DBRS Comments on Hertz Corporation’s 3Q10 Results, at BB, Trend Stable

DBRS has today commented that the ratings of Hertz Corporation (Hertz or the Company), including its Issuer Rating of BB are unaffected following the Company’s announcement of 3Q10 financial results. The trend on all ratings is Stable.

Today’s comment follows Hertz’s earnings release indicating a noteworthy increase in pre-tax profit to $158.3 million for 3Q10 compared to $75.8 million in 3Q09. On an underlying basis, corporate EBITDA grew 12.7% year-on-year to $437.2 million. Importantly, the results evidence good momentum across all businesses with revenue growth in all three operating segments. Earnings were driven by an 8.9% year-on-year increase in worldwide revenues, excluding the effects of foreign currency movements, to $2.2 billion. Revenue growth was primarily driven by increasing demand and solid pricing gains across both the U.S. and European car rental segments. Within equipment rental, the pace of decline in pricing slowed to 2.9% compared to 8.6% a year ago, providing early indications of stabilization and overall good pricing discipline. Indeed, given recent trends of monthly improvement in pricing, Hertz expects that equipment pricing will be close to flat year-on-year in the near-term. Moreover, revenue generation benefited from continued growth in both the off-airport business and Advantage, the Company’s cost-conscious leisure travel brand. Although direct operating expenses increased on a dollar basis 3.5%, largely owed to seasonality and the continuing expansion of the Company’s off-airport operations and the Advantage brand, as a percentage of revenues direct operating expenses were 200 basis points lower at 53%. DBRS sees this improvement as demonstrating the continued focus of management on costs while diversifying the revenue base. DBRS considers the results as evidence that the strategic actions by management to diversify the revenue base and streamline the fixed cost base are positively impacting the income statement.

The growth in worldwide car rental revenue was broad based, evidencing good momentum across the franchise. U.S. car rental revenue increased 11.4% year-on-year, while European car rental revenue, excluding the effects of foreign currency movements, improved 8.3%. Importantly, the increase in car rental revenue was driven by growth in both the rate per day and in transaction volume. Rental rate revenue per transaction day (RPD) increased 1.1%, as the Company realized solid pricing gains in the off-airport market and incremental growth in RPD in the U.S. on-airport and European operations. Worldwide rental transaction days increased a notable 8.2%, as corporate travel demand increased in both the U.S. and Europe, while growth in leisure demand was more modest. Moreover, off-airport demand continues to demonstrate solid growth with volumes increasing 10.4% year-on-year. For the quarter, Hertz Equipment Rental Corporation (HERC) generated $281.2 million of revenue, a 0.2% increase year-on-year. Importantly, this was the first quarter of positive revenue growth in HERC in two years, providing indications of stabilization.

The Company continues to demonstrate sound fleet management. U.S. fleet utilization remained relatively stable year-on-year at 82.2%, despite the average fleet increasing 9.4%. Moreover, fleet costs continue to benefit from the healthy used-vehicle market and continuing development of more profitable remarketing channels. U.S. vehicle depreciation per unit for 3Q10 totaled $311 per month, 2.5% lower than a year ago, while European unit costs declined 11.8%.

The Company continues to enjoy good access to the capital markets. Hertz successfully issued $1.3 billion of fleet debt and $700 million of corporate debt in 3Q10. Remaining maturities to be refinanced in 2H10 are minimal, consisting of some international fleet financing. At September 30, 2010, corporate liquidity totaled a very solid $2.3 billion.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Finance Companies Operating in the United States, which can be found on our website under methodologies.