Hertz Global Holdings, Inc Q2 FY2024 Earnings Call

Welcome to the Hertz Global Holdings Second Quarter 2024 Earnings Call. I would like to remind you that this morning's call is being recorded by the company. I will now turn the call over to our 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, including factors that could cause our actual results to differ, is contained in our earnings press release and in the Risk Factors and Forward-Looking Statements section of the filings that 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. Today, we'll use certain non-GAAP financial measures, which are reconciled with GAAP numbers in our earnings press release and earnings presentations 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 Gil West, our Chief Executive Officer; Scott Haralson, our recently appointed Chief Financial Officer; and Sandeep Dube, our newly appointed Chief Commercial Officer. We are also joined by Darren Arrington, our Executive Vice President for Revenue. I'll now turn the call over to Gil.

Good morning. Thank you all for joining our second quarter earnings call. We've accomplished a lot as a team over the past quarter, and we look forward to walking you through our Q2 results and the actions we've taken to advance our strategic priorities, enhance our operational capabilities, and drive long-term and sustainable shareholder value. As I said on our last call, we're in the midst of a critical transformation for our company, and our priority is getting back to the basics: operational excellence and unmatched customer service, and using these springboards for value creation and earnings growth. Our strategy to get there has three building blocks: our fleet, our revenue, and cost management. Our recent additions to the executive team, investments in our technology and product innovation, and the talent and hard work of our people, coupled with process rigor in how we manage the business, are key enablers. To advance these strategic priorities, two things needed to be accomplished. First, strengthen the balance sheet and ensure a more stable liquidity position so that we can accelerate the rotation of our fleet and take a longer view of how we manage the business. Both are essential parts of our transformation strategy. Second, build a team and organizational design that ensures we can execute our strategy with speed, rigor, and excellence. We've quickly done both of these things. On the financing side, we strengthened our balance sheet and improved our liquidity. With the additional capital buffer we secured in June, we are accelerating our fleet rotation, enabling us to lower our depreciation and maintenance costs, improve our customer experience, and increase pricing power. I'm pleased with the progress we're making and look forward to completing the fleet rotation as soon as practical. Our new CFO, Scott Haralson, will get into more detail on the financing and the actions we've taken to bolster the balance sheet to support our strategic plan. On the leadership front, all the seasoned leaders we've recently announced come to Hertz with a track record of driving commercial success across complex customer-facing operations in the travel and transportation industries. I've known and worked with all of them, and I'm thrilled that they share my optimism for the value creation potential here at Hertz. Starting with Scott, he brings deep expertise in financial and cost management and leveraging the capital markets to drive business transformation. He has a history of turning challenges into opportunities, and I know he's the right person for the job. Sandeep Dube, our new Chief Commercial Officer, who you will also hear from on the call today, brings a comprehensive and customer-centric approach across our commercial and revenue-generating activities. He understands what customers desire and are willing to pay for, puts these customer expectations at the center of the business operation in innovative ways, and converts the resulting customer satisfaction into revenue. Having one executive taking a holistic view of all the commercial aspects is a novel approach at Hertz, and I'm thrilled to have him on the team. We've also brought in additional senior asset management and operational expertise, with Greg May leading all aspects of Hertz fleet management, including fleet procurement and strategy, analytics, and vehicle remarketing; Henry Kuykendall overseeing our airport and off-airport car rental operations in North America; and Mike Moore, who will lead all aspects of fleet maintenance. We've also asked Katherine Martin to take on the permanent role of General Counsel. The new leadership structure will enable end-to-end oversight and accountability of key components of the business, which complement our existing dedicated team who have deep institutional knowledge of the car rental industry. With these changes now in place, I believe we have a transformative and achievable strategy, along with the right team and organization. So, now more than ever, our focus is on execution. While we will remain nimble on the exact timing of key milestones, I'm confident that the execution of our strategy will render superior unit economics for the company. Let me focus the remainder of our comments on our strategy, particularly around fleet. Then Sandeep will cover what we are actioning around revenue and customers. After that, Scott will cover our Q2 financial performance, our cost management, and balance sheet position. As I mentioned, a fundamental component of our strategy is our fleet, and completing our fleet refresh and rotation is one of our highest priorities. A substantial portion of our fleet consists of vehicles with inflated cap costs that were acquired from OEMs during a period in which both volume discounts and trim packages befitting our rental car fleet were constrained. Our fleet also consists of high-cost pre-owned vehicles we acquired from the spot market at peak pricing. Most vehicles purchased in that environment have experienced declines in resale value as the market normalized, resulting in an elevated monthly depreciation rate. This primarily applies to vehicles 12 months in age or older. As we announced in June, we have accelerated our refresh and currently expect higher depreciation vehicles to be rotated by the end of 2025. As a result, by early 2026, we expect average depreciation per unit, or DPU, in the low 300s per month. My confidence is driven by the fact that we are already seeing lower vehicle costs manifest and the purchase prices recently negotiated with OEMs already reflect our targeted DPU. Scott will talk more about the operating cost and productivity, but it's worth mentioning here that another tailwind of completing our fleet rotation will be savings generated by reduced maintenance and collision costs, which will decrease our direct operating expenses. Let's move on to the other building blocks: unit revenue and cost management. Sandeep, over to you.

