Earnings Call Transcript - HTZ Q4 2022

Operator, Operator

Welcome to Hertz Global Holdings Fourth Quarter 2022 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 now like to turn the call over to our host, Johann Rawlinson, Vice President of Investor Relations. Please go ahead.

Johann Rawlinson, Vice President of Investor Relations

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, which can be accessed on our website. I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not a guarantee 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 2022 Form 10-K filed with the SEC. All these documents are available on 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 available on our website. We believe that these non-GAAP measures provide additional information about our operations, allowing better evaluation of our profitability and performance. On the call this morning, we have Stephen Scherr, our Chief Executive Officer; and Kenny Cheung, our Chief Financial Officer. I'll now turn the call over to Stephen.

Stephen Scherr, CEO

Thank you, Johann. Good morning, and welcome to our fourth quarter earnings call. As I conclude my first fiscal year at Hertz, I am pleased to share that we had a strong quarter and a record year for the company. Our Q4 results demonstrate the progress we've made on our growth strategies, enhanced operational efficiency, effective fleet management, and our commitment to careful capital allocation in 2022, which focused on improving our services and strengthening our team to better serve customers and shareholders. As we enter 2023, we continue to see strong business performance, with January and early February showing solid results. The performance we achieved in 2022, along with early indications for Q1, gives me confidence in our financial sustainability, long-term value creation, and ability to provide a high-quality product to customers at a more efficient cost. Our strong results also support our ongoing growth initiatives, such as expanding our rideshare business, developing our electric vehicle platform, and revitalizing the Dollar and Thrifty brands. Let’s move on to the results for Q4. Our revenue for the quarter was $2 billion, representing a 4% increase year-over-year. Revenue per day and revenue per unit also showed solid growth, increasing 3% and 4% respectively. Transaction days rose by 3% year-over-year, indicating better performance than anticipated. Notably, core operating expenses per transaction day in Q4 decreased by 5% compared to Q3, showing improved operating leverage as previously indicated. Hertz generated adjusted corporate EBITDA of $309 million for the quarter, with a margin of 15%, and achieved adjusted free cash flow of $424 million. This performance stemmed from consistent rate stability and higher fleet utilization, with our NPS scores for 2022 showing an increase of 10 points year-over-year. Collectively, these financial indicators were consistent with our guidance. In the fourth quarter, depreciation per unit was $244, which aligns with the low end of our earlier projections. Kenny will discuss the future of depreciation further, but we view this figure as approaching our expected normal depreciation levels. Generally, depreciation on our P&L reflects not just the used vehicle market, which has recently stabilized after prior declines, but also our fleet strategy regarding new versus used, electric versus combustion vehicles, and the expected duration of our fleet operations. Therefore, depreciation must be understood in context. Our aim is to build a fleet with the highest return on assets. As you know, we strategically capitalized on high used car prices in early 2022 to enhance our fleet's equity. These actions, combined with the anticipated price declines in late 2022, have not compromised our equity cushion in our ABS facility. In fact, we feel secure about the equity level in this facility even under cautious assumptions regarding future residual values for both EVs and conventional vehicles. While the decline in vehicle prices means we are not experiencing the same gains on sales as in 2022, this trend is beneficial for future fleet purchases as we can take advantage of reducing prices under long-term agreements with manufacturers. Regardless of vehicle pricing, we will maintain our commitment to fleet levels that align with market demand. Overall, our Q4 performance reflected remarkable execution by the Hertz team. Despite travel disruptions causing higher than usual cancellations due to flight issues and unplanned demand for one-way rentals, we managed to adapt effectively. Utilizing advanced revenue management tools and agile fleet management, our team achieved a record of three times the typical levels of one-way rentals in the week leading to Christmas. Serving our customers through enhanced one-way rentals allowed us to relocate vehicles from northern U.S. markets to vacation destinations ahead of expected demand for January and February. This increase in high-revenue one-way rentals, coupled with reduced transportation costs associated with fleet repositioning, significantly benefited us, mitigating the negative impact of cancellations. As I mentioned earlier, our expenses improved in Q4. We had set a goal for better operating leverage in the business, especially in light of the investments we made in Q3 to address high out-of-service levels. Excluding a $168 million litigation settlement announced in December, our direct operating expense per transaction day in Q4 was just under $33, representing a $2 per day reduction compared to Q3. Our initiatives to lower third-party spending, reduce maintenance costs, and utilize telematics data are yielding results. As we expand our EV fleet and invest in technology, we foresee further improvements in operating leverage. Reflecting on Q4, the quality of our earnings was driven by effective execution in a favorable market. Demand for our leisure services exceeded seasonal expectations, and corporate activity also remained robust, enhancing mid-week utilization. Although our rideshare fleet operates at lower revenue per day compared to our rental car business, these rentals contribute positively to our margins as noted previously. Residual values have decreased from their peak in the second half of the year due to our significant harvest of fleet equity in the previous quarters. Now, let’s talk about our capital structure and liquidity. Our balance sheet remains strong, ending the year with a net corporate leverage ratio of 0.8 times, allowing for some additional leverage when capital market conditions are suitable. As of December 31, our available liquidity stood at $2.5 billion, with $943 million in unrestricted cash and the remainder accessible through our revolving credit facility. In December, we amended our European ABS facility, increasing the total borrowings allowed to EUR 1.1 billion and extending the maturity date from October 2023 to November 2024. Reflecting on 2022, it can be viewed as a foundational year for the company heading into '23 and beyond. We utilized the significant free cash flow generated throughout the year to reduce our equity base by one third. We also seized the opportunity to invest in both fleet and non-fleet capital expenditures, which will yield long-term benefits in operational efficiency and growth potential. Looking back over the year, I'd like to make a few remarks on the business and share my thoughts on our future outlook. Firstly, we have seen improved business performance, leading to a quality that aligns better with the Hertz brand. Secondly, we have instilled a financial return-focused mindset throughout the company. While customer considerations remain important, we are now managing the business with tighter and more efficient fleet oversight. Thirdly, we have enhanced our human capital through the addition of new executives, benefiting from their expertise and the experience of our existing staff, which has improved efficiency and customer service. Fourthly, we are making advancements in technology. While not all developments are visible, we are enhancing our tools and moving our systems to the cloud, which will improve our overall operations. Lastly, we have recognized the significance of a comprehensive used car market in the U.S. So, what does this mean for our future? Firstly, we have identified several growth areas, including rideshare, Dollar Thrifty, and EVs, each with different revenue durability profiles compared to traditional rental car operations. Secondly, we will continue to operate with discipline. I am seeing the same level of discipline across the industry, likely influenced by lower OEM production of vehicles. It's noteworthy that recent trends indicate used car prices are no longer linked to rental rates as they have historically been. This is particularly significant if we have passed the worst of used car price declines. I feel optimistic about our current position and capital allocation. Just as we focused on fleet and non-fleet capital expenditures in 2022, we will do the same in 2023 while remaining open to the option of share buybacks. That's where I see us moving forward.

