Internal Analysis
Financial Performance
When Hertz replace Chief Executive Officer (CEO) John Tague in January 2017, it was normal to feel the company’s investors where on edge as to what was going on. We can go as far as to think that some was thinking about selling their shares. Point in case, “Billionaire Carl Icahn, Hertz largest shareholder at 35 percent 29.3 million shares at the time was worth about $375 million, down from a high of about $1.3 billion (Billionaire Icahn Loses $179 Million…).
Mr. Tague took over the company from former CEO Mark Frissora, in which he inherited too many discounted cars sitting on revenues (Hertz Investors Bracing for More (pg. 2). With only three years in the position, Mr. Tague could not bring up the company’s earnings to shareholders expectation. The new CEO, Kathryn Marinello came from a financial background. Her career history stem from President and CEO of General Electric Financial Assurance to Stream Global Services Incorporated Chairman and CEO (Bloomberg).
According to (Pg. 4), she jumped right into the seat with we are going to fix it attitude. In detail, her fix-it plan consist of “Selling off Hertz’s bloated fleet of compact cars and family sedans and purchase more of the sport utility vehicles (SUVs) drawing greater demand” (Pg. 4). With rise in SUV sales in the United States, it make sense she went that route. Consumers are looking for comfort when they travel. Not only for themselves, but also families or friends traveling with them. SUVs are more spacious than regular cars. Not only are they spacious for passengers, many have room for luggage.
Indeed, some miracles don’t happen overnight, they go through a process. For this reason, newly inducted CEO Marinello first quarter reported a net loss from continuing operations of $223 million, $171 million more than that of FY16 first quarter (pg. 11). On the adjusted basis, “The Company reported a net loss for the first quarter 2017 of $134 million, or $1,61 diluted share, compared with an adjusted net loss of $67 million, or $0.79 per diluted share, for the same period last year” (pg. 11). (NEED TO EXPLAIN MORE AFTER RESEARCH ON WHAT THE NUMBERS MEAN)
The total revenues which include the United States rental car, international rental cars, and all other operations, $1.353 billion, $411 million, and $152 million consistently were $1.9 billion, a 3% decline compare to FY16 first quarter results (pg. 11-13). With this in mind, the “Adjusted corporate earnings before interest, taxes, depreciation and amortization (EBITDA) for the first quarter 2017 was a negative $110 million, compared to positive $27 million in the same period last year” (pg. 11). The numbers, although very high compare to FY16 1st Quarter should be expected. Marinello stated when she first took the position as CEO, her main concern in her primary focus will be Hertz’s customers (pg. 11).
Although most CEOs would concentrate on making their investors happy first, you cannot run a business without consumers. If you don’t have people to purchase or use your service, you will not have a company, so Marinello made the correct business decisions. It’s a great feeling to come first in any business decision. A happy customer will stay or become a loyal consumer.
In light of the great decrease in numbers compare to last year’s number, a great leader never focus on only one portion of a financial statement. Each section of the finance report is as important when it comes to financial management strategy. On a positive note, “The Company stayed on course with its fleet optimization plan, selling 21% more vehicles year over over and onboarding a richer mix of model year 2017 vehicles” (pg. 12). The plan to decrease the overstock of discounted cars was well on its way to be achieved.
Another positive outlook is the increase in the Company’s all other operations segment. This segment is main contributor is Hertz’s Donlen leasing operations. Hertz bought Donlen corporation in 2011 to provide “Long-term car, truck and equipment leasing and fleet management” (Hertz Completed Acquisition…). One of their goal is to allow Hertz to pay more attention to the center of the business by giving them the focus of the fleet (Donlen A Hertz Company). Well, the results of their goal reflected in the FY17 1st Quarter Financial Report.
According to (the report, pg. 13), “Company’s Donlen leasing operations reported a 6% increase in total revenues and an Adjusted Corporate EBITDA of $20 million, an increase of 18% versus first quarter last year.” With the information from the adjusted corporate EBITDA, along with Gross and Corporate EBITDA, management will use it internally to “Prepare the Company’s annual operating budget and monthly operating reviews, as well as facilitate analysis of investment decisions, profitability, and performance trends” (pg. 31).
