Hertz Announces New U.S. Rental Car Fleet Strategy
New $100 Million Cost Reduction Program Underway
Company to Restate 2011, 2012 and 2013 Financial Statements
Provides 2014 Third Quarter Business Update and Full Year Corporate EBITDA Outlook
Nov 14, 2014
NAPLES, Fla., Nov. 14, 2014 /PRNewswire/ -- Hertz Global Holdings, Inc. (NYSE: HTZ) ("Hertz" or "the Company") today announced a new fleet purchasing strategy to improve the U.S. 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
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%.
Worldwide Equipment Rental
Worldwide equipment rental segment revenue of $415 million increased 3% in the 2014 third quarter, or 4% excluding currency effects, compared with the prior year, impacted in part by a lower level of new equipment and parts sales. Rental and rental related revenue increased 4% year-over-year, or 5% excluding currency effects. Worldwide volume increased 4% in the third quarter 2014. Equipment rental pricing was 2% higher compared with the 2013 third quarter. Worldwide equipment rental segment revenue represents 13% of total consolidated revenue in the 2014 third quarter.
In North America, total equipment rental revenue was $373 million, 3% higher year-over-year, or 5% higher excluding currency effects. Rental and rental related revenue increased 4%, or 5% excluding currency effects. Volume in North America increased 4% in the third quarter 2014. Equipment rental pricing was 2% higher compared with the 2013 third quarter.
All Other Operations
The Company has grouped information about Donlen fleet leasing and management services together with other business activities, such as its third party claim management services, under "all other operations." All other operations segment revenue increased 9% over the same period last year. All other operations segment revenue represents 5% of total consolidated revenue in the 2014 third quarter.
The Company's Donlen leasing operation again delivered strong results this quarter, with revenue up 9% over last year driven by strong lease revenue and new account wins.
Selected Unaudited Financial Information
For the full year 2014, Corporate EBITDA is anticipated to be in a range of $1.30 billion to $1.45 billion, which reflects the impact of adjustments identified to date related to the Company's ongoing accounting review. Corporate EBITDA is primarily being impacted by lower U.S. car rental fleet efficiency and higher fleet maintenance, damage and depreciation expenses versus plan. The higher fleet depreciation is related to the recently accelerated vehicle disposal schedule as well as a greater-than-forecasted decline in residual values. Additionally, the disposal of obsolete equipment in the Company's equipment rental segment and costs associated with the accounting review are expected to contribute to the lower year-over-year profit forecast.
The Company noted that 2014 and 2015 should not be viewed as a base for the Company's go-forward financial results, given the unusual costs incurred associated with the accounting and financial review, the changes being implemented to improve the Company's competitive position and the expected timing for the associated benefits to be realized.
Commenting on the Company's outlook, Mr. MacDonald said, "We believe the lower revenue growth and higher direct operating expenses we are experiencing in 2014 are transitory, primarily associated with fleet and systems integration challenges related to the Dollar Thrifty acquisition as well as some execution issues. We are addressing the operational issues by strategically repositioning the fleet, hiring incremental sales and maintenance staff and migrating the Dollar and Thrifty financial and counter systems onto Hertz systems. Accordingly, 2015 will represent a transitional year with a more normal base performance becoming evident in 2016."
The Hertz Corporation operates the Hertz, Dollar, Thrifty and Firefly car rental brands in approximately more than 11,500 corporate and licensee locations throughout 145 countries in North America, Europe, Latin America, Asia, Australia, Africa, the Middle East and New Zealand. Hertz is the largest worldwide airport general use car rental brand with more than 1,400 airport locations in the U.S. and a presence at more than 250 international airports. Product and service initiatives such as Hertz Gold Plus Rewards, NeverLost®, Carfirmations, Mobile Wi-Fi and unique vehicles offered through the Adrenaline, Dream, Family, Fun, Green and Prestige Collections set Hertz apart from the competition. Additionally, Hertz owns the vehicle leasing and fleet management leader Donlen Corporation, operates the Hertz 24/7 hourly car rental business and sells vehicles through its Rent2Buy program. The company also owns Hertz Equipment Rental Corporation (HERC), one of the largest equipment rental businesses with more than 340 locations worldwide offering a diverse line of equipment and tools for rent and sale. HERC primarily serves the construction, industrial, oil, gas, entertainment and government sectors. For more information about Hertz, visit: www.hertz.com.
Corporate EBITDA is a non-GAAP financial measure. Management believes that Corporate EBITDA is useful in measuring the comparable results of the Company period-over-period. The GAAP measures most directly comparable to Corporate EBITDA are pre-tax income and cash flows from operating activities. Because of the forward-looking nature of the Company's forecasted Corporate EBITDA, specific quantifications of the amounts that would be required to reconcile forecasted cash flows from operating activities and pre-tax income are not available. The Company believes that there is a degree of volatility with respect to certain of the Company's GAAP measures, primarily related to fair value accounting for its financial assets (which includes the Company's derivative financial instruments), its income tax reporting and certain adjustments made to arrive at the relevant non-GAAP measures, which preclude the Company from providing accurate forecasted GAAP to non-GAAP reconciliations. Based on the above, the Company believes that providing estimates of the amounts that would be required to reconcile the range of the non-GAAP Corporate EBITDA to forecasted cash flows from operating activities and pre-tax income would imply a degree of precision that would be confusing or misleading to investors for the reasons identified above.
Cautionary Note Concerning Forward Looking Statements
Certain statements contained in this press release include "forward-looking statements." Forward-looking statements include information concerning the Company's liquidity and its possible or assumed future results of operations, including descriptions of its business strategies. These statements often include words such as "believe," "expect," "project," "potential," "preliminary," "anticipate," "intend," "plan," "estimate," "seek," "will," "may," "would," "should," "could," "forecasts" or similar expressions. These statements are based on certain assumptions that the Company has made in light of its experience in the industry as well as its perceptions of historical trends, current conditions, expected future developments and other factors it believes are appropriate in these circumstances. The Company believes these judgments are reasonable, but you should understand that these statements are not guarantees of performance or results, and the Company's actual results could differ materially from those expressed in the forward-looking statements due to a variety of important factors, both positive and negative. Some important factors that could affect the Company's actual results include, among others, those described under "Risk Factors" set forth in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2013, as amended, or that have been or may be disclosed from time to time in subsequent reports filed with the Securities and Exchange Commission, the thorough review of the Company's internal financial records that is being conducted, the additional time that may be required to complete the review and the ability of the Company to remediate any material weakness in its internal control over financial reporting.
Additional information concerning these factors can be found in our filings with the Securities and Exchange Commission, including our Form 10-K and our Current Reports on Form 8-K. You should not place undue reliance on forward-looking statements. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements. All such statements speak only as of the date made, and the Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
SOURCE Hertz Global Holdings, Inc.