Chris Woronka, Analyst

Stephen, sort of the high level, and you've been in the CEO seat for, I guess, about a year now. I mean, can you share any of the insights you've gained during the period and some of the key learnings and maybe what gives you confidence in the future of this business and the comment about being able to hold double-digit margins?

Stephen Scherr, CEO

Looking back at 2022, I believe it served as an initial investment for the company's future in 2023 and beyond. We utilized a significant amount of free cash flow over the year to reduce our equity base by one-third. At the same time, we seized opportunities to invest in fleet and non-fleet capital expenditures that should provide lasting benefits to the company, both in terms of operational integrity and growth opportunities. Reflecting on the year, I have a few observations about the business that underline my optimism for the future. First, business performance has improved, and we are now operating at a level that aligns more closely with the Hertz brand. Second, we've fostered a mindset focused on return on assets throughout the company, which drives how we manage the business, always keeping customers in mind. Third, we've enhanced our human capital, bringing in a new executive team that, combined with the experience of our existing staff and structural changes, will lead to better production efficiency and customer service. Fourth, our technology is evolving, and although not all of it is visible to the market, we are developing improved tools for our teams and customers, transitioning the entire company to a cloud-based infrastructure, which will be advantageous for us. Lastly, a significant realization for me and the company, particularly regarding fleet demand, is the importance of a diverse and extensive used car market in the U.S.

Chris Woronka, Analyst

I guess as a follow-up, obviously, a lot of headlines recently around price cuts on EVs, particularly Tesla. And I think there's just some general curiosity in the market about how that impacts Hertz both puts and takes, right, on the purchase and resale side. Is there any way to kind of walk through that and give us a little bit of color of how you guys are thinking about it?

