Herc Holdings Inc (HRI) 2012 Q1 法說會逐字稿

(Operator Instructions). Welcome to the Hertz Global Holdings, 2012 first quarter conference call. The Company has asked me to remind you that certain statements made on this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are not guarantees of performance and by their nature are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only of this date and the Company undertakes no obligation to update that information to reflect change circumstances. Additional Information concerning these statements is contained in the Company's Press Release regarding it's first quarter results released yesterday and in the risk factors and forward-looking statement section of the Company's 2011 Form 10-K quarterly reports.

Copies of these filings are available from the SEC, the Hertz website or the Company's Investor Relations Department. I would like to remind you that today's call is being recorded by the Company and is also made available for replay starting today at 12.30 PM Eastern Time today running through May 17, 2012. I would like to turn the call over to our host, Ms. Leslie Hunziker.

Thank you, good morning. You should all have our Press Release and associated financial information. We've provided slides to accompany our conference call that can be accessed at our website at www.hertz.com on the Investor Relations page.

Today we'll use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers in our Press Release and at the back of the slide presentation, both of which are posted on the website. We believe that our profitability and performance is better demonstrated using these non-GAAP metrics. Our call today focuses on Hertz Global Holdings, Inc. which is a publicly traded company.

Results for the Hertz Corporation will differ only slightly as explained in our Press Release. With regard to our IR calendar, this month we will be presenting at the Wells Fargo Industrial Conference on May 8th in New York City.

This morning in addition to Mark Frissora, Hertz Chairman and CEO, and Elyse Douglas, our Chief Financial Officer, on the call we have Scott Sider Executive Vice President and President of Vehicle Rental and Leasing the Americas, Michel Taride Executive Vice President and President of Hertz International, and Lois Boyd Executive Vice President of Hertz Equipment Rental Corporation.

They'll be on hand for the Q&A session. Now I'll turn the call over to Mark.

Good morning, everybody, thank you for joining us. Let start on slide 6. You can see that 2012 is off to a strong start. Consolidated revenue was up 10.2% worldwide in the first quarter.

This growth together with incremental cost savings of nearly $100 million led to a 25% increase in corporate EBITDA year-over-year. Which translated into a 130 basis point margin improvement. an adjusted pre-tax income was $29 million reversing last year's loss, and we reported adjusted earnings of $0.05 per share. A record first quarter result.

As always there were lots of puts and takes quarter, but in the end our more efficient cost structure, the ongoing macro recovery in the US and the benefits from our strategic growth initiatives prevail. Strong contributions in North America from both rental car and equipment rental more than offset the challenges resulting from the weak European economy.

In particular in the US on slide 7 rental car revenue was up 5.3% supported in part by another strong increase in in-bound revenue to the US. Adjusted pre tax margin was 10.7% in the latest period which marks a new first quarter record and reflects 240 basis point increase over last year. This earnings performance had multiple catalysts as you can see on slide 8. Let me add some color.

US rental car volume increased nearly 10% with airport transaction days for Hertz Classic and Advantage Brands up 9% and off airport transaction days up 11% higher. US fleet expanded by 8.4% on the higher demand as we ramped up fleet-sharing initiatives between brands and businesses and average rental increased 1.5% driven by more leisure and insurance replacement transactions.

On slide 9 revenue per day was down 3.9% in the US but our airport leisure RPD excluding Advantage declined only 2.4%. Advantage experienced the most pricing pressure in the first quarter as the number of competitors in the deep value segment of the market is growing. Right now these regional competitors are able to sacrifice price per share as long as high residual values continue to provide a profit cushion for them. However, as we've seen historically, as used cars residual values normalize prices rise so the profit stability is maintained.

If we adjust total revenue per day for growth in lower RPD businesses like Advantage and insurance replacement pricing was down 3%. Pressure is coming from US airport corporate pricing which fell 3.6% year-over-year. It's important to note that our largest commercial accounts revenue grew twice the rate of all our commercial accounts thus putting downward pressure on revenue per day.

Greater operating efficiency allowed for 55% of US rental car incremental revenue to flow through adjusted pre-tax income. On slide 11 of the total cost savings secured by US rental car in the quarter, about 2/3 came from depreciation which improved by 11.4% or $32 on monthly per unit basis. Slide 12 illustrates of the depreciation improvement only 35% was attributable to a generally stronger used car market driven by tighter OEM production levels, low off-lease supply for late-model vehicles and improving macro economic conditions.

