RER: Any particular achievements by United Rentals in 2005 that you feel most proud of?
Wayland Hicks: Clearly, we made important progress on our three key initiatives in 2005: to drive a further increase in rental rates, maintain strong organic growth, and expand our contractor supplies business. Our entire organization took these initiatives to heart. As a result, we were able to increase rates by an additional 6 percent, following the 7.5-percent increase we achieved in 2004. The combination of these increases helped us generate more than $250 million in incremental revenue last year. We also realized 11.8-percent growth in same-store rental revenues, and a 44-percent increase in contractor supplies sales. It was a year of progress on many fronts.
In what areas did United Rentals improve the most in 2005?
We drove dollar utilization to a record level of 65.1 percent in 2005, up 5.2 percentage points from 2004. We also made capital investments of $823 million, including $741 million invested in new rental equipment, which allowed us to grow faster than our end markets. Our return on invested capital improved 2.4 percentage points to 12 percent in 2005.
Were any particular market areas or customer segments particularly strong in 2005?
On a regional level, in the United States and Canada, we saw year-over-year growth in all areas with the exception of the Midwest and the Northeast. In the fourth quarter we began to see slight time utilization improvements in both of these regions. From a product market perspective, our growth strategy calls for us to make substantial investments in our specialty businesses, particularly trench safety, pump and power. At year-end, we had 71 locations in this business segment. Commercial and industrial demand has been driving utilization of our temporary power fleet, our larger pumps, which range from 4 to 12 inches in diameter, and our climate-control equipment.
Your volume grew significantly in 2005. How would you assess the company's profitability in ‘05?
Our strategic investments in the business, combined with the inherent operating leverage of our business model, helped us make the most of growth in our end markets in 2005. Our total revenues increased 15.2 percent to $3.56 billion. That was a record for United Rentals. Under the hood of our top-line growth were improved margins: operating income was up 95 percent to $500 million, and net income increased by $271 million. Our diluted earnings per share for 2005 were $1.80, which exceeded our outlook for the year.
Did any type of software or technology have a particularly strong impact in 2005?
URdata, our online account information management system, is a definite driver of our national accounts growth. The URdata technology features strongly in our relationships with national and multi-regional companies. Essentially, it enhances both their decision-making and their record keeping. We currently serve approximately 1,500 national accounts customers and 750 agencies of the U.S. government. Revenues from these customers increased to more than $650 million in 2005, up from $550 million in 2004.
Another critical technology is our internal data warehouse software, UREdge. The analysis provided by UREdge supports our focus on rental rate management as well as our overall management of the business.
I believe you stated you plan to open new branches at a similar rate in 2006 as in 2005?
Yes. We opened a total of 37 “cold starts” in 2005 and plan to open another 30 to 35 new branches in 2006. Branch network expansion is one of the strategies that will help us reach our goal of doubling the size of the business between 2005 and 2009. Our branch footprint is designed to capitalize on sustained construction activity by expanding our penetration in some areas and extending into other areas where our presence can attract new business.
Did you get involved in new product segments in 2005 or do you plan to in 2006?
In 2005, we started reporting in a third business segment: trench safety, pump and power. About a quarter of our new branches last year were established in this segment, and we made an acquisition that extended our presence in trench safety services in the Southwest. The branches in this segment carry specialized fleet and provide specialized services. The numbers speak for themselves — in 2005, our trench safety, pump and power business translated market demand into solid growth, including a 23-percent increase in same-store rental revenues.
Has the contractor supplies business met expectations?
Absolutely! Our revenues from contractor supplies sales grew from $184 million in 2003, to $225 million in 2004, to $324 million in 2005. As I mentioned earlier, that equates to 44 percent year-over-year growth in 2005. Our network of nine regional distribution centers, completed last year, gives us the ability to expedite customer orders for 9,200 in-stock items. The benefit of this infrastructure will begin to be realized in 2006 and beyond.
Any particular areas that United Rentals plans to concentrate on or improve in 2006?
Our immediate priorities this year, like last year, are to gain further ground on rental rates, achieve strong organic growth, and expand our contractor supplies business. We see opportunities to raise the bar on all three initiatives. For example, we believe there are additional pricing opportunities, although rates are significantly improved over two years ago. Our focus on rates is the single most important initiative we can take to improve our margins and increase our return on capital.
Most people in the industry expect 2006 and 2007 to continue very strong. What are your expectations?
There is every indication that 2006 will be another strong year for our industry. To date, the construction market is continuing to improve. And although it's hard to measure, more and more contractors seem to be embracing the use of rental equipment.
Our 2006 plan is based on the expectation of continued improvement in our operating environment in general and private non-residential construction in particular. We also expect that we will continue to grow our revenues at a faster pace than our primary end market.
We have budgeted for $175 million to $200 million in growth capital for new rental equipment, and $625 to $650 million in replacement capital to maintain the size and age of our rental fleet. Our fleet will be deployed where it can best meet the needs of our customers. There are strong pockets of demand tied to the recovery efforts along the Gulf Coast, but we also see upswings in commercial and industrial construction throughout our operating regions.
It's too early to talk about 2007 yet, but my sense is that it should be another strong year for the industry.
How has United progressed in educating and training its personnel?
Last year our employees enhanced their skills with more than 300,000 hours of training. Our company also extended its commitment to employee development by executing a number of initiatives rooted in employee suggestions. Many of these ideas came from our ongoing Town Hall Meeting series. More than 450 meetings were held throughout North America in 2005 alone, and over 8,000 of our employees had the opportunity to address senior management face-to-face. We collected hundreds of suggestions and put many of them into practice, with others currently on the drawing board. Our online eLearning curriculum is a great example of an employee idea brought to life.