Even though FY17 1st Quarter report numbers did not put Hertz’s shareholders at ease, it was clear that three months is not enough time to evaluate the new CEO fix-it plan. FY17 2nd Quarter Financial results reported a “Net loss from continuing operations of $158 million, or $1.90 per diluted share, including $54 million of impairment charges, compare with a net loss from continuing operations of $28 million, or $0.33 per diluted share, during the second quarter 2016” (pg. 38). Although the report is comparing the results with FY16 results, if it was to compare it with FY17 1st Quarter, net loss went from $223 million to $158 million, a $65 million drop, reflecting with time, things will improve with a good management team.
Hertz’s wrote off $30 million under impairment charges during FY17 1st Quarter. This action was more like testing the waters to see how far the Company can take it. As shown above in FY17 2nd Quarter, Hertz increase the number by $24 million. There are advantages and disadvantages when it comes to writing off impairment charges. According to (Pg. 88), “Under Generally Accepted Accounting Principles new rules, if the fair value is less than the carrying value, the goodwill is deemed impaired and must be charged off.” In that case, Hertz wrote off $54 million of goodwill items for FY17 2nd Quarter.
One good thing about these charges is they help investors keep up with their company’s management and the decisions they are making. However, leaving the decision to determine the value of a goodwill item opens up many door for unethical behaviors. Another disadvantage is “Increased impairment charges can reduce equity to levels that trigger technical loan defaults” (pg. 89). Coming from a financial background, newly hired CEO should be pretty much aware of how these write-offs works. With this said, it brings us now to Hertz’s third quarter financial report results.
Released on 9 November 2017, the anticipated results reported that Hertz Global Holdings, Inc. have a net income from continuing operations, not a net income loss. This income was $93 million or $1.12 per diluted share, an increase of $49 million in net income and $0.60 in diluted compare to FY16 3rd Quarter results (pg. 65). Total revenues were $2.6 billion, an increase from a decrease of $2.2 billion in FY17 2nd Quarter. The company not only made up the loss, they increased it by 1 percent compare to FY16 3rd Quarter (pg. 65).
Although a decrease of 1% in comparison to FY16 3rd Quarter, total U.S. RAC revenue was $1.7 billion; however, FY17 2nd Quarter revenue was $1.5. International RAC segment was an increase of 7% when put up against FY16 3rd Quarter results. The revenues were $728 million, and the adjusted corporate EBITDA was $158 million, another comparison increase (pg. 66). All other operations revenues dipped from the 2nd quarter result. In the second quarter, total revenues were $162 million, but this quarter it was $159 million. However, when compare to FY16 third quarter, it was at a 5% increase (pg. 66).
In response to the results of FY17 3rd Quarter Financial Report results, Marinello stated that “Our operating turnaround plan, focused on growth through enhanced fleet, service, brands and technology, is showing encouraging progress, evidence that Hertz is on the right strategic path” (pg. 65). Although humble, Marinello understands there are much more work to be done, and fourth quarter will be challenging based on the numbers from FY16 fourth quarter results. Hertz suffered a continuing operations net loss of $438 million, or $5.28 per diluted share, both twice the amount of FY17 1st Quarter net loss (FY16 4th Qtr. Results).
One of Hertz’s major competitor is Avis Budget Group, Inc., whose mission is to lead the industry “By defining service excellence and building unmatched customer loyalty” (www.avis.com). CEO Larry D. De Shon, unlike Marinello, came from an airport operations background. His job before joining Avis was overseeing “Ground operations, logistics, safety, security, customer processing and service, product development and internal communications” at United Airlines, Inc. (ww.avis.com). Mr. De Shon took over the position in 2015 from a Mr. Ronald Nelson under natural circumstances, so there was no for investors to be concerned.
Granting that this internal analysis only cover Hertz’s FY16 and 17 financial performance reports, the same will go for Avis. Avis reported a FY17 1st Quarter adjusted net loss of $81 million, or $0.94 per diluted share compared to FY16 adjusted net loss of $27 million, or $0.28 per shared. Anyone from the outside looking in would say base on Hertz’s FY17 and 16 adjusted net loss and per diluted share, Avis numbers were better. However, as stated before, there are a lot more key factors that play a role in the calculation of these results. Take for instance, Hertz operations consist of United States RAC, International RAC, and All Other, while Avis only has Americas and International.
In Avis first quarter of 2016, they have a revenue increase of 2% with a balance of $1.9 billion; however, same quarter 2017, their revenue decrease by 2% to $1.8 billion with an adjusted EBITDA loss of $27 million (ir.avisbudgetgroup.com).