Stephen Scherr, CEO

Sure. Why don't I start, and then I'll hand it to Kenny to give you sort of more particulars. But look, first of all, as Kenny said, we benefited from price declines in electric vehicles in the fourth quarter. And so we've moved in that direction. I think it's important to also know that we bought now, call it, 20% to 25% of that, which we expect in terms of an overall EV fleet that by 2024 will be a quarter of our fleet. And so as prices come down on electric vehicles, we'll buy 80% of what we want at a lower price point because, as we said in the prepared remarks, cap cost is the first ingredient to depreciation on these cars. I think it's also important to understand that in terms of EVs, we rode these up and then down, meaning we started early, bought them at a low price. Obviously, we paid higher as the market did, but then paid lower. So you need to look at kind of overall average cost that's there. And the last thing I would say, and this will play into depreciation as it being an output, not an input, but we have said on various calls that we expect the length of keep around EVs to become longer over time and longer even still to where we sit today. The nature of those cars, the experience of those cars, the ability to re-kit the interior will give us kind of a length of keep well in excess of where we are. And that will evolve in terms of the overall depreciation cost of these cars on an annual basis. But let me turn to Kenny for a little bit.

Kenny Cheung, CFO

Yes, Chris, it's Kenny. Let me provide some additional insights on what Stephen discussed regarding depreciation, and I’ll also address your question about ABS. Regarding depreciation, it's important to understand that we do not mark our vehicles to market value. Instead, the depreciation is influenced by various factors, such as capital costs. In this instance, as capital costs decrease, depreciation will also be lower. Furthermore, as Stephen mentioned, for Tesla, it's crucial to anticipate the residual value throughout the vehicle's lifecycle. Electric vehicles have the capability to be in service for longer periods, which means that extended usage will lessen the effect of changes in residual value on depreciation. Additionally, we averaged the costs of our purchases over the year; thus, our overall cost for Tesla has been lowered by earlier buys and more recent acquisitions in the fourth quarter. Currently, Tesla constitutes less than 10% of our total fleet, which minimizes the impact on depreciation. Moreover, a lower capital cost will further improve the economic viability of EVs, which is beneficial for our business. Regarding ABS, we incorporate the Teslas into the ABS at what I refer to as a haircut, roughly around 5%. From day one, there’s equity involved, meaning you start off in a favorable position. Furthermore, the Teslas depreciate at a slower rate than the economic depreciation on a monthly basis, providing additional protection. We assess the entire pool of cars collectively, rather than by individual make or model. As I noted during the call, we have ample protection as we enter 2023.

Ian Zaffino, Analyst

Great color on the comments on depreciation, maybe not tracking rates. Can you give us maybe a little bit more color? What is per se giving you confidence there? And then also, how does that then figure into your normalized EBITDA target and how you're thinking about that?

Stephen Scherr, CEO

It's important to understand that depreciation is not a static element; it is affected by various decisions and factors that we make with a focus on return on assets or overall business margins. While we consider customer preferences, if the rate is not differentiated between a new car and a high-quality, low-mileage used car, we will opt for lower capital costs and more affordable vehicles. Our decisions regarding the total costs of the vehicle are essential. In terms of financial performance, depreciation is just one aspect, and we have several levers to control based on our purchasing choices and the length of time we keep vehicles. As we expand our growth in the P&C and Dollar Thrifty sectors, we will place older cars in those areas, which supports higher margins and lower depreciation. All these factors affect depreciation, but it remains just one piece of a larger picture and is a result of clear decisions we make regarding return profiles, capital costs, maintenance expenses, and the overall economic return of the cars.

Kenny Cheung, CFO

Just to give more color, Ian, on depreciation. So if you look at Q4, right, as I mentioned, net DPU was $244. If you bifurcate between gross and gains on sale, gross was roughly $346 million, and then the gains on sale per vehicle was $102. That's how you get to the, call it, the $2.44. As you look outwards, right, I've talked about we expect in the range of $300 to $320 for the rest of the year. So growth appreciation for the most part, faced similar, right? Let's call it $350 for rounding standpoint. The gains on sale, right, we had $100 in Q4, high-low math, let's say that's $50 now. So that $350 minus $50 gets you to $300 for the rest of the year. And that's how we think about it.

Stephen Scherr, CEO

Yes. The one thing I would say, though, is that we've taken a rather conservative approach to sort of what we believe price decline will be over the course of the year. And I think we said in our remarks that we're more conservative than where the indices or the market is forecasting. And so that obviously plays into the view we have on the forward and we will adjust. So we're taking expenses down. I think in the last five weeks, we've seen a correction to use car prices to our benefit, not to our detriment. And therefore, gain on sale may improve over the course of the year to the extent that we see that sort of continue on. And to the extent that the worst of used car decline is behind us. But I think we're taking a prudent and conservative approach to this and have a number of levers to sort of offset where depreciation will be, no less what depreciation will be as we play forward.

John Healy, Analyst

Stephen, why don't you just to touch a little bit about free cash flow. I was hoping you could give us some guardrails to maybe think about that in 2023. Obviously, I know you're not giving formal guidance on it, but would just love to think about kind of non-fleet CapEx, just corporate CapEx. Anything related to cash maybe going into the funding facilities. It sounds like you have ample equity already in there. But just maybe some guardrails to think about that for this year.

