DBRS Comments on Hertz’s 2Q12 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 2Q12 financial results. The ratings remain Under Review Developing, where they were placed on May 16, 2011.

Despite slowing economies in the U.S. and the Eurozone, Hertz reported record second quarter results illustrating that strategic investments for growth that balanced the Company’s revenue generation profile, and management’s cost control initiatives are positively impacting financial performance. For the quarter, Hertz reported pre-tax income, on a GAAP basis, of $158.7 million compared to pre-tax income of $94.6 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 $233.9 million, a record for the second quarter, compared to pre-tax income of $184.4 million in 2Q11.

The quarter’s results reflected a 10.3% increase in worldwide revenues, excluding the effects of foreign currency (FX) movements, to $2.2 billion. Revenue growth was underpinned by record second quarter revenues in worldwide rental car, which increased 9.9%, excluding FX movements, to $1.9 billion. Record volume driven by good growth in transaction days across all businesses in U.S. Rental Car was a key driver of revenue growth. Moreover, Company-wide revenue expansion was supported by a 13.1% improvement, excluding FX movements, to $335.0 million in worldwide equipment rental (HERC) revenue. HERC’s results reflect the Company’s efforts to penetrate new markets as well as sound volumes and higher pricing primarily afforded by growing industrial demand as more companies turn to renting versus buying equipment in an uncertain environment.

Results also benefited from lower fleet costs evidencing the Company’s well-established capabilities in managing its fleet. Fleet costs continue to benefit from the still healthy used vehicle market and the Company’s focus on disposing of risk-vehicles in higher return retail channels. Despite the Company’s U.S. fleet increasing 8% YoY, U.S. vehicle depreciation per unit for the quarter, excluding Donlen, totaled $213 per month, 3% lower than a year ago. As a result, U.S. car rental adjusted pre-tax margins improved by 210 bps YoY to approximately 20%. DBRS views positively that Hertz continues to drive growth in revenue generation and margins, while improving efficiency and investing in the expansion of its off-airport business and Advantage brand.

By operating segment, Global Car Rental generated adjusted pre-tax income of $277.4 million, an increase of 14.5% YoY. Within Global Car Rental, strong growth across each business in U.S. Rental Car more than offset the weakening performance in International Car Rental which continues to be impacted by deteriorating economic environment in Europe. However, DBRS notes that Europe was profitable in the quarter despite the challenging conditions. U.S. Rental Car revenues were up nearly 7% on strong volume growth in off-airport and in the Advantage brand. U.S. off-airport volumes were 17.4% higher YoY. As a result, off-airport accounted for 27.2% of U.S. car rental revenue, up from 25.8% in 2Q11. Meanwhile, Advantage experienced a 41.9% YoY increase in revenues, and importantly, 31% on a same-store basis. DBRS sees the performance of the U.S. off-airport and Advantage businesses as illustrating the Company’s success in broadening the revenue base into market segments that are less cyclical. For the quarter, Hertz Equipment Rental Corporation (HERC) generated adjusted pre-tax income of $42.5 million, a 27% increase over 2Q11, on the aforementioned revenue growth. While DBRS recognizes the positive trends in the operating results of many of Hertz’s business lines, given the slowing global economy, DBRS remains cautious regarding further improvement in financial performance.

Hertz’s funding and liquidity profile continue to benefit from management’s efforts to diversify funding sources and the good access to the markets the Company enjoys. During 2Q12, Hertz executed several financing transactions including increasing its existing variable funding ABS facility by $250 million, adding a Euro seasonal revolving credit facility to fund peak season fleet requirements, extending at lower costs its Euro revolving credit facility, and renewing and amending its Canadian securitization facility. Corporate liquidity at quarter-end totaled a respectable $1.4 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: David Laterza
Approver: William Schwartz
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.