36% of the savings was achieved by Hertz through strategic and opportunistic fleet buying and vehicle rotation which benefited from a 84% risk fleet. Finally, 29% of the monthly depreciation per unit savings resulted from concerted efforts to increase sales to higher return channels like direct to dealer and direct to consumer. In the first quarter, consumer direct channels represented 14% of our total used car sold, a 109 basis point increase over last year or 92% increase of number of units sold at retail.

As you know consumer direct sales generate about $1,100 net more per vehicle than whole auction sales. In addition to depreciation savings we reduced US rental car direct operating and SG&A expenses as a percent of sales by 60 bps in the quarter through a continuation of lean and fixed sigma initiatives. The culmination of all of this was a 35% improvement in adjusted pre tax profit in US rental car.

This was achieved despite higher fuel expense and milder weather which softened demand in ski destinations and lowered the number of insurance claims in the industry. Moving to slide 13 overseas operating conditions in Europe remain challenging, and we had a tough year-over-year comp in the first quarter.

Last year European revenue was up 8% on 6% more transaction days. Keep in mind the strength in Europe in 2011 continued into April before beginning to deteriorate last May. So far this year we've seen rental car revenue decline year-over-year across our major regions. In total our European revenue fell 8.7% in the first quarter.

Excluding currency, revenue decreased 5.3% year over year with a similar level of decline in each of the first three months. For the quarter volume was down 3.2% and pricing declined 5.6%. However, if you exclude the negative mix impact of our growing Advantage discount brand the pricing decline was only 3.7%.

Higher rates on commercial accounts are more than offset by declining leisure rates reflecting weak discretionary travel trends. However, we believe European revenue has stabilized recently and advanced reservations are positive now for the summer. We are taking this opportunity to streamline Administration and Support function across the continent against a difficult economic background this restructuring will strengthen the business and create a leaner cost base.

Europe represented 67% of non-North American rental car revenue in the first quarter. The balance comes from Australia, Brazil, New Zealand, Puerto Rico, and China. Because our other global competitor reports international results, I thought it would be helpful if I quickly run through ours. Non-North America revenue declined 3.4% in the first quarter or 1.8% excluding currency.

Transactions days were relatively flat year-over-year. Revenue per day was down 3.5% but only 1.9% when you exclude negative currency translations. Now let's talk about equipment rental on slide 14.

The industry recovery and our penetration into new markets, geographies and accounts through acquisitions led to an increase of roughly 14% in rental rate revenue worldwide. In North America, rental rate revenue grew 17% driven by strong markets in US and Western Canada. In the US rental rate revenue increased 20% year-over-year.

The positive pricing environment continues with increases in both national account contract rates and local non-contract rates in North America. Our national accounts generate much higher volume, rent larger pieces of equipment and are more resilient than local business over the cycle. However, it's faster to increase prices on non-contracted rentals, given the fact that they have no rate commitment terms. In the first quarter national accounts represented 55% of domestic equipment rental rate revenue.

In the 2012 first quarter, worldwide volume growth of 9.3% was led by oil and gas and power generation projects, as well as greater overall rental penetration as more companies turn to renting versus buying equipment. North American volumes increased 10.5%.

As you know, in the first quarter we completed two acquisitions, Cinelease, and entertainment services lighting company, and RPL, a rental provider of construction equipment for the New York market. Both acquisitions provide access to customers in regions and markets where previously we had little exposure and we're tracking well ahead of our initial expectations.

Our strategy to balance the core non construction business with industrial, entertainment and pump and power has provided a continued profitable performance while we await the return of the non-res construction market where lending is tight and projects have been delayed. Despite spending being down 25% in the first quarter according to McGraw Hill, our non-res increased double digits in North America.

We are well positioned to take advantage of the upturn we expect to see later this year. In the meantime, further penetration of the less cyclical industrial and entertainment services segment is paying off through revenue growth, better utilization and operating cost controls driving profit. Five more equipment rental locations completed our Project Lighthouse last quarter, bringing the total to 28 since inception.