Avis did not do better in the second quarter of 2017 compare to 2016 revenue increase of 3% to $2.2 billion, a net income of $36 million, and the adjusted EBITDA was $204 million. Their FY17 2nd Quarter revenue was the same $2.2 billion, with a net income of $3 million, and an adjusted EBITDA of $140 million. Net income was down $23 million, and adjusted EBITDA down $60 million (ir.avisbudgetgroup.com). With this result, it is certain a few investors was a little concern. Mr. De Shon say the decreases are from “Industry over-fleeting and higher per-unit fleet costs due to lower used-vehicle values” (ir.avisbudgetgroup.com)
Well based on the numbers, it seems as if third quarter is the best months for rental car services. Hertz started to see an increase in their net income and revenues, so is Avis. Avis reported an increase of 4% in revenues to a record $2.8 billion, a net income of $245 million, and an adjusted EBITDA of $482 for FY17. Same quarter 2016 they had revenue increased 3% to $2.7 billion, net income of $209 million, and an adjusted EBITDA of $469 million (ir.avisbudgetgroup.com). Although a tragedy to the world, this quarter faced a lot of natural disasters throughout the area of operations. However, for some strange, yet strategic manner, these rental companies were able to stay on top of their game with increases to their financial performance reports.
Another big competitor of Hertz is Enterprise Holdings Inc., consisting of Enterprise Rent-A-Car (ECAR), National Car Rental, and Alamo Rent-A-Car brands. Just like Avis, Enterprise new CEO acquire the position due to the previous CEO getting promoted to a higher position within the company. Another unique situation is both Hertz and Enterprise CEOs are women.
Pamela M. Nicholson, President and CEO of Enterprise Holdings Inc. came onboard in 2013. She made history in the company by becoming the only CEO who is not in the family that founded this privately held organization. Enterprise’s financial report for the year 2016 stated an increase in revenue by 8.1 percent to more than $20.9 billion and for 2017 an increase annual revenue by 6.5 percent to achieve a $22.3 billion (www.enterpriseholdings.com). Since Enterprise Holdings Inc. is a privately owned business, not much information about their financial performance is release to the general public with easy access; a request is generally needed.
Financial Strengths and Weaknesses
One of Hertz great strengths in 2015 was its young fleet which gave them a lead way to add new cars over the course of time. However, during CEO De Shon reign, the fleet became too large, and wasn’t moving fast enough to bring in revenue; instead, it was costing the company a lot of money for storage and tax. Expanding the business to new locations and countries ended the year with 9,980 corporate and franchises in North and Latin America, Europe, Asia-Pacific, the Middle East and Africa (globalbb.onesource.com).
Building and maintaining a strong relationship with outside agencies is another strong suite of Hertz. Being in the car rental market with well-known branded competitors is a big challenge. Good networking will take the company a long way. Being that Hertz one of the largest airport car rental brands globally, it makes sense to partner with big name airlines and airports hotels, and they did (globalbb.onesource.com).
One weakness that is almost always an issue when a company goes global is cultural differences. Just about everything in that country affect the organization, to include rituals, politics, and the economy. If Hertz enter these markets with a blind eye, their business will not last long.
CEO Book Questions
Hertz sales at the end of 2016 were $8 billion with a negative growth loss of 2.37%. The company is reaching saturation quickly and starting to lose income yearly. Due to new innovations in ride-sharing like Uber and Lyft. Rent a car enterprise is growing rapidly as well, taking away some of the market share. The slowing in profit is a huge problem. The company’s profit margin is decreasing steadily year after year with no sign of slowing down.
There has been a 10 percent decrease in profits for the past three years. Hertz’s asset velocity is constantly around .455. Their return on assets has been in an up and down battle over the past six years as it has switched from negative to positive anywhere from negative six to 1.56. The company is generating less cash annually as a result of a slow market. However, Hertz is staying with their direct competition as the whole market is slowing down. With the success of ride-sharing company Uber, the success of rental car agencies is looking slim.
Hertz’s Current Strategy
One of Hertz’s CEO strategy was to reduce the overcrowded fleet that was costing the company a lot of money. She started off with good results, then aligned the strategy to match fleet capacity with targeted demand. This strategy worked, Hertz reduced their total United States fleet by 2% in the third quarter (Pg. 95).
Another strategy from the new CEO was to not refinance some of the company’s debts. Her plan is to “Conserve cash instead of redeem bonds” (Pg. 96). Although the company reported a large net loss in the second quarter, which was expected from this decision, the third quarter came out in the positive. Hertz find other ways to lower its’ debts, such as writing off goodwills.