Stephen Scherr, CEO

Sure. To provide some context, the significant gains from sales that we experienced at very high prices in the early part of 2022 are not expected to happen again. Our focus now is to replace the lost EBITDA and free cash flow that came from those sales with strong fundamental performance in the business. What we're indicating is our expectation for improved volume and rates, which we anticipate will materialize throughout the year. We are seeing ongoing growth across all channels. We will begin implementing the growth strategies within the business to generate EBITDA and free cash flow, whether through margin-enhancing activities in the rideshare sector or our initiatives with Dollar Thrifty as we move into the latter half of the year. All of this will significantly mitigate the decline we expect in gains. While it’s difficult to draw conclusions from just the first five weeks of the year, we have observed a reversal in the trend of residual prices during that time. This change suggests potential opportunities to maintain some gains, although not at last year's levels, it could offset what we initially anticipated for 2023 as we closed out 2022.

Kenny Cheung, CFO

Yes. To expand on that, in a stable situation, if you consider the buildup of free cash flow, the conversion from EBITDA to operating cash flow stands at 90%, which has been validated this year. Additionally, in a stable environment, factors such as fleet size and capital costs would remain relatively constant, with capital expenditures approaching historical levels. Is this how you arrive at a 70% conversion rate from EBITDA?

Adam Jonas, Analyst

Well, for Steve and Kenny, thanks for all the details, and it really does help us model and helps manage expectations, so well done for that. But the one thing you left out is on fleet interest expense outlook, $159 million last year, it's down about 45% year-on-year and well down $400 million from a few years ago pre-COVID. Now I know things have changed. But as your hedges roll and you see a step-up in funding costs from the ABS market, what should we be thinking about on fleet interest costs for 2023? And then I have a follow-up.

Stephen Scherr, CEO

Sure. So I'll have Kenny give you sort of some precision around the numbers, but the hedges that we have in there, Adam, are going to roll on the forward. We're obviously watching and managing them. These are not new to me just given what I did before. And so they've proven to be very valuable to us in locking in sort of the cost function of the interest expense. Kenny, maybe you want to speak to sort of the numbers themselves.

Kenny Cheung, CFO

Yes. So if you think about our structure on the debt stack, right? So roughly 75% of our costs are fixed base, right? And then most of the majority of our costs are on the ABS side. And roughly 80% of that is fixed as well. Last year, our blended cost was roughly 2.5% is very effective from a cost borrowing standpoint. Entering this year, we expect this number to be roughly around 3% to 3.5%, Adam, for the ABS side. As Stephen mentioned, we have hedges in place. So for example, roughly 40% of the ABS is variable funding notes we are contractually to have caps in place on those. And right now, they're currently in the money as we speak. And we sell this going through the P&L in Q4.

Adam Jonas, Analyst

Just to clarify that before my follow-up, you're saying 3% to 3.5% of the ABS side, but with hedges in place, that are in the money, you might have up better than that. We should be thinking that, that could be even better than that in terms on fleet interest?

Stephen Scherr, CEO

Yes, 3% to 3.5% with caps.

Adam Jonas, Analyst

Steve, regarding your point about using conservative and prudent assumptions, you've mentioned this several times. Could you share your assumptions for Manheim throughout the year or a general range? I assume there has been a further decline, but I’m unsure what we should consider there since you’re still factoring in a $50 per unit gain on sale. I don't remember if it's typical to see that magnitude of gain on sale. Any insights on this, even without tying it to a specific index, would be appreciated.

Stephen Scherr, CEO

Sure. Yes, of course, of course. I would say the following. As you would expect, we model, particularly around the ABS facility on a very conservative basis because I don't want a surprise. And so I want to understand what the risk is to us having to put equity into the ABS facility under a variety of sort of scenarios. And so we model to an annual decline in residual pricing that's probably a couple of hundred basis points wide of what the indices sort of publicly report, okay? Now those vary, and they depend on which segment of the fleet population you look at, but I think we model on a conservative basis. And then I look at kind of standard deviation movement to price to sort of understand what's our risk level and tolerance against those very conservative assumptions we believe that there's no scenario as we look forward whereby we're going to be required to sort of put money into the ABS. Now anything can change, but I think we take a fairly conservative set of assumptions. Now carry that assumption about residual price decline in '23. And I would say that we are on the conservative side, again, carrying that over from the ABS analysis into what we think gain on sale will be. And so I think that we look at what's playing out over the last five weeks. We look at what we're harvesting in terms of the increasing utilization of Carvana and our own proprietary channel, where we capture 5% to 7% premium to what we get in the wholesale market, take all of that together, and I'm still quite optimistic about the ability to harvest fair gains on sale. It won't be what it was at the top of 2022, but there's enough in there, right, to offset gross depreciation. So that's a little bit of the narrative, Adam, in terms of how we think about residual decline relative to the market, primarily for ABS, but then carrying it over to sort of sort out what we think expected gain on sale will be, again, both through wholesale and again, an increasing use of premium channels.

