Hertz Global Holdings, Inc Q4 FY2021 Earnings Call

Welcome to Hertz Global Holdings Fourth Quarter and Full Year 2021 Earnings Call. Currently, all lines are in listen-only mode. Following the presentation, 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 our host, Johann Rawlinson, Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining us. By now, you should have our press release and associated financial information. We’ve also provided slides to accompany our conference call that 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 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 this date, and the Company undertakes no obligation to update that information to reflect changed circumstances. Additional information concerning these statements is contained in our earnings press release and in the Risk Factors and Forward-Looking Statements section of our 2021 Form 10-K available from the SEC and on the Hertz website. Today, we’ll use certain non-GAAP financial measures, which are reconciled with GAAP numbers in our press release. We believe that our profitability and performance are better demonstrated using these non-GAAP metrics. All comparisons discussed will be against 2019, unless stated otherwise because we believe it provides a more relevant benchmark given the unusual impact of COVID-19 on our business in 2020. For comparisons to our 2020 results, please refer to our press release and 2021 Form 10-K. Comparisons will also exclude the effects of the Donlen fleet leasing and management business we sold in March 2021. Our call today focuses on Hertz Global Holdings, Inc., a publicly traded company. On the call this afternoon, we have Mark Fields, our Interim Chief Executive Officer; and Kenny Cheung, our Chief Financial Officer. I’ll now turn the call over to Mark.

