DBRS Comments on Hertz’s 4Q10 and Full Year Results; Issuer Rating Unchanged at BB, Trend Stable

DBRS Inc. (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 4Q10 and full year financial results indicating narrower pre-tax losses, on a GAAP basis, of $7.8 million for the quarter and $13.6 million for full year 2010. The trend on all ratings is Stable.

Hertz’s results indicate continuing positive momentum across the franchise and improving underlying profitability despite an uneven economic recovery and travel volumes remaining below pre-recession levels. On an underlying basis, corporate adjusted EBITDA for the quarter grew 20% year-on-year to $265.7 million and increased a solid 12% for the full year to $1.1 billion. Importantly, the results evidence good momentum across all businesses with revenue growth in all three operating segments. For the quarter, Company earnings were driven by a 6.3% year-on-year increase in worldwide revenues, excluding the effects of foreign currency movements, to $1.8 billion. Revenue growth was primarily driven by recovering commercial travel volumes with transaction days increasing 6.6%. Pricing remained firm across both the U.S. and European car rental segments. Moreover, revenue generation benefited from the continued expansion of the off-airport business and Advantage, the Company’s cost-conscious leisure travel brand.

Management’s cost reduction efforts have improved fleet efficiency benefiting profitability. While direct operating expenses increased 1.4% on a dollar basis, owed to a larger fleet and the continuing expansion of the Company’s off-airport operations and the Advantage brand, as a percentage of revenues, direct operating expenses were 220 basis points lower at 56.5%. In 4Q10, corporate adjusted EBITDA margins improved by 180 basis points year-on-year to 14.5%, reflecting improved earnings generation over a reduced cost base. DBRS considers the results as evidencing that ongoing management efforts to diversify the revenue base and streamline the fixed cost base are positively impacting financial performance.

By segment, the positive trajectory of Hertz’s results continued in 4Q10. For the quarter, U.S. car rental revenue increased 6% year-on-year, while European car rental revenue, excluding the effects of foreign currency movements, improved 7.3%. Importantly, off-airport demand continues to demonstrate solid growth with volumes increasing a noteworthy 11.6% year-on-year. For the quarter, Hertz Equipment Rental Corporation (HERC) generated $286.1 million of revenue, a 4% increase year-on-year, on increasing volumes and utilization rates. DBRS notes this was the second consecutive quarter of positive revenue growth in HERC indicating stabilization and the early stages of a recovery in the equipment rental market.

The Company continues to demonstrate good fleet management acumen. U.S. fleet utilization in 2010 remained relatively stable year-on-year at 79.5%, despite the average fleet increasing approximately 9%. 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 4Q10 totaled $304 per month, 4% lower than a year ago, while European unit costs declined nearly 7%.

The Company’s funding profile is solid, underpinned by good access to the capital markets. During 2010, Hertz successfully completed approximately $6.0 billion in global debt refinancings, while lowering overall funding costs. Near-term maturities are manageable with $460 million of fleet debt and only $157 million of corporate debt to be refinanced in 2011. At December 31, 2010, pro-forma corporate liquidity totaled a solid $2.0 billion, adjusted for the redemption of $1.1 billion of notes completed in January 2011.

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

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

The sources of information used for this rating include the issuer. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steve Picarillo
Approver: Alan G. Reid
Initial Rating Date: 16 May 2001
Most Recent Rating Update: 4 October 2010