Direct operating and SG&A expenses as a percent of sales improved by 180 basis points in the quarter due to Lighthouse process standardization and efficiency improvements. Even with the incremental investment in sales, marketing, fleet and staff, equipment rental employee productivity was up 12.8% in the quarter. All this drove a corporate EBITDA increase of 17.4% reflecting 150 basis points margin expansion for equipment rental in the first quarter.

I'll take a minute to state the obvious. The equipment rental industry has been disconnected in the way it reports financial metrics. With the help of ARA rental market metrics which provides equipment rental companies a consistent way of calculating and reporting performance measures we hope to able to better benchmark our operating effectiveness against the industry recognizing that equipment mix will be a driver in differentiation.

As Elyse takes you through the details of our first quarter results she'll reference both our historical and the new ARA calculations. Before I turn it over to Elyse I want to touch on guidance on slide 15. 2012 is clearly trending ahead of plan.

As a result we've updated our guidance reflecting an increase in equipment rental volumes, greater cost savings opportunities, a lower interest expense projection, stronger than expected residual values in the US for car and equipment rental and incrementally higher down wind revenue.

Keep in mind that most of our original conservatism was built in the back half of the year reflecting the uncertainty of the impact of the political election on consumer confidence in US. the weakened environment in Europe, China's slowing economy and the affect on Australia and the political instability in the middle east oil prices.

These are still concerns. One of the reasons why we're accelerating our efficiency programs. We're expecting cost savings to be $300 million, 20% higher than our original guidance. Our strategy is always to be proactive in volatile environments rather than reactive. Let me turn it over to Elyse for detailed financial review of the last three months and then I'll come back and give you color on the second quarter.

Thanks, Mark. Good morning, everyone. Let me begin on slide 17 by reviewing our financial results on the GAAP and adjusted basis.

Consolidated revenue for the quarter was up 10.2% to $2 billion with the Global Rental Car Division growing 9.8%, and worldwide equipment rental revenue reporting 12.6% revenue improvement. As Mark mentioned in the first quarter we generated cost savings of $100 million. Approximately half of those savings came from direct operating expenses, in particular fleet-related costs primarily lower vehicle damage.

Improved collections, favorable vendor negotiations and milder weather drove the improvement. Reduced employee cost also contributed as labor efficiency improved 2% for the quarter from the prior year. Slightly offsetting this was a 40 basis point increase in SG&A expense as a percent of revenue mainly due of higher advertising spending which was up 25% year-over-year.

We achieved record first quarter growth for adjusted pre tax income of $29.4 million, a 284% increase year-over-year. GAAP, pre-tax income improved 76.8%, or $122.1 million. This translated into adjusted earnings per share improvement of $0.08 per share over the prior year loss of $0.03 and a 59.4% improvement on a year-over-year basis.

Let me give you more detail on the financial performance trends by business unit. Starting with US Rental Car on slide 20, total revenue improved 5.3% in the first quarter including ancillary revenue growth of 8%. Offsetting the lower RPD that Mark already discussed was strong transaction growth of 9.6% primarily due to a 12% increase in leisure demand and 9.3% increase in commercial volume.

Slide 21 outlines our progress in expanding the off airport and Advantage businesses during the quarter. Starting with off airport, we continued to expand our footprint opening 69 new locations in the first quarter. Off airport revenue increased 8.2% year-over-year, driven by 17.2% higher leisure volume and 9.7% higher insurance replacement volume. On average our revenue with the top five national insurance agencies grew 24%.

Our worldwide Advantage brand expanded in the first quarter with revenue up 40% due to the seasoning and expansion of locations and greater consumer visibility. Over the past 12 months we opened 40 locations globally with seven opening in the first quarter of 2012. Other location expansion plans include additional affiliates and franchise partners around the globe.

In the US fleet efficiency increased 570 basis points to a record 91% in the quarter. All of this led to an 85% improvement in worldwide adjusted pre-tax and a margin increase of 180 basis points over the prior year period. Now I'd like to turn to our equipment rental business as outlined on slides 23 through 27. Worldwide Hertz total revenue was up 12.6% in the first quarter of 2012.

