Hertz Global Holdings, Inc

Welcome to the Hertz Global Holdings first quarter 2023 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 morning's call is being recorded by the company. I would now like to turn the call over to your host, Johan Rolandsson, Vice President, Investor Relations. Please go ahead.

Good morning 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 which can be accessed on our website. I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not a guarantee 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 2022 Form 10-K and our first quarter 2023 Form 10-Q filed with the SEC. These documents are also available on the investor relations section of 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 our website. We believe that these non-GAAP measures provide additional information about our operations, allowing better evaluation of our profitability and performance. Unless otherwise noted, our discussion today focuses on our global business. On the call this morning, we have Stephen Scher, our Chief Executive Officer, and Alex Brooks, our Interim Chief Financial Officer. I'll now turn the call over to Stephen.

Thank you, Johan. Good morning, and thank you all for joining us on this first quarter earnings call. I want to begin by welcoming Alex Brooks to the call. As you know, Alex has been our chief accounting officer for several years and has now assumed the role of interim CFO. Alex is a proven leader, and under her guidance, our team orchestrated a seamless close of Q1 in the context of the CFO transition. We look forward to naming a permanent CFO upon completion of our review process. With that, let me turn to our quarterly results. Hertz posted strong results in the first quarter, reflecting continued growth in demand across our customer segments and a stable pricing environment in both the U.S. and abroad. As we guided, Q1 revenue came in at $2 billion on the back of strong volumes, thereby breaking with seasonal expectations of softer demand in Q1 relative to Q4. Importantly, we remain optimistic about our expected performance in Q2. Our momentum exiting the first quarter continued into April with high utilization and solid rates, both holding across customer channels and international markets. As we close in on the second month of the quarter, we remain focused on aggressively calibrating the fleet, driving down delivery costs, and aligning price to demand. We are quick to move in markets where strong advanced bookings warrant. Looking beyond the levers we can control, our optimism is further bolstered by the positive demand indicators coming from the broader travel industry as we move into the critical summer season. To provide a bit more detail on our top line, revenue of $2 billion in Q1 was up year over year. Of particular note, transaction days in Q1 increased 10% year-over-year, while average fleet was up only 5%, reflecting improved utilization and continued focus on ROA. This higher turn on our fleet is reflected in the Q1 revenue per unit, or RPU, of $1,409, a meaningful improvement over the prior year. On a sequential basis, the strength in transaction days was all the more impressive, given the burden of elevated manufacturing recalls in the quarter, which have now largely been resolved. Coming off historically high pricing across 2022, rate in Q1 was flat year over year, reflecting relative stability as well as the impact of growth in rideshare and corporate travel on the calculation of RPD, as both exhibit lower RPD than leisure. While pricing was softer sequentially in Q1, rate in March as we exited the quarter was up versus the whole of Q4. As I mentioned, our momentum coming out of the quarter bodes well for Q2 performance. Of note, nearly 40% of transaction volume in the quarter was generated in March. We exited Q1 with March RPD well above January's pricing and March RPU materially higher than January. With Q2 now underway, we remain disciplined around fleet and see rates sustaining, particularly in certain high-demand markets. Further to our results, Hertz produced adjusted corporate EBITDA of $237 million, reflecting a 12% margin. Adjusted corporate EBITDA also reflected lower-than-expected depreciation and a positive contribution of steps taken to monetize interest rate caps associated with our ABS facility. Depreciation in Q1 came in lower than anticipated at $381 million, or $252 per unit per month, primarily related to an uptick in pricing on used vehicles and to a lesser extent fleet mix and optimization. We expect our work relative to the dollar and thrifty brands, as well as our rideshare channel, to give rise to longer expected length of keep on portions of our fleet. On expenses, our DOE per transaction day was up very modestly on a sequential basis versus our expectation of flat, due primarily to elevated collision expenses and to a lesser degree, recall-related maintenance in the quarter. Keep in mind that even though the OEMs bear the direct cost of completing a recall-related repair, recalls burden our operations by increasing expense and reducing transaction days. As we noted in our Q4 call, we remain confident that we will reduce our unit expenses through the rest of 2023. Finally, regarding the interest rate caps, adjusted corporate EBITDA on the quarter included an $88 million positive contribution from the monetization of interest rate caps associated with our ABS facility. In managing our liquidity and rate risk, we brought forward interest savings attributable to the caps expected over the next four quarters into EBITDA in Q1. Given the move in rates since the inception of the caps in 2021, we saw opportunity to monetize the embedded value of those rate caps and realize the cash for reinvestment in our operations. Given where rates have moved since transacting, the monetized value exceeds the additional expected fleet interest over the relevant period by more than $15 million. As such, we expect this will be of net benefit to full-year EBITDA in 2023. Let me turn now to free cash flow and capital allocation. In Q1, based on investments in both fleet and non-fleet CapEx, we experienced an adjusted free cash outflow of $83 million. As you know, investment in fleet is more heavily weighted to the first half of the year as we position ourselves to meet expected demand over the summer months. To that end, we expect returns on our fleet investment to be attractive and free cash flow generation to turn meaningfully positive in Q3 and Q4. That said, we remain committed to our strategy of growing fleet to fit inside expected demand and underwriting investment decisions through the lens of returns over the prescribed period of car ownership. Measuring return on assets is not limited to fleet and includes other company assets, including our real estate portfolio. To that end, in Q1, we sold a large parcel of real estate adjacent to LAX and produced net cash proceeds of $139 million. This sale should be understood in the context of the ROA mindset taking hold across the company. Our team is