In Early Stages of Recovery, United Rentals CEO Says

July 23, 2010
Although overall total revenue declined in the second quarter, other signs were positive, with indications that the rental economy is in the early stages of recovery, United Rentals CEO Michael Kneeland told a conference call this week.

Although overall total revenue declined in the second quarter, other signs were positive, with indications that the rental economy is in the early stages of recovery, United Rentals CEO Michael Kneeland told a conference call this week.

Second-quarter total revenue dropped 9.4 percent for United Rentals, posting $557 million compared with $615 million for the same period in 2009. Rental revenue was essentially flat, dropping from $454 million in the second quarter of 2009 to $450 million this year.

However, because of reduced expenses, profits were significantly improved. On a GAAP earnings per share basis, United Rentals reported second-quarter 2010 net income of $12 million, or 18 cents per diluted share, compared with a net loss of $17 million, and a 28-cents-per-diluted-share plunge for the same period last year.

Net income for the second quarter was $12 million, compared with a $21 million loss in 2009’s second quarter. Adjusted EBITDA margin was 32.1 percent for the quarter, a 31.5-percent improvement compared with 24.4 percent in the year-ago period.

Time utilization increased 4.1 percentage points compared with last year to a second-quarter record of 65.4 percent, reflecting an increase in demand and more effective management of a smaller fleet. Rental rates declined 2 percent compared with last year’s second quarter. Dollar utilization increased 1.8 percentage points to 46.7 percent.

To meet increased demand, United Rentals raised its outlook for net rental capital expenditures (defined as purchases of rental equipment minus the proceeds from sales of rental equipment) to a range of $160 million to $180 million, from its previous estimate of $100 million to $120 million. The company reaffirmed its outlook for full year free cash flow to a range of $200 million to $225 million.

“This was a strong quarter with a number of positive trends in the underlying metrics,” said CEO Michael Kneeland. “Our same-store rental revenues increased 2.7 percent, with year-over-year growth in six of our nine operating regions. We reported the highest time utilization of any second quarter in our company’s history. Rental rates, while down year over year, improved sequentially each month. We are also running the business much more efficiently and spending capex where it counts, purchasing fleet that we are confident will be in demand by our target accounts.

“While we continue to expect a choppy recovery, we believe that we are seeing the early stages of a cyclical upturn on top of the normal season benefit. As contractors take on work with limited access to capital, they are choosing to rent rather than buy equipment. We find it encouraging that demand is coming from more than one source as we move into a recovery. Our branches are meeting these opportunities head-on with a powerful strategy focused on larger construction and industrial accounts, pricing discipline and customer service excellence.”

Kneeland pointed out that United’s rental revenues were strong considering the overall state of the construction market. “Total non-construction spending, which includes both private and public construction, was down 16.1 percent in April year-over-year and down 15.2 percent in May,” Kneeland told the analysts’ conference call. “And you compare that to our rental revenues, which were down less than 1 percent for the quarter. At the same time, our same-store rental revenues were actually up 2.7 percent. So going hard after the business that’s out there, implementing our market strategy, identifying and going after the right types of customers and winning more profitable jobs, but we’re staying very aware of the quality of our revenues, not just the quantity.”

Kneeland added that the company is working hard to keep rental rates at as high a level as possible. “We estimate that every point of rate is worth about $18 million of annual EBITDA to us, so I can assure you we’re doing everything in our power to reverse the year-over-year trend on rates,” he said. “We’re working to achieve the optimal price on every contract. We’re also walking away from unprofitable deals and we’re implementing price optimization software, which we call core, which is about dynamic pricing, each price subject to that type of customer.”

Kneeland said that in the second quarter about 70 percent of the business was monthly, which are the last to recover because equipment stays out for longer period at fixed rates.

The company also continued its growth in the national accounts area, having signed 130 new national accounts in the first six months of the year, with 40 percent of those being industrial accounts. “We’re moving closer to our goal of 30 percent of revenue from the industrial market,” said Kneeland. “It will take some time to get there, but each quarter brings us closer and I have all the confidence that we’ll achieve our goal.”

Overall, the company added 6,600 new accounts in the second quarter, Kneeland added. “That’s a 25-percent increase over last year. We also reactivated dormant accounts, and year to date, we reactivated 6,100 dormant accounts and generated $16 million of rental revenue from this group alone.”

Another positive sign, United Rentals said, was the growth in rentals of earthmoving equipment.

“Earthmoving equipment was particularly strong,” said chief financial officer William Plummer. “The original equipment cost on rent, dollars for earthmoving equipment for the quarter was up 11 percent compared to last year. So that helped drive that overall 2-percent improvement in OEC on rent. And we take heart from that because earthmoving equipment tends to be earlier in the cycle when things are improving.”

Kneeland also said United intends to grow its power HVAC presence this year and into next.

Based in Greenwich, Conn., United Rentals is No. 1 on the RER 100.