Thanks, Gil, and good morning, everyone. I'm extremely pleased to join Hertz as Chief Commercial Officer. As Gil pointed out, my goal here is to bring a cohesive and customer-centric approach to our revenue generation efforts from revenue management and pricing, e-commerce, to corporate sales and strategic partnerships. I'll also be focusing on demand creation through strategic marketing and the experience of our customers throughout their rental journey. Let me outline our approach. Our goal is to grow unit revenue by focusing on how we generate the revenue, recollect, and ensuring it enhances the bottom line. As we tighten the fleet, we will benefit from culling low RPD, low contribution demand served through discretionary low price channels and contract freight business. These changes are highly actionable, and removal from our book of business will improve our overall profitability. We are committed to remaining disciplined on capacity and will seek to manage our fleet levels in response to demand. In line with the strategy, we intend to counter any headwind in yield with an appropriate tightening of the fleet to maintain return on assets and overall profitability. We are also focused on driving more quality revenue through our direct booking channels. We are utilizing new optimization tools to improve paid media strategies as well as making structural improvements to the websites themselves. While we have work to do around growing our volumes, the trends are encouraging. Another key component of our revenue strategy is an improved customer experience, enabled by a self-service digital platform, where appropriate. This means that customers, both loyalty and non-loyalty, can skip the counter and go directly to their vehicles, receiving faster, better service throughout their rental journey. We are already seeing the fruit of our efforts in the positive trend in net promoter scores across our brands, a reflection of our team's hard work and dedication, and validating our commitment to investing in our customers. Providing an unmatched customer experience leads to loyalty and creates pricing power, and we are pursuing rate parity with competitor value brands across an increased number of locations. Lastly, we are focused on growing value-added service revenue. Currently, most of our products have static pricing. We are beginning to leverage smarter dynamic pricing tools and new ways of merchandising the products. We continue to further upgrade our forecasting and pricing tools with modern technologies to enable us to yield higher rates at each point in the booking curve. During the quarter, we deliberately prioritized rate over volume. This is especially true in the Americas segment. Collectively, our revenue initiatives are showing early promise, and global RPD, while down year-over-year as we guided, was up 5% sequentially. June RPD is marginally down year-over-year by 2%, an encouraging exit rate for the quarter and consistent with our expectations that year-over-year declines are narrowing. With global RPD rate parity expected in the third quarter year-over-year, the demand and revenue outlook remains strong. With that, I'll turn it over to Scott.

