Hertz Global Holdings, Inc Q4 FY2023 Earnings Call

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, Johann 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 changed 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 8-K 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 Scherr, our Chief Executive Officer; Alex Brooks, our Chief Financial Officer; and Justin Keppy, 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 continued to experience. The core message we are sharing this morning as we begin 2024 is one of confidence moving 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 momentum into 2025. With that, let me turn to our Q4 results, both revenue and cost, and our progress on select initiatives. Justin Keppy 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 the rate for the whole of 2023 remained 40% higher than the 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 a 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 and the continued deployment of these assets. As you are well 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 cost 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 continued to experience elevated collision and damage in the quarter, largely driven by costs associated with running our EV fleet, and perhaps more significantly, the challenges that the EVs had an impact on our operational efficiency more generally, further supporting the advisability of our EV sales plan. All told, fourth quarter adjusted 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 cost-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 8-K, we expect the consequences of our Q4 decision to be material and positive moving forward. 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 incidence, 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. We started to roll out Apple Pay for the Hertz brand in select U.S. 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 importantly is our disciplined approach to 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 I am pleased to introduce our new Chief Operating Officer, Justin Keppy, to share his insights.

Thank you, Stephen and good morning, everyone. It's been an exciting first 90 days at Hertz, learning the business, visiting our larger operations, and meeting the field operations teams who make it happen. Their engagement and passion to support our customers and move the business forward is inspiring. We have a great foundation to pivot towards improved profitability. Looking forward, I see the road to profitable growth by getting back to the fundamentals in line with the three areas as Stephen referenced. In partnership with our leaders, we are bringing greater operational discipline and focusing on what immediately matters, getting costs out. It's clear that we need to take bold action on both fixed and variable costs and accelerate productivity across our operations. We aim to get $250 million in benefits this year in addition to the benefits we expect to achieve from the EV reduction. While the company has been successful in tackling costs, we believe we can do more. Our productivity and cost-benefit efforts fall into five core areas. Let's start with staffing and third-party spend across our business. We have taken a first step in right-sizing and reducing third-party spend and are assessing further actions. Within our fleet operations, we are enhancing our workforce planning process to better align staffing to volume and location. We expect meaningful benefit from these actions. Footprint is our second core focus area. We have assessed our network and we expect to reduce the cost of our physical off-airport real estate footprint as we exit underperforming locations. These actions are designed to provide more focus and enable the redeployment of over 10,000 vehicles to more attractive use without detriment to the robustness of our remaining network. We expect these network actions to be initiated within Q1. Third, we are attacking operating costs and improving field productivity. Collision, damage, maintenance, transportation, fuel, and out-of-service are the prime targets. We are rolling out to the field new digital tools to improve visibility and decision-making. During the quarter, we began to deploy digital capabilities into the field to enable more real-time and simpler documentation of damage upon a vehicle's return to the lot. This tool promises to capture an increasing number of damage incidents with better precision and ultimately yield better reimbursement outcomes. The fourth area is procurement, a significant opportunity with an addressable spend of nearly $3 billion. We have started centralizing and consolidating spend to reduce consumption and buy more effectively. We will continue to explore opportunities to accelerate our progress in this key area. The final area is technology. Technology is critical to what we do. As we have previously mentioned, we are well underway in modernizing our infrastructure, moving solutions to the cloud, and retiring legacy software platforms. We have made real progress and will start seeing benefits in 2024, including a year-over-year reduction in spend as previously highlighted. To ensure progress against our $250 million target for the year, we are developing detailed action plans with KPIs and implementing a governance process run by a newly formed and expanding program office. In addition, separate from the $250 million benefit I just outlined, we are progressing our efforts to reduce collision and damage across EVs broadly. These include active discussions with key OEMs to get access to parts and labor more quickly and at better pricing, leveraging our digital tools and insights to improve underwriting and collections, and in Rideshare specifically, lowering driver churn and expanding our EV charging network. To wrap up, I joined Hertz to make a real impact. My first impressions of the business are positive, and I'm excited to capture the opportunities ahead. We know what to do and are organized to do it. In future calls, I look forward to providing you with updates on our progress. Now, let me turn it over to Alex.

