DBRS Comments on Hertz’s 3Q12 Results; Issuer Rating at BB, Trend Negative

DBRS, Inc. (DBRS) has today commented on the 3Q12 results of Hertz Corporation (Hertz or the Company). DBRS rates the Company’s Issuer Rating at BB. The trend on the ratings is Negative. For the quarter, Hertz reported pre-tax income, on a GAAP basis, of $368.9 million compared to pre-tax income of $295.7 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 $424.8 million, the highest for any quarter in the Company’s history.

In the face of a slowing global economic environment, Hertz reported record quarterly results reflecting the Company’s continued execution on efforts to diversify its revenue generation profile and management’s ongoing focus on improving efficiency. Moreover, results were underpinned by solid industry fundamentals including a still strong used vehicle market and growing rental demand as business and consumer confidence in the U.S. continue to strengthen.

For the quarter, worldwide revenues grew 6% YoY, excluding the effects of foreign currency (FX) movements, to $2.5 billion. Revenue growth was underpinned by record revenues in worldwide rental car and a good performance at Hertz Equipment Rental Corporation (HERC). Worldwide rental car revenue increased 5% YoY, excluding FX movements, to $2.2billion bolstered by strong results in U.S. Rental Car which more than offset lower revenues in International Rental Car as the recessionary environment in Europe continues to be a headwind to earnings. Company-wide revenue benefited from a 14% improvement, excluding FX movements, to $363.0 million in worldwide equipment rental (HERC) revenue. HERC’s results reflect the Company’s efforts to penetrate new markets as well as good volume growth particularly in the oil and gas and entertainment services sectors, as well as solid pricing gains in both national accounts and noncontract accounts. Management’s cost control efforts continue to support profitability. For 3Q12, direct operating expenses and SG&A expenses totaled 57.3% of revenues, a 210 bps improvement YoY. DBRS views positively Hertz’s ability to drive growth in revenues while improving efficiency.

Fleet efficiency continues to benefit from the Company’s strategic fleet management initiatives. Hertz continues to increase the number of low-cost risk vehicles in the fleet, shift the fleet mix to better reflect the Company’s diverse customer base and leverage a deeper supply base. Moreover, the Company continues to sell more vehicles through higher return retail channels. Further, increasing fleet sharing between the Company’s brands is underpinning higher utilization rates and improving overall fleet efficiency. Despite the Company’s U.S. fleet increasing 5% YoY, U.S. vehicle depreciation per unit for the quarter, excluding Donlen, totaled $225 per month; 11.3% lower than a year ago. DBRS views the improving fleet efficiency as evidencing the Company’s acumen in managing its fleet.

By operating segment, Worldwide Car Rental’s adjusted pre-tax income increased 14% YoY to $428.7million. The record results were anchored by a strong performance in U.S. Rental Car which continues to benefit from the Company’s strategy to expand into market segments that provide revenue diversification and are less cyclical. To this end, U.S. Rental Car revenues were up nearly 4% on solid volume growth in the off-airport business despite insurance replacement revenue being negatively impacted by industry-wide lower insurance claims and strong growth in the Advantage brand. The U.S. off-airport segment’s volumes were 6% higher YoY and the segment now accounts for 28.0% of U.S. Car Rental revenue. The Advantage brand continues to make progress in expanding and taking share in the deep-value market segment. For the quarter, Advantage reported a 33% YoY increase in revenues, including 26% on a same-store basis on higher volumes and longer duration rentals.

HERC’s financial performance continues to recover from the recession. For 3Q12, HERC generated adjusted pre-tax income of $76.2 million, a notable 36% increase over 3Q11, on the aforementioned revenue growth and solid cost containment. While DBRS recognizes the solid performance across most business segments, DBRS remains cautious that the slowing global economy could result in industry fundamentals turning less favorable thus making sustaining the positive trajectory in financial performance more challenging.

DBRS views Hertz’s funding and liquidity profile as solid. During 3Q12, Hertz extended the maturity of its European securitization to July 2014 and obtained $1.95 billion of bridge loan commitments to fund the anticipated DTAG acquisition. Subsequent to quarter end, Hertz has terminated the bridge loan commitments following the successful issuance of $1.2 billion of new senior notes and the amendment of the Company’s senior term facility and increase of the loan by $750 million. DBRS notes that drawing upon these financings is contingent upon the acquisition closing, as the bond proceeds are being held in escrow and the term loan has not been funded. Additionally, the Company continues to proactively refinance facilities taking advantage of the low rate environment which should benefit earnings in coming quarters. Since quarter end, Hertz has refinanced various fleet facilities including extending and slightly increasing its $2.2 billion U.S. ABS variable funding facility and extending the $1.0 billion Donlen conduit to December 2013, while lowering the borrowing spread on both facilities. Corporate liquidity at quarter-end totaled a respectable $1.4 billion.

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: Alan G. Reid
Initial Rating Date: 16 May 2001
Most Recent Rating Update: 28 August 2012

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