Hicks Takes the Reins

March 1, 2004
RER: How will United Rentals change under the leadership of Wayland Hicks? Hicks: There will be a lot of change, but let me start off with an explanation

RER: How will United Rentals change under the leadership of Wayland Hicks?

Hicks: There will be a lot of change, but let me start off with an explanation of our business strategy. We've been operating on the same basic business strategy since the company was founded. A lot of thought went into what it would take to be successful in this industry. If you think about the rental industry there are three basic things that we have to do: we have to buy equipment, we then use it to serve customers, which we do by renting it to them and then at the end of the asset's useful life, we sell it. Those are the three things we want to do better. First, buy more efficiently, use the equipment more efficiently and serve customers more efficiently; and dispose in a way that optimizes the return. That's the core plank of the rental business.

With that in mind, scale gives us an advantage in all three areas, and so scale became a major element of our overall strategy. With scale we should be able to buy more efficiently than anybody else. We've been able to do that clearly. If you talk to just about any supplier who sells to us, they will tell you that we have changed the rules of the game in that area. Second: Can we rent equipment more efficiently than our competition? Again, scale works to our advantage. We generate roughly 12 percent of our revenue by sharing equipment between branches, so we need branches in close proximity, and an information system that enables us to coordinate that. As far as disposing of equipment, we would rather sell to end customers than go through brokers and auctions. That way we can lower costs of delivery. Through an auction I have to pay commission of 7 to 8 percent to the auctioneers; through sales force it's about 3.9 percent, so that's more attractive.

We spent a lot of time up front planning our strategy, so we don't need to change it. We want to drive more scale. Also, I see contractor supply as an adjunct to the rental business. People that buy it are the same people we rent equipment to, it gives them another service that calls for them to turn to us. And that market is huge, the gross margins are good, that's an attractive growth opportunity for us.

You have an extensive business background. Can you share some thoughts about what you bring to the table as an individual, about some of the lessons you have learned from your wide experience?

There are a few things I believe are important. Large organizations don't cope with multiple objectives well. If you give people too many things to do, you don't get any of them done, you diffuse the energy of the organization and you confuse people. It's more effective to pick one or two things you think are critical and drive them relentlessly. Every major business leader that I've studied does that. Communicate the goals very clearly and concisely, try to simplify the message and communicate it to your organization and be repetitive. Keep going after the same message whenever possible and do that through multiple levels of the organization. Communicate to the sales staff, to the district manager, to truck drivers, to mechanics. Help them understand what you're trying to do and how you're trying to do it.

Have clear goals and accountability. Once you figure out that message and make sure you've established clear goals and who has the accountability for achieving those goals, make sure you disseminate it well through the organization.

A lot of big companies become fossilized and too bureaucratic, meaning it takes too long to make decisions, too long to implement change. Be decisive, make decisions and move quickly. Any market moves quickly so make decisions quickly, communicate them quickly and move on them. We use a wide variety of means to communicate to our organization. We recently had a managers' meeting in Jacksonville, there were 250 people there. We went to communicate what we're trying to achieve. We then synthesized it in a very brief message, published it and sent it out to every manager in the company the day after the meeting.

We also hold company-wide conference calls as a regular part of our process, right after our quarterly earnings calls. We get hundreds of people on phones and it's an open communication session, we're fielding questions for two to three hours. Another thing we do a lot of is e-mails, anybody can write anybody. I receive them from entry-level employees every day. Communication is an imperative. You can't have enough.

What are your goals for the coming year and the foreseeable future?

Our goals are to work very hard on building on strengths we already have as a company and improve the service we provide to our customers. Everybody in the rental industry said to me when I first came into this industry: “This is a service business, it's all about servicing your customer.” We have to continually improve and build upon that, so that's one of our goals for the year to come. We will go after more growth. We've been in a poor economic environment. Nonresidential construction, which is 70 percent of our business, declined 16.4 percent in 2002, and further 5.3 percent last year in the first 11 months. So our environment hasn't been friendly to driving growth, but I expect to see us build revenue in 2004.

Over the past couple of years, United has changed its emphasis from acquisitions to operations. What are some of the ways United has changed, how has the organization improved?

I have to take exception to that because we've always emphasized operations. If you go back to when we first founded the business, John Milne had responsibility for acquisitions and he focused 130 percent on acquisitions, I focused 130 percent on operations. We started building operational strength into the company from the day we acquired it.

