DBRS: Hertz 2Q Results Lower on Reduced U.S. Volumes; Margins and Vehicle Costs Steady

Summary:
• For 2Q15, Hertz reported net income of $23 million compared to $72 million in the year ago period. Results were impacted by modestly lower revenues partially offset by lower operating costs as well as non-core items.
• Reported revenues were 5% lower at $2.7 billion, but excluding foreign currency movements total revenues were 1% lower year-over-year (YoY).
• DBRS’s Issuer Rating for The Hertz Corporation is BB (low), Stable trend.

DBRS, Inc. (DBRS) views The Hertz Corporation’s (Hertz or the Company) 2Q15 underlying earnings as acceptable reflecting initial progress on the Company’s strategic initiatives to improve financial performance. For the quarter, on a U.S. GAAP basis, Hertz generated pre-tax income of $23 million compared to $72 million in the comparable period a year ago. On an adjusted basis, Hertz reported pre-tax income of $88 million, 33% lower YoY, excluding such items as restructuring charges, non-cash debt charges, a non-recurring litigation settlement and acquisition related costs. While overall underlying results were down YoY, DBRS sees stabilizing trends in certain key operating metrics as providing early evidence that actions taken by the new management team are beginning to positively impact performance.

Total revenues for the quarter were $2.7 billion, approximately 1% lower YoY, excluding the impact of the strengthening U.S. dollar. U.S. Rental Car revenue was impacted by lower U.S. transaction volumes as Hertz closed 200 underperforming off-airport locations and airport volumes were lower reflecting Hertz’s decision to reduce volumes from less profitable opaque travel sites. U.S. Car Rental revenue was lower also on a mix shift in off-airport volumes to lower yielding insurance replacement business. Positively, Hertz’s U.S. Rental Car operating margins remain stable demonstrating that actions to remove costs are offsetting revenue compression. For 2Q15, U.S. Rental Car Corporate EBITDA margin was stable at 13%. Meanwhile, International segment revenues were 4% higher YoY (excluding foreign currency impacts), on strong growth in U.S. inbound travel to Europe.

HERC revenues (excluding the impact of foreign currency movements), were up slightly YoY, as solid new account growth, especially in the specialty segments, and with small local contractors, more than offset the impact of the challenging energy market, which continues to be a headwind.

Fleet costs in U.S. Car Rental were stable YoY reflecting a used vehicle market that remains above historical long-term averages and the Company’s improved focus on fleet management and good execution on disposition of the fleet. DBRS highlights that this performance was attained while shifting the fleet mix to a higher percentage of program vehicles and refreshing the fleet by approximately 125,000 vehicles in the quarter.

Excluding the fleet, Hertz’s cost performance was mixed in the quarter with direct operating costs 6% lower YoY reflecting lower fuel costs, the closure of the off-airport locations and the benefit of foreign currency in the International segment. However, SG&A expenses were 12% higher YoY reflecting costs associated with the financial reporting remediation, separation costs, and the expansion of the sales staff. As a result, DBRS-calculated operating efficiency (direct operating expenses + SG&A/ total revenues) weakened by 120 basis points to 66.9% from 65.7% a year ago. Nevertheless, given the Company’s focus on removing excess costs over the next 18 months, DBRS anticipates that the operating efficiency ratio will improve over the medium-term.

DBRS rates The Hertz Corporation’s Issuer Rating at BB (low) with a Stable trend.

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