We’ve been waiting for Hertz to say something — anything — for months now. Today, we finally got some news. Even though it’s not good news, for Hertz, it must be at least a bit of relief. “We’ve got it out there, and now let’s begin moving on.”
In June, Hertz announced that it would restate earnings for 2011 and revise earnings for 2012 and 2013. Restating earnings is a big deal, revising earnings less so. So, industry watchers and analyst types interpreted it as a good sign that Hertz hadn’t come forward with new evidence to cause it to restate 2012 and 2013 earnings. That is, until today.
Today, Hertz announced that 2012 and 2013 earnings will be restated, and that its net income was actually $87 million less over those three years. That’s substantial, and apparently the review isn’t yet over. Right now, Hertz is sticking to its guns that the material errors result in non-fleet stuff, Brazil and vehicle damage collection amounts. Would those problems add up to $87 million in errors?
Hertz released revenue figures through nine months (finally!) and, on its face, experienced a 3% revenue increase in U.S. car rental over 2013. However, this isn’t exactly a same-store comparison, as Hertz integrated Dollar Thrifty mid-year last year.
As we say in journalism, Hertz buried the lead today, understandably focusing on some move-forward initiatives. As big as Hertz is, these moves will have some impact on the overall market.
It’s no secret that Hertz needs to de-fleet some aged vehicles. Today it announced a plan to purchase roughly 350,000 model-year 2015 vehicles in the U.S., an increase of 60% over 2014.
As Hertz is the second largest fleet buyer in the United States, you might think this would have a “Hoover effect” for other rental companies that might find supply scarcer and prices higher as a result. However, the major (and mid-major) rental companies already have their first- and second-quarter delivery schedules set with their manufacturers. Perhaps, the smaller rental companies would find fewer opportunity buys.
Nonetheless, as we heard in Ricky Beggs’ terrific presentation at Auto Rental Summit, new car sales in 2014 are projected to top out at 16.4 million units, a good 800,000 units over 2013. It looks like Hertz will be assuming some of that capacity.
Hertz said that 25% of that 2015 model-year buy will come in the fourth quarter of 2014. Noting that the fourth quarter is usually de-fleet time, Hertz will be buying substantially more than usual in the final quarter. That’s a lot of internal churn of assuming new cars into fleet and selling off old ones.
In a larger market sense, a 60% increase might also be a sign that Hertz believes demand will be strong.
Also of note is the fact that Hertz is reducing its risk units from 85% in 2014 to 70% in 2015. That means Hertz is fleeting up now with repurchase units that have shorter hold times. Those units will be returning into the used car market starting in six months, around the good selling months of April and May. This may put a damper on the spring market — especially as accelerated used car supply is already projected to accelerate depreciation from 13.8% in 2014 to 15% in 2015. You wonder if Hertz’s repurchase units will have a further dampening effect on prices.
At the very least, Hertz provided a clearer picture of financials today and how it will move forward. Hertz expects heavy fleet cost increases, which has the silver lining of price increases (we hope). We also hope that further issues related to its ongoing financial review will not provide any further bombshells. We can only wait and see.