Thank you, Justin, and good morning, everyone. Let me start by covering our full 2023 results. Revenue was $9.4 billion, up 8% year-over-year. Although down 4% year-over-year, rates remained healthy at $60.62. This was about 40% above 2019, as noted earlier. Volume for the year was up 13%, compared to 2022, with meaningful growth across leisure, corporate, and Rideshare. Our fleet size grew only 9%, resulting in utilization that was 190 basis points higher than 2022, primarily driven by improved out-of-service levels. Strength in utilization of the fleet meaningfully contributed to RPU of $1,479 in 2023, down slightly versus 2022. DPU of $307 for 2023 was broadly in line with our expectations at the start of the year, notwithstanding the $245 million of incremental net depreciation expense resulting from our EV plan of sale. For the fourth quarter, DPU was $498, inclusive of the incremental depreciation, and $350, excluding the charge. As you're aware, DPU is driven by a variety of factors, including fleet mix, mileage, and condition, as well as views on forward residual values, and our historical sales experience. The combination of these factors drove Q4 DPU higher than we expected. We're closely watching residual values entering Q1, particularly in light of our plans to rotate fleet over the course of 2024 to a materially younger composition. As Stephen shared, we bring a return on assets mentality to our fleet plan, and that includes our central tenet of maintaining a fleet with unprofitable demand. Regarding operating costs, DOE per transaction day in 2023 was consistent with our prior year, excluding net collision and damage in both years and litigation settlements in 2022. DOE per day was down 8%, reflecting progress on our cost initiatives. Both vehicle and non-vehicle interest expense was higher in 2023 compared to 2022, driven primarily by the macro rate environment with modest impact from fleet size. Adjusted corporate EBITDA for 2023 was $561 million, a 6% margin, which reflected a drag of several hundred basis points related to the EV headwinds previously discussed and further burdened by the charge related to the EV sale plan. Turning to our capital structure and liquidity, with respect to our balance sheet, net corporate debt at the end of the fourth quarter was $2.5 billion, resulting in net corporate leverage of 4.5 times at year end. While this is well above our long-term leverage ambition of 1.5 times, we intend to de-lever over time as our operational initiatives yield improved profitability. Our available liquidity at December 31st was $2 billion, comprised of $764 million of unrestricted cash and the balance available under the first lien revolving credit facility. Our corporate debt maturity ladder is well-structured with no material maturities until 2026. At December 31st, we had $2.6 billion of capacity under our vehicle debt facilities globally, with a portfolio that was approximately 70% fixed rate. We maintained a sufficient equity cushion in our global ABS facilities at the end of 2023. Of note, $2 billion of medium-term notes under our U.S. ABS facility mature in December of 2024, and we intend to refinance those notes in the normal course of business with the exact timing subject to market conditions. Turning to our cash flow and capital allocation. Adjusted free cash flow for the year was an outflow of $321 million, primarily comprised of adjusted operating cash flow of $44 million, offset by $358 million of net fleet growth. Net fleet growth supported a $1.6 billion increase in revenue-earning vehicles on slightly lower-than-anticipated vehicle dispositions. Our non-fleet CAPEX for the year was minimal, as expenditures were offset by asset sales, including the previously disclosed sale of real estate adjacent to LAX in Q1. Lastly, in 2023, we repurchased $291 million of our common stock. We enter 2024 with followed demand in a stable rate environment. We expect demand to track to historical seasonal patterns and anticipate supporting RPD through initiatives, such as better monetization of upgrades, incremental value-added services revenue through digital channels, and improved price capture in our value brands. Regarding vehicle carrying costs, we expect the dynamic residual environment to be an important macro trend for the industry in the year ahead. It will influence, but not dictate, a return on asset-based approach to fleet rotation and, of course, depreciation. We plan for normal seasonality in the used car market, notwithstanding our view that the market is structurally short used vehicles in the near to medium term. On productivity, we look to achieve $250 million in benefit over the course of 2024, as Justin covered earlier. More broadly, we expect adjusted corporate EBITDA to benefit from improvements associated with the strategic sale of a third of our EV fleet, as well as the benefits of our productivity and cost initiatives, and as referenced, a focus on the fundamentals and improved operational discipline. In closing, I look forward to the future of our business and bringing the opportunities we discussed today to fruition. With that, let's open the call for Q&A.

Our first question comes from Chris Woronka of Deutsche Bank. Your line is open.

Hey, good morning everyone. Hey Stephen. So since you made that announcement regarding the planned reduction in the EV fleet, I guess the question is, at what point do you evaluate your progress on that and what would be the kind of markers that might cause you to possibly accelerate that further, just trying to get a sense for how you're going to evaluate the success of it and when you might decide you need to do more if you need or want to do more?

