Hertz Tumbles on First Earnings Since Multiyear Restatement

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Hertz Global Holdings Inc., after an era of weak financial oversight, said second-quarter net income fell 68 percent. The earnings missed analysts’ estimates and the shares fell.

Profit excluding some items was 19 cents a share on sales of $2.69 billion for the quarter ended June 30, the company said in a statement Monday. Both results came up short of the average estimates of analysts surveyed by Bloomberg, which projected adjusted profit of 20 cents a share and sales of $2.71 billion. Net income was $23 million, or 5 cents a share.

John Tague, who took over as CEO in November, has shuffled management, adding executives from the airline industry, as well as expertise in financial accounting and revenue management. Tague is trying to revive the brand’s strength in what he has called a transition year as the new management cleans up the books and tightens up operations.

“Our performance in the quarter continued to represent some of the execution challenges we’ve faced the last couple of years, but we are seeing evidence of an inflection point,” Tague said on a conference call Tuesday.

Under Tague, Naples, Florida-based Hertz has been selling its aging fleet, closing off-airport locations and trimming costs. Hertz said last month it expects to reach annualized cost savings of $300 million by next year, $100 million more than its goal. Through June, Hertz said it cut expenses by $80 million.

Hertz fell 3.6 percent to $16.50 at the close in New York time. The shares have declined 34 percent this year.

Improved Outlook

Hertz should have an “inflection in fundamentals” in the second half as the company improves overhead costs, fleet efficiency, its computer systems and revenue management, Chris Agnew, an analyst at MKM Partners, said in a research note. He recommends buying the shares.

Fresher vehicles and a renewed focus on service have customer satisfaction scores at two-year highs, Tague said on the call, and he sees more opportunities for improvement.

“We won’t be done and it won’t be fixed in the third quarter, but it will be a much better story,” he said.

Hertz last month finished restating results from the past four years after discovering accounting problems caused by shoddy oversight of the company’s financial reporting system. Correcting the misstatements reduced annual pretax income from 2011 to 2013 by as much as 23 percent and net income by as much as 26 percent.

Internal Review

Hertz said the internal review found material weaknesses, caused in part by lax oversight of former Chief Executive Officer Mark Frissora. The investigation found that the tone at the top of Hertz was “inconsistent and sometimes inappropriate,” according to a filing with U.S. regulators.

“In particular, our former chief executive officer’s management style and temperament created a pressurized operating environment,” Hertz said.

Hertz said it still expects to complete the separation of its equipment-leasing unit, announced in March 2014.

In September, Hertz announced that Frissora, now CEO of Caesars Entertainment Corp., resigned for personal reasons. Investors had pushed for his removal, citing accounting and operational missteps.

Hertz said it was notified in June 2014 by the U.S. Securities and Exchange Commission that the agency was investigating its filings.

To replace Frissora, Hertz chose former United Airlines manager Tague over Scott Thompson, the former Dollar Thrifty CEO, whom investor Jana Partners had called the “obvious choice” for the job.


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