Ryan Brinkman, Analyst

I heard in the prepared remarks that like in 2022, you expect to be agile in '23 in allocating capital between capital spending, share repurchases and other initiatives. First, maybe just other initiatives, what is this? This is spending apart from CapEx? Is it acquisition? What are the other initiatives? And then what are the current priorities in that hierarchy for capital spending? And then what would you say are like the major factors that would cause you to allocate capital differently to remain agile as 2023 plays out in your share price, interest rates, travel trends? Or what should we be thinking about?

Stephen Scherr, CEO

We categorize capital allocation into three main areas: fleet, non-fleet, and share repurchase, with fleet being our first priority. We maintain control over our fleet based on demand and aim to optimize our investment in it. For non-fleet, we will continue to invest in the foundational aspects of the company to support our core operations and growth initiatives, which involve advancements in technology and human resources, equipping our employees with the necessary tools to enhance business performance. Regarding share repurchase, we are also exploring minor opportunities, such as certain franchises sold during bankruptcy that may be more beneficial for us to own rather than franchise. These opportunities are mostly based in the U.S. and would be considered small, bolt-on acquisitions that could positively impact our overall performance. We will consider these opportunities as they arise, though our primary focus remains on fleet, non-fleet, and share repurchase. Well, let me turn it back to Kenny to walk you through our results in more detail and provide commentary on our liquidity and capital allocation.

