Hertz Global Holdings, Inc

Welcome to the Hertz Global Holdings fourth 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 like to turn the call over to your host, Johan Rawlinson, Vice President of 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, and these can be accessed through the investor relations section of 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 risks and 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 the filings we make with the Securities and Exchange Commission. Our filings are available on the SEC's website and the investor relations section of the Hertz website. I would also direct your attention to the Form 8K that we furnished to the SEC on January 11th, which includes information on our strategic decision regarding the sale of a portion of the EV fleet. Today, we'll use certain non-GAAP financial measures which are reconciled with GAAP numbers in our earnings press release and earnings presentation available on our website. We believe that these non-GAAP measures provide additional useful 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 Sher, our Chief Executive Officer, Alex Brooks, our Chief Financial Officer, and Justin Kepi, our Chief Operating Officer. I'll now turn the call over to Stephen.

Good morning, and thank you for joining our fourth quarter earnings call. We have a good amount to cover this morning. On our performance, we will address the cost challenges that the business faced in the fourth quarter, which were a continuation of the challenges we faced throughout 2023, as well as the solid demand and stable rate environment we continue to experience. The core message we are sharing this morning as we begin 2024 is one of confidence on the forward. Our confidence is based on the continued stability of the demand and rate environment, the expected benefits, of the strategic decision that we made in the fourth quarter regarding our EV fleet, which is also expected to reduce operational distraction, and the continued execution of our enhanced profitability plan. All told, we expect that 2024 will be a transitional year for Hertz, and we expect to regain our operational cadence and improve our financial performance with increasing effect into 2025. With that, let me turn to our Q4 results, both revenue and cost, and our progress on select initiatives. Justin Kepi will then share impressions from his first 90 days in his role as our Chief Operating Officer and the initiatives he is leading to enhance productivity with a particular focus on our goals for 2024. Alex will then conclude our prepared remarks with additional commentary on our financial performance, liquidity, and outlook before we turn the call over to your questions. On the quarter, revenue was $2.2 billion, in line with our expectations and in line with sequential seasonality, and up 7% year over year. Our top-line performance reflected continued demand for our product, consistent with travel trends reported across airlines and hotels. Specifically, Q4 volume was up 12% year over year. The organization delivered Q4 revenue with a strong focus on rate. Revenue per day in the quarter came in better than expected at $58.09, which is slightly better than typical seasonality would yield. Year-over-year RPD reflected a moderating trend relative to prior quarterly comparisons and the rate of year-over-year decline decelerated. Overall, this better than expected rate performance was the product of a relatively stable rate environment in the quarter, and underscores that rate for the whole of 2023 remained 40% higher than rate in 2019. Our ability to capture this rate was not only a product of stable demand, but our prioritization of RPD. We made some very intentional decisions in the quarter to forego lower margin business, even though it was at the expense of utilization. Further to utilization, we did carry more cars into quarter end than we had previously anticipated. Like all decisions regarding fleet, we are guided by an ROA or return on asset mindset with the central objective of keeping our supply of fleet inside profitable demand. Against declining vehicle residual values in the fourth quarter and what we might yield on sale, we saw the opportunity for greater returns in the continued deployment of these assets. As you are aware, we have been focusing on growing customer channels like Dollar and Rideshare both of which can accommodate higher mileage vehicles. In addition, we are being very intentional about our choice of disposition channel. We continue to see the opportunity to increase vehicle sales through retail channels, including Carvana and our proprietary network. As compared to auction or wholesale, retail typically yields higher selling prices when residual prices are in decline. In Q4, for example, we saw a positive variance between wholesale and retail gross price in the range of 5% to 10%. This prioritization of more favorable economics related to continued rental versus immediate disposition and the selection of channel to optimize price reflects our continued attention to asset returns. Let me turn to vehicle carrying and operating costs. Quickly on carrying costs, weakness in residual values together with the charge we took on the held for sale EVs along with higher interest rates resulted in a higher than expected vehicle carrying costs for the quarter. Alex will expand on this in more detail. With respect to operating costs, direct operating expense or DOE per transaction day was $36.92 in the fourth quarter. Excluding net collision and damage and adjusting for extraordinary litigation expense in the fourth quarter of 2022, DOE per transaction day was flat in Q4 versus a year ago and decreased by 8% for the year. We continue to experience elevated collision and damage in the quarter, largely driven by costs associated with running our EV fleet. And perhaps more significantly, the challenge of the EVs had an impact on our operational efficiency more generally. further supporting the advisability of our EV sales plan. As Justin will speak to more, DOE is squarely in our sights. All told, fourth quarter adjusted corporate EBITDA was a loss of $382 million, which includes the $245 million of incremental net depreciation expense associated with the EV sales plan. To be clear, this bottom line result is unacceptable. But as I said at the beginning of my remarks, I have confidence in our trajectory, particularly with the bold but achievable tossed-out plan and our decision around EVs. The drivers of this outcome are understood and are being addressed, and the opportunities before us are real. Our decision regarding the EV fleet is one driver of opportunity. As we discussed in our 8K, we expect the consequences of our Q4 decision to be material and positive on the forwards. We expect improved adjusted corporate EBITDA and cash flow over the next two years from that decision. We will also be positioned to better meet customer demand through higher utilization on fewer and less expensive ICE vehicles while maintaining an EV fleet where again, supply better meets profitable demand. And because we are eliminating a portion of the EV fleet that yielded the lowest RPD and exhibited the highest level of damage incidents, we expect to yield a disproportionately higher financial benefit over this year and next than the size of the fleet reduction would imply. The anticipated two-year payback on the charge taken in Q4 related to EVs in terms of aggregate benefit to adjusted corporate EBITDA production is to be understood as entirely separate and apart from the opportunity to generate an incremental $500 million of adjusted corporate EBITDA which we have discussed on previous calls. This incremental 500 million opportunity falls into three areas. First, we have our project-driven initiatives, which are focused on the creation of profitable incremental revenue. This includes growing rideshare and improving our European and value brand businesses. In 2024, we will expand on the progress we made across each of these initiatives in 2023, which included on rideshare growing revenue by 75% over the prior year. Uber drivers have now driven over 1 billion miles in EVs rented from Hertz. Our international business increased volume across key customer channels and grew annual revenue by 17% over the prior year. We also made progress in our dollar and thrifty brands, where we now have new websites designed to enable improved direct bookings and enhance customer loyalty. Second, we have our efforts to enhance the yield on our core business and the assets deployed against it. through a focus on improved revenue management. Some specific progress to note. Our team rolled out an improved skip-the-counter process across all brands in select airports during the quarter, reducing pressure on field employees and improving the customer experience with real opportunity to increase the sale of value-added services or vast products through digital channels. And we started to roll out Apple Pay for the Hertz brand in select US channels, providing our customers with an easy, secure, and private payment option. We are already seeing over 20% of eligible reservations completed with Apple Pay. Third and perhaps most in focus now is our disciplined approach on productivity to reduce cost throughout the business. Justin will speak to this cost out opportunity in more detail, but the work is well underway. The team is energized and sees the opportunity and is working to deliver. A terrific add to the team, who is already putting us in an improved position, is our new Chief Operating Officer, Justin Kepi, and I'm pleased to turn it over for his comments. Justin?