Our specialty categories like entertainment services and energy services along with our penetration in the oil and gas market and acquisitions are helping to offset continued macro-pressure in Europe. As Mark mentioned, we've adopted the America Rental Association standardized and methodology for key metrics including pricing utilization and fleet age. We're benefiting in a few ways from these new standards.

First, today's new methodology on calculating price changes the basket of fleet used to index price year-over-year. Our pricing results improved using the new method as historically we were using more conservative calculations. Secondly, while our reported fleet agent utilization did not change materially the new methodology improved our results relative to competition.

As you can see on slide 24, using the ARA methodology in Q1 improved our pricing by 80 basis points, and pricing has been positive every quarter since 2010. In the first quarter worldwide pricing improved 3.7% with pricing up 5.5% in the US and up 4% in North America. The improvements were mainly driven by 9.4% increase in non-contract pricing in the US.

I'd like to point out that Cinelease data is excluded for these metrics due to nature of the business where volume and pricing are attracted by project versus specific piece of fleet. We are currently working toward integrating the system so the Cinelease assets can be tracked using the Hertz methodology. Slide 25 outlines our strong earnings performance in the first quarter of our world wide equipment rental.

Adjusted pre-tax income of $25.9 million improved 153.9% over the prior year period. The adjusted pre-tax margin of 8.6% was a 480 basis point improvement over last year and a direct result of our focused effort on productivity, process improvements and tightly managed operating costs.

In addition to the direct operating and SG&A improvement we increased time utilization by 470 basis points in North America as result of operating efficiency and demand. Revenue flow through to corporate EBITDA was 47%, compared with 37% last year. We estimate that the recent acquisitions have a 4% to 5% drag on the flow through during the first 12 months.

We're anticipating a 60% flow through for the full year excluding acquisitions. You have to keep in mind that the first quarter is historically our lowest revenue generating quarter, and on top of that this is an investment period for Hertz. During the quarter we spent $165 million to refresh and grow our fleet to address the accelerating demand shown on slide 26.

The average equipment fleet age is down one month from the fourth quarter in 2011, to under 47 months, which is more than three months younger than last year. We continue to see improvement in sales of used equipment as values approach pre-recession levels. World wide sales proceeds were 51% of original equipment cost in the first quarter.

920 basis points higher than last year's results. Moving to slide 28, interest expense for the first quarter was $162.3 million, a decrease from 2011 from $34.6 million. The decline is primarily due to non cash financing charge write offs associated with the $4.4 billion in refinancing activity last year.

Cash interest expense was flat year-over-year as lower rates related to our refinancing offset higher interest due to higher fleet levels in the inclusion of $835 million of ABS debt for Donlen. During the quarter we issued $250 million in high yield notes at the maturity of 6.05%. The proceeds, along with corporate liquidity were used to redeem our highest rate US and Euro notes that were due in 2014.

This refinancing lowers our interest expense this year so our full year interest expense outlook is flat to up $10 million over 2011. Restructuring and restructuring related charges are shown on slide 29. In the first quarter these charges were $10 million, compared with the prior years $5.4 million.

This is a continuation of our 2011 initiative to streamline the Hertz business, rationalize our global workforce and address the difficult economic environment in Europe. During the first quarter we closed several European car and equipment rental locations and reduced our workforce by 65 people.

Cash flow from operations for the quarter was $492 million, an improvement of $326 million over the prior year, primarily due to the timing of interest and other corporate payments as well as an increase of net income of depreciation and amortization. Corporate cash of flow $282 million compared with $350 million last year. Despite higher growth in fleet year-over-year corporate cash flow before acquisitions improved by $249 million, reflecting higher earnings, better fleet working capital performance and improved average advance rates.

Turning to slide 31 at the end of the first quarter we had approximately $1.5 billion of corporate liquidity available. And our corporate leverage ratio continued to improve declining to 2.8 times down from 3.3 times in 2011. While we no longer have financial covenants in our credit facility, reduced leverage illustrates the progress we're making to achieving investment grade status.

Finally we have no major debt maturities this year. This year our financing activity will focus on establishing the term ABS platform for Donlen and refinancing select fleet debt in Europe. With that I'll turn it back to Mark.

Thanks, Elyse. I'll start on slide 33, despite the risk in the global macro environment we're comfortable increasing our annual guidance as a result of acceleration of cost efficiencies and a better delivery of US growth initiatives.