Kenny Cheung, CFO

Thank you, Stephen, and good morning, everyone. As Stephen noted, we had a solid fourth quarter and a record full year. Fourth quarter revenue was up in both the Americas and International segments and totaled over $2 billion, an increase of 4% year-over-year or 7% on a constant currency basis. RPD, RPU, and transaction days for both segments improved year-over-year. Both rate and volume met our expectations for the quarter, as we laid out on our last call, and I'll reiterate that the volume performance was 500 basis points better than seasonality typically yields. Utilization increased 100 basis points year-over-year despite severe air travel disruptions in the U.S. at year-end. Domestic leisure volumes across the industry have made progress towards pre-pandemic levels within our business, and we see steady improvement in corporate volumes. International inbound have been slower to recover but hold considerable promise for us. As of the fourth quarter in the Americas, corporate was at about 80% of 2019 levels and international inbound grew to about 50%, up from 45% in Q3. As international inbound continues to recover, we expect it will prove accretive to RPU, utilization, and margins. Adjusted corporate EBITDA was $309 million in the fourth quarter, a margin of 15%, growth in corporate and rideshare were large contributors with continued strength in leisure. Geographically, we saw strong performance across all markets. For the full year, revenue was $8.7 billion, an 18% increase from 2021. On a constant currency basis, revenue increased 23% year-over-year with strong increases in RPD, RPU, and days across both the Americas and International segments. Adjusted corporate EBITDA for the full year was a record $2.3 billion, a margin of 27%, with both the Americas and our International business at record levels. Our focus on higher-yielding business, a dynamic fleet strategy, and a focus on asset return all contributed to an improved business. We generated higher EBITDA while maintaining a tight fleet. Staying on fleet, we continue to dynamically manage our composition of vehicles during the quarter, ending the year with a fleet size of approximately 480,000 vehicles roughly equal to the fleet size at the start of the year, just as we guided. Due to seasonal de-fleeting and other rotation, fourth quarter net fleet CapEx was a source of cash. Fourth quarter net DPU was $244 within the range we quoted on our last call and continued to normalize during the fourth quarter, ending at $300 for the month of December. We expect our average fleet size in Q1 to be higher than what we closed the year in light of elevated levels of demand. Depreciation in the ABS facility let me put a bit more detail to what Stephen spoke about earlier. First, as Stephen noted, we managed the business to margin and ROA, we don't solve for depreciation in isolation. Depreciation is the output of various fleet decisions, including acquisitions and holding periods that we make in order to maximize return on the business as a whole. Second, declining car prices render a lower cap cost, which is the first ingredient to depreciation. We have been and will be buyers of both new and used cars. And as a result, we expect to benefit from downward price trends. For avoidance of doubt, we benefited in Q4 from price declines on EV purchases. Third, the holding period on our vehicles are dynamic. And decisions on length of keep are not made across the whole fleet but are specific to model and year. On EVs, specifically, and as we have stated previously, we expect longer length of keep over time. Further, we currently depreciate EVs over a time period that is longer than ICE vehicles. We believe this time period could lengthen given the mechanical profile of the car and with more history under our belt. Fourth, entering 2023, we are less likely to be sellers of vehicles with a primary purpose of capturing excess value, which was an opportunity that may prove to have been unique to 2022. Make no mistake, we will look for smart opportunities to harvest gains, and we model for gain on sale in 2023. But we entered 2023 with far fewer non-depreciating vehicles in our fleet. And given the decline in residual prices broadly, we expect operational utility to be the primary driver of decisions on fleet deletions. And finally, the last point I will make is on our available channels for fleet disposals. While not directly impacting gross depreciation expense, we continue to leverage the Hertz car sales and Carvana retail disposition channels, providing us with a meaningful premium over wholesale channels. This represents nearly one quarter of our car sales in 2022, and we look to grow that from here. Two points to make on the ABS facility. First, and as a reminder, equity in the ABS is measured as the excess of the fair market value over ABS book value. This fair market value is determined based on the entire fleet, not just one make or model, and entering the fourth quarter, we had vehicles that carried excess equity at inception, driven by smart and opportunistic fleet procurement. Second, after vehicle acquisition, incremental equity is typically created by vehicles that are required to be amortized in ABS at an accelerated pace compared with economic depreciation rates. This incremental equity cushion to either buffer future declines or be harvested by us selling cars with high built-in gains or high residual value risk. This is what we deliberately did last year. Our actions enabled us to harvest gains. In Q4, our equity cushion went from $2 billion to $1.1 billion. From here, we expect that the cushion will continue to be sufficient under stress scenarios more conservative than those offered by the market. Turning now to operating costs. Our revenue growth outpaced our expenses and as Stephen pointed out, BOE per transaction day exclusive of the litigation settlement was under $33, a $2 per day improvement from the third quarter. Our efforts with respect to reducing third-party spend and maintenance costs and utilizing telematics data are showing benefit. As we continue to grow our EV fleet and progress on a technology investment, we expect further improvement in operating leverage. Looking back on Q4, the quality of our earnings was driven by solid execution in a strong market. Demand exceeded a seasonal expectation across our leisure business and corporate activity proved strong, which was beneficial to mid-week utilization. Our rideshare fleet continued to grow and while at reduced RPD compared to RAC, the economics of these rentals are margin accretive, as we pointed out in the past. Residuals came off the peak in the back half of the year following our significant harvest of fleet equity in Q2 and Q3. Let me now turn to capital structure and liquidity. Our balance sheet continues to remain healthy, and we ended the year with a net corporate leverage of 0.8 times suggesting room for modest incremental leverage on the business when capital market conditions make it prudent to do so. At December 31, our available liquidity was $2.5 billion, comprised of $943 million in unrestricted cash and the balance available under the revolving credit facility. In December, we amended our European ABS facility, the Italian fleet, increasing aggregate maximum borrowings to EUR 1.1 billion extending the maturity from October 2023 to November 2024. Turning to our cash flow and capital allocation for the quarter. Adjusted operating cash flow of $156 million in the fourth quarter before considering fleet CapEx, which was a source of cash of $312 million due to seasonal de-fleeting and rotation, as I mentioned earlier. Adjusted free cash flow was a strong $424 million, a conversion of over 100%. For the full year, adjusted operating cash flow was $2 billion, and adjusted free cash flow was $1.5 billion. I should point out that both the quarterly and annual amounts exclude the impact of the $168 million in litigation settlements, which were paid in the fourth quarter due to their unusual nonrecurring nature. Despite the adjustment for the settlement, full year adjusted cash flows were at record highs. As stated previously, the settlement did not impact our capital allocation. Our capital priorities of investing in our fleet, funding our strategic initiatives, and returning excess cash to shareholders remain unchanged. During the fourth quarter, we repurchased 19 million shares of common stock for $350 million. Overall, we allocated nearly $360 million towards note capital investments and share repurchases during the quarter. For the full year, we repurchased shares equal to nearly 30% of the equity base of the company. Lastly, let me give some highlights for what we expect in 2023. I'll start with revenue. Seasonally, first quarter revenue is normally slightly below Q4 based on a reduction in volumes and flat RPD. However, for Q1 this year, we expect revenue to be flat compared with Q4 with transaction days to hold steady. For Q2 and Q3, we expect both rates and volume to increase, contributing to higher revenue in those quarters. We would expect Q4 to seasonally adjust down from those levels. On fleet, we expect average fleet in Q1 to be slightly elevated to where we ended the year at 480,000 cars, particularly given heightened demand levels, and compensating for slightly higher recall levels in the fleet. We also expect seasonal growth in fleet through Q2 and Q3 to meet higher demand in the spring and summer. From there, typical de-fleeting is expected as the year comes to a close. On net DPU, we anticipate depreciation to further normalize and settle in the range of $300 to $320 in Q1. Regarding net DPU expectations for the balance of the year, we expect it to trend down towards the lower end of the Q1 range, given anticipated mix and changing whole patterns and reflecting some modest gains on sale across the fleet. And with respect to direct operating expenses, we expect Q1 DOE per transaction day to be approximately $33, roughly equivalent to the normalized figure for Q4. From there, we expect it to trend lower from Q2 through year-end. Lastly, in prior years, we anticipate the trajectory of free cash flow generation to be weighted more heavily towards the back half of the year as we de-fleet off the summer peak and through year-end. First half 2023 free cash flow will reflect investments in fleet CapEx as the size of fleets to meet expected demand in the busy summer season. That said, and consistent with our behavior in 2022, we will continue to balance capital allocation among capital spending, share repurchase, and other initiatives. In closing, we are pleased with the momentum we have seen early in 2023. And as we assess our prospects for the year, we have confidence in our ability to deliver attractive full-year financial returns.