Thanks, Sandeep, and good morning, everyone. First, I want to thank the Hertz team members who have been so welcoming in my short time here. It's been great to see the pride in the Hertz brand and the desire to win throughout the organization. It's an honor to join a global company with such a recognized and valuable brand and be part of the team to help bring Hertz back to its historical prominence and performance. I knew coming in that we had a good bit of work to do, but it's now been over a month since I started and some real themes are starting to come together for me. So, before I cover some of the financial results for the quarter, let me highlight a few things. The post-transformation view of the business is bright. Our North Star Metrics are very attainable and we will continue to push the business to be a data-driven, high-performance business with an efficiency mindset and a ROIC-based discipline. That's one side of the coin. The other side is that it could take us through 2025 to get where we need to be. Since my arrival, we've conducted further analysis and continue to refine our view of the financial impact and the timeline of the business transformation, particularly the fleet rotation, and there are a few items to call out. First and foremost, our fleet. A critical piece of our P&L repair is transforming the fleet. Our primary objective, in its simplest form, is to limit the difference between what we buy a car for and what we sell it for. This translates to our North Star DPU metric of the low $300 range. As of June 30, over 30% of our global fleet was at a DPU of $325 or less, and the remainder of our fleet was at a DPU of about $660. The deals we are consummating today for vehicles to be delivered later this year and into 2025 have DPU rates below $325. We are executing the refresh at the utmost urgency and we will accelerate this as fast as economically and logistically possible. With the speed of rotation as an objective, it may be helpful to clarify some important concepts about the rotation. The concepts of the total P&L impact of the rotation and the cash impact of the rotation, what they are and why they are different. Based on current residual estimates, we expect that the fleet refresh will push through a little more than $1 billion of non-cash depreciation through the P&L from Q3 of this year through probably the end of 2025. Obviously, it could be higher or lower depending on where residuals come out. The timing of that excess depreciation may be a bit lumpy, depending on how quickly we can rotate, but we want that to happen as soon as possible. Although a bit counterintuitive, larger near-term depreciation amounts are the desired outcome. That means we are exiting high depreciation cost vehicles and bringing in lower ones quicker. Now, the confusion for some people is, how can we push through that large of a P&L impact without it having a similar cash impact going forward? The answer lies in how we amortize the debt on the vehicles in our ABS facility. We amortize our vehicle financing facility typically quicker than we depreciate the assets on our P&L. In other words, the majority of the cash impact has already been felt through the ABS facility. When we sell the vehicles, we will unlock the initial equity we invested as well as any amounts gained through the amortization of the debt, if any. The cash release from the sale of the vehicles left to be rotated will likely amount to more than $1.5 billion, and that money will be reinvested to acquire new vehicles at lower purchase prices or cap cost. Depending on the number of vehicles and the types, it will likely cover most of the new car buys. We may need to use some of our liquidity for new car purchases, but the amount of that is not firm yet, given the number of variables at play. We will try to give you a better sense of that amount on future calls. Now, the other side of the coin I mentioned is that this fleet rotation will take through 2025, so we must be realistic about the cash generation capabilities of the business between now and then. We are still refining the inputs to this, but it looks like we'll probably use some cash on the operating side through the first half of 2025. Given the cash burn on the operating side and the cash required for the fleet refresh, right now, we expect the low point of liquidity will likely be at the end of the second quarter of 2025. I'm not at a point yet where I can give you the specifics on the cash balance levels at that date, but we'll look to provide that information on future calls as well. The good news is that we believe we have plenty of liquidity to handle this. With our recent capital raise, we have bolstered liquidity to a place where we are comfortable that we can complete the transformation, even if residuals decline at a faster rate than we have conservatively forecasted. Next is our cost structure, or DOE and SG&A expenses. Becoming more efficient and reducing our operating cost is an important component of our transformation. We've made some good progress so far, but overall this is more than just managing initiatives, it's managing the entire cost structure with an efficiency mindset. We have some work to do here, but we made good progress quarter-over-quarter. Again, though, we have to be realistic about the timing of the reductions. DOE per transaction day for Q1 was $37, and Q2 was $36. While directionally positive, insurance and labor rates were higher than expected, which partially offset the value of the