BCG Matrix
Hertz’s United States Rental Car is in the upper low cash cows to middle high stars on the Boston Consulting Group matrix. Their domestic services units have a large market share in a fast growing industry. According to (Globalbb.onesource.com), “The United States accounts for 46% of the global car rental market value in 2016” (Pg. 94). This segment is generating cash, however, with so much competition, huge investments are expected in order for Hertz to stay in the race. The company invested over three billions dollars in investing activities during the third quarter of FY17. Hertz adjusted net cash flow may be in the negative, but will increase as they go along because of their investment activities.
The International Rental Car services is in the middle high stars to early high question marks. International market share is in between large and low, and the the industry is growing fast. As with the domestic segment, Hertz will continue to invest in long-term growth of the company. The market is low because there is plenty room expansion.
Hertz’s Other Operations segment, primarily the Donlen leasing services is at the high middle starting point of question marks on the matrix. The company is has a low relative market share and is located in a high growth industry. As stated before, the company is fairly new to the market, it was adopted in 2011. So, when considering expansion, much attention is needed to ensure the venture is viable. Revenue is increasing each quarter; however, there is room for more investments.
Corporate Culture
Hertz developed a booklet which governs the behavior of all executives, managers, employees and their subsidiaries. The Standard of Business Conduct, aka Code, directs the organization’s culture. It covers actions from upholding fair working conditions to protecting company assets; two topics out of a multitude. When it comes to corporate culture, a business will be hesitant to show its true color; however, no matter how hard they try to hide the facts, the public always find out. There is no such thing as a perfect cultural environment in any form of organization; one have to remember we are dealing with humans of all different form of values, beliefs and characteristics. Although not recommended by Hertz, and may not be a credible source, is to find out what the employees are saying.
According to the (Indeed.com), a website for job hunters, many former employees from manager position to trainee believes Hertz actions speaks louder than the words in their Code pamphlet. A former Director stated that “The move to Florida was poorly executed and that they were struggling to hire and keep good people” (Indeed.com). A few more cons with working for Hertz were doing basically everything yourself, management positions are basically a salesperson, management flip flop on what metrics are our main focus, and pay is low for the work output.
Based on a few of these reviews, it is easy to see that Hertz have a few corporate culture issues that could damage their reputation. Potential employees and consumers do pay close attention to an organization’s culture when thinking of joining that establishment and using their services. If Hertz’s employees is paying attention to details, most is not pertaining to their job, more like what management is doing. Management however is focusing on their outcome. Changing metrics to fit your outcome no matter the consequences to your employee is not good cultural behavior.
Although it may seems unreachable, changing the rules for getting a sales commission allow employees to be aggressive and innovative. If the guidelines don’t change, it will make it too easy for the next person to get a commission, and there will be no challenge or encouragement to reach for the top. One key point of many in the Code book that obviously is not working base on these reviews is the right to report questions and concerns. Although some of these reviews may be from disgruntled employees that were let go for one reason or another, if majority is saying the same thing over and over, it is easy to see there is a problem.
Company Internal SWOT/IFE Analysis
One way amongst many how Hertz promote customer loyalty is through their Hertz Gold
Plus Rewards program. This is Hertz’s biggest loyalty program, where members can participate
in the Great Gold Giveaway for a chance to win one million gold plus reward points (pg. 34).
One of the rules behind this program is members have up to four years to use the points. To make
it easier on some of the members, those in the United States will be entered automatically; no
need to fill out an entry form (pg. 34). Non-members can “Enroll for free in Gold Plus Rewards
and read the official rules for the Great Gold Giveaway Sweepstakes term and conditions” (pg.
34). This rewards program is so popular amongst Hertz members, it earned the title Best
Rewards Program in their industry by Flyertalk Awards (pg. 35). Not only is Hertz showing their
appreciation for their loyal customers, they are promoting their business to potential customers.
Being a member of Hertz have its rewards too. Even though the sweepstake gear mostly towards
their loyal customers, members can participate in other incentives offered by the company.
One of these incentives is the Hertz Fifty Plus Program. The name of the make it simple for consumers to know who are eligible. They incentives is “Travelers 50 and over save up to 20% off base rates every day, plus take advantage of additional program benefits (pg. 34). Visit a certain international location where Hertz operates and receive a free additional driver is another incentive. You can also get this deal when you buy the fuel purchase option when you rent from Hertz in these countries (pg. 92).