Operator, Operator

Our first question comes from Chris Woronka with Deutsche Bank. Please go ahead.

Chris Woronka, Analyst

Stephen Scherr, CEO

Looking back at 2022, I see it as a foundational year for our company as we move into 2023 and beyond. We generated significant free cash flow throughout the year and reduced our equity base by a third. Additionally, we seized opportunities to invest in both our fleet and non-fleet capital expenditures, which I believe will benefit the company in the long run, enhancing our operational efficiency and growth prospects. Reflecting on the year, I have a few observations about the business that I believe will support my optimism for the future. Firstly, our business performance has improved, and we are now operating at a level that reflects the Hertz brand better. Secondly, we have shifted our company mindset to focus on return on assets. This means we are now managing and understanding the business across the whole company based on financial returns while still valuing customer perspectives. Our management approach has become more focused and efficient. Thirdly, we've strengthened our leadership team with new executives who will enhance our operations. Combined with the experience of our field staff and organizational changes to improve production efficiency and customer service, this will drive better results. Fourthly, our technology is advancing, even if it isn't immediately apparent in the market. We are developing superior technology tools for our field teams and customers, and transitioning our operations to the cloud instead of a traditional data center will ultimately benefit us. Lastly, a significant realization for both me and the company is understanding the substantial value of a diverse used car market in the U.S., especially as we assess fleet demand.

Chris Woronka, Analyst

Stephen Scherr, CEO

Kenny Cheung, CFO

Yes, Chris, it's Kenny. I’d like to elaborate on what Stephen mentioned about depreciation and also address your question regarding the ABS. Regarding depreciation, it's essential to understand that we don't perform a mark-to-market assessment on our vehicles. Instead, depreciation is influenced by different factors, such as capital costs. In this instance, since capital costs are decreasing, we see lower depreciation. Additionally, as Stephen noted, it's crucial for a Tesla to consider the residual value over its entire lifespan. With electric vehicles, this is particularly significant because they can operate effectively for a more extended period. Prolonged usage will lessen the effect of residual value changes on depreciation. On the pricing front, remember that we averaged in the costs throughout the year, so our overall cost for Tesla has been reduced due to earlier purchases and the recent acquisitions made in Q4. In terms of our fleet, Teslas make up less than 10% of our total, which lessens the impact on depreciation. Lastly, all else being equal, reduced capital costs will improve the economics of electric vehicles, which is beneficial for our business. Quickly on the ABS, we include Tesla vehicles at what I refer to as a haircut, around 5%. From day one, there’s equity in the deal. Each month, Teslas perform better in the ABS compared to the economic depreciation rates, creating an additional buffer. We view our fleet as a whole rather than by specific make or model. Currently, as I mentioned on the call, we have a comfortable cushion going into 2023.

