Welcome to Hertz Global Holdings Second Quarter 2022 Earnings Call. [Operator Instructions] 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 your host, Johann Rawlinson, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us. By now, you should have our earnings press release and associated financial information. We've also provided slides to accompany our conference call, which can be accessed on our website. I want l 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 Statement section of our 2021 Form 10-K and our second quarter 2022 Form 10-Q 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. We believe that our profitability and performance is better demonstrated using these non-GAAP measures. 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.

Thank you, Johann. Good morning and welcome to our second quarter earnings call. Our financial results for the second quarter were strong, reflecting the continued strength of our underlying business, positive market forces and high demand for our services. Revenue was $2.3 billion, up 25% year-over-year, and up 30% quarter-over-quarter and adjusted corporate EBITDA was a second quarter record of $764 million. Adjusted free cash flow in the quarter was $484 million, with the company demonstrating increased free cash flow conversion from the first quarter. In the quarter, our performance facilitated continued investment in fleet and non-fleet CapEx as well as the repurchase of $890 million of stock through open market purchases, completing our initial $2 billion authorization. We also initiated purchases under a new $2 billion Board authorization, which we announced on June 15 of this year. Overall, I am very pleased with our performance and the momentum of the business coming out of the second quarter with strong results across the U.S., Canada, Europe and APAC. Demand for our services remains elevated, as each of leisure, corporate and ride sharing continued to demonstrate improvement. Getting into the specifics of the quarter, our operational performance was strong overall, and importantly showed sequential month-to-month improvement as the team capitalized on the heightened pace of the summer travel season. We achieved fleet utilization of just under 80% in the quarter, 5 points higher than in the first quarter, with June representing the highest utilization month for the year thus far at over 80%. Similarly, our monthly revenue per unit hit a June record of $1,667. For the quarter RPU was $1,606 and RPD of $67. Both metrics were up over last year. I would point out that we achieved these results despite elevated auto recall activity in the quarter, which we…

Thank you, Stephen, and good morning, everyone. As Stephen mentioned, we had a very strong second quarter, and I continue to focus on asset yield paid off. Our adjusted EPS was $1.22 and adjusted corporate EBITDA was a second quarter record of $764 million, reflecting a margin of 33%. Revenue was $2.3 billion, up 25% from 2021 and up 30% sequentially, well above the historical seasonal uptick of 20%. While auto recalls burdened utilization in the quarter, we also experienced a modestly negative foreign currency impact, mainly from the euro conversion to dollar, impacting revenue by about $20 million, or roughly 1% quarter-over-quarter. That notwithstanding, our results reflected our operational focus and price discipline. Monthly RPU was above $1,600 for the quarter, in line with March as we exited Q1. We experienced an almost 20% increase in volume compared to last year, driven by continued strong demand in leisure rentals, corporate and international inbound customer demand have yet to fully return to pre-COVID levels, but have shown improvement. International inbound travel, for example, only began to benefit from relaxation of U.S COVID testing requirements and mass mandates late in the second quarter. However, we did see the volume gaps began to close during the quarter. Corporate volume was at 70% of 2019 levels in Q2 with international inbound at about 40%, both modestly up versus Q1. Depreciation per unit per month for Q2 was $71, which was lower than the average we estimated on our last call. This lower-than-anticipated depreciation was largely driven by fewer cars purchased in the quarter as we maintain tighter fleet management and higher-than-anticipated residual values, including on EVs, as well as higher than expected gains in the quarter, producing an offset to the gross depreciation line. Let me stay on residual value of used cars…

[Operator Instructions] Our first question comes from the line of Chris Woronka from Deutsche Bank. Please go ahead.

Yes. Hey. Good morning, guys. Stephen, can you maybe talk a little bit more about the modifications you made to the fleet plan to reduce the CapEx estimates so substantially? Just maybe a little more detail there and the thought process that went into that?

