Welcome to Hertz Global Holdings First Quarter 2022 Earnings Call. 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, Johann Rawlinson, Vice President of Investor Relations.

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 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 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 Donlen fleet leasing and management business, which we sold in March 2021. On the call this afternoon, we have Stephen Scherr, our Chief Executive Officer; and Kenny Cheung, our Chief Financial Officer. I'll now turn the call over to Stephen.

Thank you, Johann. 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, form 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 have 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 ridesharing. 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 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 6 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 discipline, 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 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 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, remains 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, ensuring 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, but 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 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've 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. Our recent partnership with Polestar is yet another important milestone in our EV journey. This partnership stretches over 5 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. 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 ridesharing, 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 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 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 road maps 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.

Thank you, Stephen, and good afternoon, everyone. We continue to execute our strategy of focusing on profitable revenue growth, staying disciplined with fleet size, utilization, and productivity. Our first quarter adjusted EPS was $0.87 and adjusted corporate EBITDA was $640 million, a margin, as Stephen noted, of 34%. Our revenue for the first quarter was $1.8 billion, 57% higher than in 2021. This was slightly higher than the estimate that I put forward on our last call and masks the fact that this was really two different periods within the quarter, as mentioned earlier. The first 6 weeks were weaker than originally expected due to Omicron, but March more than compensated for that. Our performance in the back half of the quarter was due in large measure to improved rates, primarily driven by leisure customers' demand. Our disciplined pricing, together with structural improvements we've spoken about previously, led to revenue per unit per month of $1,326, up 26% from 2021. Within Q1, our RPU sequentially increased from approximately $1,100 in January to over $1,600 in March, driven by sequential improvement in utilization and pricing. I should highlight that effective from Q1, we revised our calculation of monthly revenue per unit, or total RPU, to use average rentable vehicles as the denominator. Average rentable vehicles exclude vehicles for sale on the company's retail lots or actively being sold through other disposition channels and are, therefore, unavailable for rent. We believe this is a better measurement of the productivity of our rental fleet as it is unaffected by fluctuations in our disposition activity. For clarity, the calculation of depreciation per unit remains unchanged and includes all cars in the fleet as these remain subject to depreciation. As I've said before, we are keenly focused on generating healthy revenue that is more accretive to the bottom line, and we are deliberate about pursuing high-quality business. We've worked hard to permanently improve our business from a go-to-market standpoint, but market forces on pricing are a function of limited supply and recurring demand. Depreciation per unit per month for Q1 was a gain of $40 instead of an expense, which is within the range we previously guided. As explained in detail on our Q4 call, this is a result of today's strong market for used cars. As we fleet up for our spring and summer peak season and as we rotate more expensive cars into the fleet, the number of fully depreciated vehicles will decrease. As such, we continue to expect monthly depreciation per unit to increase sequentially through the remainder of 2022, normalizing towards the end of the year. For Q2, we expect monthly depreciation per unit to be between $110 and $130. We expect full-year monthly DPU to be between $175 and $225. Our quarterly estimates of depreciation are based on our fleet plan, composition, vehicle acquisition, and disposal amounts and related holding periods. Present and future market conditions factor into vehicle cap costs and residual value and therefore also impact depreciation. These factors are also relevant in assessing ROA in connection with both acquisitions and disposition of vehicles. Now moving to costs more broadly. Like most companies in the U.S., and as Stephen mentioned, we also experienced inflationary pressure during the quarter, which impacted us primarily in 3 ways: first, higher vehicle acquisition costs, which increased gross depreciation; second, higher operating costs resulting from labor shortages and increased employee compensation; and third, higher maintenance costs for our vehicles due to increased pricing of parts and service labor. We see these as being industry-wide factors that need to be offset by pricing and other initiatives. As we mitigate these challenges, we will emerge a more operationally efficient organization. Notwithstanding these immediate challenges, we have several ongoing initiatives to drive additional productivity and operational efficiencies, including hiring at the field level to avoid costly outsourced labor and bringing on more mechanics and leveraging partnerships with vendors to meet the maintenance needs of the fleet. We