benefits we achieved. That's why I say we have to continue to manage the entire P&L, not just initiatives. There are a lot of areas to address, and some require process and technology enhancements or addressing out-of-market contracts, and some have delayed benefits like those tied to the fleet rotation. So, these impacts will be layered in over time, but you should measure us on seasonally adjusted DOE and SG&A metrics sequentially. With the new team we have, I am extremely confident that we will get there, but it will be a gradual progression. So, now, let's cover Q2 results. Revenue for the quarter was $2.4 billion, and our adjusted corporate EBITDA was a loss of $460 million, coming in at about the midpoint of the range we updated in mid-June. The results for the quarter were significantly impacted by the year-over-year increase in depreciation expense of about $700 million. Revenue was driven by our desire to maintain pricing integrity in the quarter, with particular strength in the Americas segment, which saw a 5% increase quarter-over-quarter. This provides strong evidence of pricing discipline across our business and the desire to manage capacity at levels that support rates. DPU was elevated, driven by our plans to accelerate the fleet refresh. As I mentioned earlier, higher DPU in the short run, driven by our fleet refresh acceleration, is a good thing because we will get to our target DPU faster. We've renegotiated several national contracts for parts and labor, while also exercising more centralized oversight of vehicle repair and maintenance expense. Refreshing the fleet will also contribute to the reduction of direct operating expenses per transaction day through reduced maintenance and lower losses on salvaged vehicles. As a result, maintenance and collision have declined quarter-over-quarter by 12% on a volume-adjusted basis, and we've only just begun. SG&A has decreased on a year-over-year basis as a result of headcount and third-party spend reductions taken both last year and this year, as well as higher efficiency on lower marketing spend. Excluding non-EBITDA impacting items, SG&A decreased 9% year-over-year. We believe there is still more opportunity to tighten third-party expense, which we will be able to realize over time as centralized procurement works through our $3 billion base of contracted spend. So, now, let me talk about liquidity and cash flow. We ended the quarter with $1.8 billion of liquidity, comprised of over $500 million of unrestricted cash and $1.3 billion of available capacity under the senior revolving credit facility. We raised $1 billion of liquidity in June by issuing $750 million of first lien notes and $250 million of exchangeable second lien PIK notes, both maturing in 2029. In addition, we issued $750 million of ABS securities for our U.S. ABS program, which will refinance part of our near-term maturities coming due this year. Our committed VFN will more than cover the remaining amounts of those maturities. We used the net proceeds to pay down our senior credit facility and ended the quarter with $160 million drawn. We have no meaningful non-vehicle debt maturities until mid-2026. The capital raise will help offset further expected cash burn as well as future liquidity contributions needed for the fleet refresh. It's also a buffer against unforeseen macro challenges and helps ensure stability throughout the transformation. Regarding our vehicle debt, our ABS facilities are designed to amortize the loans faster than the vehicles are depreciating. As a result, the fair market values of our vehicles are typically greater than their ABS values. However, we have seen vehicle residuals decline at a higher rate than usual this year. In June, the Mannheim rental risk index dropped by 5%. We currently have sufficient fair market value cushion in our ABS facilities, but to the extent the current volatility in the residual market negatively impacts that metric, we could expect to make incremental lease payments to maintain a positive cushion. Our liquidity position provides the flexibility to do so. Staying on our fleet rotation for a moment, during Q2, we increased the fleet size ahead of the peak rental season, largely driving our adjusted free cash outflow of $553 million. As for the $2 billion in vehicle debt maturing at the end of the year, we have the option to refinance or to redeem the debt using the variable funding notes within the U.S. ABS. Before I turn it back over to Gil for closing remarks, let me summarize comments made regarding our outlook. For Q3, demand is strong, but we're intentionally culling low RPD business, so we don't expect days to grow materially year-over-year, and we expect RPD to be flat to slightly up 1%. Over the remainder of the year, we intend to manage our fleet levels below the same periods in 2023. We expect DPU to be elevated through 2024 before sequentially improving through 2025 until we near the end of the rotation. When we get to the other side of the fleet rotation and have fully executed our transformation, we are targeting the following: RPD in the low 60s, DPU in the low 300s, and DOE per day in the low 30s. I echo Gil in that this is a critical phase for our company. Transformations are never easy, but we are putting the right pieces in place and believe the company's long-term unit economics and overall financial profile are appealing and achievable. And I come to the CFO position confident about our future. Now, let me hand it back to Gil for a closing comment.

