Hertz cites weak demand, high damage costs in decision to downsize EV fleet

By Ciara Linnane

Rental-car company is the latest to be hit by weak demand for electric cars

Hertz Global Holdings Inc. said Thursday it is selling about 20,000 electric vehicles from its fleet, or about one-third of the total, in the latest sign that the EV revolution is stalling amid weak demand from consumers.

The car-rental company said it expects to book $245 million in charges in the fourth quarter, sending its stock (HTZ) down 6% in early trading and weighing on its main rival, Avis Budget Group Inc. (CAR), which was down 3.6%.

The move is aimed at better balancing supply and expected demand for EVs, allowing the car-rental company to scrap a disproportionate number of lower-margin rentals and reduce damage expenses associated with EVs.

Collision and damage costs for EVs remained high in the fourth quarter, Hertz said in a regulatory filing. That's because EVs require special tools and parts and specialist knowledge to repair after a crash, more so than traditional gas-powered vehicles.

The charge is on top of the depreciation costs the company expects to record in the quarter in the ordinary course of managing its fleet.

The news is the latest bad news on EVs, with softer-than-expected demand leading many original-equipment manufacturers to scale back plans. In October, Ford Motor Co. (F) reported lower-than-expected quarterly earnings, which included an adjusted loss of $1.3 billion for its EV unit, wider than Wall Street expected.

Ford said that customers interested in EVs were "unwilling" to pay the vehicles' premium prices, and the company paused billions of dollars in long-term investment in EVs due to that disconnect.

General Motors Co. (GM) that same month said it was scrapping its target to build 400,000 electric vehicles by mid-2024 because of weak demand.

Analysts were expecting Hertz to move on its EV fleet. Oppenheimer said as much in a December note in which it downgraded the stock to perform from outperform.

"We move to the sidelines, as we believe next year will be a transition year for [Hertz]. The company will face several headwinds in 2024, including significant ongoing challenges to its EV initiative, higher vehicle interest expense, and higher DPU," or distributed power units.

Hertz will continue to offer EVs but will implement measures to boost profitability, including by expanding infrastructure such as charging stations and expanding relationships with EV makers, particularly as it relates to more affordable access to parts and labor, the company said.

"Going forward, the company will continue to actively manage the total size of its EV fleet, as well as the allocation of EVs among customer segments, including leisure, corporate, government and rideshare," Hertz said in the filing.

Hertz will reinvest in additional internal-combustion-engine vehicles and expects to improve adjusted Ebitda, or earnings before interest, taxes, depreciation and amortization, across 2024, as vehicles are rotated, and in 2025, by which time all the vehicles in the plan will have been sold.

"It is expected that this benefit to the company's financial results will be derived from higher revenue per day and lower depreciation and operating expenses related to its remaining fleet," the filing said.

"The company further anticipates that incremental free cash flow generation related to this action will approximate $250 million to $300 million in the aggregate over 2024 and 2025."

Hertz backed its revenue guidance for the fourth quarter of $2.1 billion to $2.2 billion and said its adjusted Ebitda will be negatively affected by the EV sales plan.

It expects adjusted Ebitda to be a loss of $120 million to $130 million.

The company's two active high-yield bond series, meanwhile, also moved lower on the news, as the following chart from data solutions provider BondCliQ Media Services shows. The bonds are down about 1 1/2 points on the day.

Hertz has two bond series maturing in 2026 and 2029.

The bonds sold off early in the day, but that was followed by net buying.

The stock (HTZ) has fallen 48% in the last 12 months, while the S&P 500 SPX has gained 20.5%.

-Ciara Linnane

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01-11-24 1108ET

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