anticipate that cost inflation will further promote industry discipline and ensure optimal allocation of resources across the board. Overall, the permanent cost improvements we have made and are making to the business have helped us to mitigate these inflationary pressures. As a percentage of revenue, DOE and SG&A for the quarter were 800 bps or $145 million better than 2021 and 250 bps or $45 million better than 2019. In terms of our capital structure and liquidity, our balance sheet remains very healthy, positioning us well to fund our strategic initiatives and return value to shareholders via our share repurchase program. As of March 31, our liquidity was $2.7 billion, and is comprised of $1.5 billion of unrestricted cash and nearly $1.2 billion available under the revolving credit facility. During the quarter, we increased our RCF capacity by $220 million to nearly $1.5 billion, which creates additional financial flexibility and enhances our corporate liquidity. We also raised approximately $2.5 billion through the issuance of medium-term notes as part of our ABS structure. The proceeds were used to repay existing revolving ABS debt, which in turn, freed up incremental capacity for future growth. We also increased the commitments under the variable funding notes by $200 million to $3.2 billion. Turning now to our cash flow for the quarter and our capital deployment strategy more broadly. There are several possible uses of our cash, which need to be considered together and assessed on a relative basis. They are not mutually exclusive. We consider investments in our revenue-generating asset base, our fleet, and these positions are based on long-term calculations on growth and return on investments. Capital allocation requires that we are mindful of the balance between size and capacity to demand and return on asset. In making an investment decision on fleet, we consider the potential for a differentiated return on investment as between EVs and ICE vehicles as an example, whereby the return on EVs may prove higher because of elevated RPD, lower operating costs, and the possibility of extended depreciable life. We also consider non-fleet capital expenditure, which mainly consists of information technology and infrastructure, all consistent with the strategy of improving customer experience and operational efficiency that Stephen spoke to earlier. Here again, we focus on ROI of these investments in terms of improving fleet deployment and customer experience. As we have over the past several quarters, we consider the return of cash to shareholders. Given our net leverage governor of up to 1.5x and our current cash-generating ability, we are in a position where we can invest in growth and return cash to shareholders without placing pressure on the balance sheet. As of April 21, we purchased approximately 55 million shares under the $2 billion plan with approximately $800 million remaining to spend. Before we exhaust the current plan, we will be approaching the Board with proposals around subsequent plans. Turning now to some specific cash flow numbers for the quarter. Our adjusted operating cash flow was $677 million, our non-fleet CapEx was $29 million, and net fleet CapEx was $569 million, resulting in adjusted free cash flow of $79 million this quarter. As we rotate our older cars and broaden new or high-quality pre-owned cars, we fund those at about 20% equity. We generated sufficient cash flow to fund our fleet growth and the reduction in liquidity was related to share repurchases. Let me explain for a moment on how I see cash flow playing out for the full year. We expect that cash taxes and working capital will be approximately 10% of EBITDA and that our non-fleet CapEx will be around $250 million to $300 million for the year. Given the investment in the fleet we are making this year, we expect our net fleet CapEx to be between $1 billion to $1.5 billion, depending on market conditions to reflect the equity component of our fleet rejuvenation and growth investments. Bear in mind, this is mostly funded by the gains realized upon disposals of other vehicles, which are reflected in our reported depreciation and therefore, embedded in EBITDA. We know that people are acutely focused on our view of EBITDA and cash flow once the market normalizes. As we have told you in the past, we continue to believe that at pre-pandemic demand levels and industry-wide depreciation rates, our normalized annual EBITDA generation would be approximately $1.5 billion, excluding initiatives such as the transition towards EVs, supplying ridesharing fleets and our Carvana and Amex GBT relationships. From that EBITDA baseline, we will normally expect free cash flow conversion of at least 70%. This is because once our aggregate fleet value and depreciation return to more normal levels, we expect that EBITDA will adequately reflect the entirety of our fleet expense and net fleet CapEx will be minimal. Finally, with a view forward and consistent with what we are seeing across the travel industry, the positive trend we saw in March is continuing into Q2, where month-to-day RPU is similar to the strength we saw in March. We generated 20% more EBITDA in March than we had originally expected due to fleet tightness and strong demand. We do not see any abatement of the limited vehicle supply, as Stephen mentioned earlier. With the current geopolitical environment impacting the supply chain constraints, I believe industry fleets will continue to be tight and that pricing and residual value will remain elevated as a result. Q2 revenue has historically been higher than Q1 by about 20% due to seasonality, given the momentum we are seeing in our business, we expect our performance for Q2 to exceed Q1 by 30% to 35%. With that, let's open the call for Q&A.

Your first question comes from the line of Chris Woronka from Deutsche Bank.

Stephen, yes, there's a mention of the $1.5 billion as a normalized EBITDA range, which I think most people associate with 2023 or beyond. As the new CEO, what are some of the opportunities and threats to that number?

