Welcome to Hertz Global Holdings First Quarter 2022 Earnings Call. [Operator Instructions] I would like to remind you that this afternoon's call is being recorded by the company. I would now like to turn the call over to your host, Johann Rawlinson, Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining us. By now, you should have our earnings press release and associated financial information. We've also provided slides to accompany our conference call that can be accessed on our website. I would like to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance and by their nature, are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of today's date and the company undertakes no obligation to update that information to reflect changed circumstances. Additional information concerning these statements is contained in our earnings press release and in the Risk Factors and Forward-Looking Statements section of our 2021 Form 10-K and our first quarter 2022 Form 10-Q filed with the SEC and on the Hertz website. Today, we'll use certain non-GAAP financial measures, which are reconciled with GAAP numbers in our earnings press release available on the Investor Relations section of our website. We believe that our profitability and performance is better demonstrated using these non-GAAP measures. Comparisons discussed will exclude the effects of Donlen fleet leasing and management business, which we sold in March 2021. On the call this afternoon, we have Stephen Scherr, our Chief Executive Officer; and Kenny Cheung, our Chief Financial Officer. I'll now turn the call over to Stephen.

Thank you, Johann. Good afternoon, everyone, and welcome to our first quarter earnings call. This is my first call as the new CEO of Hertz, and I look forward to speaking and meeting with many of you in the coming weeks and months. Let me start by saying how proud I am to be a part of this company. My first 60 days have been exciting and have provided me with valuable insights into the business, both in terms of what we do well and equally where we need to improve. I've spent considerable time with our senior leadership team as well as our colleagues in the field at locations across the country. My initial impressions are uniformly positive and consistent with what attractive need to the opportunity to lead this company. Hertz possesses an extraordinary brand, a brand that is commercially powerful and that aligns well with other emerging leaders in mobility. It is also a brand that attracts talent, both in terms of retention and in bringing new talent to the company. Hertz benefits from an exceptionally resilient workforce with employees that have long tenure at the company with a deep appreciation for and relationship with our customers. These tenured employees, combined with new and innovative talent is a powerful combination. Hertz enjoys an exciting first mover advantage with electric vehicles now deployed across more than 30 markets in RAC and TNC. A considerable portion of our fleet will be electric by year-end with promising economics as EVs command higher pricing and draw lower operating costs. We are benefiting from early performance analytics and a growing roster of OEM partners. And of significance, Hertz operates from a position of financial strength, following its reorganization with impressive cash flow conversion, a renewed focus on returns, low leverage and a…

Thank you, Stephen, and good afternoon, everyone. We continue to execute on our strategy of focusing on profitable revenue growth, staying disciplined with fleet and size, utilization and productivity. Our first quarter adjusted EPS was $0.87 and adjusted corporate EBITDA was $640 million, a margin, as Stephen noted, of 34%. Our revenue for the first quarter was $1.8 billion, 57% higher than in 2021. This was slightly higher than the estimate that I put forward on our last call and mask the fact that this was really 2 different periods within the quarter, as mentioned earlier. The first 6 weeks were weaker than originally expected due to Omicron, but March more than compensated for that. Our performance in the back half of the quarter was due in large measure to improved rates, primarily driven by leisure customers demand. Our disciplined pricing, together with structural improvements we've spoken about previously, led to revenue per unit per month of $1,326, up 26% from 2021. Within Q1, our RPU sequentially increased from approximately $1,100 in January to over $1,600 in March, driven by sequential improvement in utilization and pricing. I should highlight that effective from Q1, we revised our calculation of monthly revenue per unit, or total RPU, to use average rentable vehicles as the denominator. Average rentable vehicles excludes vehicles for sale on the company's retail lots were actively being sold through other disposition channels and are, therefore, unavailable for rent. We believe this is a better measurement of productivity of our rental fleet as it is unaffected by fluctuations in our disposition activity. For clarity, the calculation of depreciation per unit remains unchanged and includes all cars in the fleet as these remain subject to depreciation. As I've said before, we are keenly focused on generating healthy revenue that is more…

[Operator Instructions] Your first question comes from the line of Chris Woronka from Deutsche Bank.

