Hertz CFO Sees Limited Impact From Rising Interest Rates on Company Finances

Kenny Cheung says consumer demand for cars and investor demand for asset backed securities remains robust

Hertz continues to benefit from strong bookings for its car rental services and is working to size its fleet to match demand and maintain pricing discipline.

Photo: Constanza Hevia H. for The Wall Street Journal

Over a year after it emerged from bankruptcy, Hertz Global Holdings Inc. continues to benefit from strong bookings for its car rental services. The Estero, Fla.-based company is working to size its fleet to match demand and maintain pricing discipline, resulting in a 12% increase in third-quarter revenue to $2.5 billion and net income of $577 million attributable to common shareholders, up from $571 million during the prior-year period.

Kenny Cheung, who became chief financial officer in September 2020, in recent quarters has been running the company’s finances with a focus on return on assets, which meant adding revenue streams, for example selling some vehicles through Carvana Co. ’s online platform.

WSJ’s CFO Journal spoke to Mr. Cheung about the Federal Reserve’s recent changes to interest rates, leverage and the metrics the company is watching to gauge where consumer demand is headed. Edited excerpts follow.

Kenny Cheung, CFO of Hertz

Photo: Hertz Global Holdings Inc.

WSJ: How far is Hertz impacted by rising interest rates? The Fed this week implemented another 75 basis point hike.

Mr. Cheung: We have a strong balance sheet and our debt profile insulates us from interest rate volatility. Changes in interest rates have had limited sensitivity to our business as approximately 75% of vehicle debt [Note: used to purchase vehicles] and 70% of total debt has a fixed interest rate. If underlying interest rates move by 1%, it will impact our profit and loss [statement] by about $30 million net at current debt levels. We don’t have any material corporate debt maturities until 2026. Our asset backed securities maturities are typically in the three-to-five year period. On the variable portion of the ABS, we have an interest rate cap in place to manage our exposure to fluctuations in interest rates.

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

Mr. Cheung: We continually look for opportunities to manage our liquidity, both on the corporate and vehicle funding side. Even in a rising interest 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 adding to our leverage as and when it makes sense to do so, but given the current interest rate environment we are funding the majority of our share repurchases out of free cash flow.

WSJ: How far does Hertz’s history as a formerly 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 business. We made structural improvements to the business. This began with our contract mix where we walked away from unprofitable contracts. Then we looked at our segment mix and relocated cars away from unprofitable sectors and into more profitable ones such as the leisure traveler.

WSJ: What did this mean for your cost base?

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

WSJ: Are there certain things you would do differently as CFO now because of that history?

Mr. Cheung: We have 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 a far healthier, more disciplined business now than we were previously.

WSJ: Does the rapid rise in interest rates lead to you managing working capital more efficiently?

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

WSJ: What do you focus your capital spending on?

Mr. Cheung: Our priorities remain investing in our fleet, funding our strategic initiatives and returning excess cash to shareholders. During the third quarter, we repurchased 27 million shares for $500 million. Overall, we allocated nearly $570 million towards capital investments and share repurchases during the quarter, all funded from operating cash flows. Additionally, our liquidity position [was] still healthy at the end of the third quarter. Our available liquidity was $2.6 billion, comprised of $1 billion in unrestricted cash and the balance available under the revolving credit facility.

WSJ: What are the signals you are watching to detect changes in consumer demand, and how often are you checking these metrics?

Mr. Cheung: We constantly monitor the market for any changes in consumer demand for rental car services, either 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 economic slowdown, we see no evidence of softness based on current bookings for Q4.

WSJ: How far are you hedging your currency exposure?

Mr. Cheung: The strong dollar has had a rather limited impact on our business. About 80% of our business is U.S. dollar denominated, and hence we are already largely internally hedged. The strong currency does not appear to be deterring European travelers from booking rental cars in the United States through the holiday season.

The Federal Reserve raised interest rates by another 0.75 percentage point to combat inflation, Chairman Jerome Powell said on Wednesday. Powell hinted at a possible slowdown in the pace of increases. Photo: Al Drago/Bloomberg News

Write to Nina Trentmann at nina.trentmann@nzm7.com

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