Thanks, Johann. Good afternoon, everyone, and welcome to our fourth quarter 2021 earnings call. I’m very excited to speak with you today as we reflect on a very transformative year and contemplate an exciting road ahead for Hertz. On today’s call, I’ll be providing a high-level review of our business initiatives and an update on our strategic initiatives. Kenny will then provide a review of our financials before we open up the call for Q&A. Before I begin, I’d like to take a moment to recognize some exciting news around our search for a world-class permanent CEO. As we announced a few weeks ago, we’re pleased to welcome Stephen Scherr to the Hertz family as CEO, effective February 28. We’re thrilled to have someone of his caliber taking the reins and to continue Hertz’ commitment to being at the center of the modern mobility ecosystem. Stephen was Chief Financial Officer of Goldman Sachs, and in that role, he developed and led Goldman’s all-digital consumer banking business, which was built to enable customers to save, borrow, and spend on a clean digital platform. I plan to work closely with Stephen to ensure a smooth transition, and I very much look forward to staying involved with Hertz in my capacity as a member of the Board of Directors. I would also like to start off by recognizing the very hard work and efforts of the entire Hertz team that enabled us to report these results to you today. Now, turning to our results. Sustained structural improvements on both the top and bottom line contributed to a strong performance. Monthly revenue per unit rose 31% from the fourth quarter of 2019, driven by a 35% increase in revenue per day. We maintained discipline in our fleet planning and our pricing. We aligned our fleet below demand and did not chase unprofitable business. Our fourth quarter adjusted corporate EBITDA exceeded guidance. We achieved a record fiscal year adjusted corporate EBITDA of $2.1 billion and a margin of 29%, which resulted in adjusted earnings per share of $4.39. Our leaner cost structure also contributed meaningfully to our results. We previously mentioned that we realized $300 million in annual cost savings, and our results this quarter reflect just that. We’re becoming more efficient and agile, and as a result, we’re a healthier, stronger business. During the quarter, we unveiled how Hertz is positioning itself at the center of the modern mobility ecosystem, announcing transformative initiatives with Tesla, Uber, and Carvana. We also completed a listing through a secondary offering of our common stock that now publicly trades on the NASDAQ Global Select Market, as do our warrants. We redeemed $1.5 billion of preferred shares for less than the 30% premium originally contracted and are currently executing on a Board-approved $2 billion share repurchase program, which is incremental to the $300 million repurchase in conjunction with the NASDAQ listing. As you can see, it was a busy but exciting quarter for our business. Last fall, we laid out five key priorities that would serve as the foundation behind everything we do to position Hertz for long-term success. As noted on slide 7, these priorities include excellence in executing on the fundamentals, committing to a customer-first mentality, innovating relentlessly, leading in the adoption of electric vehicles, and investing in our future. Our teams around the world are guided by these priorities, and they act as a driving force behind the execution of our key strategic initiatives, which are summarized on slide 8. Now, the bottom line is we’re positioning ourselves at the center of the modern mobility ecosystem and discussing this in the context of our recent partnership with Tesla, Uber, and Carvana. So, let me take you through a few highlights on the progress that we’re making with these partnerships. First, Hertz customers can now rent Teslas in multiple major markets across the United States including, but not limited to, Atlanta, Fort Lauderdale, Los Angeles, Orlando, San Francisco, and Washington, D.C. Initial learnings from this rollout have been invaluable, and we’re already starting to implement them into our standard operating procedures. For instance, on-site customer training is proving to be very important. Our website and app have an expedited EV rental booking process and include digitized guidance to educate customers about the EV to get them on their way quickly. We’re currently ahead of plan in building out our charging infrastructure. We have over 700 Level 2 chargers installed across 65 markets globally. Our purpose-built infrastructure consists of charging stations across airport, suburban locations, and shared mobility rental locations. And we are accelerating our plans to install Level 3 DC fast chargers into our top markets in 2022. As we’ve explained, a significant number of our Tesla electric vehicles are dedicated to our strategic initiative with Uber. We’re seeing strong driver interest, and participating drivers are generating higher earnings. The program is launched in over 30 markets including, but not limited to, Los Angeles, San Francisco, Chicago, and Atlanta. As we grow the EV fleet and continue to build out our infrastructure, we’re committed to being an agile and always-learning team. These learnings will improve our operations and, in my view, will give us a huge competitive advantage in the industry. We’ve seen several of our OEM partners announce EV launches in the coming year, and we’re having active ongoing discussions with our OEM partners and evaluating all available models for inclusion into our fleet. Our partnership with Carvana is exceeding initial expectations as we work to revolutionize fleet management. Leveraging Carvana’s customer dedication, technology, and nationwide first-party network allows for a more efficient direct-to-consumer sales channel, providing Hertz the opportunity to increase its retail-focused disposition channels. We are ramping up the program with several thousand vehicles listed on the Carvana platform which are converting