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If rental companies are disciplined in capex spending excess fleet will be absorbed by increasing demand
If rental companies are disciplined in capex spending, excess fleet will be absorbed by increasing demand.

Secular Penetration Continues to Drive Rental Industry, Kneeland Says

United Rentals CEO Michael Kneeland told an investor conference call this week that the secular penetration of rental, i.e., the increasing numbers of equipment end users that choose to rent equipment rather than purchase their own fleet continues to drive the rental industry despite headwinds brought about by low oil prices.

“Secular penetration is still a tailwind and demand from non-residential construction is on the rise,” Kneeland told investors. “We also know that our industry added a lot of fleet last year. The new fleet, combined with equipment coming out of Canada in the oil patch has created an oversupply in U.S. markets in the short-term. However, our services are still earning premium pricing. Strategically, this is the right positioning for us in the long-term.”

While United Rentals’ revenue was largely flat in the first quarter, the company did generate free cash flow of $627 million, despite the oil-and-gas slump and the slowdown in western Canada.

“Canada was the major constraint,” said Kneeland. “The drag from our Canadian business was significant in the quarter. It accounted for almost a full point of rate decline, and we’re managing through it by reducing fleet in weak markets, particularly in Western provinces.”

However, Kneeland is optimistic that a turnaround in Canada is coming soon. “We're pleased to see that the Canadian Government is taking steps to turn the economy around,” he said. “And importantly for us, the current plan includes an investment of more than $120 billion in Canadian infrastructure over 10 years, with $11 billion to be allocated immediately.

As so many companies have moved rental inventory away from oil- and gas-related applications, other markets have seen an excess of equipment. Kneeland said a cautious approach to capex will be required in 2016.

“If rental companies continue to show discipline with CapEx in 2016, excess fleet will be absorbed more quickly by the growth in demand,” Kneeland said. “In the first quarter, our capital spend was down by two-thirds versus last year, and it gives us major flexibility in managing the balance of our CapEx spend in 2016. Last night, we reaffirmed our $1.2 billion CapEx target for the full year and this is based on the substantial demand that we're seeing in many of our end markets.”

Specialty rentals continues to be the fastest-growing segment of United Rentals’ business, Kneeland noted. “Rental revenues were up 8.7 percent year over year for specialty, with same-store growth being more than 6 percent,” he said. “And the combined rental revenues from Trench Safety and Power & HVAC, our two largest specialty businesses, increased by 12 percent year over year, again largely on a same-store basis.”

To read about United Rentals’ Q1 results, go to: http://rermag.com/headline-news/specialty-businesses-shine-during-flat-first-quarter-united-rentals

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