8-K: Hertz to Sell 20,000 EVs, Citing High Costs and Low Demand

Hertz plans to sell approximately 20,000 electric vehicles from its U.S. fleet, about one-third of its global EV holdings, due to high depreciation and repair costs.

Summary

• Hertz has decided to sell around 20,000 electric vehicles, which is about one-third of their global EV fleet, primarily from their U.S. operations.
• The sale of these EVs is expected to occur throughout 2024, with the vehicles remaining available for rental during the sales process.
• Hertz intends to reinvest some of the proceeds from the EV sales into purchasing internal combustion engine (ICE) vehicles to better meet customer demand.
• This strategic move will result in a $245 million non-cash charge in the fourth quarter of 2023 due to the write-down of the EVs' carrying values.
• The company anticipates that this action will improve Adjusted Corporate EBITDA in 2024 and 2025, with an expected aggregate two-year benefit equal to the $245 million depreciation expense.
• Hertz also expects to generate approximately $250 million to $300 million in incremental free cash flow over 2024 and 2025 from this initiative.
• The company expects to report fourth-quarter 2023 revenue between $2.1 billion and $2.2 billion.
• Adjusted Corporate EBITDA for the fourth quarter of 2023 is expected to be negative, ranging from ($120 million) to ($130 million), excluding the $245 million non-cash charge.

Sentiment

Score: 4

Explanation: The document contains both positive and negative elements. The strategic shift to reduce the EV fleet and reinvest in ICE vehicles is a response to market conditions and is expected to improve profitability in the long term. However, the significant $245 million non-cash charge and negative Adjusted Corporate EBITDA for Q4 2023 are concerning. The overall sentiment is cautiously negative due to the immediate financial impact.

Positives

• The sale of EVs is expected to improve Adjusted Corporate EBITDA in 2024 and 2025.
• The company anticipates an increase in free cash flow of $250 million to $300 million over the next two years.
• Reinvesting in ICE vehicles will help meet customer demand.
• The company expects to eliminate lower margin rentals and reduce damage expenses associated with EVs.
• Hertz will continue to implement initiatives to improve the profitability of its remaining EV fleet.

Negatives

• Hertz will recognize a $245 million non-cash depreciation expense in the fourth quarter of 2023.
• The company expects a negative Adjusted Corporate EBITDA for the fourth quarter of 2023, ranging from ($120 million) to ($130 million), excluding the non-cash charge.
• Collision and damage expenses, primarily associated with EVs, remained high in the quarter.

Risks

• The company faces uncertainty with respect to the economics of EVs, including customer demand, pricing, maintenance, and residual value volatility.
• There is a risk that the company may not realize the expected benefits from the reduction of its EV fleet.
• The company's ability to purchase adequate supplies of competitively priced vehicles at a reasonable cost is subject to disruptions in the global supply chain and inflationary pressures.
• Changes in travel demand, competition, and disruptions during peak periods could impact the company's results.
• The company's ability to maintain its network of leases and vehicle rental concessions at airports and other key locations is a risk.

Future Outlook

Hertz expects the reduction in its EV fleet and reinvestment in ICE vehicles to improve Adjusted Corporate EBITDA in 2024 and 2025, with an anticipated increase in free cash flow. The company will continue to actively manage its EV fleet and implement initiatives to improve profitability.

Management Comments

• The company expects this action to better balance supply against expected demand of EVs.
• The company will continue to execute its strategy around EV mobility and offer customers a wide selection of vehicles.
• Management uses Adjusted Corporate EBITDA as an operating performance metric for internal monitoring and planning purposes.

Industry Context

This announcement reflects a broader trend in the rental car industry where companies are re-evaluating their EV strategies due to high costs and lower-than-expected demand. It also highlights the challenges of managing a large EV fleet, including depreciation, maintenance, and repair costs.

Comparison to Industry Standards

• Other rental car companies like Avis have also been adjusting their EV fleet sizes, indicating a broader industry trend of re-evaluating EV investments.
• The $245 million depreciation charge is significant and highlights the challenges of accurately predicting the residual value of EVs, a common issue across the industry.
• Hertz's move to reinvest in ICE vehicles is a response to current customer demand, which is a strategy also being considered by other players in the market.
• The expected improvement in Adjusted Corporate EBITDA is a key metric that will be closely watched by investors, as profitability in the rental car sector is a major focus.

Stakeholder Impact

• Shareholders will be impacted by the $245 million non-cash charge in Q4 2023.
• Customers may see a shift in the availability of EVs and an increase in ICE vehicle options.
• Employees may be affected by changes in fleet management and maintenance.
• Suppliers of ICE vehicles may see an increase in demand from Hertz.

Next Steps

• Hertz will continue to sell approximately 20,000 EVs throughout 2024.
• The company will reinvest a portion of the proceeds from EV sales into purchasing ICE vehicles.
• Hertz will report its fourth-quarter 2023 financial results on February 6, 2024.
• The company will continue to implement initiatives to improve the profitability of its remaining EV fleet.

Key Dates

Keywords

electric vehicles, EV fleet, depreciation, Adjusted Corporate EBITDA, internal combustion engine, ICE vehicles, free cash flow, vehicle sales, rental car, Hertz