When Hertz partner up with the American Automobile Association (AAA), their members gained access to a mass amount of incentives. To list a few, no additional fee for young car renters; no additional driver charge fee; reduced fees fro Neverlost, and 50% discount off SiriusXM satellite radio. Young renters ages 20 to 24, who are AAA members don’t have to pay an estimated $30 additional fee. Hertz’s additional driver fee is an estimated $13.50 daily. So, if a AAA member goes on a week long trip with a family or friend, and that individual is expected to help with the driving, that member will save about $94 on that trip.
NeverLost is an in-car navigational system that is available in all of Hertz’s Prestige Collection vehicles (www.aaa.com). This technology also give car renters “Access to AAA Diamond ratings on hotels and restaurants, written and audio attraction details, and will never get you lost” (www.aaa.com). This feature would cost a renter approximately $17 per day; however, a AAA member pays $7 a day. Instead of searching for a radio station each time you cross into another county, city, or state, SiriusXM statelite radio make it easy, less stressful, and safe for you to sing along with your favorite songs or sports team play. I will cost you a standard fee of $7.99 per day plus tax. AAA members only pays half of the amount plus tax per day (www.aaa.com). Say a AAA member goes on a week long road trip and wishes to use enjoy all these special offers, that individual could save over $220 on that trip. Membership fees ranges from $49 for your Basic, $79 for Plus, and $109 for the Premier (carolinas.aaa.com). Prices varies; they are base on your zip code.
Although others besides top managers make up the workforce of a company, one of Hertz’s strengths is their recruitment of highly skilled leaders. Take for instance, there general sales agents in India and Vietnam. With research, it was noted that “Around 14.5 million travelers from India visited other countries, and approximately 4.8 million from Vietnam in 2016” (pg. 93). It only make sense to use this knowledge to your advantage, so Hertz went ahead and job on the possibilities.
Hertz appointed two general sales agents companies to promote their products and services in India and Vietnam. In India, you have “Sunil Talreja, Vice President International Sales and Services, InterGlobe Air Transport Limited (IGAT, and in Vietnam Amanda Yang, Vice President Asia Pacific, Discover the World” (pg. 93). Hertz was smart to first partner with these organizations that are already in place, than to start up a new branch in these areas.
One of Talreja’s plans is to use their “Pan India reach and extensive customer corporate customer base to expand sales of Hertz products and services to their citizens traveling abroad. Yang’s strategy is to steer towards those Vietnamese citizens with international driving permits” (pg. 93). Discover the World is not new to the Hertz’s family, they are also Hertz’s general sales agents in Indonesia, Malaysia, Philippines, Taiwan, and Thailand (pg. 93).
Even though Hertz has a strong recruiting tool for top leaders, they are struggling with recruiting and retaining lower-end staffs. When you look at Hertz’s corporate culture guidelines and feedback from current and former employees, you will see there is a breakdown somewhere in the system. Due to these concerns and issues, there is a high turnover rate of lower-end employees. There is little to no thrust between lower and top end managers and employees. Incentives to motivate employees to want to stay or be a part of the Hertz’s family didn’t seems to exist. High debt burden and tarnish reputation could be contributors to these problems.
As stated previously, newly hired CEO Marinello came on board with a herited overflow of fleet that was not moving fast enough to generate revenue. So, like most CEO of a company that is losing profit, first thing would be to generate a plan to bring in money to the business. One of Marinello’s fix-it plan was to get rid of this bloated fleet (Pg. 6). This would mean extra work hours for existing employers, and hit-the-ground running for newly hires. Now you can see a little of where the breakdown is happening.
As to tarnish reputation, branding is getting a bad exposure, which means the possibility of losing current customers, and hesitation of potential users of Hertz’s services. Hertz leaders are not in the news when it comes to unethical behaviours; however, when you check out their current and former employees’ reviews along with their customers, they caused just about the same damages as being in the news. Today’s generation are more prone to reading blogs and reviews than they are to read or listen to the news. When a consumer is looking to rent a car, they are not inclined to search for news on that business, they will go to the reviews to see what previous customers have to say about their experience with the company.
Take for instance, Hertz employee giving a customer the choice of paying him not to report damages to a vehicle or filling out a form reporting them which will cost much more. When the customer choose to fill out the form with damages that was noted during her pre-inspection, an extra cost showed up on her credit card. Although the customer can dispute the charges, no one knows what the outcome will be or wishes to go through all this after a vacation or business trip.