Elyse Douglas - Chief Financial Officer and Executive Vice President
Hertz Global Holdings, Inc. (HTZ) Credit Suisse 15th Annual Global Services Conference March 11, 2013 4:00 PM ET
We're going to get it started with Hertz Global Holdings. We have Elyse Douglas, CFO, with us.
Thank you, and good afternoon, everyone. So let's see if I get this right here. So before I get started, let me just point out our language around forward-looking financial statements, as well as the disclosure on the financials in the presentation.
And today, I'm going to talk about the transformation that's been going on within Hertz over the past several years. You can see that today, we have a very diverse global portfolio of businesses that I'm going to take you through. Within that portfolio, we have a number of double-digit growth drivers. Some of those strategies I'm going to highlight for them -- for you today.
We have a culture of operational excellence, and since 2006, you can see that in our Lean/Six Sigma projects that have taken over $2.9 billion of costs out of the business. During this period, we've been making investments, a lot of investments in technology. And I'm going to share with you some of the new products that you're going to be hearing more about around technology and its use in the Rent-A-Car space.
And these strategies have really all been put in place over the past several years, and now we're really going to be reaping the benefits in terms of seeing the profits and accelerated cash flow as a result. And in 2013, we've said that our target for corporate cash flow is going to be between $500 million and $600 million.
So here's a snapshot of Hertz today. It's, in 2012, a $9 billion revenue business, a little bit more than 84% in the rent in the car rental business and the balance in equipment rental. Within the car rental space, you can see we operate in 3 segments: in the airport segment, where we operate under the Hertz brand, and also now we've acquired Dollar Thrifty; the off-airport business today for us is a $2.7 billion business, and I'm going to talk about that because that's one of our key growth drivers; and then we also, in the end of 2011, bought Donlen, the leasing business, and I'm going to spend some time on that today as well.
In the equipment rental business, we operate in a variety of segments, the construction market, the industrial market. And again, that business has continued to do well over the past several years. So in 2012, our revenues were up 8.7% and our pretax income was up 32.5%.
Here's a snapshot of the global diversity of our business. Our corporate locations, you can see, span all major continents. And you can see on the bottom that in addition to our corporate exposure, both Hertz and Dollar Thrifty have active franchise exposures. So when you include the network, including the franchisees, you can see that we generate actually almost $14 billion of revenues through the brands out of 10,600 locations.
So let's look at the revenue trajectories since 2009. This chart shows that on a compounded average growth basis, we had 8.5% growth in the top line. That's really being driven by our Rent-A-Car operation, which is today is $710 million above 2007 peak levels, and that's in spite of the headwinds that we faced in Europe.
And on the equipment rental side, we're still below our peak levels, but really that's the opportunity that we see over the next couple of years as the economy continues to recover and the non-res business starts to rebound.
So over this time period, we have been deliberately building a portfolio of businesses to address our customers' mobility needs. With the Donlen acquisition, we have the leasing operations; Dollar Thrifty in the leisure space; Hertz On Demand, which is our car sharing offering; Cinelease is one of the market niche businesses that we operate in, in equipment rental; and then Rent2Buy is our retail car operations and Hertz Local Edition is our off-airport, and we're going to talk about that in greater detail.
So looking at our 4 double-digit growth drivers within our business today, we've got the off-airport business. That business is made up of commercial as well as leisure and as well as insurance replacement. That -- our insurance replacement business is growing at double-digit pace.
The Donlen business, which we offer integrated leasing and fleet management solutions to our commercial customers, again growing at a 14% rate in 2012. Our leisure business, which we were pursuing under the Advantage brand, but now with Dollar Thrifty, we have a well -- 2 well-established brands to compete in that marketplace. And in the equipment rental business, again, we've made a number of tuck-in acquisitions. And with the non-res construction rebound not yet occurring, we have significant amount of runway on top of the double-digit growth that we're seeing in that business already today.
So let me talk about each of these individually. The off-airport market is an $11 billion market. It is as big as the airport rental car market. Hertz, which we have a 26% share under the Hertz brand in the Rent-A-Car market, we only have a 12% share of the off-airport market as Enterprise has about an 80% share.
We've been able to grow our business with penetrating the insurance replacement business. Today, we are in all of the top insurance companies, and that's been double-digit growth over the past 2 years. I'm going to talk more today about how we're going to develop our off-airport market using a 24/7 branding, using our car technology, and I'm going to spend some time specifically talking about that technology in a few minutes.
