DBRS: Hertz 3Q Results Higher on Cost Discipline and Fleet Efficiency Gains, Revenues Flat

Summary:
• For 3Q15, Hertz reported net income of $237 million, up strongly from the year ago quarter period. Results benefited from good operating cost control and improved fleet efficiency.
• Revenue growth remains a challenge. Reported revenues were 5% lower year-on-year (YoY) at $3.0 billion, but were stable excluding foreign currency movements.
• 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) 3Q15 underlying earnings as reflecting early progress in the Company’s efforts to improve financial performance, while also demonstrating that more work needs to be done, especially in achieving revenue expansion consistent with industry peers. For 3Q15, on a U.S. GAAP basis, Hertz generated net income of $237 million, up from $149 million a year ago. On an adjusted basis, Hertz reported net income of $226 million, an 11% improvement YoY, excluding such items as restructuring charges, non-cash debt charges, Hertz Equipment Rental Corporation (HERC) spin-off costs and acquisition related costs. DBRS considers the improved profitability as demonstrating that the benefits of actions taken by management to improve the financial performance of the Company are being realized.

Hertz continues to make progress in reducing its cost structure to be more efficient and better aligned with its operating environment. For the quarter, the Company’s direct operating expense and selling, general and administrative expenses as a percentage of revenue improved by 290 basis points (bps) from the year ago period to 61.2%. Lower maintenance expense as a result of the recent fleet refresh and reduced employee compensation expense as a result of headcount reductions were key contributors to the improved operating efficiency. Further, process enhancements resulted in a higher percentage of damage billed back to customers driving an improvement in net damage collections, also a primary contributor to lower operating expenses. As a result, to date, Hertz has realized more than $150 million of the Company’s $200 million full year 2015 target cost savings, and its annualized target of $300 million by end of 2016. Given the Company’s focus on removing further costs through 2016, DBRS anticipates that the operating efficiency ratio will continue to improve over the medium-term.

Strong used vehicle residual values as well as a higher percentage of non-program vehicles disposed of through alternative channels served to contain fleet costs. For the quarter, net fleet depreciation per month was $267 per unit for the U.S. fleet, just 1% higher YoY. Importantly, Hertz reported a 300 basis point YoY improvement in U.S. fleet efficiency (transaction days divided by available car days) to 83% in 3Q15, partially due to the Company’s decision to capture some of the benefits of the strong used vehicle market by reducing the size of the fleet ahead of the traditional autumn de-fleeting season.

While management’s actions to remove costs are providing early benefits to earnings, improving revenue growth is more of a challenge reflecting slowing commercial travel volumes, lower pricing in the on-airport market and the Company’s decision to reduce its presence in the U.S. off-airport market. Total revenues for the quarter were $3.0 billion, 5% lower YoY, but unchanged from the comparable period a year ago, excluding the impact of the strong U.S. dollar. DBRS notes that the revenue decline in U.S. Rental Car was primarily driven by the off-airport business reflecting store closures earlier in 2015 and reduced fleet allocation to the business. In the key U.S. on-airport market, revenue was flat as volume growth offset weakness in pricing. Heading into 2016, DBRS will look for the Company’s initiatives to expand revenue to begin to take hold and support continued solid earnings generation.

Positively, despite the lackluster revenue performance, Hertz’s U.S. Rental Car operating margins improved 236 bps from the year ago period to 16% as cost discipline offset revenue constraints. Meanwhile, International segment operating margins were up 509 bps to 24% on solid revenue expansion, on a constant currency basis, a 6% reduction in net depreciation per unit per month, and improved operating efficiency.

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.