DBRS Comments on Hertz Corporation’s 1Q11 Results, 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 1Q11 financial results. The trend on all ratings is Stable.

For the quarter, Hertz reported a pre-tax loss, on a GAAP basis, of $158.9 million as compared to a pre-tax loss of $157.8 million a year ago. However, excluding non-cash items, Hertz reported an adjusted pre-tax loss of $16.0 million, as compared to an adjusted pre-tax loss of $69.2 million in 1Q10. Despite the loss, the results reflect improving revenue generation as worldwide revenues increased 6.1% year-on-year, excluding the effects of foreign currency movements, to $1.8 billion. Furthermore, the Company’s results benefited from lower fleet costs which were helped by the still robust used vehicle market. While the Company continues to invest in the expansion of its off-airport business and Advantage brand, operating costs remain under control. DBRS views Hertz’s results as evidencing good underlying momentum across the franchise, the positive trends in industry fundamentals and the progress the Company has achieved in improving the funding profile.

Corporate EBITDA, which only includes interest and depreciation expense related to the vehicle fleet, grew 37.1% year-on-year to $166.4 million, the third consecutive quarter of double digit growth. Demonstrating the improving operating environment across all businesses, revenue growth was solid in all three operating segments driven by improving transaction volumes. Indeed, despite unfavorable winter weather during 1Q11, U.S. transaction days increased 4.4%, while worldwide transaction days grew 5.4% evidencing the strengthening recovery in commercial and leisure travel and the strength of the Hertz brand. Pricing, or revenue per day, in worldwide rental car, was broadly stable, only declining 1%, reflecting competitive pricing conditions, as the industry was slightly over-fleeted early in the quarter.

By operating segment, the positive trajectory continued. For the quarter, U.S. car rental revenue increased 3.6% year-on-year, while European car rental revenue improved 7.8%, excluding the effects of foreign currency movements. Importantly, U.S. off-airport demand continues to demonstrate solid growth with volumes increasing a noteworthy 11.5% year-on-year. As a result, off-airport accounts for 26% of U.S. car rental revenue, illustrating the success of the Company in broadening its revenue base. For the quarter, Hertz Equipment Rental Corporation (HERC) generated $268.2 million of revenue, an 11.9% increase year-on-year, excluding the effects of foreign currency, on increasing volumes and utilization rates. DBRS notes that 1Q11 was the first quarter since 4Q06 that HERC generated double digit growth in revenue and the third consecutive quarter of positive revenue growth for HERC. DBRS sees the results at HERC as indicating that the recovery in the equipment rental market is gathering pace as the improving macroeconomic environment drives growing demand.

The Company continues to demonstrate good fleet management. In 1Q11, U.S. fleet efficiency was 78.3%, the best first quarter since the Company went public. Moreover, despite a 2.3% increase in the worldwide average fleet size in 1Q11, fleet costs were lower year-on-year. 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 the quarter totaled $281 per month, 7.3% lower than a year ago.

Hertz continues to be proactive in refinancing debt, lowering funding costs. Following the successful refinancing of nearly $6 billion of corporate and fleet-related debt in 2010, Hertz completed the refinancing of over $4.0 billion of corporate debt in 1Q11. Near-term maturities are quite manageable with $419 million of fleet debt and only $26 million of corporate debt to be refinanced in 2011. At March 31, 2011, pro-forma corporate liquidity totaled a solid $1.8 billion, adjusted for the redemption of $480 million of high yield notes completed in April 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