Investor Letter: Hertz Cuts Costs, Boosts Cashflow

NEW YORK (Reuters) – Rental car company Hertz Global (HTZ.N) expects to further cut costs and boost cashflow in 2009, and sees opportunities for acquisitions, according to a letter from private equity firm Clayton, Dubilier & Rice, a large shareholder of Hertz.

The letter, obtained by Reuters, gave highlights of a March 19 conference call that CD&R held with investors. Hertz was taken private by CD&R, Carlyle and Merrill Lynch Global Private Equity in 2005, then relisted in 2006. CD&R still holds a stake in the firm. Private equity firms routinely update investors on their
progress, but those communications are not made available to the public. The CD&R letter gives updates on its portfolio and says the firm sees opportunities ahead for deals. Other buyout firms such as Blackstone Group (BX.N), Kohlberg Kravis Roberts & Co., Carlyle Group and Texas-based TPG have recently updated investors with their own year-end numbers.

CD&R declined comment on the letter. In a section on Hertz, citing CD&R operating partner George Tamke, the letter said it is focusing on cost actions and cashflow initiatives at the car rental firm. Hertz has been Hit by slow demand, and in February said the uncertain economic environment prevented it from giving specific
quarterly or even full-year forecasts. It reported at the time a quarterly loss, and said that it hoped to achieve $350 million in additional cost savings in 2009.

According to the investor letter, cost and expense reductions at the car rental firm for 2008 and 2009 are expected to total a cumulative $600 million.

More details given on the call, but not included in the letter, indicated that there would be further improvement in cashflow in 2009 and that given current conditions Hertz could generate an additional total net cashflow of around $500 million, a source familiar with the call said. The letter said that in 2009, additional cashflow of $1 billion could be expected. The source familiar with the call said that figure was based on whether the company reduced the size of its fleet amid economic volatility. That means the additional total net cashflow is expected to be in a range of $500 million to $1 billion, the source said.

Hertz’s performance against competitors continues to be much better from a margin point of view and there could be opportunities for it to look for profitable acquisitions, the letter said. The call was made prior to Hertz winning the bankruptcy auction for the assets of Advantage Rent-A-Car and buying a power generation company in Spain. Beauty products retailer and distributor Sally Beauty (SBH.N), another CD&R investment, is outperforming the retail environment, the letter said, citing CD&R operating partner Jim
Berges. It has seen a significant increase in same-store traffic for the first time in about five years, has $375 million of liquidity and no near-term refinancing requirements, the letter said.

Sally Beauty in February posted a smaller-than-expected first-quarter profit, as consumer cutbacks during the holidays took a toll on the company’s sales. CD&R’s letter said its most challenging portfolio company is
construction and industrial supplier HD Supply [HDSPY.UL], where it has been cutting jobs and costs. The private equity firm as a whole sees more opportunities ahead for deals, and said it could complete a transaction in 2009 while the prospects for investments in 2010 and 2011 look even better. Private equity firms have done few deals since the credit crisis diminished the availability of leverage.

 (Reporting by Megan Davies; Editing by Gary Hill and Matthew Lewis)