OSHA training and we have a partnership with the National Safety Council. Typically our safety officers are employees who become NSC trainers.”
Not only does United's attention to safety benefit it by low accident rates and thus lower insurance premiums, but it helps the company's marketing. With an employer modification rate of about .75, Crickette says, the company's ability to earn the respect of national accounts, particularly on industrial sites, is enhanced.
“National accounts ask to see a copy of our safety program, and they ask about our EMR,” Crickette says. “They don't ask how many accidents customers have had, they only want to know how many accidents our employees have. If EMR is above 1.0, they won't even get in the door. All the companies combined prior to being acquired were higher than 1.0, and we were able to aggressively bring it down.”