We went public in December of 1997, and on that roadshow we decided to go with Wynne Systems, and we had it implemented by March 1998. That was the backbone of the company in terms of tracking assets, understanding time and dollar utilization on assets, whether or not the business is profitable, by category class of equipment. It was the key plank to operationally organizing the business.

We began the process of consolidating our vendor base; we went from 111 to 28 major lines of equipment. That was important to have consistency of equipment within a branch, to move from one branch to another, to have mechanics be familiar as we moved it around. We reduced parts-carrying costs. We conducted monthly operating reviews from the very beginning, focusing on the operating side of the business with those reviews. We standardized vehicles, buying white Ford pickup trucks. All sales and branch managers had the same, white with company logo. We implemented a common look and feel for our branches, with common color schemes and signage. We started this literally as we began the business, we didn't start it in the last couple of years.

We will continue to do acquisitions and if we have a favorable economic environment we will do more because we can assimilate them as quickly as anybody.

What are some of the areas you'd like to see United improve, or that you'd like to concentrate on?

Rental rates are critical, for ourselves and for the industry. If you look at the industry, the return on capital is not adequate, for us as well as other companies that we are outperforming. The industry must improve return on capital to provide the level of service customers demand. I consider that the single biggest priority for the company and for the industry as a whole.

We will continue to invest heavily in training: in our field service and our shop mechanics. We launched a number of initiatives in that area. The rental counter is the core strength of the business. It's like a quarterback, it influences so many things, dispatchers, outside sales people, everything. We put an organization together to do nothing but call counter people. Each counter person gets at least four calls a year, it's a coaching process, they simulate a customer to see how well they respond. We explain to the counter person what they did well and what they need to work on. We try to make it positive and offer positive feedback. And we recognized counter people for their contributions. We honored top counter people at our national management meeting.

So training is a very important part of what we're trying to do.

You've worked with Brad Jacobs for a long time. Not taking away anything from yourself and the many excellent qualities you bring to United, but how will Jacobs be missed?

As far as missing him, he is still the chairman of the company, so he's still here. But he is one of the most charismatic leaders I've ever been around. As a public speaker he can relate to any audience, he can reach out and make people understand him. He has a powerful ability to communicate ideas. I don't know anybody who can do that as well, so I would put him on a pedestal in that area.

United Rentals is going to increase its capex spending in 2004 over 2003. You are obviously expecting increased revenues? What are your expectations for 2004 and beyond?

We're planning about $450 million in replacement capex and an additional $50 million to $100 million in growth capex. We ended 2003 with an average fleet age of 41 to 42 months, so we will slightly reduce that. We expect that we'll sell about $250 million more in used equipment than this year, and we expect the top line to grow between 3 and 7 percent. I can't comment on the bottom line at this point. But a lot of that will depend. If the economic environment stays similar to 2003, we'd be on the low end of that 3 to 7 percent. If the environment is more positive, we might go to the higher end. If the first half continues soft and the second half increases, we might be somewhere in the middle of that projection. That's not factoring any acquisitions into it.

As for acquisitions, they happen when the stars line up right, when an opportunity presents itself and the financing makes sense and is available.

What kinds of changes do you expect to see in the rental industry over the next few years?

I think we'll see a return to acquisitions. Part of growth going forward will be driven by acquisitions; some will be organic. Back before the slowdown, we had aggregate double-digit growth as an industry. The industry will still grow 7 to 10 percent a year, although maybe not in 2004, because the nonresidential segment doesn't grow that quickly. We don't expect more than 1 to 2 percent growth in 2004 in nonresidential, but by 2005 nonresidential should grow closer to 5 percent.

Industry growth won't be as robust as the late '90s, but we still expect good growth. Rental will be, increasingly, the leading channel for distribution of OEM products. If you look at one end of the spectrum, Genie and JLG sell 80 percent to 90 percent of their volume to the rental industry. Dirt-movers sell more like 15 to 17 percent of their total volume to the rental industry. That will grow over time.

Eventually we will branch out beyond North America, like Caterpillar has done. In three to five years, we will do the same.

We recognized contractor supplies as an opportunity, and we reset our stores to have product displays. We brought in outside help to present it in a way that's inviting, to have equipment arrayed in a way that the customer will feel better about it. We published our first catalog in late 2002, reprinted it and are upgrading the size of catalog, printing in Spanish and English, and French to honor our French-Canadian customers. We will double the number of SKU's that we carry in the catalog. We are commissioning our outside sales force to sell contractor supplies, and we are puting a fair amount of energy to introduce them to customers.