Hertz CFO sees limited impact of rising interest rates on company’s finances

More than a year after coming out of bankruptcy,

Hertz Global Holdings Inc.

continues to enjoy strong bookings for its car rental services. The Estero, Fla.-based company is working to size its fleet to meet demand and maintain pricing discipline, which led to a 12% increase in third-quarter revenue to $2.5 billion and net income attributable to common shareholders of $577 million, compared with $571. million in the prior year period.

Kenny Cheung, who became CFO in September 2020over the past several quarters, managed the company’s finances with a focus on return on assets, which meant adding revenue streams, such as the sale of certain vehicles through

carvana Co.

the online platform of.

The WSJ’s CFO Journal spoke with Cheung about the Federal Reserve’s recent changes to interest rates, leverage and the metrics the company monitors to gauge the direction of consumer demand. . Edited excerpts follow.

Kenny Cheung, CFO of Hertz


Hertz Global Holdings Inc.

WSJ: How is Hertz impacted by rising interest rates? The Fed has put in place this week another 75 basis point hike.

Mr cheung: We have a strong balance sheet and our leverage profile protects us from interest rate volatility. Changes in interest rates have had limited sensitivity to our business, as approximately 75% of auto debt [Note: used to purchase vehicles] and 70% of the total debt has a fixed interest rate. If the underlying interest rates move by 1%, it will impact our profit and loss [statement] of approximately $30 million net at current debt levels. We do not have significant corporate debt maturities before 2026. Maturities of our asset-backed securities are generally between three and five years. On the variable part of the ABS, we have implemented an interest rate cap to manage our exposure to interest rate fluctuations.

WSJ: Do you see Hertz tapping into the bond or ABS markets soon?

Mr cheung: We are constantly looking for opportunities to manage our liquidity, both on the corporate finance side and on the vehicle side. Even in a rising interest rate environment, investor demand for ABS debt is still robust as these notes are rated investment grade as they are collateralized by the vehicle. We will consider modestly increasing our leverage as it makes sense, but given the current interest rate environment, we are funding the majority of our share buybacks from cash flow. available.

WSJ: How does Hertz’s history as a former bankrupt company influence your decision-making as CFO?

Mr cheung: The restructuring process we went through during Chapter 11 had several long-term benefits for the company. We have made structural improvements to the business. It started with our contract mix where we moved away from unprofitable contracts. Next, we looked at our segment mix and moved cars from unprofitable sectors to more profitable sectors such as leisure travellers.

WSJ: What does this mean for your cost base?

Mr cheung: From a cost improvement perspective, we closed unprofitable Hertz branches and reduced our interest expense by designing a more efficient ABS structure. Finally, we reset our balance sheet. In the pre-pandemic world, Hertz had high leverage, but in the post-restructuring era, we emerged with a low leverage balance sheet with much more financial flexibility.

WSJ: Are there some things you would do differently as a CFO now because of this story?

Mr cheung: We used the restructuring process as an opportunity to make structural changes to the business, increase financial flexibility and reset the company’s balance sheet. As a result, we are now a much healthier and more disciplined company than before.

WSJ: Are rapidly rising interest rates causing you to manage your working capital more effectively?

Mr cheung: We have always managed and will continue to manage the business in such a way as to optimize funds tied up in working capital and simultaneously seek to maximize liquidity to ensure maximum financial flexibility. Overall, our business has a very limited investment in working capital.

WSJ: What are you focusing your capital expenditure on?

Mr cheung: Our priorities remain to invest in our fleet, fund our strategic initiatives and return excess cash to shareholders. During the third quarter, we repurchased 27 million shares for $500 million. Overall, we spent nearly $570 million on capital investments and share buybacks during the quarter, all funded from operating cash flow. In addition, our liquidity position [was] still healthy at the end of the third trimester. Our available cash was $2.6 billion, comprised of $1 billion in unrestricted cash and the balance available under the revolving credit facility.

WSJ: What signals do you monitor for changes in consumer demand, and how often do you check these metrics?

Mr cheung: We continuously monitor the market for any changes in consumer demand for car rental services, whether up or down, by tracking several indicators on our dashboard. [Note: This includes forwarding booking rates and volumes, cancellation and no-show rates and Transportation Security Administration travel data.] Despite a risk of an economic slowdown, we see no evidence of weakness based on current bookings for the fourth quarter.

WSJ: To what extent do you hedge your currency exposure?

Mr cheung: The strong dollar had a rather limited impact on our activities. Approximately 80% of our business is denominated in US dollars and therefore we are already largely hedged internally. The strength of the currency does not seem to deter European travelers from booking rental cars in the United States during the holiday season.

The Federal Reserve raised interest rates an additional 0.75 percentage points to fight inflation, Chairman Jerome Powell said on Wednesday. Powell hinted at a possible slowing in the pace of increases. Photo: Al Drago/Bloomberg News

Write to Nina Trentmann at [email protected]

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