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

Yes, sure. So thanks, Chris. I appreciate the question. Kenny, in his prepared remarks, talked about normalized EBITDA in the context of '19 as a reference point. So let me come at it slightly different angle, which is let's look at current conditions kind of as a delta to where we think normal is. So let's look first at the demand side. On the demand side, notwithstanding how elevated it is, we're still shy of where I think normal demand will sit. So you look at leisure in the RAC business, it's at about 90% of where it was in '19, so limited amount to see there. But if you look at corporate and you look at inbound, so these are international travelers coming to the United States, is considerable demand that can be recovered to get us to a normal state of affairs. So thinking about corporate travel. Corporate is now running at about 63% of where it was in '19 and inbounds are running only at about 35%, and that will change as COVID measures and the like of entry into the United States will change. So on the demand side, there's still room, right, for improvement to get us to a normalized state. Then you look at the supply side, right? Typically through fleet, and I think as we've said, more limited conditions around supply, much as we will get our fair share of it, I think, persist in through '23, maybe a bit beyond. And so there, I think as fleet comes on to more normalized levels, you'll see us grow our fleet but grow it in the context of demand that's there, so fleet will increase. I think we can sustain utilization at levels that we're seeing now in March and in through the second…

Yes. Stephen, very helpful. And just as a follow-up, like kind of on the fleet side, and you mentioned that the RPU of the things you're bringing in, which you have a lot of EVs coming into the fleet, does that make you reconsider wanting to get the total fleet even back to '19 levels even if demand gets there? Is there a case to be made that you could be smaller with different fleet because the fleet -- the cost of that fleet is going to look a little bit different? And so therefore, really totally zone in on RPU and not on matching the fleet to the demand, to the liquidity?

Yes. I mean, my view on this is that this is managing a set of assets, okay, and sweating the ROA on your fleet. So unless focused on the aggregate amount of fleet, I'm more focused on making sure that I'm sizing fleet into demand. And that the composition of the fleet as between electric vehicle and ICE is taken into consideration in part because I think the ROA on the EVs will be higher. They will be higher because they attract a higher rate and they carry with them appreciably lower operating costs with respect to maintenance and otherwise. And I think on the forward, there's more good to be had on depreciation of those vehicles because I think we're operating with very limited history. But in the end, I think the life of those vehicles will be longer and the depreciation less. So my point to you is that I'm not looking to go back to a prescribed fleet number. I want to grow fleet in the context of sweating the ROA, meeting the demand that's there and looking at the mix of fleet in the context of where I can harvest the greatest margin on the fleet itself.

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

Big picture question for you, Stephen and Kenny. Just getting a lot of questions about where we're at in the cycle and what's happening with the economy. Would just love to get your view of how Hertz is thinking about the economy? And maybe how Hertz is different relative to historical periods as maybe we encounter some potential economic turbulence? So I would just love to hear your thoughts on kind of leading economic indicators and how you're planning the business? And maybe how the business might be more or less resistant to those pressures that come about cyclically?

Hey, John, yes, it's Kenny, I'll try to answer this one first. So thanks for the question. A few things come to my mind as I think about your question right? The potential downturn, economic pressure. I'll say 2 things here, right? First and foremost, we can fleet up and down our fleet very, very quickly, unlike other travel and hospitality peers who can now with their fixed asset. The name of the game for us, regardless of any environment, recession or no recession or pressure, is to match fleet to demand, right below the demand curve, right, to maximize profit. The second thing I'd say is we are a very nimble company, right? 70% of our cost base is variable and that provides flexibility as volume flexes up and down. And remember, this is combined with the fact that we have a very strong book of business off year, which is resilient as proven at the peak of the pandemic. The second thing I'd say is that people talk about inflation, right? My view is we don't view inflation as necessary a bad thing for us as this creates more discipline across the industry in terms of pricing and asset allocation, which you can see currently. The second thing I'd say is that in an inflationary environment, car rental is not a bad place to be at. As you're utilizing an asset purchase that today slash historical value and monetize them against the backdrop of rising rate environment. And the last thing I'd say about inflation is that we continue to drive productivity, optimize business processes and drive operational efficiencies to offset that. And then the last thing I'd say around the current environment is interest rates, right? As I mentioned in my prepared remarks, we have a really strong balance sheet. But if you think about debt profile, right, our debt stack, 70% of our total debt is fixed rate, so we are largely insulated from interest rate hikes. And we have caps in place as well on the VSN standpoint. So long story short, while the current environment is dynamic, as you pointed out, our business model is resilient across a wide range of circumstances. And by the way, we are -- we've been battle-tested and we are students of the business. We analyze and study all aspects of the auto market. Since quite frankly, we participate in all aspects of it. So we are prepared for all scenarios.

