Essay by Eric Worrall
First published JoNova, h/t KN, tony_g, bnice2000, doonman – Customers don’t want EVs: “… eliminate a disproportionate number of lower margin rentals and reduce damage expense associated with EVs. …”
From the Hertz official SEC statement;
Item 2.02 Results of Operations and Financial Condition
Hertz Global Holdings, Inc. (the “Company” or “Hertz”) has made the strategic decision to sell approximately 20,000 electric vehicles (“EVs”) from its U.S. fleet, or about one-third of the global EV fleet. These vehicle dispositions, which were initiated in December 2023 and are expected to take place in an orderly fashion over the course of 2024, will cover multiple makes and models. EVs held for sale will remain eligible for rental within the Company’s fleet during the sales process. The Company expects to reinvest a portion of the proceeds from the sale of EVs into the purchase of internal combustion engine (“ICE”) vehicles to meet customer demand.
The Company’s decision to reduce its EV fleet will result in the recognition, during the fourth quarter of 2023, of approximately $245 million of incremental net depreciation expense related to the sale. This non-cash charge represents the write down of the EVs’ carrying values as of December 31, 2023 to their fair values, less related expenses associated with the disposition of the vehicles. This charge is in addition to the depreciation expense that the Company will report for the fourth quarter in the ordinary course with respect to the remainder of its fleet. Future depreciation expense on the specific vehicles held for sale is expected to be limited to impacts from changes in the vehicles’ condition and general market factors. Any gain or loss associated with the ultimate disposition of any specific EV will be recognized in the period of sale. The Company does not expect this EV fleet reduction and the corresponding addition of ICE vehicles to have a material impact on its asset-backed securitization facilities, nor does it anticipate the need to make additional cash contributions to such facilities as a result of this strategic action.
The Company expects this action to better balance supply against expected demand of EVs. This will position the Company to eliminate a disproportionate number of lower margin rentals and reduce damage expense associated with EVs. The Company will continue to execute its strategy around EV mobility and offer customers a wide selection of vehicles. The Company continues to implement a series of initiatives that it anticipates will continue to improve the profitability of the remaining EV fleet. These initiatives include the expansion of EV charging infrastructure, growing relationships with EV manufacturers, particularly related to more affordable access to parts and labor, and continued implementation of policies and educational tools to help enhance the EV experience for customers. 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.
It is expected that the planned reduction in the EV fleet and reinvestment in additional ICE vehicles will improve Adjusted Corporate EBITDA across 2024, as vehicles are rotated, and in 2025, by which time all of the vehicles included in this plan are expected to be sold. By year end 2025, it is expected that the aggregate two-year benefit to Adjusted Corporate EBITDA related to the sale will approximate the incremental net depreciation expense to be recognized in the fourth quarter of 2023. 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 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.
The Company expects to report financial results for the fourth quarter ended December 31, 2023 on February 6, 2024. Consistent with expectations, the Company expects to report revenue for the fourth quarter of 2023 in the range of $2.1 billion to $2.2 billion, in line with historical seasonality relative to its third quarter. Adjusted Corporate EBITDA for the fourth quarter of 2023 will be negatively impacted by the incremental net depreciation expense associated with the EV sales plan, and further burdened by higher depreciation expense in the ordinary course as residual values for vehicles generally fell throughout the quarter greater than previously expected. While direct operating expenses per transaction day, excluding collision and damage, will be flat for the quarter and down for the year, expenses related to collision and damage, primarily associated with EVs, remained high in the quarter, thereby supporting the Company’s decision to initiate the material reduction in the EV fleet. The Company expects to report a negative Adjusted Corporate EBITDA (excluding the impact of the non-cash charge related to the EV sales plan) for the fourth quarter in the range of ($120 million) to ($130 million).
The Company’s estimated results for the fourth quarter ended December 31, 2023, are preliminary in nature and subject to change as results for such period are finalized. Estimates of results are inherently uncertain and subject to change, and the Company undertakes no obligation to update the estimated results. The Company’s estimates contained in this Current Report on Form 8-K may differ, perhaps materially, from actual results. Hertz is in the process of finalizing its fourth quarter 2023 financial statements and will discuss actual performance and more details in its regularly scheduled earnings release and conference call, which are planned for February 6, 2024.
The Company cannot, without unreasonable effort, reconcile its forecasted range of Adjusted Corporate EBITDA, a non-GAAP financial measure, to its most directly comparable GAAP financial measure, net income (loss) attributable to the Company, due to the uncertainty and inherent difficulty of predicting the occurrence and the financial impact of items impacting comparability as of the date of this Current Report on Form 8-K. Management uses Adjusted Corporate EBITDA as an operating performance metric for internal monitoring and planning purposes, including the preparation of the Company’s annual operating budget and monthly operating reviews, and analysis of investment decisions, profitability and performance trends. This measure enables management and investors to isolate the effects on profitability of operating metrics most meaningful to the business of renting and leasing vehicles. It also allows management and investors to assess the performance of the entire business on the same basis as its reportable segments.
What can I say? Another bad day for EV manufacturers.
I wouldn’t be surprised if Hertz’s $245 million write-off from dumping a third of their EV fleet turns out to be an underestimate, that is only $12,250 estimated loss per vehicle (245 million / 20,000). I mean, who would want a second hand rental EV, which may have been treated harshly, which might even have undetected damage to the battery pack?