Thanks, Scott. Looking ahead, we are optimistic about our prospects. I've been here before, and so has the team. We've got a lot of things going for us. Global travel demand remains strong, and inflation is tempering. Supply chain constraints have abated, and OEM production is on the rise. The macro environment for our business, combined with our operational strategy, means that we have more opportunities than challenges ahead of us. Our executive team is experienced with executing transformations committed to our strategy. Our employees are also highly dedicated to serving our customers, and I can't thank them enough for their heroism during the CrowdStrike software outage. While some companies in the travel industry face challenges from the outage, we had contingency plans in place that operated as intended. This minimized disruptions and allowed us to continue to go above and beyond for our customers to get them to their destinations. Coming back to our operational strategy, as we mentioned previously, it's likely going to take the rest of the year and through 2025 to fully implement our plans and achieve our desired state of unit economics. Once we do that, I believe the financials of our business will be strong. I'm confident that we have the right strategy, the right team, and the liquidity to get there. With that, let's open it up for Q&A.

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

Hi. Good morning, guys. Thanks for all the details so far and for taking my questions. Yes, I guess, first one, it's a liquidity question, and appreciating what Scott just mentioned about how you took a lot of the cash impact from the excess depreciation already prior to now. And so, the question is kind of, as you look back, you raised the capital about two months ago. Was that the right amount to raise, more or less, and what are your thoughts on any future liquidity needs? Thanks.

Yes, let me start. This is Gil. I'll turn it over to Scott, who will provide further insights. First, I want to emphasize that we have rapidly assembled an exceptional executive team equipped with the necessary skills and proven execution track record for the challenges ahead. With the team established and gaining momentum, we have initiated transformation strategies and initiatives aimed at improving the business. We secured additional capital to strengthen the balance sheet, ensure a more stable liquidity position, and enhance our flexibility in executing our transformation, especially if any risks, whether anticipated or unexpected, arise. Furthermore, this additional capital enables us to speed up the fleet rotation that we discussed, providing us with a longer-term perspective for managing the business moving forward. Scott?

Yes, thank you, Gil. I believe flexibility is crucial here. In my prepared remarks, I mentioned my expectations regarding operating cash flow for the first half of '25, which I anticipate will be slightly negative. However, we expect to generate around $1.5 billion from selling the remaining vehicles we need to rotate, which should address most of our needs for purchasing new cars. There are several factors that will affect both the cash inflow from these sales and the outflow required for new car acquisitions. These include the residual values, the number and mix of cars, the associated costs or risks, and the ABS values. As it stands, while it's challenging to make precise predictions, it's possible that we may need some additional cash. With the recent capital raise, we now have the liquidity to explore all our options without being constrained to any specific outcome. This improved liquidity provides us with that much-needed flexibility.

Thank you, Gil and Scott. I have a follow-up question regarding the fleet. You often discuss the discounts you’re receiving on new car purchases. Currently, you're operating in the low 300s of DPU for vehicles entering the fleet. Looking ahead, do you anticipate maintaining this level? Do you consider it sustainable? If used car prices continue to decline or stabilize, could these discounts potentially increase? Additionally, do these discounts influence your decision to expedite purchases? Lastly, how do the hold periods for these new purchases compare to your historical practices? Thank you.

Yes, thanks, Chris. That's a great question. To emphasize, we are already seeing deals that align with our target unit economics on DPU. While it's challenging to predict dynamics, we will remain disciplined and selective on our purchase side to ensure that the economics work in our favor. We have several deals in the pipeline that we're evaluating while collaborating with the OEMs. Moving forward, I believe the macro environment will return to historical norms. Darren, do you have any additional comments based on what you've observed?

The other part of your question was around hold periods. And I think the industry has been pushed into higher hold periods than I think what is historically normal for us. And as those discounts are coming back into place, the math would tell you to bring the hold period back in line or closer to in line with where things have been before. So, we're seeing a lot of deals right now that would benefit from a shorter rotation than what we've been pushed into as an industry. And we look forward to that because that carries a number of benefits beyond just depreciation, but also in terms of the customer and the product that we can offer to the customer, the damage, and the maintenance expenses that go along with that. I think those aspects of it, besides just the depth, help really transform our business into something that's healthier.

Yes, it's accurately stated that as the supply side stabilizes and we update the fleet, we can concentrate on the best selling point at the vehicle level, down to the VIN number, to enhance that process. The holding periods may differ based on vehicle types, but we will aim to optimize that. With the supply side normalizing, we will have the opportunity to do so.

Okay, very good. Appreciate it. Thanks, guys.

Thank you. One moment for our next question. Our next question comes from the line of John Healy from Northcoast Research. Your line is open.

Thanks for taking my question. I wanted to dive in a little bit on RPD. I think it's slide nine, I think it's pretty important in the deck where you guys talk about kind of getting to that low $62 RPD potential. You talk about kind of moving away from some contractual business. Can you talk to what type of contractual business that is and how much you need to move away from? And did your RPD this quarter also get the benefit of some of that moving away? So, I'm trying to think about just kind of like pure market RPD and then what you're kind of moving away from? Is it the TNC business, is it insurance, is it corporate? Just trying to understand that.

