We’ll Continue to Invest

April 20, 2007
RER interviewed United Rentals CEO Wayland Hicks about three weeks before United Rentals’ announcement that the company would explore strategic alternatives including a possible sale and that Hicks would retire from his position in June. United Rentals officials have since said the company is continuing along with its growth plans in a business-as-usual manner. Here are some of Hicks’ comments.

RER interviewed United Rentals CEO Wayland Hicks about three weeks before United Rentals’ announcement that the company would explore strategic alternatives including a possible sale and that Hicks would retire from his position in June. United Rentals officials have since said the company is continuing along with its growth plans in a business-as-usual manner. Here are some of Hicks’ comments.

RER: How would you sum up United Rentals’ performance in 2006?

Hicks: Our business performed extremely well throughout the year, particularly in the fourth quarter. We had record annual revenue of $3.64 billion and record earnings per share of $2.28, which represents 18-percent growth in EPS. Contractor supplies revenues grew 28 percent and our rental revenues grew 8.2 percent, which outpaced the reported industry growth. We also improved our return on invested capital, reduced our total debt, and had exceptionally strong free cash flow. Those are just a few of the highlights.

The 2006 numbers we reported speak for themselves. All told, 2006 has given us a very strong platform and momentum for 2007 going forward.

What are your expectations for 2007?

Our 2007 outlook calls for diluted EPS in the range of $2.65 to $2.75 on revenue of $3.85 billion. We also expect to generate $150 million to $200 million in free cash flow after recognizing almost $115 million of additional taxes we expect to pay in 2007. The free cash flow forecast also excludes the $68 million of proceeds we recorded from the sale of our traffic control business. We intend to invest a total of $900 million to $950 million of capital, including $125 million in growth capex. Our outlook is based on the expectation that private non-residential construction spending in North America will continue to grow in 2007, although at a more moderate pace than we saw in 2005 and 2006.

What kind of goals do you have for the year in terms of equipment and fleet mix, age of fleet?

We don’t anticipate any major shifts in our fleet mix. We’ll continue to invest in equipment categories that demonstrate potential for higher-than-average utilization in both our business segments: general rentals and trench safety, pump and power.

As for fleet age, we’ve said for several years now that we’re comfortable with a range of 35 to 45 months on average. Our general construction equipment, at about 34 months, is younger than the aerial equipment, which is running about 46 or 47 months at the moment. We reported an average fleet age of 39 months at the end of 2006, and we don’t expect that number to change much this year.

What are your primary objectives in terms of technology for 2007, in counter systems, in shop, in customer relationship management, in providing services for customers?

Technology has been a huge competitive advantage for us almost from the day the company was founded. A lot of this stems from the information technology we use to run our branch operations. Our criteria for any technology at the branches is that it must help us manage the business better and help our customers succeed at their own jobs. This year we are examining ways to increase the use of technology by our outside sales force.

We have also begun to utilize "smart devices" on certain machines in our fleet to monitor engine diagnostics during rentals. This improves preventive maintenance and helps ensure that the equipment is performing properly for our customers.

Regarding our recent announcement with SmartEquip, we have selected their e-Procurement Enterprise System to manage our company's purchasing transactions. The software will handle all aspects of purchasing activities related to our fleet, shop services, contractor supplies and parts. We believe that the SmartEquip relationship will result in significant cost and time savings, as well as improved order accuracy.

What are some other examples of how technology has helped United Rentals be more efficient?

In the early days we used to go out on road shows raising capital for the company and we talked about some of the advantages we thought a larger company would have including the density of branches to give us the ability to share equipment between branches. We do that and today a little north of 12 percent of our revenue comes from equipment shared between branches. I think that’s something that’s almost unique to United Rentals, I don’t think anybody does that to the extent that we do. And I think that’s largely because of our footprint, but also our technology, we have visibility into the assets that we have and because we have visibility we are able to move more gracefully from one branch to another.

What type of expectations do you have for your suppliers in terms of dealing with United Rentals on an electronic basis, i.e., what kind of services do you expect them to provide?

We recently selected Xign to automate our accounts payable operations using its on-demand Order To Pay software. The technology will allow us to shorten our payables cycle and reduce corporate spend by maximizing early payment discount opportunities. In addition, by shifting from paper to an electronic payables process, we can reduce our financial settlement costs and enhance visibility and control for Sarbanes-Oxley compliance. Our suppliers will see advantages as well, such as self-service invoicing capabilities.