Sure, sure. Thanks a lot, Chris. So as I said in the prepared remarks, we are going to carry a fleet at year-end that will approximate where we began the year, which was sort of approaching half a million cars. Obviously, that will be down from a current peak as we carry fleet right now to sort of meet the summer surge of demand. And so over the course of this year, I think it's to be expected that we will kind of buy and sell roughly 300,000 cars aside. And if you look at what we buy, it will sort of trend 2:1 new cars to newer used or good condition used cars. And so that in and of itself, I would say it is a bit of a departure in philosophy from where we've been in the past. Meaning, in the past, this company had kind of locked in on a fleet number at the beginning of the year and sort of held at it and stayed long on fleet, notwithstanding where demand or where demand sort of was expressed. And so we relied exclusively on that. I think we were ignoring a valuable option, which is we do have an option to go into the used car market both to sell and buy cars to meet marginal demand. So make no mistake, we are going to be fundamental buyers of new cars as we rejuvenate the fleet, but the swing factor here is really going to be expressed in the up and down in what we do in the used car market. And so with questions about what demand will look like in the back half yet continued strong demand here, our view is that we ought to run on the short and not the long side…

Yes. Thanks, Stephen. Very helpful. And then a follow-up, if I could, kind of relate to that. I guess where we see the fleet plan and we know demand overall is very strong, you've given us a lot of detail on what you're doing with EVs and the Ubers and such. Is there any shift in kind of strategic direction in terms of business you're pursuing? You talked about Amex. I guess the question is, are you over time, wanting to do less, I guess, hand to hand combat at some of the airports where at some point pricing can maybe normalize? Is that a strategic shift or not?

Well, I would not read any of this as in any way kind of an abandonment of the classic business that you see on or off-airport locations. The way I would characterize what we are doing is twofold. One, I think there's inherent benefit in drawing out multiple channels of customers and not relying on kind of the RAC business as a monolith. What that means is we need to play hard not just for the conventional RAC business and leisure travel, we also need to play hard for deeper penetration of corporate travel and the TNC business is meaningful incremental demand potential that to this point had not been realized. So this is about pursuing diversified channels of demand than it is about an abandonment or withdrawal from any one particular channel. I'd also say to you that the ability to pursue multiple demand channels is predicated on carrying a more diversified fleet because the interest that each of those customer channels have may be differentiated one to the next. So for example, having electric vehicles as a growing component of the fleet in its overall composition is playing well in the corporate sector and playing well in P&C. Corporates want to satisfy their own sort of carbon footprint objectives, so they're compelling employees to get into electric vehicles, therefore, there's incremental demand. TNC, given where gas prices are and the quality of what a Hertz car means to the earnings power of an Uber driver, wants to sort of place their drivers into electric vehicles. So it's a combination of multiple channels of demand using different composition of fleet, right, to sort of give ourselves a greater ability to capture pockets of demand and have the agility to move fleet around in and throughout those channels.

Thank you.

Sure.

And I show our next question comes from the line of Ian Zaffino from Oppenheimer. Please go ahead.

Hi, great. Thank you very much. Great quarter, guys.

Thank you.

Kenny, just as far as the cost pressures you’re seeing here from inflation, maybe talk about leverage you have at your disposal to manage those and to address those costs. And then also share count, if you have that at quarter end? Thanks.

Hey, Ian. Hey. Thanks for the questions. So, yes, let me remind you that about 70% of our cost is variable, right? These expenses will adjust as fleet size changes. And as Stephen mentioned, this is a unique feature of the car rental industry as we can fleet up and down pretty quickly, right? In terms of managing cost, right, we are obsessed with operating leverage. It's the thing we think about each and every day. And we have multiple levers that we can pull. Let me give you some tangible examples, right? On the labor front, as I mentioned, we are replacing expensive third-party labor with Hertz badge and FTEs, and that arbitrage would be flowing through the P&L going forward. On the maintenance side, in addition to increasing mechanics to repair vehicles in-house, we are currently working extremely hard to rejuvenate our fleet and that will improve maintenance expense over time. And personally, I'm extremely excited about getting more EVs this year, right? The EV economic has proven to be extremely accretive to our business, and that would also improve maintenance expense as well. Out-of-service, we are working extremely hard on out-of-service. And this will drive a few things, Ian: rentable fleet, utilization and drive more revenue, which ultimately drives scale and leverage as a percent of revenue, the expenses will go down. Stephen talked about tech plays, right, telematics, and that's going to be huge for us as well. Right now, we're about 75% tagged up. And by the end of the year, we'll be 100%. And that will really help on a few folds: theft, bad debt, damage recovery, service efficiencies and fuel recovery as well. Now we are also working very hard on technology plays, and we expect to see long-term benefits from that. And as you think about on-premise, the cloud conversion as well as legacy system refresh. So long story short, this is a key area of focus for us and will continue to be for the management team as we can match both fleet and expenses to demand.