In the US in the second quarter volumes continue to accelerate. In fact, in April airport demand remained strong. While Advantage and off Airport reported double digit increases. Higher demand is coming from general improvements in the economy, incremental investment in advertising, new locations and continued roll out of new products and services.

Today we have 122 virtual kiosks in operation worldwide. 91 of the airports and 31 off-airport. We expect to have 500 video kiosk in operation worldwide by year end. In addition we're offering Gold Choice in 52 locations currently and expect to have it available in the final seven locations later this year.

Gold Choice is a new program that gives customers the security of reserving a car in advance or the freedom to choose another from the Gold Choice aisle upon arrival. As always, with either choice you save time by bypassing the counter. Gold Membership is now free to anyone.

We believe our fleet plan is sized appropriately to capitalize on all of these opportunities. In terms of pricing, total RPD should improve sequentially in the second quarter. With the biggest upside coming from leisure rentals at airports. Advance reservations for the summer peak are already robust. We're pleased at the indications that Advantage pricing is trending positive year-over-year from May forward with the pace of volume growth accelerating.

Our growth outlook supports American Express data showing US consumers are planning to spend 11% more on vacations in 2012 than last year. The national average price per gallon of gasoline at around $3.83 has fallen for three weeks in a row for the first time since December. An early March gallop survey concluded the price of roughly $5.30 a gallon would be the tipping point for consumer sentiment. Finally, residual values are stronger than anticipated and in our efforts to diversify our sales channel are progressing faster than planned.

As a result we now project full year monthly depreciation per vehicle in the US will be down 2% to 5%, from a 2011 rather than up 2% to 3% as originally guided. In the second quarter, we expect depreciation per unit to increase slightly over last year, as the cars being sold have incurred less depreciation than the cars sold in 2011 and more reflective of the current residual values.

In terms of Donlen during the quarter we focused on sales of assimilation which is very productive with leads being passed both ways between Hertz and Donlen. There are currently 315 qualified leads in the pipeline and twelve new accounts have been signed by Hertz and Donlen since January.

In March Donlen realized its largest win since the acquisition by leveraging new Hertz products created specifically for the fleet industry. For equipment rental we're taking delivery of incremental new fleet first quarter and continuing to sell older, used equipment. By the end of the first half we expect to have 60% of our $700 million fleet buy completed for 2012. New fleet is one way we're delivering revenue growth, further penetrating new markets is another.

We're continue to pursue acquisition opportunities targeting companies with higher than average ROI potential in the fastest growing areas of the market. Including acquisitions, we expect equipment rental revenues to be up 15% over 2011, or up 16% when you exclude negative currency adjustments. Finally our franchising initiatives are progressing nicely. We're in discussion with multiple prospects in the US and Europe and expect to close some of these transactions in the second half of the year.

For 2012 in terms of guidance, we weighed the incremental upside with the potential risk turning to slide 34 we improved our full year earnings per share forecast 9.5% over previous guidance and 42% over 2011. These improvements are specifically driven by our expectations for higher cost savings and reduced cash interest and US depreciation expense partially offset by higher depression into Europe and incremental investments in new products and emerging markets. Continued cost management discipline while leveraging the investments we made in growth should enable us to achieve our now more aggressive performance targets.

Before we open it up for questions I would like to provide an update on where we stand in our efforts before the FTC with respect to a possible acquisition of Dollar Thrifty. We believe we have made substantial progress towards our goal to obtaining anti-trust clearance that would allow us to consider the terms on which we might move forward on that acquisition.

We have agreed on the material terms of a divestiture of our Advantage business with the potential buyer and provided those terms to the FTC staff. We're optimistic this divestiture will satisfy the FTC staff. In addition, Hertz has made significant progress in negotiating a draft consent order with the FTC staff.

We're working with the FTC staff on the next steps toward obtaining a final consent order from the FTC. Having said this we want to focus this call on the first quarter results and guidance accordingly we will not be taking any questions about the potential divestiture or Dollar Thrifty. Let's open it up for questions now, Operator.

(Operator Instructions). We'll start with Chris Agnew with MKM Partners.

Good morning. I was wondering if you could give an update on your franchising initiatives.

I kind of did that. You want more detail. We have several large projects we're working in the United States.