increasingly focused on undertaking a continuous review of assets to ensure their accretive contribution to the overall return profile of our business, with an eye toward creating opportunity to buffer cash consumption where it makes strategic sense to do so. Reflecting on our performance in Q1, let me speak to two trends as they relate to the opportunity that sits in front of us. First, on the macro environment. As we move into Q2, the travel industry is positioning itself for a strong summer. We are doing the same. Already, we have experienced seasonal acceleration with a strong spring break and Easter week bringing us forward to Memorial Day, and we have some good demand indicators with respect to summer. Airlines and hotels are both forecasting robust demand and have reported strength in advanced summer bookings in their earnings calls. For Hertz, there is a particular opportunity around international inbound travel, which has been a significant component of rental revenue, yet remains only 60% back to pre-pandemic levels through Q1. Recall that this customer segment traditionally demonstrates higher margin on elevated RPD, International inbound business from Latin America is pacing strong. European travel, which is much improved from the troughs of the pandemic, continues to build, yet is not yet back to pre-pandemic levels, creating opportunity. And perhaps most significantly, Asian inbound business is only beginning to show improvement. With COVID rules relaxed, we believe inbound travel from Japan, Korea, and eventually China will yield positive returns for our business. Second, on continued strength in used car prices. The team's focus in 2022 to monetize and redeploy excess equity in our fleet is again relevant as residual values rose through Q1. This trend means that we are again presented with the opportunity to harvest gains on the rotation of our fleet to subsidize growth and acquisition. Of course, there is no certainty of this trend continuing, and it may yet reverse. But this early price action was better than forecasted, despite uncertainty in the economy and higher interest rates, which may in the end indicate a fundamentally stronger supply-demand balance in the car markets. With that, let me turn to our strategic priorities with a focus on execution. First, on electrification. At the end of Q1, we had about 50,000 electric vehicles in our fleet, comprising approximately 10% of total cars. We have begun taking delivery of GM and other OEM EVs, thereby providing more options for our customers to experience EV models at various price points. Our fleet acquisition costs are generally aligned with vehicle delivery timing. As a result, we have been benefiting from recent price declines from EV OEMs. We are forecasting nearly 2 million EV rentals in 2023, approximately five times the number of the prior year. In terms of charging, our proprietary network of charging stations continues to grow so as to service our fleet. Through our partnership with BP Pulse, we are accelerating the build out of EV charging infrastructure at Hertz locations in major U.S. cities to serve both our customers and the driving public. In addition, through our public-private partnership, Hertz Electrifies, we have signed up Denver, Houston, and Atlanta and other cities are in process, all with the objective of increasing EV utilization and the targeted build-out of charging stations to serve the public, and importantly, our rideshare and other customers across metropolitan areas. Next on rideshare, rental volumes to rideshare drivers for both ICE vehicles and EVs continues to grow. Transaction days and fleet associated with these rentals for Q1 doubled year over year, with notable increase in pricing. To promote further growth in this business, we are working to optimize the rental process for these drivers by offering remote renewals and streamlined payment processing, all to ensure ease of rent, longer length of keep, lower cost to serve, and reduced churn among drivers. Rideshare drivers renting an EV from Hertz can increase their take-home economics by 10% to 15% relative to an ICE rental. Operationally, I would observe that our growing rideshare business is creating greater volume and the potential to buffer the modulation of quarterly peak to trough typically experienced in the leisure business. As I noted on a prior call, we have begun a project to revitalize our value brands, Dollar and Thrifty, and to do so on a cost basis that provides an attractive margin for Hertz. In a departure from the past, we intend to engage customers on a lower cost digital basis. with a dedicated fleet of lower depreciating cars and on an overall cost infrastructure that produces elevated margins. In that context, we've begun to co-develop a digital forward customer experience, including direct channel digital properties designed to provide customers with a touchless experience at an affordable value point. We are looking to an early launch of the project in the summer with early select operations at a limited number of airport locations as we hone the operations more generally. Finally, on Europe, in the second half of 2022 and now entering 23, we reset the priorities of our European operations, which are now under new leadership. As a reminder, in 2022, our European business produced record revenue and adjusted EBITDA, and our performance in Q1 is also up significantly versus a year ago. In terms of our strategic priorities, we are increasing our EV penetration, we extended our Uber partnership to Europe, and we have taken steps to right-size our expense base and improve our operational cadence in each of our European markets. With changes in motion, we anticipate considerable growth from here. As these initiatives continue to mature over the course of 2023, we will be in a position later in the year to share a more specific view on our expectations for their financial contribution to the company. Before turning the call to Alex, it is important that we acknowledge the uncertainty in the market and the view that near-term strength in consumer demand may be unsustainable in a weakening economy. While we are prepared to meet the opportunity of a strong summer, we are equally positioned defensively to manage against a weaker set of economic conditions. Our fleet plan is dynamic and can be right-sized to sit inside wherever the demand curve moves. We can alter fleet quickly and without repercussion. What's more, we are not positioned long cars right now as our utilization is running high. so our actions in a slowdown would focus on reducing buys more than accelerating sells. We will not chase unprofitable volume. We are running Hertz differently and believe the industry is transforming as well. Challenging times, should they arise, will evidence this and underscore the importance of agile fleet management as the cornerstone of running the business better than before. With that, let me turn the call to Alex to provide you added detail on our quarterly financial performance. Alex, over to you.