Okay. Thank you. And then if I could, just as a follow-up, on Carvana, you talked about that a lot now. Now that we're kind of through a couple of months, quarters, can you maybe tell us how large maybe that channel can become for you or maybe like the realized premium that you're seeing or that we should expect, just so we could conceptualize the value of that agreement.

Sure.

And then also just ending quarter share count. Thanks.

Yes. So I leave Kenny to give you the quarter end share count. But on Carvana, we are realizing something in the neighborhood of about a 5% premium to what we otherwise sell cars in the wholesale market. And this is obviously very attractive. And the view is that we can and will continue to grow this. I mean this should number in the tens of thousands of cars in terms of what we can push through. So that could present meaningful and consequential 10% of total sales in a year. Just as I mentioned earlier, we will sell 300,000 cars this year. And as Carvana matures, it's not quite there yet, we will grow that to be a consequential and material percentage of what's sold. I will also say to you that I think the relationship with Carvana will also present, as I mentioned in the remarks, kind of an interesting view as to kind of where car sales and car prices are moving. That kind of intelligence will be important as we think about managing the fleet and just the sheer volume of cars that we will look to sell. But I think Carvana holds enormous promise, 5% above or thereabout what we get in the wholesale market and tens of thousands of cars at the mature state to sort of push through the channel itself.

Yes. Ian, it's Kenny. Just to give you a perspective, right, on Carvana then I will answer the share count question. If you think about a normal year, we sell, call it, 300,000 cars, one-third is retail, two-third is wholesale. So there's a big opportunity there converting wholesale to Carvana. The share count at the end of the period was 368 million.

Thank you.

And I show our next question comes from the line of Adam Jonas from Morgan Stanley. Please go ahead.

Hey, Steve. Hey, Kenny.

Hey, Adam.

Definitely very, very smart to err on the side of caution with the fleet size. That's really, really good to hear. I'm almost pinching myself, I can't believe I'm hearing this.

You are hearing it. You are hearing it.

It's actually happening. I don't believe it. A little more detail on the EVs. How many EVs do you have in your U.S. fleet right now? Where are they? Well, if you don't mind, I'll just rapid fire. How many?

So we are at about, I think, 20,000 cars now kind of active in the fleet and obviously deliveries ongoing.

Okay. And what can you tell us about any stats? You mentioned a premium, $30, $35 premium, that's great. But anything else on D&A per unit? I don't know if you're able to share that right now if you have enough information or OpEx or anything else on profitability of that line? Because I think there are some issues with logistical challenges and things, which are part of the early EV fleet, right, which you've talked about in the past. I'm just curious if you pundit [ph] all together, how is -- is that a positive EBITDA shift for you or margin shift for you? Or is it [multiple speakers]?

The answer is unequivocally yes. In fact, last week, we did kind of re-underwrite on the EV fleet, how it's playing, how it's presenting relative to what we thought it would do on the initial decision to go in. So I'd say a couple of things. First of all, we continue to take delivery of Teslas and we will continue to do that, number one. Number two, I think you should expect in the coming months that you'll see announcements from us about purchase of electric vehicles in sizable quantity from other OEMs as we try to sort of build out kind of a broad population of vehicles across a range of OEMs, and we will see those at very attractive kind of price entry points. Third, we are capturing, I think, as I said in the remarks, kind of a $30 to $35 premium on this. That premium has been fairly sustainable. And in the T&C channel, we are renting these for about $334, $335. We have found kind of just the right price point where given all sorts of externalities around economics for an Uber driver, they want to and are excited about renting that and they can turn a profit there. What that means for us, by the way, particularly in the TNC side is fewer touch points on the car over a course of a month, maybe by as many as 5 to 7x. That reduces cost considerably. We are obviously passing some of that on because the weekly rental is lower for the P&C driver than the per diem or per day rental out to the normal RAC. On maintenance, I think Kenny said to you, we are running kind of 50% to 60% of what maintenance costs are on ICE vehicles. That's roughly in…

Yes, just to add on that, on depreciation, we originally pegged depreciation rate to an ICE vehicle, as Stephen mentioned. Right now based on early inning on data, we are seeing the depreciation rate on the EVs being lower than ICE vehicles. So as we underwrite the business case with new data, we are even more confident with the economics of EVs.

That's really, really valuable data. If I can just squeeze in one more. Of the 20,000, how many of those are in TNC versus non-TNC? That's it. Thanks.