Yes, John. Thanks for the question. So, as you outlined, our North Star is to get to the low 60s RPD. In terms of our progression through that over the quarter, basically what we've done is try to call out some of the lower RPD yielding segments. And some of that is at the tail end of what comes through from an insurance perspective, some of them are basically some of the opaque fares that we see coming through. So, that's primarily what we've kind of deprioritized, that's the low RPD pieces in the equation. Now, as we look ahead, we're going to continue to build on customer demand through high RPD channels. So, whether that's direct booking and whether that's other sources that deliver a higher RPD back from a customer demand perspective, we're going to dial in on those factors. So, that should be a factor that basically continues to enable us to refine our RPD and drive in more premium RPD values. The other factor that I'll bring in place is basically a focus on value-added service. So, we're doubling down our focus on value-added service, which is, of course, a high margin product offering for us. There is significant scope of optimization in that space, and that's another lever we're going to pull on significantly as we look into the future. Part of your question was whether it had in-quarter impact? Yes, those actions did have in-quarter impact, and we continue to expect those to have impact over the upcoming quarters. I don't know Darren if there's anything?

And then just one question I wanted to ask just about kind of longer-term fleet plans. I think you've talked about using the phrase higher cap cost or more expensive cars, rotating those out. Previously, I think a lot of us were viewing those as the electric vehicles in your fleet. Gil, what's your thought about having electric vehicles in the fleet, probably in the medium term here over the next three or four years? Does it make sense for Hertz? And do you see yourself doing that at size, or was this an experiment that the conclusion is way too early and maybe not for rental? Just kind of what your big picture thought is on the category itself?

I understand that electric vehicles receive significant attention, but I want to clarify that they currently make up less than 10% of our fleet. I grew up passionate about internal combustion engines while working at my father's auto parts store in the '70s, but I recognize that electric vehicles are crucial for the future. The challenge lies in the rates of transition and adoption. The entire automotive industry, including original equipment manufacturers, is facing challenges due to the slow adoption of electric vehicles by mainstream buyers. It’s important to note that this issue is not limited to Hertz; it’s a widespread concern. We’re trying to predict and harmonize the supply and demand for electric vehicles, but progress has slowed among consumers. Many manufacturers are reconsidering their production schedules for electric vehicles, suggesting that the entire industry may have overestimated the speed of adoption. At Hertz, we’re adapting to this change. Our goal is to offer customers the option to choose their vehicles, including electric ones. We have restructured our electric vehicle fleet and are distributing it across our operations to optimize revenue per day while ensuring a good market fit for our customers. We have three distinct channels to tailor this approach: airports, off-airport operations, and our ride-hailing business. Each channel has unique market needs and revenue profiles, allowing us to identify genuine demand for electric vehicles. Looking ahead, we will adjust our electric vehicle fleet to align with real market demand, which will be part of our regular business operations, just like our other fleets. That’s our perspective on electric vehicles.

Thank you. One moment for our next question. Our next question comes from the line of John Babcock from Bank of America. Your line is open.

Hi. Good morning, and thank you for taking my questions. I wanted to ask about the fleet refresh and whether it will result in any significant changes in the mix compared to how Hertz has been operating recently.

Yes, I believe it will, and that is our goal. If you look back at the COVID production period, there was a limited supply of vehicles, which caused our mix to shift away from core demand. As we are refreshing the fleet, we are aiming to correct that mix. Therefore, I think as we update the fleet, our mix will align more closely with core demand profiles.

Can you explain what you consider to be the core demand? Is it more related to CUVs and SUVs based on the current market trends, or does it lean more towards sedans? Any details you can share?

We prefer not to disclose the specifics of the fleet mix, but we are aware of the booking patterns of our customers. We measure their preferences regarding fleet choices and have modeled that comprehensively, not just by classification type but also within subclassifications for our ideal state. We then consider the supply side purchasing opportunities to inform our vehicle acquisitions. This is the methodology we are using. Certain mixes stand out more than others, and those are the ones we prioritize in our purchasing decisions.

That's helpful. Next question, you've mentioned efforts to improve revenue per day and also on cost-cutting within the business. However, we've heard that Hertz has room to enhance getting the right vehicles into the right markets. What are you doing to address this aspect of the business, as it can significantly influence supply-demand dynamics?