We continue to grow our network. We had 300 -- approximately 300 locations per year annually. Today, we have over 2,500 locations and that's up from 1,500 in 2007.
While the off-airport market has lower RPD or revenue per day characteristics, it's got equally lower cost characteristics as well. And this chart shows that on a per-day basis, our labor costs, our DOE and our SG&A costs are significantly lower on a per-day basis versus the airport business. This is showing a mature off-airport location versus our average airport business. So you can see labor costs are 8% lower, DOE is 34% and SG&A is 48% lower.
In addition to that, the off-airport business has much longer rentals and that results in better utilization, so a 220 basis point improvement in utilization. So this is a much higher return on asset business. We don't have the same overhead that we have in the airports, we're not paying the concession fees. And that's the reason why it's been one of the key drivers of our growth and profitability over the past several years.
Let me move to Donlen. Again, this is our leasing company. We offer integrated leasing, fleet management and rental car solutions to our customers, so let me spend a little bit more time talking about exactly what services Donlen provides. On the acquisition side, we help companies buy fleet, we help them sell fleet and we help them do all the license and titling around it. We offer them vehicle fleet management services around vehicle maintenance, around damage maintenance, as well as fuel maintenance.
Our Telematics offerings really helped to drive improved driver productivity from a fuel usage perspective as well as a safety perspective.
And then we also have a very unique business within Donlen that allows us to, in addition to providing our equipment rental customers with our traditional short-term rentals, we can also offer a contracting firm, a long-term fixed-rate rental. And we do this in a syndicated market, so we actually don't own the fleet in the lease. We syndicate that to a third party, a bank, and so we provide all the fleet management services to a very asset-light aspect of the business model. And all of these services are provided through robust reporting and analytics.
Okay, moving on to the Leisure segment. You can see that Hertz participates in the premium segment of the market. We were not represented until the acquisition of Dollar Thrifty in that mid-tier segment, which is really a large and growing segment of the market. In fact very often, we would have to try to use the Hertz brand to penetrate that market, and now hopefully going forward, we'll be able to protect the Hertz brand within that premium segment and continue to grow in the mid-tier segment using the Dollar and the Thrifty brands.
Dollar Thrifty, in addition, compared to our Advantage brand, which we sold in order to get our FTC consent on Dollar Thrifty, we really -- was not a fair competitor to Dollar Thrifty. Advantage competes in the value segment, $250 million business versus Dollar Thrifty, which is much more significant and has a national presence.
So what exactly did we buy when we bought Dollar Thrifty? We bought a brand that had 1,580 locations, a fleet size of about 114,000 cars, $1.6 billion of revenues, $327 million of EBITDA with a margin of 21%. It took our airport market share from 26% with just Hertz to 37%, given that they have an 11% brand. But in addition to that, it gives us a much more significant presence in that Leisure segment on airport.
We believe that we have a number of strategies that will help us to leverage the new brands, the Dollar and the Thrifty brands, with our existing commercial and travel partners. And in addition to that, Thrifty really -- Dollar Thrifty really operated as a domestic brand, and outside the U.S., they were mostly franchised that we believe there's an opportunity for us to grow internationally as well.
Equipment rental, again growing 15% a year. One of the things that has been driving the growth over the past 2 years has really been the rebound in the industrial space. And you can see that in the charts on the middle of the page, on the far left-hand side, you can see that uptick in industrial spending.
The industrial market's grown 7%, but we've actually grown it twice that in 2012, more than twice that in 2012. And that's really a function of getting better pricing, as well as being able to take market share from some of those smaller midsized players who have not been able to invest in fleet.
The real opportunity for us is on the non-res side. Non-res has always been an important market for our equipment rental business, and you can see here that the non-res business was still down 10% last year, and it's been down 38% since 2007. So we believe that when the non-res business does rebound, we'll be able to get back to those profitability levels that we saw in 2007, which right now in 2012, we were still a little bit more than 30% below those peak levels of profitability so significant upside for us.
So as we've seen the industrial markets continue when we start to see some percolation in the non-res, we have been investing in the fleet. We've been able to bring the fleet age down from 50 at the peak down to a little over 42 months at the end of 2012.
In addition, our time utilization has improved significantly as well. On the left-hand bottom chart, you can see time used is up to 67%. And the middle chart really shows you how, since 2010, both pricing and volume have been in positive territory.