John, it's Steven. The one other perspective I'll offer you is that I think rental car -- the rental car industry and the travel industry more broadly is going to be the beneficiary of what I would describe as a delayed consumptive response, meaning if you look across a range of other industries, stimulus led to increased consumption in the back half of 2021. If you think about travel, travel has not had that opportunity just yet, largely by virtue of COVID and restrictions that have been in place. If I look at our forward book of bookings in the summer, what it's suggesting to me is that we may see delayed consumptive patterns around travel, and we will be the beneficiary of that. And as I said in response to the question that I was answering for Chris, just look at where we've yet to pick up the demand that indicates there's some delay to it. So think about what's left on corporate demand to come through. And impressively, what's left on the inbound international traveler to the U.S., which is a very profitable segment for us. And so I think there's an element here where stimulus came through, we saw that in the consumptive behavior of consumers, but it didn't necessarily materialize in the way in which I think it will in this summer. And so that's just a broad perspective to offer you in the context of what the forward holds for the industry.

Great. That's really helpful. And just 1 follow-up question, Kenny. Could you run us through the math on the view on fleet cost for the year again? Was that a -- were those just U.S. comments? Or was that company-wide? And I was just hoping to try to sketch out kind of the $175 to $225 number because it's, to be in size, maybe a number like 300 at the end of the year?

Okay. So yes, so let me go a bit deeper since I'm sure I'll get more questions on depreciation, so I'll hit it right now. So if you think about this quarter, right, call it negative 40. If you bifurcate between gross depreciation, which is simply your recorded depreciation of the vehicle, and then your gains on sale, if you bifurcate that, you're roughly $223 of gross depreciation per car per unit per month and $263 of gains per car per month per unit, that's negative $40, right? So as you work your way into, call it, Q2 now, your fully depreciated vehicles will decrease, as I mentioned in the prepared remarks. And then essentially, if you do the math, right? If Q2 was, call it, $100 or $120 and change, then that means your back half will normalize, right, closer to the $300 mark in terms of depreciation. So -- and then the number I've given for the full year, that is a global number.

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

My first question is a big picture question for Stephen. There are a lot of views about what the future of mobility looks like. And obviously, there are a lot of moving parts. But as you were attracted to this opportunity, what was your own framework for what that future looks like over the next, call it, 3 to 5 years? And how are you balancing moving the company towards that view, while also staying nimble if the future goes in a bit of a different direction?

Sure. Thanks, Stephen. I appreciate it. So I'll answer that on a couple of levels. First of all, my view was that Hertz sits with an extraordinary brand, perhaps a brand that was worthy of an even better business, which I think we can build, and that doesn't often happen. In the context of mobility, there are enough really impressive players that are in and around those changes where I think Hertz can align itself quite comfortably. And we're already doing that, obviously, in the context of Tesla and Uber and Carvana and the like. And I think there's more to do there. For me, the forward path around mobility is all about us thinking now about the way in which we diversify the composition of fleet and equally think about diversification of our customer channels. So in the context of fleet, obviously, it's about combustion engine and electric vehicle, and what that will mean and what that carries, okay? On the customer side, it means not just playing direct, but also thinking about corporate and equally ridesharing and the forward view on what that might mean for fleet management overall. In the context of corporate, there's an interesting developing phenomenon, which is that the electric vehicle is turning out to be a great appeal to our corporate customer. They need to rent cars to their employees, but they're equally through EV, satisfying their own ESG and carbon footprint objectives. And that's sort of an interesting dynamic there. On the Uber side and translate that over through to Lyft or to a variety of other fleet players, imagine where Hertz is in a position, in this case, to take EVs and rent them, changing the consistency of product delivery and the economic dynamics to the driver, what could we do…

That's helpful and interesting. As a follow-up on the fleet side of your response, is there any sense for how electric vehicle pricing has trended as you've rolled out more? And you kind of alluded to this, but maybe it's too early to really see this in terms of differences in uptake between consumers versus business customers? And then how you're just generally thinking about the pricing umbrella of these vehicles versus the base they become more ubiquitous?