very well into sales. As we mentioned in conjunction with our listing, all of these initiatives that I just went through remain margin accretive relative to our view of our normalized earnings power. Our ability to execute effectively on each of these initiatives is, of course, highly dependent on a skilled and motivated workforce. Given the current challenges in the U.S. labor market, this has never been more important. And recognizing this, we recently began implementing a series of further enhancements to our workforce hiring and retention practices to ensure we have the right people in the right place at the right time. These include the use of analytics for local pay and competitive benchmarking, leveraging technology to improve the candidate experience during the interview and communication process, and more closely aligning workforce planning to fleet fluctuations. In addition to supporting employees, Hertz is prioritizing being environmentally conscious on our path to lead the future of mobility. We’re actively working towards establishing short- and long-term science-based greenhouse gas emission reduction targets. Ongoing investments in growing our global EV fleet and robust charging infrastructure will be critical to achieving future targets and improving customers’ access to zero emissions transportation options. Last quarter, we emphasized our focus on modernizing our technological offerings, delivering innovation and growth, and connecting our entire fleet. We originally anticipated having a substantial portion of our fleet connected by the end of 2022. However, we’re now partnering with a leading telematics supplier and continue to work with various OEM partners on select vehicle models or telematics enabled from the factory. These developments have accelerated our telematics rollout timing, and we now expect to have a majority of our U.S. fleet connected before the end of the summer. To make that data then work for us, we’ve also developed and implemented a technology platform that ingests data from these connected cars to promote fleet and operational efficiencies. Among others, this data can tell us where a car is, if it moves to a location that it should not be in, the charge level of the vehicle’s battery or triggering an engine service indicator. We expect this data to further improve fleet efficiency and reduce our operating costs. On the international side of the business, we recently invested in an early-stage company with a customer-centric platform built around a fully digital EV rental experience. The technology is supported by a fleet management system to assist in the deployment and management of our EV fleet, which, combined with Hertz’ in-house initiatives could ultimately be scaled globally. These efforts will further our capabilities to leverage the best of transportation and logistics management alongside a strong digital backbone. We’re also busy with several initiatives that we believe will enhance the customer experience and streamline the car rental process. These include a touchless experience for renting vehicles and enhancements to the Hertz mobile app. Hertz customers will start to see improvement with the app by next month, and an iterative series of enhancements will follow through the rest of the year. This will allow us to deliver a more personalized customer experience to help us attract and retain new customers and drive loyalty. We’ve expanded our customer experience team to better coordinate and oversee these activities. And as I mentioned earlier, taking a customer-first approach is central to how we run the business. Finally, before turning things over to Kenny, I want to update you on what we’re seeing thus far in 2022. The Omicron variant brought a new wave of cases and had a near-term impact on the travel industry. Throughout this period, the industry has remained fairly disciplined. The weakness we saw was localized to January and the first half of February. Industry pricing for the remainder of the quarter is significantly stronger than the first half of the quarter. As a result of this relative industry discipline, the recovery has been swift. And Kenny will provide more specifics on this in a few minutes. As a reminder, our 2021 results were heavily driven by leisure travel demand in the U.S. The rebound for international leisure inbound and business travel has yet to take shape, but we stand ready. Business travel tends to be more concentrated towards the beginning and middle of the week, which is where our utilization rates are currently at their lowest. The return of business travel is expected to improve revenue per unit as midweek utilization rates improve. On the fleet side, we’re still experiencing a constrained supply of new vehicles, and the Manheim data for December showed that units of inventory was still down over 20% compared with 2019. We expect that the vehicle shortage will persist for several quarters to come. We believe we’re getting our fair share of new vehicles, and we continue to supplement the fleet with good quality pre-owned vehicles. In light of these conditions, we’ve maintained strict discipline on fleet size management and pricing. Historically, there was a tendency in Hertz to chase utilization and fleet size, which led to excess fleet and lower monthly revenue per vehicle. Today, we’re managing this business differently, and I believe we’re a healthier and more sustainable business as a result. Looking ahead, in addition to focusing on our key priorities, we will continue to build on our brand strength and global fleet management expertise, combining it with new investments in technology, electrification, shared mobility, and a digital-first customer experience. Our key fleet management capabilities will allow us to diversify and profitably grow in new areas of the mobility sector. Bottom line, we have a view of where mobility is headed, and we’re very excited about executing on a strategy to put us firmly in the middle of that. So, with that, I’ll turn it over to Kenny.