How do you see your relationships with your suppliers evolving in the coming years?

We are moving toward a model of fewer, stronger, more effective relationships through our Strategic Sourcing Initiative. We estimate that we currently spend $1.1 billion on non-rental purchases. We believe we can cut this indirect spend by $60 million to $100 million when SSI is fully implemented by 2009. We have already made a lot of progress in rationalizing our vendor base and using our purchasing power to negotiate savings on volume purchases. In 2006, we realized a savings of $5 million, and we estimate our cost savings will be between $15 million and $20 million this year. SSI is also giving us the mechanism to negotiate better supplier response time and value-added services for our operations.

We spoke recently about greater diversity in the rental industry in relationship to more opportunities for women, African-Americans, Latinos and other “minorities.”

I can really only speak to our own situation. Essentially the goal we have set for ourselves is to achieve a diverse workforce that mirrors the communities where we do business. For example, if 30 percent of the contractors in Miami are Hispanic, then roughly an equal percentage of our Miami area workforce should be Hispanic. With a company of our size, it will take time to achieve this goal in every market, but our branches are on board with the objective.

There are a number of reasons why this position is important to United Rentals. First, having cultural, ethnic and gender diversity strengthens our company, as it does any company. We can develop a better understanding of others’ needs, which in turn helps us better understand what we need to do to be successful. Diversity is particularly important in attracting quality people to our business, both employees and customers.

I am pleased that some recent analysis has shown we are doing a good job of increasing the level of diversity in our company. Approximately 40 percent of the sales coordinators we hired or promoted into that position in 2006 would be considered diverse by our industry. Of those, a little over half were female, which is a terrific accomplishment.

What is your expansion strategy for the coming year, i.e., new branches, acquisitions, etc.?

Our company opened a total of 36 cold starts in 2006, and we plan to open another 30 to 35 new branches this year. Our 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.

Relative to acquisitions, we do intend to add revenue to the company by way of acquisition. As I have said in the past, our intention is to add about $100 million a year in revenue on average, with room for fluctuation.

What about expanding internationally? Are you looking forward to expanding internationally in the near future?

United Rentals does not have operations outside of North America and does not have immediate plans to operate in other parts of the globe. Over the next few years, however, we would expect to expand our operations into Europe.

For example, it is generally accepted that rental penetration is very low in South America, with the exception of certain categories such as temporary power. That factor is attractive. However, for the equipment rental industry to develop that market as a new frontier it would have to overcome some obstacles, including the availability of low-cost labor and economic instabilities.

What kind of rate environment do you expect to see in 2007? Will there be greater pressure on rates if it’s a less robust, increasingly competitive environment?

We have achieved 15 consecutive quarters of rate improvements, for which I credit our branch teams and field managers. They have done an incredible job of communicating the added value of United Rentals.

For 2007 we expect to see some improvement, about 1 percent. Some of that has to do with the market, which is expected to moderate its growth rate. But we have also made a deliberate decision to balance our focus on rates with a focus on utilization. We believe this is the best way to build value in our company. In some areas of the country where we have very high ROIC, it makes sense for us to shift a little toward increasing volume. Other markets may have an opposite set of dynamics. Our goal is to optimize our assets to maximize ROIC while providing our customers with superior services.

Any additional areas where you’d like to see United Rentals improve efficiencies in the years to come?

Return on invested capital ROIC is a major objective for us. We have improved it several years in a row, and reported a 14.7 percent ROIC at year-end 2006, which was up 1.8 percentage points from the previous year. Our goal for 2007 is an additional 1 percentage point, to 15.7 percent.

Even though we are the industry leader, we continually strive to find ways of improving our service to customers. Service is a more powerful competitive advantage than any equipment we can offer.

What led up to the sale of the traffic division?

I would describe it as not core to our mainstream business. Also, although we were improving our results considerably, we had for 2004 and 2005 negative earnings, which gives us negative return on invested capital. One of the things we try very hard is to improve our return on invested capital. We saw that we could have continued to manage the business and we could have continued to make it better, but it still would not have given us the kind of return on invested capital that we’re capable of getting in other parts of the business.