United Rentals completed its acquisition of RSC Holdings April 30. Shortly before the deal closed, RER spoke with Michael Kneeland about the preparations for the integration of the two companies as well as the year in rental 2011, prospects for this year, and the growth of some of United’s recently developed programs.
RER: Can you sum up what made 2011 such a successful year for United Rentals?
Kneeland: I think it’s a combination of things. For the last several years we’ve been focusing our strategy around our core customers and around rental. We transformed the company by concentrating on rental and the right customers. We established national accounts, strategic accounts, and assigned accounts segments. These accounts make up about 55 percent of our business.
We also measured our services regardless of the economy, regardless of what equipment we were holding or not holding. We measure ourselves on the things that matter to our customers, such as on-time delivery and service response time. These are the things that they told us were very important when they were thinking about what company to rent from. And being able to do that every day and sharing those results with our customers distinguishes us from other rental players. We look at the world through our customers’ eyes.
At the same time, we focused on our cost structure and realized we had to make significant changes. And we did. We’ve said that 50 percent of the $500 million we cut in costs are gone for good. But we did it in a way that made sure that we weren’t impacting our services.
We’ve also benefitted from the secular growth of rental, and our go-to-market strategy of earning more share of wallet of our current customer base. And our financial ability to buy equipment despite tough economic times, to be able to go into the capital markets to raise funds. All of the above made 2011 a success. It really was the things that we have been talking about since early 2008 that we were going to do. When we started to see the secular shift move in our direction, we brought it to our margins; we brought it to our top line and bottom line, which I think are equally important.
When I visited you, almost two years ago, we talked about the key measures of Operation United, improving delivery and pickup times, establishing a single point of contact, billing accuracy, measuring response times on breakdowns. Have all those areas improved?
They have. We have this motto that we always have to strive to be better, and we’re using innovation and technology to help us do that and we rolled out FAST, a very comprehensive program that started later than anticipated because we wanted to get it right. It’s a process that changes the way in which the branches think about delivery and about logistics. We’ve been doing it very methodically to make sure that we give the appropriate attention to training so that it yields the benefits we’re looking for. What I can tell you is we’ve seen reductions in the amount of overtime, outside hauling, and also idle time for our delivery vehicles. And for the branches that have been on this for more than six months, the results are strong. But we are on the right path, though we have more to go to achieve this vision of excellence.
It seems that along with all those things you’ve done to improve the company internally, the market has also turned a bit with more demand for equipment and more projects going on.
Yes and we are starting to see modest growth. We started to see some positive trends late last year and into this year and we’re getting indications from various construction forecast resources that are available to us, that about 2-percent improvement is expected, which is not high growth, but nonetheless it is growth year over year, and you’re right, we’ve been able to benefit from that as well.
How about the CORE (customer-oriented rates excellence) program for rental rates? You’ve been able to raise rental rates to a degree so it must be working.
Yes we have. But it’s not just about raising rental rates, it’s about managing rental rates for profitable growth. And there are different attributes and different pricing mechanisms for different customers. If a customer doesn’t damage our equipment, pays us on time, is loyal to us, a large account, rents a diverse portfolio of equipment and utilizes us in multiple branches, they receive a price that’s different from somebody who just walks in and says “I need something today.” CORE has given us the ability to do that. It’s very unique, and it also helps maintain a greater consistency in pricing.
So from that perspective it’s been very successful in giving visibility and a useful tool to our management teams in the field. It’s real time, it’s available to our branch sales reps, to our branch managers, our inside sales reps, our regional platform. So they have the ability to look at rates, and adjust them. CORE gives you a scale by which there’s a reasonable chance of success for the managed rate to the high end of the rate based on the data that it collects based on that type of customer, that market, that type of equipment.
So as a sales person goes in to quote a rate to a particular customer, there’s a system within CORE electronically whereby the customer is rated to some degree so the salesman can see where they stand in terms of the pricing the customer is eligible for.
Yes, it’s right there in real time, based on the customer, based on the market, based on the assets, based on time utilization.
Your first-quarter results were extremely strong. Anything in particular you’d like to say about them?