Thank you, Mark, and good afternoon, everyone. During our last call, I discussed our strategy for achieving profitable growth, which includes optimizing our market segment and distribution network, managing our fleet capacity carefully, and maintaining productivity. As we noted during our listing last year, our efforts to enhance revenue while controlling costs have positively impacted our earnings. The structural revenue improvement in RPU and $300 million in lasting cost reductions are management actions that have led to a more profitable business. We have made significant changes to our operations since 2019. In the fourth quarter, we executed our plan and delivered impressive results. We reported $0.91 in adjusted diluted EPS, $628 million in adjusted corporate EBITDA, and an EBITDA margin of 32%, with adjusted free cash flow of $509 million. RPU reached a fourth-quarter high, increasing 31% compared to Q4 2019. The main factor driving the RPU increase was RPD, which rose 35% from Q4 2019. Monthly depreciation per unit was slightly better than expected at $57. We ended the year with liquidity of $3.2 billion, which exceeded our guidance after accounting for the redemption of our preferred shares and common share repurchases, both of which I will elaborate on shortly. Adjusted operating cash flow for the quarter was $573 million, accounting for 91% of adjusted corporate EBITDA, and we anticipate maintaining that ratio around 90% moving forward. In Q4, we demonstrated how management decisions, including changes to corporate contracts and optimizing our segment mix, along with selling additional products, contributed to the growth in RPU. Our total RPU for Q4 was $326 higher than in the same period of 2019, due to management actions and market conditions. As previously mentioned, the monthly depreciation per unit was $57 for the quarter, slightly better than our guidance range of $60 to $70. This is influenced by the current strong market for used cars, which affects our income statement in two ways: it lowers gross depreciation expenses on our vehicles and generates gains on vehicle sales. Gross depreciation is the recorded depreciation of our vehicles while they are in our fleet. The gross depreciation rate at any time is the difference between our book value and expected sale value divided by our projected hold period. The starting vehicle value is our acquisition cost, while book values reflect depreciation as the vehicle is used. When used vehicle prices increase, expected sale values also rise. This narrows the gap between our book value and expected sale value, reducing our anticipated gross depreciation. We have reflected this trend in our results over recent quarters. Additionally, when we sell a vehicle for more than its depreciated book value, we record a gain that offsets gross depreciation expenses in our income statement. Due to strong residual values, some vehicles have book values lower than expected sale prices, which we classify as fully depreciated vehicles. Since we do not account for further depreciation on these vehicles, they contribute to a lower average depreciation rate and create the impression that many vehicles are undergoing normal gross depreciation. When these vehicles are sold, the resulting sale gains offset depreciation further. In Q4, we reported $224 million in gross depreciation expenses and $146 million in net gains from sales, leading to the $78 million seen on our income statement. It is important to note that we rotate more vehicles out of our fleet during Q4 and Q1. So far in 2022, we continue to see strong residual values and achieve exceptional gains. Given these circumstances, we expect Q1 depreciation to result in a gain or a negative expense of $40 to $50 per vehicle per month. Looking beyond Q1, we anticipate these factors will ease. As we increase our fleet for the spring and summer peak seasons, we will introduce more expensive vehicles into the fleet, leading to a decrease in both the quantity and proportion of fully depreciated vehicles. Consequently, we expect monthly depreciation per unit to gradually increase throughout the remainder of 2022, returning to more normal levels by year-end. Given the robust used car market, investors are understandably concerned about the sensitivity to declining residual values over time. From a cash flow standpoint, the ABS is well-capitalized, with an equity cushion exceeding $2.5 billion, which protects it from a 25% drop in residuals. Furthermore, we believe that decreases in vehicle residuals do not necessarily lead to downward pressure on rental pricing. Pricing is fundamentally influenced by the supply-demand dynamics for rental cars. As Mark noted, we are maintaining fleet supply slightly below anticipated demand. Although it is just one case study, the industry's pricing response to Omicron reflects responsible growth that aligns with the recovery from the pandemic without exceeding it. We continue to project that Hertz will achieve strong RPU, supported both by these industry conditions and the advancements in our technology, fleet, ancillary offerings, and segment mix. We remain committed to disciplined pricing. Transitioning to our operating expenses, our continued focus on productivity led to a decrease in DOE and SG&A as a percentage of revenue by over 600 basis points compared to 2019. As previously reported, we implemented cost reductions that, on a comparable basis, could have increased full-year 2019 adjusted corporate EBITDA by approximately $500 million, factoring in lower interest rates on vehicle debt. We expect $300 million of these cost reductions to be permanent. Our ongoing efforts to enhance the bottom line involve optimizing business processes and driving operational efficiencies. Regarding our capital structure and liquidity, our balance sheet is exceptionally strong, positioning us well to fund our strategic initiatives, including the share repurchase program and to expand as demand recovers fully. During Q4, we issued $1.5 billion of senior notes in a private offering. We used these proceeds, along with cash reserves, to redeem all outstanding preferred shares at a reduced premium of 25%, achieving savings of $75 million. This redemption eliminates the 9% dividend cost and will save the company over $90 million annually, with $60 million in annual net savings. As of December 31st, our corporate net debt was approximately $550 million, with no significant corporate debt maturities until 2026. At that date, our liquidity stood at $3.2 billion, or $4.3 billion when excluding capital structure activities. Our liquidity consisted of $2.3 billion in unrestricted cash and $925 million in available first lien RCF. The company initiated a 10b5 repurchase plan, allowing us to conduct share repurchases within specific guidelines during our restricted period. As of February 17th, we executed repurchases totaling $1.1 billion or 48 million shares. As a result, we have about $1.2 billion remaining from our $2 billion repurchase plan. We continue to believe that the share repurchase program is an excellent method to return cash to shareholders while taking advantage of what we perceive as a very favorable buying opportunity. We believe Hertz's share price is undervalued based on our strong earnings, healthy cash conversion, low corporate leverage, sustainable fundamentals driving our earnings, pricing discipline, and our growth strategy in the context of the EV mobility acquisition. Now, let’s look ahead to the first quarter. Traditionally, we observe a revenue decrease of about 10% to 15% from Q4 to Q1 due to normal seasonal patterns. Based on current data, we anticipate that this quarter will trend toward the favorable end of that range. As Mark pointed out, industry pricing has remained relatively disciplined during this period, and our forward bookings suggest a positive trend in pricing for the remainder of the quarter. All signs indicate that the impacts of Omicron are behind us, and we are optimistic about the quarter ahead. As countries lift travel restrictions, we expect our international inbound segment results to continue to improve. Given that this is a high-value segment, it will help boost global RPU. We also anticipate a rebound in business travel, further contributing to rising RPU. With that, I will turn it back to Mark.