Ian Zaffino, Analyst

Stephen Scherr, CEO

It's important to understand that depreciation is not a fixed factor; it's affected by various decisions and elements we consider, all aimed at improving our return on assets or overall business margin. While we pay attention to customer preferences, if there's no significant distinction in rates between a new vehicle and a quality used vehicle with low mileage, we will opt for lower capital costs and more affordable cars. Our decisions take into account the complete cost of each vehicle. In terms of financial performance, depreciation is just one aspect among others like EBITDA and cash flow, and we have multiple levers to manage, based on our purchases and vehicle retention duration. As we expand in the Property & Casualty sector and with Dollar Thrifty, we anticipate that older cars will be transitioned there, which should contribute to higher margins and reduced depreciation. All these factors play a role in determining depreciation, but it's just one component of the greater picture, influenced by our strategic decisions related to return expectations, capital costs, maintenance expenses, and overall yields from each vehicle.

Kenny Cheung, CFO

Stephen Scherr, CEO

John Healy, Analyst

Stephen Scherr, CEO

Sure, to provide some context, the substantial gain from sales at significantly high prices that we experienced in early 2022 is not expected to happen again. Our focus now is to make up for the lost EBITDA and consequently the lost free cash flow that resulted from those sales, aiming to achieve similar performance through our core business operations. What we are indicating is that we anticipate improvements in volume and pricing, which should unfold over the year. We are continuing to experience growth across all channels, and we will begin implementing growth strategies to generate EBITDA and free cash flow. This includes activities that enhance margins in our rideshare business and initiatives related to Dollar Thrifty as we progress into the latter half of the year, which will significantly help offset any declines from sales gains. While it is challenging to draw conclusions from the first few weeks of the year, we've noted a reversal in the trend of residual prices, suggesting potential for maintaining some sales gains, though not at last year's levels, but possibly better than what we projected for 2023 at the end of 2022.

Kenny Cheung, CFO

Yes, to expand on that, if we look at the free cash flow growth, the relationship between EBITDA and operating cash flow is 90%, which has been confirmed this year. Additionally, in a stable environment, the fleet size and capital costs would remain relatively constant. So, if we don't consider CapEx and look at levels close to historical averages, is that how we achieve 70% conversion from EBITDA?

Adam Jonas, Analyst

Stephen Scherr, CEO

Kenny Cheung, CFO

Yes. So if you think about our structure on the debt stack, right? So roughly 75% of our costs are fixed base, right? And then most of the majority of our costs are on the ABS side. And roughly 80% of that is fixed as well. Last year, our blended cost was roughly 2.5%, is very effective from a cost borrowing standpoint. Entering this year, we expect this number to be roughly around 3% to 3.5%, Adam, for the ABS side. As Stephen mentioned, we have hedges in place. So for example, roughly 40% of the ABS is variable funding notes we are contractually to have caps in place on those. And right now, they're currently in the money as we speak. And we sell this going through the P&L in Q4.

Adam Jonas, Analyst

Stephen Scherr, CEO

Yes, 3% to 3.5% with caps.

Adam Jonas, Analyst

Steve, you’ve raised a good point about using conservative and prudent assumptions, which you've mentioned several times. Can you share what your assumptions for Manheim are for the year, or provide a range? It's likely that it has further declined, but I'm curious about what we should consider since you're still allowing for a $50 per unit gain on sale. I’m not sure if that’s a typical gain or not, so any insights you could provide without tying it to a specific index would be appreciated.

Stephen Scherr, CEO

Ryan Brinkman, Analyst

Stephen Scherr, CEO

I believe you’ve outlined the main points. Capital allocation typically falls into three categories: fleet, non-fleet, and share repurchase. We prioritize them in that order, while recognizing the possibilities across all three areas. We’ve discussed fleet and our approach to manage it based on demand, aiming to optimize returns on our investments. For non-fleet, we will continue to invest in the essential foundations of the company to effectively implement our core business and growth strategies. This includes technology, workforce development, and providing our employees with necessary tools, all of which contribute positively to our operational performance. Regarding share repurchase, there are minor opportunities to consider certain franchises sold during bankruptcy, which might be more beneficial for us to own rather than franchise. These opportunities are primarily based in the U.S. and while they would be small-scale acquisitions, they could enhance the overall performance of the company. We will evaluate these chances as they arise, distinct from our primary focus on fleet and non-fleet investments and share repurchase activities. Well, let me turn it back to Kenny to walk you through our results in more detail and provide commentary on our liquidity and capital allocation.

Kenny Cheung, CFO

Operator, Operator

This concludes today's question-and-answer session. I'd now like to hand the call back to Stephen Scherr, Chief Executive Officer. Please go ahead.

Stephen Scherr, CEO

So thank you all for your participation today. We look forward to sharing further updates with you all certainly on our next call, if not before. And with that, I'll turn it back to the operator.

Operator, Operator

This concludes the Hertz Global Holdings Fourth Quarter 2022 Earnings Conference Call. Thank you for your participation.