Yes, sure. So thanks, Chris. I appreciate the question. Kenny, in his prepared remarks, talked about normalized EBITDA in the context of '19 as a reference point. Let me come at it from a slightly different angle, which is looking at current conditions as a delta to where we think normal is. On the demand side, notwithstanding how elevated it is, we're still shy of where I think normal demand will sit. In leisure, it's at about 90% of where it was in '19, so there's limited upside there. But if you look at corporate and inbound, these are international travelers coming to the United States, there is considerable demand that can be recovered to get us to a normal state of affairs. Corporate travel is now running at about 63% of where it was in '19 and inbound is running only at about 35%, and that will change as COVID measures and the like of entry into the United States will change. So on the demand side, there is still room for improvement to get us to a normalized state. Then you look at the supply side, right? Typically through fleet, and I think as we've said, more limited conditions around supply. Much as we will get our fair share of it, I think conditions will persist into '23, maybe a bit beyond. As fleet comes back to more normalized levels, you'll see us grow our fleet but grow it in the context of demand that's there, and I believe we can sustain utilization at levels we're seeing now in March and through the second quarter. Assuming there's some softness in price, it's not going to stay elevated. So if one assumes that we take a 20% or 25% reduction in rate, we still believe that at more modest margins, we can produce $1.5 billion. The upside to that comes from looking at sources of incremental revenue and cost reductions. We're not just thinking about ridesharing to Uber but also what we can sell through Carvana or collaborative marketing efforts that are out there, and the benefit that will come as more electric vehicles come in at a higher RPU than what we're seeing on ICE. And on the cost side, much of what I talked about in the context of certain technology developments will result in better pricing, lower out-of-service rates. Our cloud migration will generate meaningful cost reductions in the context of what we spend on older technology. So those are my thoughts looking both at supply/demand and potential upsides.

Yes, Stephen, very helpful. And just as a follow-up, like kind of on the fleet side, and you mentioned that the RPU of the things you're bringing in, which you have a lot of EVs coming into the fleet, does that make you reconsider wanting to get the total fleet even back to '19 levels even if demand gets there? Is there a case to be made that you could be smaller with a different fleet because the cost of that fleet is going to look a little different?

Yes. My view on this is that this is managing a set of assets and sweating the ROA on your fleet. So I'm more focused on making sure that I'm sizing fleet into demand. The composition of the fleet as between electric vehicles and ICE is crucial because I think the ROA on the EVs will be higher. They will attract a higher rate and they carry lower operating costs. I think the life of those vehicles will be longer and the depreciation will be less. So my point is that I’m not looking to go back to a prescribed fleet number. I want to grow fleet in the context of sweating the ROA, meeting the demand that's there, and looking at the mix of fleet as it affects margin.

And your next question comes from the line of John Healy from Northcoast Research.

Big picture question for you, Stephen and Kenny. Just getting a lot of questions about where we're at in the cycle and what's happening with the economy. Would just love to get your view of how Hertz is thinking about the economy? And maybe how Hertz is different relative to historical periods as maybe we encounter some potential economic turbulence?

Hey, John, yes, it's Kenny. I'll try to answer this one first. A few things come to my mind as I think about your question. For the potential downturn or economic pressure, we can fleet up and down our fleet very quickly unlike other travel and hospitality peers who have fixed assets. The name of the game for us, regardless of any environment, recession or not, is to match fleet to demand below the demand curve to maximize profit. Secondly, we are a very nimble company, with 70% of our cost base being variable, which provides flexibility as volume flexes up and down. This is combined with a strong book of business off-year with proven resilience. Regarding inflation, we don't view it as necessarily a bad thing; it creates more discipline across the industry in terms of pricing and asset allocation. In an inflationary environment, car rental can be a good place to be as you're utilizing an asset purchase that has historical value and monetizing against the backdrop of rising rates. Lastly, regarding the current environment and interest rates, our debt stack is 70% fixed rate, so we are largely insulated from interest rate hikes. Therefore, while the environment is dynamic, our business model is resilient across a wide range of circumstances.

John, it's Stephen. One other perspective is that the rental car industry and the travel industry more broadly are going to be beneficiaries of what I call a delayed consumptive response. If you look across a variety of industries, stimulus led to increased consumption in the back half of 2021. However, travel has not had that opportunity largely due to COVID and restrictions. If I look at our bookings for the summer, it suggests we may see delayed consumptive patterns around travel, and we will benefit from that. A substantial amount of corporate demand and international inbound travelers remains, which is a very profitable segment for us.

Great. That's really helpful. And just 1 follow-up question, Kenny. Could you run us through the math on the view of fleet costs for the year again? Was that a U.S. comment or company-wide? And I was hoping to sketch out kind of the $175 to $225 number?

Okay. So yes, let me go deeper since I’m sure I'll get more questions on depreciation. When you look at this quarter, you’re roughly at negative $40. If you bifurcate between gross depreciation and gains on sale, you’re looking at roughly $223 of gross depreciation per car per month and $263 of gains per car per month, resulting in negative $40. As you work into Q2, your fully depreciated vehicles will decrease, which means the exit rate will close in on $300 as I alluded to earlier. The number I’ve given for the full year is a global figure.