Thanks, Kenny. So, I hope from this afternoon’s call, it’s clear that Hertz has made great strides and that the Company is well-positioned for profitable growth. Hertz has established strong momentum since its restructuring and listing, successfully executing on the fundamentals and starting to execute on the strategic partnership we have forged with mobility leaders. Hertz is poised to play a central role in the evolution of the modern mobility ecosystem, leading the electric vehicle fleet transition and creating a digital-first experience for business and leisure travelers around the world. I’ve been thrilled to have been part of Hertz at such a pivotal time for an iconic brand like ours, and I look forward to staying close to the business as a Board member. I can tell you the Hertz teams around the world are energized about the future. And together, we look forward to capitalizing on the significant opportunities ahead. So with that, why don’t we open up the session for Q&A?

Our first question comes from Chris Woronka with Deutsche Bank.

Hey. Good afternoon, guys. Thanks for taking the questions. Maybe we can talk just for a second about fleet and drill down a little bit into how you think the fleet normalizes in the sense of your typical kind of buying and disposition cadence, because I know you’re a little bit off pace right now in terms of seasonality. Is there any way for us to think about as we get towards the end of the year, can you get back to more of a normal seasonal pattern? And does that allow you to possibly take fewer used cars into the fleet and buy on a more normalized schedule?

Thank you, Chris. I’ll address that first. As we've indicated before, our fleet strategy is to align it with our expectations for future demand. In the past, we may have focused on having the largest fleet, but our current focus is on maintaining the most profitable fleet that corresponds with demand. Regarding seasonal trends, the car industry continues to face significant supply chain challenges and production scheduling issues. As is customary, we collaborate with every OEM on these matters. To answer your question about seasonality, it largely depends on the OEMs' ability to return to a normal operating rhythm in their manufacturing plants. Nonetheless, we will adjust our fleet to match demand to maintain pricing discipline. In the meantime, we're acquiring new vehicles and, as Kenny pointed out, we're actively purchasing high-quality pre-owned vehicles to ensure we have the right fleet for the current demand levels.

Okay, great. Thanks, Mark. And follow-up kind of related to that, which is, obviously, since this whole process began, call it, two years ago, you guys had several iterations of what you might look like in the future. But kind of on the demand side, how do you think you look at the world now versus 18 months ago, 12 months ago or 6 months ago? Do you think there’s more of an opportunity? Is the size of the pie growing, or do you think Hertz is just going to take more market share than you might have originally thought?

Firstly, regarding your question on market share, we aim to maintain healthy and profitable market share. In the near to medium term, we are witnessing significant pent-up demand that has only increased due to Omicron. This situation is favorable for our business as consumers are eager to travel. Although our pre-COVID business levels remain notably low, we are beginning to see positive signs. Last year, we observed a sequential improvement each quarter when comparing to 2019. Businesses are beginning to travel again, although Omicron did impact that momentum. However, as Kenny pointed out, any rise in business travel will benefit us since it generally occurs earlier in the week when our utilization rates are lower. Even if companies choose to travel less than they did before COVID, I believe we are in a strong position. We have renegotiated and exited several unprofitable contracts, which has led to higher volume and rates in our travel segment compared to both 2021 and 2019. In summary, I believe we will see growth in the short to medium term due to pent-up demand, and we will be well-positioned regardless of market fluctuations, thanks to our operational improvements and careful fleet planning.

Yes. Chris, it’s Kenny. Just to add to Mark’s point, as Mark mentioned, as we implemented structural improvement to our business, we did deliberately walk away from businesses that were not profitable or margin accretive. So, if you think about our fleet versus 2019, on paper, it’s down about 30%, but half of that was business that we walked away from. So, as a result, because of that, we are now a much stronger business with sustainable earnings, higher margins, and stronger cash conversion.

Mark, you say Hertz is positioned for the future mobility. And I don’t doubt that, but the truth is today Hertz still generates 100% of revenues from car rental, and that’s got its own cyclical drivers. Question is, when will some of these long-term initiatives play out in the financials? And on that point, can you point us to that when we’re in a more normalized environment on pricing and fleet cost, what will the new Hertz look like in terms of EBITDA with all the positive actions you guys have taken? Is it closer to $1 billion, or is it closer to $2 billion? Because I think that’s the key debate on the stock. And it’s really hard for investors to look pass some of these cyclical near-term drivers to focus on the long term, and I’m very excited of the long-term initiatives. I just want to make sure that the short-term normalized EBITDA is under RPU. Thanks, guys.

