DBRS Comments on Hertz’s 4Q12 and Full Year 2012 Results, Issuer Rating at BB, Trend Negative

DBRS, Inc. (DBRS) has today commented on the 4Q12 and full year 2012 results of Hertz Corporation (Hertz or the Company). DBRS rates the Company’s Issuer Rating at BB. The trend on the ratings is Negative, where they were placed on August 28, 2012. The Negative trend reflects the substantial integration risks and other near-term risks associated with the Company’s acquisition of Dollar Thrifty Automotive Group, Inc. (DTAG), which closed on November 19, 2012.

For the quarter, Hertz reported record fourth quarter revenues of $2.3 billion and a pre-tax loss of $40.3 million, primarily reflecting $144 million of costs and charges related to the DTAG acquisition and sale of Advantage. On an adjusted basis, excluding the aforementioned costs and other non-cash and one-time items, Hertz reported record pre-tax income of $213.5 million, a 29% improvement year-on-year (YoY). For the full year 2012, Hertz reported worldwide revenues of $9.0 billion, GAAP pre-tax income of $450.6 million and adjusted pre-tax income of $901.5 million, up 32.5% YoY. DBRS notes that all of the full year profitability metrics were records for the Company.

Results for the quarter reflect the impact of the acquisition and strategic investments in businesses that offer sizeable growth opportunities. Moreover, solid margin expansion benefiting from good revenue growth and a continued focus on cost containment supported results. Sound industry fundamentals including a healthy used vehicle market and growing rental volumes as business and consumer confidence in the U.S. continue to strengthen further underpinned the strong results.

In 4Q12, worldwide revenues grew 15.5% YoY, excluding the effects of foreign currency (FX) movements, to a record $2.3 billion. Importantly, Hertz would have recorded record fourth quarter revenues even if the 43 days of revenue earned from DTAG were excluded. Revenue growth was underpinned by record revenues in worldwide rental car and continuing solid performance at Hertz Equipment Rental Corporation (HERC). Worldwide rental car revenue increased 14.6% YoY, excluding FX movements, to $1.9 billion underpinned by strong growth in U.S. Rental Car as higher volumes offset slightly lower pricing. DBRS comments that while pricing declined modestly due to a shift in business mix to off-airport and replacement rentals, pricing improved as the quarter progressed and improved on a sequential basis. Revenue generation in the equipment rental business continues to expand reflecting the benefits of bolt-on acquisitions that have broadened the segment’s operations into new markets with solid opportunities for growth. For the quarter, revenues improved 20.7% YoY, excluding FX movements, to $385.3 million. Operating expenses were higher in the quarter reflecting the impact of the DTAG acquisition. For 4Q12, direct operating expenses and SG&A expenses totaled 68.2% of revenues, 730 bps higher YoY. Nonetheless, given management’s proven ability to effectively manage and reduce costs over the last six years, DBRS expects the Company’s operating efficiency will return to a favorable trajectory as cost synergies from the acquisition are captured.

For the 14th consecutive quarter, U.S. fleet costs were lower YoY. Although the U.S. fleet expanded 27% reflecting the DTAG acquisition and fleet growth to meet improving demand, U.S. vehicle depreciation, excluding Donlen, was 20% lower at $214 per month. The improvement was driven by the diversified fleet mix, the Company’s growing ability to share fleet between brands and the continuing expansion of the Company’s efforts to sell more vehicles in higher-return channels.

By operating segment, Worldwide Car Rental’s adjusted pre-tax income grew 30% YoY to $222.0 million. The record results were underpinned by another strong performance in U.S. Rental Car which more than offset weakness in International Car Rental primarily due to the difficult operating environment in Europe. U.S. Car Rental revenue expanded 24.5% YoY reflecting 43 days of DTAG as well as solid growth in U.S. off-airport, particularly in the replacement rental businesses. U.S. off-airport segment volumes were 12% higher driving 12% growth in revenues. HERC’s financial performance continues to recover from the recession. For 4Q12, the segment generated adjusted pre-tax income of $82.4 million, a notable 33% increase YoY. As noted above, revenue growth was solid while costs remain under control. As a result, adjusted pre-tax margin improved to 21.4%.

DBRS views Hertz’s funding and liquidity profile as solid and well-managed. During 4Q12, Hertz secured $1.95 billion of permanent funding for the DTAG acquisition. Moreover, the Company continues to proactively refinance facilities taking advantage of the low rate environment which should benefit earnings in coming quarters. Hertz refinanced a $2.2 billion U.S. ABS variable funding facility and extended the $1.0 billion Donlen conduit all at lower costs. Further in early 2013, Hertz issued $950 million of ABS notes at very favorable rates and completed a GBP 195 million refinancing of a U.K. capital lease facility. Corporate liquidity at quarter-end totaled a respectable $1.7 billion.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]