Sure. Well, I think what we're seeing in the early introduction of electric vehicles into the fleet is consistent with what we had analytically modeled in making the decision that the ROA on this segment of the fleet was attractive. That is, we're seeing elevated pricing certainly into RAC and equally into ridesharing. On the ridesharing side, it carries the extra benefit of those rentals being longer, 4 weeks. It means our touch point into those cars is appreciably less, meaning we won't touch the car 3, 4, 5 times in the way in which we would in the normal fleet. So the operating cost associated with that is much lower. The maintenance, while it's early, the maintenance is lower. We expect those maintenance costs to continue to be lower and utilization, as an expression of demand, in both the corporate segment as well as in ridesharing and RAC would suggest to us that the demand is really impressive. I mean we're seeing waiting lists among Uber drivers to take these cars, and we're seeing very, very quick uptake, again, at high utilization levels across the consumer and the corporate side.

Hey, it's Kenny. I mean, from a financial standpoint, I'm excited to say that the Teslas coming in is validating our long-term view of the EV economics being accretive to ICE vehicles. So our view was having a first-mover advantage here is invaluable here as the learnings are improving our daily operations and giving us a huge competitive advantage.

Steve, I would also say one other thing, which is if one harbors a view that there will be forward softness for a variety of reasons, right, in price, I think the EVs present as they grow within our fleet, a pretty defensive floor, if you will, as to where that pricing will go, meaning we have a first-mover advantage. They are a scarce component of the fleet just on a relative basis. Therefore, the ability to hold price, I think, is higher. And so it's just an exciting proposition for us as we take more of these vehicles in and look to partner with more OEMs on the intake.

Next up, we have Brian Johnson from Barclays.

I just want to talk a little bit more about the depreciation, in particular, around not just used car sales and pricing outlook, but used car acquisitions as I'm sure you're probably aware there's some well-known used car resellers who were seen by the market in their most recent earnings results for buying used cars earlier in the year or late last year 1 price and then selling them in another. So 2 questions. One, can you give us some sense of how your activity in the used car acquisition market was, how that factors into your depreciation outlook? And then number two, it's comforting that you're guiding to about 110 next quarter, the 1,500 number, very similar to what's in our model and other analyst referenced. We do have depreciation of normalizing as part of that. But how do investors get some comfort that as used car prices moderate slightly, there isn't an overshoot in your depreciation numbers?

So why don't I let Kenny start and then we'll come back.

I think one of the questions that I think you're alluding to, Brian, is that how do we think about a normalized depreciation rate going forward, right? As you know, right now, the back half, the exit rate close to $300 as I alluded to earlier. Here's how I think about it, right? When you look at depreciation, it's unfair to look at it in silo, right? You have to look at it in conjunction with other dynamics. RPD, residuals, cap costs, just to name a few, right? So let me give you a quick stat. It's not a coincidence that RPD, residual cap cost right now, at this very moment, is all up by 30% to 40% versus prepandemic, right? So simple math is, if DPU, right, use an example, right, went up to $500, you may say, "Wow, that's really high." But RPU falls to 2,000, I'd take that economics all day and all night, right? So I think it's important to really look at depreciation in conjunction with other variables. And that goes back to the point about return on assets that Stephen mentioned, right? So I don't know, Stephen, if you have anything else to add on?

No, no. I mean I think the point that Kenny is making is the right one, which is, obviously, we need to be mindful of depreciation and think about it in the context of how we manage the fleet, and I'll come back to that. But I think when Kenny and I manage the business, we're looking at a dashboard that has multiple indicators on it, okay? We're looking at the rate we're charging. We're looking at utilization. We're looking at depreciation and you need to take those all in tandem. Now my adherence to sort of ROA as a good framework is we want to sweat the asset. And therefore, all of these are inputs to the return that the fleet is ultimately going to yield to us. Now in the context of our own behavior in the used car market, we are, at the moment, both a buyer and a seller, okay? So we are buying low mileage, high-quality used cars because the returns are attractive in a market that's displaying the kind of demand relative to supply that it is. At the same time, we are looking at selling portions of our fleet because they are high mileage cars, they're of deteriorating value. It's not a product that we want to put a customer in. And when we do the math and we do the analytics, harvesting at the current elevated residual level or car price on that through Carvana or any other channel is in excess of the present value of the rental revenue that we're otherwise going to take in. That's the kind of dynamic we need to go through as both a buyer and a seller. And so I think that answers your question, but that's how we're thinking about this more broadly.