Thanks, Billy. In response to your question about when these initiatives will start showing results, I can tell you that they already are. When it comes to our efforts in the electric vehicle market, our Tesla business is in its early stages. We have launched in nine U.S. markets for retail customers to rent vehicles, and we are now operating in over 30 markets with our business offering Tesla vehicles to Uber drivers. The demand is quite strong. Retail customers are willing to pay a premium compared to similar internal combustion engine vehicles, and customer satisfaction levels are high. For Uber, there is also significant demand. Additionally, we previously mentioned that one of the advantages for Uber drivers would be the potential to earn more money, and that has proven to be true. Recall that during our relisting roadshow, we indicated that these actions would positively impact the Company’s margins, and they are doing just that. We plan to continue building on this progress. In short, it's starting now, and we will expand on that moving forward. Kenny, would you like to elaborate on how the business will look on a normalized basis?

Yes. So, I think the easiest way to think about this, Billy, is let’s take 2019 EBITDA as a "normal year." And so, we had $649 million of EBITDA. And to be fair, let’s back out Donlen, just to be fair, about $100 million of EBITDA. So, you’re left with about $550 million of EBITDA. And let’s factor in the $300 million of structural cost reduction that we made to our business. And let’s also factor in the $95 of RPU benefit and structural improvement for business as well, right? So, if you do the math, it’s $649 million minus $100 million for Donlen, plus $300 million plus roughly $600 million for the RPU side, you get to a roughly $1.5 billion EBITDA number. And if you do the math, it’s roughly a 17% margin business. I’ll say this though. This excludes any of the mobility play that we have with Tesla, Uber, and Carvana. This excludes the favorable residual environment that we’re currently operating in right now. This excludes any of the favorable market forces that we believe some will actually stick going forward from a pricing standpoint. So, again, think of this as right now as the floor and not the ceiling.

Kenny, that’s really helpful. Just one quick follow-up. What’s the assumption that is used for per unit fleet cost to get to that $1.5 billion in the U.S.? Is it around $250, or is it based on current market rates?

No. Yes, you’re spot on. It’s based on our historical depreciation rate, which was roughly around $300.

I wanted to ask a question or two about fleet cost. I would love to get your view on the value of the fleet that you see today versus what it’s on the books for. My guess is the gain you’ll take in Q1 is probably going to be north of $200 million. So, I was just kind of wondering how much more gains are left in the system? And when do those fall off? And when you look at the fleet today, I got to imagine it’s a pretty diverse mix of model year vehicles. I guess there’s ‘18, ‘19, ‘20, ‘21, ‘22 is all in there. So, I would love to kind of get your thoughts as you look at ‘23, how much more will your acquisition costs of your fleet in ‘23 be compared to maybe what you’ve seen historically?

Let me break down your question into parts. Your first question was about the fair market value compared to the value of the vehicles on our books. Currently, the asset-backed securities have about a $2.5 billion equity cushion. In other words, even if the residuals decreased by 25%, we wouldn’t need any collateral for these vehicles. Now, regarding your second question about the gains, I'll explain it using Q4 as an example to give you better insight into our gains moving forward. The $57 depreciation rate includes gross depreciation, which is about $160 per month per vehicle as of Q4. If you analyze that $160, there are many vehicles that are fully depreciated, meaning their value is almost zero now. The other vehicles are depreciating at about the historical rate of roughly $300. So, we have a mix of zero and $300, averaging out to $160. On the gains side, we currently see roughly $103 per vehicle in monthly gains. So, if you take $160 minus $103, you get the $57. Most of these gains are coming from those fully depreciated assets. As these vehicles leave our fleet, we can expect the gains to decrease, and the gross depreciation will likely normalize closer to $300, based on what we have observed over the last five years. However, it’s important to note that various factors will influence depreciation, like fleet costs, holding periods, fleet mix, and market residual values. Thus, you can anticipate that the gains will narrow throughout the year, especially as the zero depreciation vehicles are removed from our fleet, and we expect gross depreciation to approach $300. Lastly, consider the relationship between residual values, gains, and purchase prices. Compared to 2019, residual values have increased by 25% to 30%. However, other vehicles that are not fully depreciating are still at around $300. This is due to the direct correlation between purchase price and residual value, which means that the path of depreciation remains unaffected.

That's helpful. I have a follow-up on that. Can you provide insight into how the costs in 2023 may differ from what you've experienced in the past? When considering retail prices from dealers, it appears these prices might not align with historical figures or what you paid for the cars. My question is whether the $300 a month figure remains relevant as we look ahead to 2023 and beyond.

Well, I wish I had a clear prediction on this, but it will be determined by the market. We will collaborate with our OEM partners. I can say that any market price we might receive will also be available to our competitors. Therefore, it won't significantly impact the industry among competitors. However, it is difficult to predict market pricing, especially in this environment as the OEMs address their supply chain challenges and need to first replenish their retail network before reaching out to us.