Yes. In terms of markets, you mean specific locations then, having the right allocations?

Yes, that's right.

Yes, with Sandeep and Scott joining the team, we are focusing on planning the business and making seasonal adjustments, which we are currently in the process of. It is crucial to view this at a market level. We need to understand the economics of these markets, including revenue and cost aspects, as well as customer demand patterns. The mix can vary significantly from market to market, so getting the right allocations is important while minimizing fleet movements to control costs. We are concentrating on optimizing this process. We can naturally adjust as we acquire and dispose of vehicles, which is an important factor in executing our plans.

Okay. And then, sorry, if you don't mind, just one more question. Just with everything you've talked about, are you sticking to the same cost-cutting goals that you had laid out previously?

Hi. Yes, thanks, John. This is Scott. So, I hinted to this sort of a little bit in my prepared remarks, but I think maybe best to sort of unpack the philosophy a bit. So, I mean, my overall cost management philosophy will be to sort of manage the entire P&L. I know initiatives were discussed in the past, and those items are obviously still being worked along with many other items across the business. And so, I think it's just good cost management to think about it that way. I mean, we view it as a lifestyle change. It's not just about managing initiatives or projects. So, I think as I mentioned in the remarks, measure us on sort of DOE, we will probably get away from identifying specific projects and itemizing those things, I think it's just tough to reconcile. So, I think, look, the two important takeaways are the North Star metric on DOE in the low 30s is sort of our target, it's attainable. But given the items that we have to address, I think it's going to take us a year or so. So, it's going to be a gradual move, but measure us on that DOE metric.

Okay. Thank you. Appreciate it.

Thank you. One moment for our next question. Our next question will come from the line of Stephanie Moore from Jefferies. Your line is open.

Good morning. Thank you for the detailed insights on the fleet refresh and the actions you're planning for the next year. I'd like to hear your thoughts on potentially increasing the percentage of program cars in the U.S. fleet. It was significantly higher before COVID and remains higher internationally. I'm interested in your perspective on moving forward with this and your willingness, as well as that of the OEMs. Thank you.

Yes. Thanks, Stephanie. Appreciate that question. I mean, we certainly recognize the program cars as a lever to help us manage the fleet rotation domestically and internationally. So, as we think about it, the dynamics, of course, are typically the financing in terms of how much equity is required to finance the vehicle is less on a program car, some tradeoffs on kind of total vehicle carrying cost with it, but it also, as you know, helps us mitigate the residual risk exposure. So, we do want to think of it as a balanced profile, but I would also say that the markets or the dynamics are different internationally versus domestically. So, we'll likely tend to use more program cars internationally than domestically. But I also think the supply side is important in that. Generally, we're seeing more supply availability with program cars than we have over the last couple of years. So, we do have the luxury of that kind of tool is available to us as we manage the rotation of the fleet. So, we'll look to play some of that in as we move forward.

Thank you. And then maybe one for you, Scott, here. In terms of kind of your updated liquidity profile, I think you did call out in your prepared remarks the possibility of having to make incremental lease payments to your ABS, just given the movement that we've seen in residual values. I think if we look at where Mannheim and other third-party sites have kind of reported declining used car values on a monthly basis, it does seem to be a little bit greater than you guys would be planning here. So, maybe if you could just expand on that likelihood of having to make those incremental lease payments and kind of your positioning and able to do so? Thanks.

Yes, thank you for the question, Stephanie. I mentioned in the prepared remarks that we currently have some cushion and are in compliance. Looking ahead, there is a likelihood that we will need to make adjustments to the U.S. side of the ABS facility due to the decline in residual values. We estimate that this could involve a payment in the range of $50 million to $100 million, but the liquidity enhancement gives us the capability to handle this. We hope this situation is temporary, taking into account future market movements, but it is possible that we will need to proceed with those payments.

All right. Thank you, everybody.

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

Hi. Great. Thank you very much. Gil, I know you talked in the past about some premiumization of the fleet, etc., and the business. Can you maybe just tell us how that's progressing? What are you trying to do on that side? And then, also, how does that kind of square with just bringing in a lower-cost fleet, or does that not matter? Thank you.

