Hertz announces new US rental car fleet strategy

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Written by Linda Hohnholz

NAPLES, FL – Hertz Global Holdings, Inc today announced a new fleet purchasing strategy to improve the US rental car business’s competitive position and customer experience.

NAPLES, FL – Hertz Global Holdings, Inc today announced a new fleet purchasing strategy to improve the US rental car business’s competitive position and customer experience.

Additionally, the Company is implementing a global cost reduction program that is expected to result in approximately $100 million of run-rate cost savings by year end 2015.

Linda Fayne Levinson, Independent Non-Executive Chair of the Hertz Board, said, “We believe the actions we are announcing today will strengthen the Company’s competitive position, improve customer satisfaction and drive financial performance. The Hertz team is fully aligned to execute on these key priorities.”

Brian MacDonald, interim Chief Executive Officer of Hertz, said, “The actions announced today are already underway, and are an important part of our efforts to improve the Company’s operating and financial performance and focus on the highest-return opportunities. While we are quickly moving forward, it will take time for the full benefits to be reflected in the Company’s results.”

New Fleet Strategy for the U.S. Rental Car Business

Mr. MacDonald continued, “The Hertz Board and management team have determined that a comprehensive modification to Hertz’s U.S. fleet strategy is necessary to establish a more competitive product position, improve the customer experience, provide greater flexibility for demand fluctuations and better protect against a fluctuating used-car sales cycle.”

Hertz will purchase roughly 350,000 model year 2015 vehicles in the U.S., approximately 60% more than the model year 2014 vehicles. Approximately 25% of the model year 2015 fleet buy is being delivered in the fourth quarter of 2014. Approximately 70% of the U.S. operating fleet is expected to be risk vehicles in calendar year 2015 versus approximately 85% in 2014. As the Company strategically transforms the U.S. fleet, the average U.S. risk-car holding period for 2014 and 2015 model year vehicles is expected to be substantially lower than the 2013 model year holding periods.

Financing for the fleet purchase will be funded through the Company’s revolving credit facilities, which were recently amended to extend maturities and provide incremental growth capital.

To accelerate its fleet transformation, the Company increased its fourth quarter 2014 U.S. risk vehicle dispositions by 45% versus plan, targeting its highest mileage vehicles. As of the end of October, approximately 40% of the sales planned for fourth quarter 2014 have been completed.

For the full year 2014, U.S. car rental monthly depreciation per vehicle is expected to be approximately $280 – $300 per unit, which is higher than forecast primarily due to the accelerated disposition timeline and weaker residual values.

$100 Million Cost Reduction Program

The Company is implementing actions to reduce costs by approximately $100 million annually, primarily through reduced general and administrative expenses, reduced information technology and capital investments, a reduction in external strategic advisor expenses, and a previously announced freeze to its pension plans. The Company expects to achieve the full run-rate of these savings by year-end 2015.

Accounting Review and Financial Restatement Process

Today, the Company filed a Current Report on Form 8-K announcing that although its accounting review and investigation are ongoing, the Audit Committee of the Hertz Board of Directors has concluded that additional proposed adjustments arising out of the accounting review are material to the Company’s 2012 and 2013 financial statements. Therefore, in addition to the 2011 financial statements, the 2012 and 2013 annual and quarterly financial statements must be restated and should no longer be relied upon. The financial information set forth in this release is subject to change based on the completion of the investigation and review, and such changes may be significant.

In addition to the 2011 financial statements, as previously disclosed, the further requirement to restate the 2012 and 2013 financial statements, will further lengthen the period for completion of the applicable accounting activities. Hertz does not currently expect to complete the process and file updated financial statements before mid-2015, and there can be no assurance that the process will be completed at that time or that additional adjustments may be identified.

Hertz is continuing to work closely with PricewaterhouseCoopers LLP, its independent registered public accounting firm, and is putting all of the necessary resources and efforts into resolving these accounting matters. Remediation activities are also underway.

Hertz Equipment Rental Business Separation

Hertz remains committed to the separation of its equipment rental business and is continuing to advance those plans, although the timing of the actual separation will be delayed and will not occur until after the Company has completed its accounting review and filed the necessary updated financial statements with the SEC. The Company intends to then file a Form 10 with the SEC which will need to be reviewed and declared effective by the SEC before the separation can occur.

2014 Third Quarter Business Update

For the third quarter ended September 30, 2014, the Company is providing the following operating highlights:

Unaudited Revenue by Segment

Three Months Ended
September 30,

Percent Increase/

Nine Months Ended
September 30,

Percent Increase/

2014

2013

(Decrease)

2014

2013

(Decrease)

Revenue:

U.S. Car Rental
$ 1,761

$ 1,765

$ 4,971

$ 4,848

3%

International Car Rental
795

769

3%

1,915

1,838

4%

Worldwide Equipment Rental
415

402

3%

1,161

1,137

2%

All Other Operations
145

133

9%

425

392

8%

Total Revenue
$ 3,116

$ 3,069

2%

$ 8,472

$ 8,215

3%

U.S. Car Rental

Total U.S. car rental revenue was $1.8 billion in the 2014 third quarter, in line with the 2013 third quarter. The 2014 year-over-year revenue comparison is partially impacted by the termination of the Advantage vehicle sublease in November 2013. U.S. car rental segment revenue represents 57% of total consolidated revenue in the 2014 third quarter. As previously disclosed, the Company experienced a rapid, substantial increase in contracted bookings beginning in June 2014 due to a large new account win. While demand was trending ahead of plan, transaction days in the 2014 third quarter were tempered by tight fleets in the face of rising OEM recall activity.

In the 2014 third quarter, transaction days increased 5% year-over-year. U.S. rental car fleet efficiency was 80% in the third quarter.

U.S. car rental total revenue per day (RPD) decreased 4% year-over-year. For the Hertz brand on airport, total RPD was flat on a 2% decline in transaction days. Mix-adjusted total RPD in the third quarter was down 2%. The more limited fleet availability continued to have a counter-intuitive effect on the Company’s rental car pricing in the third quarter. Fulfilling the larger amount of contracted business consumed the majority of available fleet. This left the company without inventory to capture more of the higher-rate leisure close-in rental reservations, which also typically generate greater ancillary sales.

International Car Rental

International car rental segment revenue was $795 million, a 3% increase in the 2014 third quarter, or 2% excluding currency effects, compared to the 2013 third quarter. International car rental segment revenue represents 25% of total consolidated revenue in the 2014 third quarter. The growth in revenue was driven by strong performance in Europe, which represented about 74% of the total International segment’s revenue. Europe revenue grew 3% as compared to the prior-year period, excluding currency effects, primarily driven by the expansion of the Firefly and Thrifty value brands, as well as CCL Vehicle Rentals Ltd., the Company’s insurance replacement acquisition from June 2013. Europe transaction days increased 4%. Total RPD declined 1% in the quarter due to the rapid incremental volume growth in the value segment as the Company rolls out its Thrifty and Firefly brands.

In the Asia Pacific market, New Zealand reported strong, year-over-year revenue growth in the third quarter and Australia gained market share as airport revenue grew 9% over the prior year versus the industry growth rate of 6%.

About the author

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Linda Hohnholz

Editor in chief for eTurboNews based in the eTN HQ.

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