Hertz Global Holdings, Inc

Welcome to Hertz Global Holdings' first quarter 2022 earnings call. Currently, all lines are in a listen-only mode. Following management's commentary, we will conduct a question and answer session. I would like to remind you that this afternoon's call is being recorded by the company. I would now like to turn the call over to your host, Johan Rawlinson, Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining us. By now, you should have our earnings press release and associated financial information. We've also provided slides to accompany our conference call that can be accessed on our website. I would like to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance and by their nature are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of today's date and the company undertakes no obligation to update that information to reflect change circumstances. Additional information concerning these statements is contained in our earnings press release and in the risk factors and forward-looking statement section of our 2021 Form 10-K and our first quarter 2022 Form 10-Q filed with the SEC and on the Hertz website. Today we'll use certain non-GAAP financial measures which are reconciled with GAAP numbers in our earnings press release available on the investor relations section of our website. We believe that our profitability and performance is better demonstrated using these non-GAAP measures. Comparisons discussed will exclude the effects of Donlin fleet leasing and management business which we sold in March 2021. On the call this afternoon, we have Stephen Sher, our Chief Executive Officer, and Kenny Chung, our Chief Financial Officer. I'll now turn the call over to Stephen.

Thank you, Johan. Good afternoon, everyone, and welcome to our first quarter earnings call. This is my first call as the new CEO of Hertz, and I look forward to speaking and meeting with many of you in the coming weeks and months. Let me start by saying how proud I am to be a part of this company. My first 60 days have been exciting and have provided me with valuable insights into the business, both in terms of what we do well and equally where we need to improve. I've spent considerable time with our senior leadership team as well as our colleagues in the field at locations across the country. My initial impressions are uniformly positive and consistent with what attracted me to the opportunity to lead this company. Hertz possesses an extraordinary brand, a brand that is commercially powerful and that aligns well with other emerging leaders in mobility. It is also a brand that attracts talent, both in terms of retention and in bringing new talent to the company. Hertz benefits from an exceptionally resilient workforce with employees that have long tenure at the company with a deep appreciation for and relationship with our customers. These tenured employees combined with new and innovative talent is a powerful combination. Hertz enjoys an exciting first-mover advantage with electric vehicles, now deployed across more than 30 markets in RAC and TNC. A considerable portion of our fleet will be electric by year-end, with promising economics as EVs command higher pricing and draw lower operating costs. We are benefiting from early performance analytics and a growing roster of OEM partners. And of significance, Hertz operates from a position of financial strength following its reorganization. with impressive cash flow conversion, a renewed focus on returns, low leverage, and a disciplined fleet size that is more in balance with demand at better margins than where the industry has been historically. I took the CEO seat at Hertz because this company has the potential to reimagine its customer offering, produce higher returns, and grow through its participation in the mobility equation through improved technology and better use of data. Hertz will continue to move people and things as it has throughout its 103-year history, except we will do it now in the context of a changing mobility landscape. We are building a more diversified fleet, including electric vehicles and a wider set of customer channels, including individuals, corporates, and ride-sharing. At its core, and borrowing from my past, I have come to view Hertz as an asset management business that combines vehicle purchasing, renting, and disposition with into a single analytical framework against which we measure returns. With a renewed focus on customers and greater attention to return on our assets, the Hertz of the future will be fundamentally different from the Hertz of the past. There is much to do. The journey to improve our technology is underway. From the use of mobile phones to the deployment of telematics to the incorporation of artificial intelligence, Hertz will be in a better position to serve our customers, to price our assets, and to manage our business. We are building in the cloud with API architecture to enable Hertz to partner with others. We will have nearly the entire North American fleet equipped with telematics by year end. All technology need not be built by Hertz, as we can embed existing advancements in our systems at lower cost. What's more, with a growing EV fleet and a network of charging stations on our premises, expanding to 3,000 across 80 markets by year end, We will participate in the development of a new large-scale charging network being conceived both in the U.S. and abroad. Interested parties include governments, private capital, energy companies, and infrastructure investors. As the mobility ecosystem changes, Hertz will play in it and grow with it. To accomplish our objectives, we must compete in the race for talent. On this score, we are beginning with an exceptional base. As I noted, I have met with some of our Hertz professionals who have been with us for 25, 40, and even close to 50 years. We are also attracting new talent with a focus on engineering, technology, and product design to a new and exciting opportunity at Hertz, including our announcement this morning of a new Chief Product Development Officer and recently around a new General Counsel. We also implemented a company-wide profit-sharing program, which means now all Hertz employees will participate in our success and will be awarded with cash bonuses as we hit profitability and customer satisfaction targets. Combining young, innovative talent with technology will be a priority for the company in the pursuit of our strategic objectives. The results in the first quarter, which Kenny will detail, tell a story of two halves. The first six weeks of the quarter were softer than expected, due primarily to the impact of Omicron and lower volumes. By late February, we began to see demand rebound, and our results for the back half of the quarter compensated for the initial softness. March was the first month since the onset of the pandemic where revenue exceeded its 2019 level, and we are seeing that momentum continue into April. The progressive improvement in rentable utilization from January through February into March, moving from 66% to 80% across the quarter, was a good indicator of that momentum, as well as a reflection of stability in demand and solid management of the fleet. Total revenue for the quarter