We have a large one in Canada, and we have two countries in Europe, all of these deals are in the contract stage where we're negotiating the finer points of the contract. But these things, as you know, take time, and so that's why we're forecasting the announcement in the second half of the year. On both continents we have deals significant enough to talk about.

There will be a press release as we complete them. Several large ones in the US. As I say we're working on three counties and we feel confident in two of those in Europe. That's the most color I can give you.

The next question from Michael Millman from Millman Research Associates.

Could you talk about any concern that you have now with Avis realizing the residual reality I guess that they will reenter the competition for Dollar Thrifty.

I can't comment on that, Michael, as I discussed in my opening remarks. There is no comment on the potential Dollar Thrifty transaction.

Next we'll go to Rich Cross with Wells Fargo Securities.

Good morning, everyone. Mark, on HERC pricing you're up four in the first quarter guidance maintained for two to three. Where are the puts and takes in for the rest of the year? Your thoughts on the pricing for HERC.

I think our forecast maintains itself. I don't know if I want to say there is upside. There is a little upside on that with what we've been guided to in the past. A lot of it will be the mix of business that we gain over the next eight months. We feel pretty good that there's some upside, but I don't want to forecast too much at this point.

We'll go to John Healy with North Coast Research.

Thanks. Mark, you made a very interesting comment earlier in the call when you mentioned in the low end of the rental car market, these players are using price because of how strong the used car market is today. I want to get your thoughts in terms of how you guys think about the relationship between the used car market and the rental rates per day.

A lot of us feel that the industry is over earning because of how strong the used car market is. I want to get your thoughts on how confident you are if and when the used car market comes off the level we are if you'll get higher revenue per day at the counter and margins of the business will be maintained.

I'm very confident. We've seen it historically in the business model. It's not a trend different today than it has been the last 40 years. As you know, John, we've got a lot of histograms that support this.

When you have strong residuals oftentimes pricing does suffer. Once the residuals normalize, pricing improves, this is just typically the way it goes. This is the reason why we have the no-price competitors. It's not that they decided to enter the market.

It's because the market allows them to enter itself because of stronger residuals that allows them to play price without losing. Those people if they can get an anchor and enough share they may be able to maintain a momentum going forward. If not, they won't have staying power. We see this every time.

In periods of strong residuals low price competitors usually start up and pop up all over the place. This is not an one-time phenomena. It's pretty cyclical, actually. We feel the long-term profitability prospects of the whole rental market are strong and will continue to be strong because OEMs have rationalized capacity and we have a much better OEM universe.

People are better from a system standpoint on logistics. People are better on a cost basis due to lean programs for the industry. And the industry is enjoying the fact that, you know, we're all more sophisticated than we have been historically on pricing, understanding how to optimize price more readily and in a quicker way using technology than we have in the past. All those bode well overall for the rental industry all of those bode well for the overall rental industry.

We have follow up from Rich Cross, go ahead.

When we think about, I know you don't give quarterly guidance but when we think about the rest of year, last year's second quarter was pretty good because of the depreciation benefit. Do you view that as a tougher comp when you look at the balance of the year? Just some color on that will be helpful.

Absolutely. We'll have a tougher comp in the second quarter given the tsunami last year. It is driven most part by the strong residuals in the eight week period we had in the second quarter last year.

Our next questions from Bobby Jones with Highland Capital Management.

Hey guys, I was wondering if you could comment on the evolution of the rental car RPD, the US market specifically through the quarter.

I'm sorry, you want to repeat the question again.

Just how rental rates changed through the quarter? Basically consistently down kind of 3% through the quarter? Was it down more in January versus March? You know, there's comments from competitors perhaps putting through price increases in late February and March, and just wanted to know if you saw any flow-through from that.

Well, things improved sequentially. Pricing got better and better. As I mentioned in my script we're seeing that right now. Pricing has turned much more positive than it has in the first quarter.

We were tight fleet to begin with. We were right-fleeted for the quarter. But some of our competitors were over-fleeted. The bottom line, we think the dynamics of the quarter improved from at least where we sit today. It looks good right now.

We have no additional questions at this time.

All right. Well, thank you, Operator, and we thank everyone participating in this conference call. We appreciate your interest and we'll talk to you next time.