Sure. Thanks for the question, Chris. Look, this is dynamic. I mean, we are assessing the move we made all the time, not just simply on the disposition of the cars, but equally on the residual EV fleet that we had. We obviously took and are taking 20,000 cars out. That's largely to bring supply inside demand. The framework for whether there's more to do or whether we're content with the fleet we have is going to be a return on invested capital assessment on the EVs. In taking the 20,000 out, think about it this way: we have effectively clipped the lowest rung of demand in terms of RPD and candidly, the most defensive component of demand as it related to damage. Our expectation is that while we're taking a third of the fleet down, we will capture close to half, if you will, of the economic drag that's posed there. So where does that come from? We obviously told you in the 8-K that we expect over the two years in the aggregate to recapture about $250 million of EBITDA and free cash flow of about $250 million to $300 million. So what's embedded in that? And what are we going to look at as we harvest this? First of all, there's a reduction in fleet carrying cost, there's lower operating costs relating to collision and transport and charging and labor. Additionally, we expect enhanced revenue in the context of deploying fewer cars at higher utilization than the cars we're taking out. On the reduced carrying cost, I mean that's in front of us. The depreciation is captured. That's for us to take. What we do in terms of unit economics will be a function of the fact that we're going to only replace 15,000 of the 20,000 cars taken out. These are less expensive cars, lower depreciation, lower vehicle carrying costs, operating at higher utilization so that will produce much higher margin dollars to us.

Thanks Stephen, that's really helpful. I guess as a follow-up, I'm curious about how you're thinking about fleet sourcing. Are you willing to lean more into the used car market now that given the current pricing environment there, is that something that's more on the table this year?

Well, I would say a couple of things on the fleet. First of all, on the ICE vehicles to substitute in for the EVs, recognize that as we reduced down unprofitable network locations, as Justin noted, we are redeploying fleet, mostly ICE vehicles back to airports and other locations. So part of the 15,000 will be vehicles that we're capturing from other locations where utilization is not sufficient, number one. Number two, we are this month at our lowest out of service. We're going to continue to drive out of service down and redeploy and use those vehicles where we can. Third, in deference to cash, we're going to look to manage between purchases and sales and modulate that based on the return profile of what those activities have.

Okay, understood. Thanks a lot Stephen.

Yeah, of course.

Thank you. One moment please. Our next question comes from the line of Ian Zaffino of Oppenheimer. Your line is open.

Great. Thank you very much. Thanks for all the details on the cost savings. Just conceptually, I'm trying to understand here, when you think about your normalized EBITDA number, where do you think that is? And then you've stated it previously, so now is this cost savings on top of that normalized earnings number or EBITDA number, or is this what you need to get to that number?

So thanks for the question, Ian. Here's what I would tell you. You need to separate out what we're forecasting in terms of EBITDA benefit from the EV sale, which we believe to be $250 million of EBITDA uplift over two years, such that, that's a round trip, if you will, relative to the charge that we took in the fourth quarter. So set that aside, and let's call that the normal, as it were, adjusting for the EV move. On top of that, we are coming back to the $500 million that we've spoken of before, which is a combination of new projects like Rideshare and otherwise, realizing higher yield on the assets that we have, and the third—a key part in the context of this call—is an ability to gain productivity and pull costs out of the business.

Sure, thanks, Stephen. If you look at it, I'll say just the majority of our planned $250 million productivity benefit for the year is cost-out. If I look across the categories, and we're looking globally, it's just not an Americas effort, we're working across all of our businesses. First thing within staffing and third party. We've already taken action. We've got headcount actions that are benefiting us coming into the year. We're locking down hire-new requests. So any new adds are being scrutinized, and we're only adding where essential. We took a tough look first thing when I came in, and we've already identified over $30 million of spend reductions. I can tell you, we're not done yet. On footprint, we've closed year-to-date, eight of our lower-performing retail locations as we expand our relationship with Carvana and others. We've completed an assessment of our off-airport rent-a-car locations, looking at the ones that are underperforming. As Stephen highlighted, it gives us the ability to free up vehicles to reallocate to on-airport or other more profitable locations. We expect a sizable portion of those actions to be complete here in Q1. On field productivity, I'm pleased to say the team is energized and it's going. The technology that we launched last year has taken hold. We're rolling out the digital tool on collision I mentioned before. Also on the telematics, seeing real progress on the fuel that's been talked about before. It's accelerating, expanding, and looking very positive. In procurement, I said we spent almost $3 billion. If you think about that for a second, 1% is $30 million. And first kind of observations, there's more that we can do to leverage our larger spend on categories such as tire or glass, and we can get real meaningful reductions here, and we're going to. Finally, the last category is technology. Our modernization continues; we're seeing benefit from the capabilities that were developed last year. This year, it's all about prioritization, speed of completion, and we're going to see meaningful reductions in spend year-over-year. There's a lot of activity there across activities. It's the reason why we're taking a programmatic effort to ensure that we stay on track and build out the program office. While I see $250 million of productivity that I outlined, I'm personally going to be disappointed if we don't do more. The opportunities are there and it's exciting to see the momentum continue to build. I look forward to giving you updates in the future. Thanks for the question. Hopefully, this clarifies.