The first quarter played out as we expected it, which was strong, especially given it is our most challenging seasonal quarter. We saw record time utilization for a first quarter, record fleet growth, and record adjusted EBITDA at a record margin.
Can you talk a bit about the RSC deal and how it came together?
It’s no secret that back in the late 1990s our company looked at RSC. Then back in 2006 when they put themselves up for sale, we looked at them again. But this time we looked at it from a different perspective; we looked at it from a strategic point of view, based on their portfolio of customer mix and areas that we wanted to concentrate in such as the industrial sector, which is very strong. We go through a strategy review program regularly. We look at choices, imagining each of those with different outcomes and then we select what we would like to do. Strategically we were looking to diversify our customer portfolio, we wanted to make sure that we had a cultural fit and we wanted to make sure that we were enhancing shareholder value. RSC came to the top of that list.
I am in contact with various CEOs in our industry and it came to a point where we were looking at the world, the economy, the market, particularly the debt market and things came together rather quickly in the back half of last year. We looked at it and said, “What would this company be worth, what’s the value from the perspective of our shareholders?” We came up with a price and we were very happy that they accepted.
How about the integration process up to this point?
People are rolling up their sleeves with the goal that one and one is more than two. People from both sides are working hard to assure a smooth and successful transaction. I am very impressed by the level of work ethic, and the willingness to succeed on both teams. That also goes to the cultural aspect, which is very important and is often overlooked in a lot of transactions. We have an IMO [Integration Management Office] office, we have a steering committee, and we have roughly 20-plus work streams of different categories. And all of these are manned by both United Rentals and RSC professionals, working through, mapping out the processes, mapping out the best of both worlds and then marching forward to Day One, which would be the day after the deal is officially closed.
And I would say that there’s a lot of blood, sweat and tears on both sides. They deserve a pat on the back because it’s remarkable to see people who were once fierce competitors work together so cooperatively.
I guess there is an integration process on the executive level and then again on a day-to-day operations level.
We are both on the same operating system; we both have the same types of equipment. We may some different types of customers; we may have some different terminologies. There are also some nuances between our operating systems. We’re mapping all of those out. We have a “Go-to-market” team that looks at a day in the life of a branch manager and what he has to accomplish, and service, to name just two. We’ve mapped everything out and we have what we call “critical must-haves” when we flip the switch to one operating system.
We break down our needs into three groups: “must have,” “like to have,” and “we can wait for.” These are all being mapped in a team effort to identify what is needed and when it’s needed. We’re putting the resources behind it to make sure that we achieve those objectives. Each team has been given a task, both from “follow the money” but also looking through the customers’ eyes and also looking for the best in class. So the teams walk in the room with egos parked at the door and basically roll up their sleeves and say, “Ok, let’s take a look at this and what the benefits are” and I’m very happy with what I’m seeing. It’s not easy. In fact, it’s complicated, but both sides are tenacious and committed to get this done. Again, we want to deliver on what we say we’re going to do.
Will it take time to integrate programs such as FAST and CORE?
CORE will come first but it can’t happen overnight. As for FAST that will also be incorporated but that will take a bit more time.
In recent weeks you’ve made a few acquisitions and opened some branches. Will that sort of activity go on as usual during the integration period?
We will always be open and looking at possibilities. Keep in mind that acquisitions we’re doing are in the trench, power and HVAC area. We’re building those out. We’ll always look at opportunities and make that judgment call based on the facts. So it’s too early to determine, but we’ll always be interested in what opportunities may exist.
There was an acquisition at the beginning of the year, after the announcement with RSC, that’s already been integrated. Trench, power and HVAC, they have their own specific team. We’re very good at small acquisitions as you know; we’ve done a lot of them. The large ones are more complicated and we have to do things differently.
If you look at what Global Insight sees for industry growth over the next few years, I think the timing of the RSC combination is appropriate because we are at the early stages of an improving construction cycle.
Do you pretty well sense the next few years will be a very strong growth period?
I’ll tell you what, if you look at what Scott Hazelton of Global Insight said, that the compounded annual growth rate over the next five years for the global rental industry will be a bit more than 12 percent, and if you discounted that by half, I’d still take that.