Yes, I understand your question. Please feel free to follow up if needed. As we consider the fleet rotation, getting the mix right is crucial, and it’s important to align that with our customers' demand patterns. Ultimately, this optimizes our return on assets. We're thinking about various vehicle types in this mix, from luxury SUVs to compact cars. The rotation of the fleet to newer models and potentially shorter hold periods improves the customer experience due to the overall condition of the vehicles—lower mileage and newer vehicles enhance that experience. In the marketplace, a better experience translates to greater pricing power and increased customer loyalty, which we can capitalize on. This generates benefits on the revenue side, and we also see cost advantages, as a newer fleet incurs lower maintenance costs. Thus, the fleet rotation offers additional benefits beyond just DPU.

Okay. And then maybe as a follow-up, I just kind of wanted to get your sense of commitment to managing the fleet as far as trying to keep RPDs up. Is it a matter of you'll just shrink the fleet to whatever it takes to keep RPDs up? Is there any point where there's somewhat of a trade-off between price and transaction fees? Thank you.

Ian, this is Sandeep here. Earlier in the call, we discussed reducing the lower end from an RPD perspective. That said, there's a significant emphasis on increasing customer demand, which we're addressing from various angles. This includes enhancing direct booking channel demand and reinforcing the value proposition of our dollar brand. Additionally, we have improved our technology in revenue management, pricing, and forecasting tools. We are taking a comprehensive approach to boost customer demand and enhance our capability to forecast that demand. I believe this will enable us to continue expanding demand for our brands, which should help balance out our efforts to reduce the lower end.

Okay, great. Thank you very much.

Thank you. One moment for our next question. Our next question comes from the line of Christopher Stathoulopoulos from SIG. Your line is open.

Good morning, everyone. Gil, congratulations on assembling the team. I have a question that I’ll combine into one. Gil or Scott, I appreciate the detailed information on the algorithm. As we consider the relationship between sales and costs, I’m curious about how this connects to the ABS facility and its cash impact. I believe you have some soft targets for the second quarter next year and the year-end of the following year. I would like to understand the assumptions regarding demand and the used car market. Scott, as you know, there's a lot of uncertainty with the airlines and specific airport locations. My main question is whether there’s a scenario in which you could achieve the desired unit economics or ROIC before the end of 2025. Is there any cushion factored in? I would like more clarity on the core assumptions or KPIs included in these timelines. Thank you.

Yes, hi Chris. It's nice to see you again in a different context. It's great to talk to you once more. Currently, we are taking a fresh look at our analysis. We are developing a methodical, realistic, and achievable plan, but there are many variables involved. We are ensuring flexibility and focusing on accelerating our progress, as that would provide the most benefits, allowing us to transition from high-cost cars to lower-cap cost cars as quickly as possible, although there are some constraints we need to manage. At this point, we are projecting metrics towards the end of 2025. As we gather more data, we will keep you updated, but that’s our focus for now. Changes can always occur, either positive or negative, but that’s the plan we are committed to executing. I'll pause here. Gil, do you or Sandeep have anything to add? Darren?

No, I think that you summarized it well. I mean, I'd just double up that to the degree, I think the pace of all this will be on the supply side. So, we would want to lean into that, if possible. But I mean, that ultimately will pace everything.

Yes. No, good color there.

Congratulations on your new role, Sandeep. You mentioned sizing the fleet according to demand, and I wanted to ask about what that means for fleet composition. Gil, you mentioned you prefer not to disclose too much on that topic. However, regarding value-added services, I'm assuming a significant aspect involves technology, particularly in pursuing a more streamlined customer experience. Could you provide more details on what these value-added services might include? Thank you.

Yes, absolutely, Christopher. Regarding the value-added services, I would highlight two specific aspects: merchandising and pricing. When we talk about merchandising, value-added services involve matching the right product with the right customer at the right time. If you consider our direct booking channel and other sales channels, particularly at the counter, there's a significant opportunity to present the right product to the right customer. Much of this is driven by technology in both our direct booking channel and at the counter. That's one area we are focusing on. The other aspect is pricing, which involves understanding the customer's ability to pay and ensuring our products meet a substantial portion of that demand. This is another critical element we are examining from the value-added services perspective.

Okay, thank you.

Thank you. And with that, this concludes the Hertz Global Holdings second quarter 2024 earnings conference call. Thank you for your participation. You may now disconnect. Everyone, have a great day.