Okay. So you're not worried that you bought -- basically what you're saying is used car acquisitions are an alternative in a tight market to new car acquisitions and can follow depreciation curve? And obviously, you're renting them in the meantime?

I think that's right. And I think that equally, I'm not standing in a static position, meaning if we start to see the market move, okay, so something happens in the relationship, if you will, between new car prices and where we're taking in expensive vehicles and what we're doing with respect to the residual on the use, my view is that it's unlikely to move at a beta of 1. And equally, it's not going to move on an overnight basis. And so because we study this all the time, we're going to act, right, on where those numbers sit. So the calculus that we do about you keep the car or do you sell the car is in the context of a spot price relative to where we can earn rental money on the property itself. So we're going to be quick on this should these dynamics change. But again, I think ROA is the broader context within which to think of it.

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

As far as -- and I know you guys mentioned Carvana saying you got an uptick, is there any more color you could maybe give us surrounding that? Maybe how much was the uptick? Or do you expect to see continued upticks? And how many vehicles do you think you could actually move through that channel? How do we think about that?

Sure. Well, I think we need to stay away from the specifics of the arrangement for a host of different competitive reasons, but let me shed a little bit of light on it. What we're seeing in Carvana is a material uptick to what we could harvest in the wholesale market. Carvana, therefore, provides us with an incremental channel alongside the Hertz used car retail channel that we have to sort of provide us with really interesting economics on the sale of the used car fleet. I'd also point out, particularly relevant to the last question and the last exchange, anytime you avail yourself of an incremental channel to move used cars, you therefore provide yourself with added flexibility to be quick and agile as and to the extent that there's changing circumstance in the market or pricing. But what we are seeing through Carvana is perhaps more elevated in terms of volumes than what we had initially imagined. And it's a good, robust channel for us that's suiting us in the context of materially elevated prices relative to what the wholesale market provides.

Ian, this is Kenny. Just to kind of dimensionize potential, how you think about volume, right? In a normal year, usually, we sell 1/3 of our vehicles through our retail channel and 2/3 through the wholesale auction channel. Carvana is not cannibalizing the retail side of the house, which is the highest margin for us, right, from a disposition standpoint. It's really taken away from the wholesale auction side. So again, it's accretive for our business and our margins.

Okay. Great. And then as a follow-up question, I know we had a nice discussion about ROA and investment in either the business or the fleet. But I know you still have about $800 million left in your buyback. But based on kind of like your leverage ratios that you're talking about, you can take on incremental leverage just to reach your target. And with that excess call it cash or capacity, where do buybacks fit in that? And again, I know you have some left on there, but are they mutually exclusive? And how do we exactly think about that going forward?

Sure. So let me just say the following. First, in the context of what we were doing in the first quarter, we were in kind of an elongated blackout, and therefore, what we were doing by way of volume was a prescribed volume. Obviously, the opportunity for us to recalibrate the volume and reevaluate the volume of shares that we'll repurchase happens now, occasioned by the fact that we're having this earnings call and the earnings release, and therefore, we are free to sort of recalibrate the volume that we want to do, and we will do that. And my view is we will exhaust the existing program, and we will roll into a new program as we pick up just the aggregate amount with among the management team and the Board. So that's just the mechanic of it. As a philosophical matter, I think repurchase stands alongside what Kenny had articulated, which is we have opportunity to invest in fleet. We have opportunity to invest in the business to render it more operationally efficient. And we have the opportunity, particularly in this market, to look at share repurchase, and all 3 are always on the table in the context of yielding attractive returns. And so that's the philosophy we'll continue to take. I think given the largest of the market in which we're in, we can do all 3. We will do all 3. And I think we'll take up the pace of that repurchase now that we have earnings behind us.

And your math is right. We're 1 turn away from a governor number, so this shows you that we have a lot of optionality and flexibility when it comes to capital allocation.

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

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

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