Yes. I won’t comment on the depreciation of 1.25 to 1.5 is kind of how we’ve modeled it ourselves.

First, I wanted to ask on the partnership with Tesla, including how many vehicles you may have purchased from Tesla so far, how many you hope to or expect to take delivery of this year or in total by the end of this year. And also, are you able to comment at all on like the trend in revenue per day or per unit so far for your Tesla vehicles relative to your fleet average? Are you seeing maybe any trends in demand for renting electric versus ICE vehicles from leisure versus commercial customers, for example, I’m not sure, maybe corporate customers might like to see their employees rent EVs, when possible to better pursue their ESG initiatives, or just anything else to keep in mind?

Thank you for the question, Ryan. I won’t provide specific numbers on Tesla, similar to how we don’t disclose such details with any of our OEM partners. However, I can share that the launch is going very well. We’re currently in nine markets in the U.S. and in a few European markets like Germany, Italy, and France for retail rental. Demand is strong, and customers are willing to pay a premium compared to similarly sized ICE vehicles, with high satisfaction levels reported. For Uber, we’re seeing significant demand, and one of the benefits we highlighted was that Uber drivers could earn more, which is indeed happening. During the roadshow for the relisting, we indicated that all these actions would positively impact our margins, and they have. We plan to build on this moving forward. Vehicles are being distributed successfully, and I mentioned that we are accelerating our charging infrastructure rollout, now covering 65 markets with 700 Level 2 chargers. We expect further expansion as we continue to receive Tesla vehicles. We’re pleased with this rollout. Regarding leisure and business travelers, we are seeing that customers are very enthusiastic about renting a Tesla from Hertz and are willing to pay for the experience. Encouragingly, as business travel starts to recover, we’re noticing strong interest from corporate travelers in renting EVs from us.

Very interesting. Thank you. And I heard you mention a very strong, 90% conversion of EBITDA into FCF, at least for this year. Can you maybe talk about some of the puts and takes there? I imagine you may be benefiting from the improved loan-to-value of the existing fleet, given the strong used car price environment there by allowing you to perhaps grow the fleet in unit terms without additional dollar investment, right, sort of benefiting FCF. Is that the case? And for how long would you expect that dynamic to persist? And how should we maybe think about FCF conversion thereafter?

Yes. So, just a correction, it’s 90% of OCF, so it’s operating cash flow, right? So that’s the stat that we’re referencing. So that walk is EBITDA. And then you have a bit of working capital, which again, given the fact that we’re healthier, from an infrastructure standpoint, as the footprint standpoint as well as the fact that we are generating high RPU, the drive on working capital is less, right? So that drives the 90% OCF conversion. In terms of FCF, I won’t give a lot of details in terms of how many cars are buying, selling, et cetera. But I will say this, right, the net fleet growth line on a single core unit economics, right, the buying and purposing, given the fact that we have equity that gets on track with several vehicles. However, as I mentioned in my prepared remarks, we are rotating our fleet right now, and that will have a cash need from a net rebill standpoint. So obviously, it will impact us, yes.

Okay, perfect. Thanks. And then just my last question is on the allocation of that cash flow, of which I expect share repurchases to take up by far the lion’s share, including for all the reasons that you mentioned towards the end of the prepared remarks there. But I saw the UFODRIVE announcement. And while small in the context of your ample FCF, I’m just curious, are there many other similar opportunities for investment, or what other M&A opportunities could be out there? Of course, car rental itself is already highly consolidated, but I’m not sure if there are maybe certain currently outsourced functions you could in-source or maybe you might look to grow via inorganic investment to offer for third-party certain functions you do today, like fleet management or, for example, selling. Would you ever sell vehicles in your retail stores that are not coming out of your fleet or capitalize upon your already vertically integrated direct to dealer auctions to stand between buyers and sellers of auction vehicles or just anything else? Maybe won't make sense to just keep hammering away at the repurchase given where the share price is. But just curious what other priorities or opportunities you feel might be out there.

Thanks, Ryan. So first off, I would just characterize our growth strategy as not dependent on significant M&A. We think we have lots of ample opportunity to grow, given our strategic initiatives that we’ve outlined. That being said, we’re always going to be looking for interesting tuck-in types of M&A that could further our strategy and give us opportunities to further grow. I do think other things we’re doing in the business that we’ve talked about in the past, we’re investing a significant amount of money in our IT infrastructure. We’re doing it in a different way than we’ve done in the past, different tasks. We tried to boil the ocean all at once. Now, we’re being very targeted and have business owners for each one of these investments. But I think the good news is given our business performance and given Kenny’s comment around what we see as the free cash flow conversion, it’s going to give us lots of opportunities to look at many of the things that you just mentioned, and that will be an ongoing process.

