DBRS Comments on Hertz’s 1Q12 Results; Issuer Rating at BB, UR - Developing

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 1Q12 financial results. The ratings remain Under Review Developing, where they were placed on May 16, 2011.

Hertz’s results evidence the impact of the strengthening U.S. economy and the benefits of managements cost control initiatives and strategic investments for growth. For the quarter, Hertz reported a loss before tax, on a GAAP basis, of $36.8 million as compared to a pre-tax loss of $158.9 million a year ago. On an adjusted basis, excluding such items as restructuring charges, non-cash debt charges and acquisition related costs, Hertz reported pre-tax income of $29.4 million, a record for the first quarter, compared to a pre-tax loss of $16.0 million in 1Q11. The quarter’s results reflect a 10.7% increase in worldwide revenues, excluding the effects of foreign currency movements, to $2.0 billion. Revenue growth was underpinned by record first quarter revenues in worldwide rental car, which increased 10.3%, excluding FX movements, to $1.7 billion driven by good transaction growth in both the U.S. on-airport and off-airport businesses. Moreover, revenue expansion was supported by a 13.4% improvement, excluding FX movements, in worldwide equipment rental revenue to $302.1 million reflecting the Company’s efforts to penetrate new markets as well as higher transaction volumes as more companies turn to renting versus buying equipment in an uncertain environment.

The results were supported by lower fleet costs demonstrating the Company’s solid fleet management acumen. Fleet costs benefited from the still healthy used vehicle market, the Company’s focus on disposing of risk-vehicles in higher return retail channels, and the strategic purchase and rotation of fleet. Despite the U.S. fleet increasing 8% year-on-year, U.S. vehicle depreciation per unit for the quarter totaled $249 per month, 11.4% lower than a year ago. As a result, U.S. car rental adjusted pre-tax margins improved by 240 basis points year-on-year to 10.7%. DBRS views positively that the improvement in revenue generation and margins were achieved, while Hertz continues to invest in the expansion of its off-airport business and Advantage brand demonstrating that operating costs remain under control.

By operating segment, Global Car Rental generated adjusted pre-tax income of $91.6 million, an increase of 49% year-on-year. Results were underpinned by a 10% (yoy) increase in transaction volumes, which more than offset the slight decline in revenue per day (RPD). U.S. off-airport demand continues to demonstrate solid growth with volumes increasing 11% year-on-year. As a result, off-airport accounts for 26.4% of U.S. car rental revenue, illustrating Hertz’s success in broadening the revenue base. International Car Rental reported acceptable performance although revenues were modestly lower from last year. For the quarter, Hertz Equipment Rental Corporation (HERC) generated adjusted pre-tax income of $25.9 million, a notable 154% increase over 2011, on the aforementioned revenue growth. Nevertheless, given the uncertainties as to the strength and sustainability of the global economic recovery, DBRS remains cautious regarding further improvement in the operating environment.

Hertz’s liquidity and funding profile remains acceptable supported by good access to the markets. During 1Q12, Hertz issued $250 million of corporate debt, the proceeds of which, along with corporate liquidity, were utilized to redeem the Company’s highest-rate U.S. and Euro notes due in 2014. DBRS notes Hertz has no sizable corporate or fleet debt maturities in 2012. Corporate liquidity at quarter-end totaled a respectable $1.5 billion.

The ratings remain Under Review Developing reflecting Hertz’s ongoing discussions with the Federal Trade Commission (FTC) regarding antitrust clearance for a potential acquisition of Dollar Thrifty Automotive Group, Inc. (DTAG). The review status considers DBRS’s view that a potential acquisition of DTAG would be a long-term positive for Hertz strengthening the Company’s overall franchise. While DBRS notes that there are certain uncertainties regarding this potential transaction, including the lack of a signed definitive merger agreement between the companies, the transaction would combine two complementary businesses: Hertz with its strong presence in the premium and corporate travel segment, and DTAG, with its solid position in the value-oriented leisure travel segment. Conversely however, DBRS sees potential risks in this transaction especially should the purchase price increase resulting in increased leverage, which in turn would weaken the Company’s financial profile and be less accretive. Should a final consent order be received and a deal progress with a final purchase price and financing composition become more certain, DBRS will complete its review assessing the impact on Hertz’s franchise, risk profile, capital structure, and its earnings generation ability. Also, DBRS will continue to monitor the structure of the purchase, the actual level of net debt incurred, goodwill and the ultimate impact on leverage. Furthermore, the review status also considers DBRS’s view that the upside potential offered by the transaction may be muted should industry fundamentals deteriorate.

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 company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: David Laterza
Approver: Alan G. Reid
Initial Rating Date: 16 May 2001
Most Recent Rating Update: 16 May 2011

For additional information on this rating, please refer to the linking document under Related Research.