18.07.2012

Merger costs push United into the red

United Rentals has reported its second quarter results which now include RSC, following the merger of the two companies. The first effects of the merger are, as expected negative in terms of profitability.

The company has taken a total of $143 million in restructuring costs in the first half, of which $90 million are directly related to the merger. Add this to the substantially higher interest costs and it is easy to understand the pre-tax loss for the quarter of $64 million and $45 million loss for the first half.

Total revenue for the six months was $1.65 billion compared to $1.15 billion last year, However this does not include RSC’s numbers from last year, and this year’s numbers do not include RSC for the first four months – confused? You will be.

In a very rough estimate the two businesses generated around $1.9 billion in the first six months of this year, compared with a combined $1.846 last year. The second quarter is a great deal easier with the two generating revenues of $996 million last year which compared to $993 this year.

More importantly the company says that progress on merging the two businesses is running well ahead of schedule, with cost savings looking like they will exceed forecasts. Physical utilisation of the fleet improved marginally to 67.1 percent, while rental rates helped with a 7.4 percent improvement over the same period last year.

Looking at the year as a whole United is forecasting rental rates to rise 6.5 percent with physical utilisation at68 percent, the same as the full 12 months last year.

Net capital expenditure on the fleet will be between $1.07 billion and $1.125 billion, after gross purchases of between $1.5 billion and $1.6 billion.

United’s chief executive Michael Kneeland said: "Our strong results in the second quarter were driven by several positive factors that should continue to benefit our performance. Our end markets are more robust than a year ago, and we see a growing customer appreciation for the economic value of renting equipment. In addition, we capitalised on our enhanced market position following the acquisition of RSC, particularly in the industrial sector. The integration is very much on track: we have already brought the RSC operations onto our technology platform, aligned our sales force territories, and completed 61 of 185 branch consolidations. Our cost synergies are tracking ahead of target."

"The macro environment is still difficult to forecast, and we're keeping a close watch on our end market indicators. Nevertheless, we like what we’re hearing from our customers. The higher rates and volume we achieved in the second quarter reflect continued demand for our equipment. Our customers remain confident in their outlook, and we feel comfortable with our financial targets for 2012. Our model provides us with flexibility to address changes in economic circumstances."

Vertikal Comment

It is pointless to over analyse these results as they include all sort of distortions that are typical when such mergers occur. The key thing is that the market is continuing along its positive trend and the merger restructuring is going well, which are the two things that United wants and needs while it absorbs this massive acquisition.

While it is early days it is looking like the net effect of the merger will be 2+2 = 3.75 or better. If that is the end result then it will be exceptional performance for two such large businesses with some considerable overlap.

The costs savings will more than compensate for the marginal fall out of some revenues and the business should be in good shape as a bigger more diverse entity to exploit the continuing growth in the North American rental market.

It is early days but it looks like United has got off to a very decent start.