Our next question comes from Brian Johnson with Barclays.

Thank you. I want to discuss corporate travel a bit. You mentioned trends and their effect on midweek utilization, which should positively impact the RPU metric, and we appreciate that. However, Avis reported a challenge from corporate travel. It appears that some large corporate accounts have rates set before COVID and before the chip shortage, making them much lower than the retail market, which is more than the usual arbitrage. Can you provide insight into whether you are experiencing similar issues with those large contracts, especially considering the unprofitable contracts rolling off during your restructuring? Also, how does your relationship with Amex Global GBT play into this, especially since you likely have more pricing power with SMEs, while many of the large corporates, including 75% of the big 4 or big 3 accounting firms, are still utilizing GBT? My understanding is that they would maintain their contract rates rather than switching to the global business travel rates. Could you elaborate on the corporate pricing aspect?

Thank you, Brian. Those are good questions. Regarding our corporate contracts, I can't comment on our competitors' situations, but I can share what we're experiencing. During our restructuring, we managed to either exit or renegotiate nearly all of our contracts. Generally, as corporate and business travel resumes, we see it as a positive factor for us since these travelers typically journey at the start of the week when our utilization is lower, which should significantly enhance our revenue per unit. As for small and medium enterprises (SMEs) and large corporates along with our relationship with Amex, this partnership is very important to us. We anticipate increasing our market share compared to historical levels, and we're beginning to see that happen. In terms of SMEs, the rates are currently more appealing as they return to the market and start traveling again. For large corporates, they not only offer volume but also stability. Given that we've renegotiated all our contracts, we feel optimistic about this business as it gradually returns. Even if it doesn't reach pre-COVID levels, we believe we will still be in a strong position.

And just a quick follow-on. I get the utilization point in terms of overall days, but as our business travels often took us to the Hartfords, the Indianapolis, the Columbus, Ohios, which are not Miami, Los Angeles, Denver, Phoenix or other vacation spots, so how does the utilization impact of corporate change when you need more cars at those kind of mid-tier business airports?

Well, that’s normal course of business for us, right, as we manage our fleet. And to that end, I think when you look at some of the examples, and I think I mentioned this in my prepared remarks around better managing our fleet to demand, things like telematics that we’re putting into our business give us a lot better data in terms of availability of our vehicles and being able to match that to forward bookings and manage our fleet to where the customers are, so. And that’s also part of the investments. As you know, Brian, we’ve mentioned in the past that we’re making in our IT infrastructure to continue to improve our fleet and revenue management.

I’m sure that Stephen Scherr will want to provide his own thoughts on the strategy and financials of the company and what drove them to the role next quarter. But I’m curious from a forward standpoint, what aspects stood him apart from others you looked at, recognizing that his reputation perceived him. And how that might impact the strategic direction, if at all, for the company?

Great. Well, first off, as we mentioned, we’re very excited to get Stephen on board. Listen, what Stephen brings is not only great kind of strategic skills because he ran Goldman’s strategy for quite some time. He’s also an operator as well, having basically started up and led the consumer banking business for them in Marcus. So, we think both of those things are quite important skills as we look at navigating the future here at Hertz. And as I mentioned, he’s very supportive of the strategy. And as I said, like every CEO, they’re going to come and bring their perspective, but it’s not going to be a student body left; it’s going to be about building on the momentum that we have going forward.

Great. And then, as an unrelated follow-up, you mentioned that you want to be the most profitable fleet, not the largest fleet. How do we think about how that plays out from a competitive standpoint if peers are more willing to add supply faster? And are there scale benefits that could theoretically drive more aggressive pricing, or perhaps asked another way, what dictates pricing more, macro or competitive dynamics?

Great. From what you’re observing in the marketplace right now, pricing is primarily influenced by supply and demand. Regarding competitors, I can’t comment on them; this is really about our strategy of aligning capacity with demand. I believe it will be quite challenging for any rental car company to significantly increase their fleet in the near future, primarily due to production issues faced by manufacturers. This suggests a positive outlook for the pricing environment moving forward, at least in the near to medium term.

This concludes the Hertz Global Holdings fourth quarter and full year 2021 earnings conference call.