And next up, we have Stephen Grambling from Goldman Sachs.

My first question is a big picture question for Stephen. There are a lot of views about what the future of mobility looks like. What was your framework for that future over the next 3 to 5 years and how are you balancing moving the company towards that view?

Sure. Thanks, Stephen. My view is that Hertz has an extraordinary brand, worthy of an even better business, which I think we can build. Mobility is about diversifying fleet composition and customer channels. Regarding the fleet, it's about balancing between combustion engines and electric vehicles. For customers, it's about direct rental, corporate business, and ridesharing. Electric vehicles have great appeal to corporate customers looking to satisfy ESG objectives. For Uber and Lyft, utilizing EVs provides economic benefits to drivers. We must leverage our existing data to better manage the fleet and serve customer interests: electric vehicles, corporate customers, and more. This forward path presents many exciting opportunities for Hertz.

That's helpful. As a follow-up on the fleet side, do you have any sense of how electric vehicle pricing has trended as you've rolled out more? Is there a difference in uptake between consumers versus business customers?

What we're seeing in the early introduction of electric vehicles into the fleet is consistent with what we had modeled in making the decision that the ROA on this segment of the fleet was attractive. We're seeing elevated pricing certainly in RAC and ridesharing. The utilization rates are impressive. We're seeing waiting lists among Uber drivers to take these cars, and we're seeing a strong uptake, at high utilization levels across both consumer and corporate sides.

From a financial standpoint, the Teslas coming in validate our long-term view of the EV economics being accretive to ICE vehicles. Having a first-mover advantage is invaluable as the learnings are improving our operations and providing a competitive advantage.

If you believe there will be forward softness in pricing for various reasons, EVs growing within our fleet present a defensive floor for pricing. We have a first-mover advantage as they are a scarce component of the fleet.

Next up, we have Brian Johnson from Barclays.

I just want to talk a little bit more about the depreciation, particularly around used car sales and pricing outlook. Can you give us some sense of your activity in the used car acquisition market and how that factors into your depreciation outlook?

Kenny will start and then we'll come back. We are both a buyer and a seller in the used car market. We're buying low mileage, high-quality used cars because the returns are attractive. We're also looking at selling portions of our fleet that are high mileage and deteriorating in value. The calculus we use to keep or sell a car is based on current residual levels relative to what we can earn in rental revenue. We'll be quick to act should the market dynamics change. We view ROA as a broader context within which to think about asset performance.

To address your question about normalized depreciation going forward, you need to look at it in conjunction with other dynamics. RPD, residuals, cap costs, just to name a few. RPD, residual cap costs are up by 30% to 40% versus pre-pandemic. If DPU went up significantly, you'd want to consider that in the broader context of RPU. That creates an important interplay that we’re monitoring.

And our next question comes from the line of Ian Zaffino from Oppenheimer.

Regarding Carvana, how much of an uptick are you seeing? Do you expect to see continued upticks, and how many vehicles do you think you could move through that channel?

We need to avoid specifics due to competitive reasons, but we are seeing a material uptick in sales through Carvana compared to what we could harvest in the wholesale market. Carvana provides us with an incremental channel alongside Hertz’s used car retail channel, and this flexibility allows us to be agile in response to market changes. The volumes through Carvana are exceeding our initial expectations; it's a robust channel for us.

Carvana is not cannibalizing our retail channel, which offers the highest margins. It is taking away from our wholesale auction side, which is accretive to our business and margins.

With the excess cash or capacity you have, where do buybacks fit in, and how do we think about that going forward?

The mechanics of what we were doing in Q1 meant we were in an elongated blackout period, so our volume was prescribed. Now that we’ve passed earnings, we can reassess our repurchase plan, and other opportunities to invest in growth or enhance operational efficiency. I believe repurchases, fleet investments, and operational improvements can all coexist. Given the market we’re in, we can pursue all three, and we’ll increase the pace of repurchases now that we have earnings behind us.

We are 1 turn away from a governor number; this shows we have a lot of optionality and flexibility regarding capital allocation.

And that was our last question. I will turn the call back over to our CEO, Stephen Scherr, for closing remarks.

I want to thank you all for participating today. I hope that today's call provided you with a better sense of the progress we've made, the dynamics we're seeing in the industry and the market, and a better appreciation for the improved financial condition and prospects for the company. I look forward to sharing further updates with you on our next call and obviously meeting and visiting with many of you now sitting in my new seat. So with that, we thank you again for joining us.

Thank you, presenters. This concludes the Hertz Global Holdings First Quarter 2022 Earnings Conference Call. Thank you for your participation, and good afternoon.