was $1.8 billion, a 57% improvement from the prior year period, and adjusted corporate EBITDA was $614 million, a margin of 34%. While a portion of our results are unquestionably attributable to positive market forces, They also reflect pricing disciplines, structural improvements made to the business, and strength in the residual value of the fleet. Current conditions provide us with an opportunity to invest in our future and to reduce our equity base through share repurchases. Like others in the industry, we are experiencing the impact of constraints on the supply of new vehicles, as well as certain inflationary cost pressures. It remains difficult to source fleet to meet demand. and this dynamic may well persist into 2023. The recent industry dynamics of limited fleet supply combined with rapid post-COVID recovery of travel have led to demand for rental cars materially exceeding available supply, which is reflected in pricing. Given these challenges, our organization remains operationally flexible and careful on the cost side. We are keeping cars longer, buying low-mileage pre-owned vehicles, and infleeting new car supply, including electric vehicles, more quickly than before. We are also being careful to dispose of older vehicles from the fleet so as to ensure quality of product. As our cars age, we are taking care to weigh elevated used car prices against potential rental earnings and time our dispositions to maximize asset returns. Notwithstanding strong top-line performance, now is the time to get prepared for as and when market conditions turn. Impressively, our strong results this quarter were achieved while corporate and international inbound activity remained considerably below pre-pandemic levels. Domestic leisure travel nonetheless remained strong coming into the high summer season. As business travel returns, we are focused on serving the highest quality, highest margin demand offered in the market at any given time. In aggregate, we expect the return of corporate and international inbound activity to be accretive to our earnings and margins for the balance of the year. In my first 60 days, we have established near-term work plans to address our core technology stack, systems architecture, changes to the app, and various other components of the customer journey. Progress will be real and incremental, and we will report on it as such. As we enter the summer peak season, we have already initiated enhancements to the customer experience. Our objective is to provide customers with a seamless digital experience every step of the way, in short, to take the hassle out of renting a car. This begins with the app, which must be reimagined. Early progress in technology won't always be visible to our customers and that the experience will get better over a manageable time period. We have multiple pilot programs currently underway to field test certain touchless exit gate and rental experiences. Learnings here will be invaluable as we scale these initiatives. We are also running a pilot to move our insurance replacement business from a heavily paper-based system onto a digital platform. Earlier this week, we announced that we will be collaborating with Amazon Web Services to modernize and digitize the Hertz customer experience and key components of our new mobility platform, such as enhanced data analytics and vehicle telematics. We're also engaged with Oracle on the upgrade of our back-end systems and with Stripe on improvements to our payment systems. These initiatives will improve the efficiency and integrity of our operations and and equip us with the tools to improve customer experience. On the topic of customers, I want to address the ongoing media coverage around the false arrest litigation. Let me first note that the overwhelming majority of these cases involve renters who have kept our vehicles well beyond the due date and ignored repeated requests from Hertz to return our cars. In those instances, we have a responsibility to secure our assets and protect the company. In the minority of cases where customers were negatively affected through no fault of their own, as I have said publicly, we will do right by them. Our policies and procedures are designed to diminish the possibility of innocent customers being impacted in the future. While the affected group is a fraction of a percentage of the millions of rentals we process a year, even one customer being negatively and unfairly impacted is too much. The task to fix this belongs with me as the CEO of the company. Let me pivot to our strategy around electric vehicles, where our momentum continues. We have expanded our Tesla rental offering to more than 20 markets, and we intend to be in 40 markets with Teslas by year-end. Looking forward, we are excited to take in additional Model 3 and Model Y vehicles over the course of the coming quarters. Rentals for the Model Ys have commenced in California, and the rest of the country will follow soon. A recent partnership with Polestar is yet another important milestone in our EV journey. This partnership stretches over five years and aims to bring 65,000 Polestar 2 vehicles into our fleet. We continue to talk to multiple EV manufacturers to accelerate the adoption of electrification of our fleet while promoting a lower carbon footprint. And I would like to see more than 30% of our fleet being electric by the end of 2024. Our EV partnership with Uber also continues to grow and stretches across over 30 markets in the United States. The utilization rates we are seeing on this portion of the fleet are well over 80%, and we continue to experience strong driver demand, supported by the increased earnings these drivers can generate by renting from Hertz versus outright ownership. The longer rental periods typical of this segment mean fewer vehicle turns and meaningfully lower variable costs. This channel also provides us with greater flexibility to pivot our vehicles between rental and ride sharing so as to make better use of our assets. We are also continuing to see strong progress with our Carvana partnership. Several thousand cars have been sold through the Carvana platform, and we are very pleased with the results, providing us with a material uptick to prices found in the wholesale market. All these initiatives are expected to be earnings accretive for Hertz. Looking ahead, we do not see demand for our services lessening anytime soon, and in fact, all indications point to an extremely busy summer. This, coupled with our high operating leverage and attention to the risks of supply chain and cost control, gives me confidence that we are well positioned for the next quarter and the balance of the year. I equally have confidence that we are taking the right steps to position this business for success in an evolving mobility landscape, from the cars we acquire to to the customer experience and the products we offer, to the expanding channels of customers with whom we engage, to the increasing efficiency with which we price and manage our fleet, to the way in which we dispose of our fleet. Hertz now has execution roadmaps and technology plans to elevate its competitive and strategic position. Now I'll turn it over to Kenny to walk you through our results in more detail.