No, that's great. Thank you very much. And I guess maybe a higher level on just another topic, you guys seem a little bit more confident in the rate environment and RPD going forward. Kind of what’s giving you that confidence or maybe give us a little data point on what you saw in January?

Sure. Let me start with what we're seeing in January or what we saw in January. First of all, leisure business and leisure demand is really quite strong, and we're seeing considerable volumes across the sort of Sunbelt from Florida all the way west to Hawaii, Hawaii making sort of a considerable rebound. We've seen larger inbound activity growth, and we've seen strong corporate growth, particularly in the Midwest, locations like Detroit and Chicago that are showing high volume. I would say that looking backward, as I said in the prepared remarks, the rate of decline year-over-year on a quarterly basis is decelerating. We saw better performance in the fourth quarter on rate than we had seen again on a year-over-year basis in the prior quarters. I'd also say that as we listen to what the airlines and the hotels and the travel industry is reporting, forecast growth is substantial. In the context of stable demand, we feel quite optimistic about what we're seeing, both in terms of demand and what we saw as a decelerating trend in terms of decline. And I would also point out that, as I did in the remarks, we're 40% better than where we were, and stability around that number, I think, is in front of us.

Thank you very much. I wanted to ask on the softer trend of earnings in 4Q apart from the one-time charge related to the plan to sell 20,000 electric vehicles. How should investors be thinking about the sequential trend in EBITDA results generally from 4Q to 1Q this year relative to the more typical 4Q to 1Q seasonal pattern?

Well, I would say that remember we spoke about several points of margin as the effect of EV relative to ICE. So think about that as a $70 million to $80 million drag in the quarter in the context of overall cost. While those elements are impacted by the EV fleet, there are also consequences that have manifested in the fourth quarter and motivated us to take the charge and the action that we did. The spillover effect and the distraction on the field more broadly meant that we were running with personnel higher than we needed to and incurring related costs. Therefore, taking a bolder action to address that trend by pulling down a third of the fleet was the choice we made.

That's very helpful, thanks. And then just lastly, if you could help us dimension the step-down in those repair costs and the cadence or pace of that step down? How should we think about potential savings in 2024 versus 2023?

They should trend lower. Remember that there were a series of steps we were taking to try to address both the elevated damage and elevated cost of damage. We expect that the measures we were taking will have greater effect on the remaining EVs, leading to improvements and tapping into further cost-saving strategies on the remaining fleet as we reduce the number of EVs in circulation.

That’s very helpful, thank you very much.

Hi there. Thank you for taking the question. You noted that you're prioritizing RPD over utilization this year. Can you clarify how you're thinking about that, whether that reflects the change in strategy?

Yes. First principle is that we should continue to hold supply of cars inside where we expect demand to be so that we can run at a respectable level of utilization. We're not of a mind to have capital deployed against cars that aren't going to be used. There are obvious variations in demand. Our view has been not to chase low-quality demand even if it meant that utilization falls. Stability is crucial and our strategy reflects that.

Thank you, that’s helpful.

Thank you. One moment please.

I want to thank you all for your participation today. Before we close the call, I'd like to thank our employees for their continued hard work and dedication over the year, without whose efforts none of this would be possible. In closing, we look forward to sharing further updates with you on our next call. And with that, I'll turn it back to the operator.

Thank you. This concludes the Hertz Global Holdings Fourth Quarter 2023 Earnings Conference Call. Thank you for your participation.