On the right-hand side, really looks at the investments we've made. So since 2010, we've made 11 tuck-in acquisitions. And they've really had specific market's needs that we've been addressing. So in the Cinelease, First Call, 24/7, that's really been our expansion into the entertainment services segment, which is a very fragmented part of the rental space and also noncyclical, so it helps to smooth out the cyclicality of our business.
Pioneer and Delta gave us a bigger presence in the oil and gas space, and Arpielle filled the geographic gap in the New York Metropolitan area, which is a very profitable market where we were underrepresented.
So I showed you a chart that had our revenues growing over the last 4 years at a compounded rate of 8.5%. This chart focuses on our profits, our adjusted pretax, which over the same period has grown at a 65.5% compounded rate.
And I think the important thing to note here is that this is in spite of the fact that Europe is still 73% below the peak from a standpoint of profitability and HERC is still 40%. So the strategies that we've been implementing have really helped to fuel that growth. And we do expect that margin expansion and growth in profits to continue in 2014. We feel confident in meeting our objectives of 15% -- 14% to 15% pretax margins.
Obviously, profits fuel cash flow. And this chart shows our cash flow from operations. And since 2009, our cash flow from operations has increased by over $1 billion. Some of that has gone into growing the fleet over this period of time, as well as some of those acquisitions.
In terms of 2013, we are going to continue to make some higher investments in technology as well as our facilities to upgrade our facilities. But that being said, our corporate cash flow, which is available for paying down debt or making acquisitions, we expect to be in the $500 million to $600 million range for 2013.
And beyond that, we expect the cash flow to continue to accelerate basically through improved profits and margins, as well as through our better capital management.
So what's behind our profits? Let me talk about a few key initiatives that are really driving those profit improvements. And one is in the area of the fleet. We've made a significant investment in developing our fleet management capabilities. So not only are we bigger in size, so with Donlen, we had a fleet of about 665,000 cars. We're going to be adding another 115,000 now with Dollar Thrifty. So we become much more -- our scale is much more -- is larger and will help us out on the acquisition side.
You can see on the top right-hand side our trends in fleet efficiency. And they've continued to improve throughout this period through our strategies to grow the longer rental lengths off-airport and Leisure markets, as well as the operating efficiencies we've been able to achieve on the airports.
And then we've been spending a lot of time and energy in developing remarketing channels. We've increased our fleet to an almost all-risk fleet. In 2012, our risk we had on average 76% of our cars were at risk and that's going to be 95% in 2013. And in order for us to feel comfortable with that shift, we've developed capabilities in terms of how we sell cars.
So in addition to the wholesale market, we now can sell directly to dealers, and we can sell directly into the retail to the consumer. And the benefits of those channels is that we actually get higher residual values in certain markets. So in the Dealer Direct market, we earn about $500 more per car, and in the retail market, about $1,100 more per car.
One of the things I also want to point out here is that we don't always track to the Manheim Index. The Manheim Index in 2012, which is a measure of the broad overall used car market, was actually down 130 basis points. Our residuals for 2012 actually improved by 400 basis points. And that's really a function of the fact that the market is again the overall broad market we sell in the sweet spot, that 12- to 18-month old car, and our ability to sell in different channels that I've mentioned here, which really help us to get greater residuals than we would otherwise.
And the acquisition of Dollar Thrifty creates a big opportunity for us here. They have a 94% risk fleet, and 64% of their sales were through auctions. They really didn't have much of a retail presence, so our ability to continue to sell their cars in remarketing channels creates opportunity.
In terms of our cost efficiencies, this really highlights the results of our Lean/Six Sigma programs. As I mentioned, took out $2.9 billion since 2006. We have, over the last 26 consecutive quarters, improved our labor productivity, and that was even during the recession. And what we've stated for 2013 is we expect another $300 million worth of cost savings, which will more than offset any impacts we have from inflation.
Now let me spend a minute on our technology because I think this is really exciting. We have really 2 different forms of technology. One is the video kiosks, which allows us to expand our off-airport presence on a very cost effective basis. So we do this by setting up a video kiosk rather than putting in bricks and mortar.
It'll also allow us to have -- be able to offer a rental at anytime during the day. In addition to that, we're combining our car technology for car sharing, our Hertz On Demand. We're going to equip that in the fleet, and that's eventually going to give us the ability to offer 24/7 service out of all our off-airport locations.
