Introduction
Hertz Global Holdings, a leading player in the car rental industry, has faced its fair share of challenges in recent years, but the company's unwavering determination to transform and adapt has positioned it for a promising future. With a seasoned executive team at the helm, Hertz is charting a strategic course to not only overcome past obstacles but also capitalize on emerging opportunities in the dynamic mobility landscape.
Company History and Structure
Hertz's rich history dates back to 1918, when it was founded as a car rental company in Chicago. Over the decades, the company has grown into a global powerhouse, operating in over 150 countries and offering a diverse fleet of vehicles to meet the evolving needs of its customers. However, the company's journey has not been without its share of ups and downs.
Hertz Global Holdings, Inc. was incorporated in Delaware in 2015 to serve as the top-level holding company for Rental Car Intermediate Holdings, LLC, which wholly owns The Hertz Corporation. The Hertz Corporation itself was incorporated in Delaware in 1967 as a successor to corporations that have been engaged in the vehicle rental and leasing business since 1918.
The company operates its vehicle rental business globally from company-owned and franchisee locations in North America, Europe, Africa, Asia, Australia, the Caribbean, Latin America, the Middle East and New Zealand. In addition to its core rental business, Hertz also sells vehicles through Hertz Car Sales. The company's revenues are primarily derived from rental and related charges, including worldwide vehicle rental revenues from all company-operated vehicle rental operations. These charges also encompass reimbursements for costs incurred relating to airport concession fees, vehicle license fees, fueling and electric charging of vehicles, as well as revenues associated with value-added services.
Recent Challenges and Restructuring
In 2016, Hertz underwent a significant restructuring when it separated its car rental business from its equipment rental business. This move was aimed at streamlining operations and focusing on core competencies. However, the company faced its most significant challenge in 2020 when the COVID-19 pandemic severely impacted its business, leading to the company filing for Chapter 11 bankruptcy in May 2020.
In 2020, Hertz faced significant challenges during the COVID-19 pandemic, which led to a sharp decline in travel demand and a significant impact on its financial performance. The company filed for Chapter 11 bankruptcy in May 2020, but after a comprehensive restructuring process, it emerged from bankruptcy in June 2021 with a strengthened balance sheet and renewed focus on operational excellence.
Post-Bankruptcy Transformation
Since its emergence from bankruptcy, Hertz has undergone a transformative journey, marked by strategic initiatives and a renewed commitment to delivering exceptional customer experiences. The company has streamlined its operations, optimized its fleet management, and invested in cutting-edge technologies to enhance its service offerings.
One of Hertz's key priorities has been the transition towards a more sustainable fleet, with a focus on electric vehicles (EVs). In 2021, the company made headlines by announcing a landmark deal with Tesla to add up to 100,000 EVs to its fleet, reflecting its determination to lead the charge in the shift towards eco-friendly transportation. This move not only aligns with the growing consumer demand for sustainable mobility options but also positions Hertz at the forefront of the industry's evolution.
However, the company's foray into EVs has not been without its challenges. In December 2023, Hertz identified a group of EVs (the First EV Disposal Group) for sale due to supply exceeding customer demand, elevated EV damage and collision costs, and declining EV residual values. In March 2024, a Second EV Disposal Group was identified for similar reasons. As of June 30, 2024, approximately 90% of the First EV Disposal Group and 60% of the Second EV Disposal Group have been sold, with the remaining vehicles written down to fair value less costs to sell.
Financials
Hertz's financial performance has been a mixed bag in recent years. In 2023, the company reported annual revenue of $9.37 billion and a net income of $616 million. However, the ongoing volatility in the used car market and the company's strategic investments in its transformation have weighed on its profitability.
For the second quarter of 2024, Hertz reported revenue of $2.35 billion, a 3% decrease year-over-year due to lower pricing, partially offset by higher volume. The company reported a net loss of $865 million for the quarter, primarily driven by a $706 million increase in depreciation and lease charges, net, as well as a $93 million increase in direct vehicle and operating expenses.
The company operates through two reportable segments: Americas RAC and International RAC. In 2023, the Americas RAC segment accounted for $3.67 billion (83%) of total revenue, while the International RAC segment contributed $766 million (17%).
For Q2 2024, the Americas RAC segment generated $1.93 billion in revenues, a 4% decrease compared to the same period in 2023, primarily due to lower pricing. The segment's Adjusted EBITDA was $403 million, an increase from $331 million in Q2 2023. The International RAC segment saw a 1% increase in revenues to $425 million, driven by higher volume partially offset by lower pricing. However, its Adjusted EBITDA decreased to $6 million from $96 million in Q2 2023.
Liquidity
As of June 30, 2024, Hertz had a debt-to-equity ratio of 5.76 and cash and cash equivalents of $568 million. The company also had $1.26 billion available under its First Lien RCF. Its current ratio stood at 1.41, and its quick ratio was 1.42.
Despite these challenges, Hertz's leadership team, led by CEO Gil West, remains optimistic about the company's long-term prospects. The company has implemented a comprehensive strategy focused on enhancing its operational efficiency, diversifying its revenue streams, and strengthening its customer relationships.
Strategic Initiatives
A key component of Hertz's transformation is its commitment to digital innovation. The company has invested heavily in developing a robust digital platform, enabling customers to seamlessly book, manage, and enjoy their rental experiences. This focus on technology has not only improved the customer experience but also streamlined internal operations, driving cost efficiencies and improving decision-making.
Moreover, Hertz has bolstered its executive team with seasoned industry veterans, bringing in leaders with proven track records in automotive, technology, and customer-centric industries. This infusion of fresh talent and diverse expertise has been instrumental in shaping the company's strategic direction and executing its transformation initiatives.
The company is currently focused on completing its fleet refresh and rotation, which is one of its highest priorities. A substantial portion of the fleet consists of vehicles with inflated cap costs that were acquired during a period of constrained volume discounts and trim packages. Hertz expects to rotate out these higher depreciation vehicles by the end of 2025, which should result in an average depreciation per unit per month in the low $300s by early 2026.
Hertz is also focused on growing unit revenue by culling low RPD (Revenue Per Day), low contribution demand, driving more quality revenue through direct booking channels, improving the customer experience, and growing value-added service revenue. Global RPD, while down year-over-year, was up 5% sequentially in Q2 2024, and the company expects year-over-year RPD declines to narrow in Q3 2024.
Future Outlook
For Q3 2024, Hertz expects demand to be strong but anticipates that days won't grow materially year-over-year due to intentional culling of low RPD business. The company expects RPD to be flat to slightly up 1%. Over the remainder of 2024, Hertz intends to manage its fleet levels below the same periods in 2023.
The company expects DPU (Depreciation Per Unit) to be elevated through 2024 before sequentially improving through 2025 until they near the end of the fleet rotation. When Hertz fully executes its transformation, which is likely to take the rest of 2024 and through 2025, the company is targeting RPD in the low 60s, DPU in the low 300s, and DOE (Direct Operating Expenses) per day in the low 30s.
Despite the challenges, Hertz remains optimistic about its future. The company's commitment to sustainability, digital transformation, and operational excellence positions it well to navigate the evolving mobility landscape and capitalize on the growing demand for innovative transportation solutions.
As Hertz continues its journey of reinvention, investors will be closely watching the company's ability to effectively manage the used car market volatility, optimize its fleet management, and deliver consistent financial performance. With a strong brand, a renewed focus on customer experience, and a talented leadership team, Hertz is poised to write the next chapter of its storied history and emerge as a formidable player in the car rental industry.