I think it's a pretty fluid number. I mean the idea here is that they're not locked in, right? I want the flexibility to be able to move cars as between TNC and non-TNC, and so it's pretty fluid. Some of the facts and figures we gave you in the prepared remarks just indicate the sheer magnitude of demand that's being expressed by TNC, but that's going to be a fluid number by design.

Thank you. And I show our next question comes from the line of Ryan Brinkman from JPMorgan. Please go ahead.

Hi. Thanks for taking my questions. I heard you say that demand has remained strong in 3Q as reflected in bookings in August, et cetera. What insights can you share about the trend in pricing so far, either in July or maybe what you can glean based upon the bookings for August, et cetera?

Yes. I would say on pricing, remember, the move from Q1 to Q2 showed pricing up, I want to say, about 12%, which was well above what seasonal movement Q1 to Q2 would have been. On the back of where we sit at elevated prices, I don't know that there's a lot of room for pricing to go up as it traditionally would have, right, between Q2 and Q3. So in my own mind, I think we will stay at a relatively static price in through Q3. And really, what we will see in the third quarter will be an expression of seasonal demand uptick, so more days. And that's historically been in the 7% to 8% range in terms of Q2 to Q3. And I think that's what we will see. We are at a very elevated sort of price level. I think it's sustainable. I don't foresee, as Kenny said, a sudden influx of new supply from the OEMs. And so holding fleet tight, protecting rate, we will sort of see that stay stable and we will see pick up Q2 to Q3, more in the expression of days in volume than in rates.

Yes. The only thing I add is on pricing. Stephen is right. Q2 to Q3 is going to be a bit more flattish given where it is right now. But RPU, based on early reads are higher, right, so we are more effective and efficient with the use of our fleet.

Okay. Very helpful. Thanks. And what impact do you think there will be going forward on RPD from like the different crosscurrents and mix? So for example, like as international inbound continues to recover, maybe as Tesla increases as a percent of total on the leisure side. That should provide a nice tailwind, but how does that compare against, for example, a higher mix of corporate travel as that market also recovers? And with the balance of supply and demand as tight as it is, are you may be seeing like less than the traditional difference in RPD between leisure and corporate? And so maybe that wouldn't be the same headwind to RPD as you might ordinarily expect? Or how do you think these things might net out going forward?

Sure. Well, I mean, first, I will say your question reflects kind of why we're now playing, I propose the question earlier, to multiple sort of pockets of demand because you will see sort of expression of demand different, right, across each. International inbound is improving, okay? And it's a very attractive segment for us by virtue of what we realize on rate and equally what we take in terms of value-added services. And the fact that testing sort of restrictions around COVID were lifted on inbound into the U.S., that's quite positive. And by the way, I would tell you that our European business is seeing exceptional growth and exceptional performance as is the Asia business. So there's kind of two way travel that's sort of benefiting. On the Tesla side, as I said in response to Andy's question earlier, we are seeing -- or Adam's question earlier, we are seeing heightened demand and elevated price by way of premium, we think we continue to capture that on the forward. The corporate segment is a really interesting one. So corporate business in Q1 was kind of back 60% to pre-COVID levels. I would say that's now at about 70% of pre-COVID levels. And I would tell you that what we are seeing in terms of rate is equally up. So like sequentially, Q1 to Q2, we saw roughly 28%, 29% improvement in rate, okay, around the corporate side. We are seeing similar momentum in corporate internationally. And I would also tell you that as we look at reengagement with corporates on contract renewals, we are seeing about a 97% retention of those accounts and they are almost all renewing at higher rate relative to where the older contract was. And so those are obviously very good signs in the context of what corporate can produce for us.

The only thing to add on corporate is even though the RPD is a potential drag, it's RPU accretive because you get to utilize the fleet between Monday through Wednesday, which by default is a bit [indiscernible] versus the weekend, right? So again, it's the RPD drive. But from a fleet sort of ROA standpoint, it's good because they get to use the asset a bit more in the early part of the week.

Thank you.

Sure.

This concludes today's Q&A session. I would now like to hand over to Stephen Scherr, Chief Executive Officer. Please go ahead.

So I'd like to thank you all for your participation on today's call. I hope the call left you with a sense of the progress we are making on our strategic and operational advancements and equally demonstrated a level of adaptability of our business more broadly. We look forward to sharing further updates with you at our next call. And until then, stay safe, enjoy the balance of the summer. And I will now turn it back to the operator.

Thank you, sir. This concludes the Hertz Global Holdings Second Quarter 2022 Earnings Conference Call. [Technical difficulty] for your participation.