United Rentals CEO Says Technology Will Elevate Rental from Commodity Status

Recently we were able to catch up with Michael Kneeland, CEO of United Rentals, while in Miami for the IPAF Summit. Following is an excerpt from our discussion:

Rental: How is 2013 shaping up for United Rentals?

Kneeland: We see the back half being stronger than the front half. Most analysts are suggesting we’re going to see somewhere around 8-percent growth this year and about 11-percent growth next year. We’re well positioned to capture that, and we’re very excited.

Rental: What specifically puts you in this position for growth?

Kneeland: We’re in every state, with the exception of Hawaii; we’re in all 10 Canadian provinces; and we have over 830 locations. We can move equipment of any size rapidly, we have buying power and we have capital. That, along with our shift toward private non-residential construction and industrial (we’re about 50/50), is going to take some of the peaks and valleys out, so we’ll be more consistent. We just went through the integration with RSC and we did it during a timeframe when end markets weren’t growing. So, we’ve got the heavy lifting behind us, and we’re on a unified platform going forward.

Rental: Has the process of integration with RSC gone as planned?

Kneeland: We said we were going to see between a $230 million and $250 million of cost-related synergies as a result of the acquisition, and we already achieved about $104 million of that in the first eight months. We’re very much on track to achieve the goal we set. All the RSC branches we intended to close have been effectively closed, all the management is in place, all the sales territories have been realigned. Now we’re introducing tools such as SalesForce.com, which has been integrated with all of our sales reps. It was legacy - RSC had it. It’s scalable and universal, so we went with it. Right now, we’re rolling out best practices and that will continue to play out through the balance of the year.

Rental: Was it a challenge to integrate the cultures of United Rentals and RSC?

Kneeland: Surprisingly, the cultures are much more aligned than they are apart. Both companies were metrics focused, especially aimed at customer service. So, we focused our whole concept of the integration through the customers’ eyes, and that kind of put everybody on the same page. Is there still pride about the red or blue legacy? Sure, but the cultures were much more similar than dissimilar.

Rental: What was the most difficult part of the integration?

Kneeland: We had to pick the right people. We had extensive HR data that we used and we challenged our people. I challenged myself. There are people who were on my team, at the executive level, that are no longer with us. That’s because we had to get the best of both worlds. When we started doing that at the higher level, it became easier at the lower level. But it’s still painful.

Rental: Getting back to the industry in general, do you believe the so-called secular shift toward rental is permanent?

Kneeland: I would think so. Our traditional end markets have had a tough few years, but the rental industry has experienced solid growth. Secular penetration is the best explanation. The tough economic times have encouraged rental, and generally that shift may flatten out if the construction environment improves, but most customers stick with rental because in so many cases it makes the most economic sense. When I started in this industry 30 years ago, rental penetration was about 5 percent. Today it’s 50 percent. So, you could say it has to stick in order to grow.

Rental: Do you think the recent economic downturn has put the glue into that shift?

Kneeland: Sure, it has. It’s a paradigm shift. In a lot of cases today, the bank won’t even give contractors the money to acquire equipment, so they have to go out and find another way to get the job done. They rent and they start to see the financial benefits of renting, and then they see they can do more jobs without owning the equipment.

Rental: Rental rates are an important part of the equation for sustained growth in our industry. Do you have a philosophy on how to get and keep rates at a profitable level?

Kneeland: I think everyone has to understand what their cost of capital is. A challenge that our industry faces is it hasn’t been a very good steward of other people’s money. Historically, during almost every downturn we have one or two companies that go into Chapter 11, and that doesn’t bode well for the industry at all; it’s a stain on our industry. We need to understand that if we borrow a dollar, we have to bring something back north of that dollar in order to give a return to the investor. That investor could be the bank, it could be personal, or it could be public debt. It doesn’t matter. We still have to get a return, and that comes down to rates. We can only squeeze so much juice out of the grape of cost. It comes down to “what am I worth?” and this is an industry that goes for cash. That’s okay for the moment, but it’s not sustainable in the longer term.

Rental: The industry is more savvy than it was 10 years ago...

Kneeland: But so are the lenders. When I took out personal loans to start up my business, that gave me religion real quick. I had to make sure I could pay that back. And I had to pay everything else that goes along with it too... the employees, the benefits, etc. We have a tendency to react, “I gotta get the equipment out,” right? Then all of a sudden, it becomes a self-fulfilling prophecy. Sometimes we over-fleet intentionally, but we should really stop and think: Maybe we shouldn’t buy as much and instead, enjoy a higher rate and higher return. I’ve always had this philosophy that you shouldn’t work really hard to lose money.

Rental: Where does the industry need to improve? Where are there opportunities?

Kneeland: We, as an industry, are looked at somewhat as a commodity, so we need to think about how we can differentiate ourselves. Clearly, technology is a game changer. People have accessibility and I do believe that plays a role in what we want to give our customers. Everything’s readily available at everyone’s fingertips. For one, we need to find a better way of doing business and take the commodity out of it. Second, safety. We’re an industry that doesn’t have a very good record on safety. We think we do, but we don’t, and we need to take ownership of that and do better.

I also think we’re in a global economy today. The U.S. is now becoming a big producer of natural gas, and I think over the next decade, we’re going to see more companies come here because of the low cost of energy, which is rather attractive. That’s a likely opportunity. We’re in a great place as an industry, we just need to seize the opportunity.