In addition to that, we've done -- we've rolled out a number of new technologies to enhance the customer experience: eReturns, which allow you to get your return receipt on your cell phone; and Mobile Gold alerts, which we've advertised as Carfirmation, you land, you get a text message or an email from us telling you exactly what car you have. At 25 airports today, you can actually select another car if you'd like and we'll automatically change that reservation for you or it'll even allow you to select an upgrade. So lots of exciting stuff we're going to be rolling out this year in the technology space.
Franchising. In 2000 -- over the last 3 years, we've franchised about $130 million of our corporate locations. We've done 2 major ones with Emil Frey in Switzerland and Roger Penske. As our business continues to perform, it gets harder and harder to franchise a corporate location. So really, our focus has been shifted a little bit toward looking at that white space, although we will consider -- continue to look at opportunities as they present themselves.
Over the past several years, we've done a tremendous amount to improve the balance sheet. We've maintained adequate liquidity throughout the period. We have our fleet debt pretty much for '13. It's either been completed or well on the way to being completed. We'll look at other opportunities to fund out that fleet debt. And you can see on the corporate debt side, we have no significant maturities until 2018. And in 2012, our average blended interest rate for total debt was 4%, and that was a 65-basis-point improvement over the prior year.
So where does that put us in terms of the outlook for '13? Here's our guidance in the upper left-hand column. You can see revenue growth of 21.4%, pretax growth of 48.6%, EPS growth of 44.9% and cash flow with the $500 million to $600 million. And the trajectory here for revenue pretax and corporate EBITDA are shown graphically.
This is the numbers to support the chart. The only thing I want to add here is the cash flow from operations. So you can see continued improvement year-over-year. And the difference between 2012, where our cash from operations was a little under $780 million, is $1.350 billion for 2013.
So given our strategies and all the work that we've done to put these strategies in place, we believe that we're going to see significant growth in profits and margins continue into 2015. So with that, let me open it up to any questions.
Maybe if you could just talk about your ability to do larger deals on the equipment rental side. It seems like there's been consolidation in that marketplace. Most of the deals you've done have been smaller. If you could talk to what you're seeing there?
Yes. We look at a lot of different transactions. And as I said, we've made a significant investment over the last couple of years. We'll continue to look at things in the equipment rental space. I think at this stage though, with what we've just completed with Dollar Thrifty, that we may pause a little in terms of something big, but I wouldn't rule anything out to be quite honest. But right now, our focus is really to take the pieces that we've put in place. We think there's a tremendous amount of upside. We think we can continue to grow organically. We are still investing in the HERC fleet. It's going to be about 20% less than last year, but last year was a big dollar amount in fleet investment, so we are still going to continue to grow that organically. And again, we'll look at things as they come along. But I think the focus will be on taking the businesses we have today and driving the profits and cash flow.
When you look at the technology initiatives, do you think that, that is going to lead you to lower the number of employees per location? Or do you think that it's just going to allow you to scale them better in the future?
I think it's both, right? One of the things -- we're going to use the technology both in the off-airport to offer that 24/7 because today, we don't staff our off-airport locations 24/7. We staff pretty much kind of like 8 to 6 during the week and only until 1 on Saturday and we're closed on Sunday. So this will be able to let us rent without having to staff up. In the airport businesses, we really used some of the kiosks to really manage the lines. So sometimes, we get these huge influx of customers at different points during the day. So rather than staff up to meet that demand, we'll use these video kiosks to really address that so that we don't have long queue lines and help with our customer satisfaction. Does that answer your question?
In the past, you guys have talked about a long-term goal becoming investment grade, and that's all a focus, and to that extent, for the $500 million to $600 million of cash flow that you're anticipating, what are some of the uses and targeted spots?
Sure. It is still a goal for us, and we think based on our outlook for the next couple of years that we think we'll be in the area of having the statistics for an investment grade company. We think it may take the rating agencies a little bit longer. It has a benefit to us. Certainly on the corporate debt side, we think there's probably about 200 basis points of margin improvement on the financing side, but it will obviously give us a lot more flexibility. And give us -- we'll be able to use that cash more creatively than perhaps we do today. But today, the $500 million to $600 million, obviously, we're going to look to pay down debt. We will continue to look at certain investments. As I mentioned, we are going to be spending some investments in our technology. We continue to look at the emerging markets, and we may end up doing something in the emerging markets, but we're really looking to be balanced. But clearly, one of the goals is to reduce our leverage post-acquisition. Does that answer your question? Great.
Any other questions? Okay, I think that's my time. Thank you.
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