Welcome to the Hertz Global Holdings First Quarter 2023 Earnings Call. Currently, all lines are in a listen-only mode. Following management's commentary we will conduct a question-and-answer session. I would like to remind you that this morning's call is being recorded by the company. I would 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 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 and our first quarter 2023 Form 10-Q filed with the SEC. These documents are also 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. Unless otherwise noted, our discussion today focuses on our global business. On the call this morning, we have Stephen Scherr, our Chief Executive Officer; and Alex Brooks, our Interim Chief Financial Officer. I'll now turn the call over to Stephen.

Thank you, Johann. Good morning, and thank you all for joining us on this first quarter earnings call. I want to begin by welcoming Alex Brooks to the call. As you know, Alex has been our Chief Accounting Officer for several years and has now assumed the role of Interim CFO. Alex is a proven leader and under her guidance her team orchestrated a seamless close of Q1 in the context to the CFO transition. We look forward to naming a permanent CFO upon completion of our review process. With that, let me turn to our quarterly results. Hertz posted strong results in the first quarter, reflecting continued growth and demand across our customer segments and a stable pricing environment in both the U.S and broad. As we guided, Q1 revenue came in at $2 billion on the back of strong volumes, by breaking with seasonal expectations of softer demand in Q1 relative to Q4. Importantly, we remain optimistic about our expected performance in Q2. Our momentum exiting the first quarter continued into April with high utilization and solid rates both holding across customer channels and international markets. As we close in on the second month of the quarter, we remain focused on aggressively calibrating the fleet, driving down delivery costs and aligning price to demand. We are quick to move in markets where strong advanced bookings warrant. Looking beyond the levers we can control, our optimism is further bolstered by the positive demand indicators coming from the broader travel industry as we move into the critical summer season. To provide a bit more detail on our top line, revenue of $2 billion in Q1 was up year-over-year. A particular note, transaction days in Q1 increased 10% year-over-year, while average fleet was up only 5%, reflecting improved utilization and continued…

Thank you, Stephen, and good morning, everyone. The Hertz team delivered another quarter of progress following a record fiscal 2022. Solid rate, continued strength and leisure demand and growth in corporate and international inbounds combined with our dynamic fleet strategy contributed to year-on-year growth in revenue in both the Americas and international segments. Importantly, top line momentum continued into the target Q2 with bookings over the Easter holiday period up year-over-year. In fact, April has seen several days of post-pandemic records in terms of the number of vehicles on rent. Revenue in Q1 was $2 billion, up 13% versus Q1 2022 as reported. Transaction days were up 10% year-over-year, while pricing remained firm. Over the course of the quarter, utilization improved from 72% in January to 81% in March and has continued to show momentum early into Q2. We believe that the post-pandemic recovery in the Americas is substantially complete for domestic leisure and corporate and international inbounds have progressed to 80% and 60% of 2019 levels, respectively. Recovery in the international segment, which has lagged the Americas, continues to build momentum and we expect further growth from here as Stephen noted earlier. To break this opportunity down further in our international segments, leisure and inbound business are 50% of 2019 level, while corporate is it 75% of 2019 level. Adjusted corporate EBITDA was $237 million for Q1 2023, a 12% margin. Margin in the Americans business in Q1, which is typically lower than the balance of the year was 15%. For international, adjusted EBITDA nearly doubled year-over-year and produced a 17% margin for the quarter. On a year-over-year comparison, Q1 EBITDA production reflects a more normalized level of gains on sale of vehicles relative to the prior year period, which carried very elevated gains on sales as have been…

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

Great. Thanks. Stephen, so thanks for all the comments so far, and you spoke of a stable pricing environment. I guess, can you maybe talk a little bit about the underpinnings of that. And also along those same lines, I guess you've kind of laid out for us what you might do in a downturn. Give us a sense for what your view is on prospects for the balance of 2023?

Sure. Thanks, Chris. Appreciate that. So maybe I start with pricing. On pricing, we're obviously well north of where the pricing regime was pre-pandemic, sort of going back to 2019. But of more relevance to this quarter and this environment, in the U.S., we've seen very stable pricing. Pricing has been holding, particularly in the U.S market. And we have seen a pickup in pricing dynamics, particularly in the European market. So very attractive rates coming in, and higher utilization that's driving that business. If you look at what we spoke about in terms of increasing sequential month-over-month performance in the quarter, just looking at RPU, because it shows both where rate is going and what's happening with utilization, we saw a 15% increase from January into March, meaning March was 15% higher than where we were in January. And again, that's on the back of utilization running kind of just north of about 80%. So we're seeing strength in leisure, strength in corporate where renewables continue and often at higher negotiated price. And I spoke about TNC kind of doubling in volume, but we're also seeing rate increase there. And so, across those three elements, if you will, strength is there. So what's driving all of this? Mean, I would say that, well, there are more cars available across the industry this year relative to last, we're certainly not back to sort of more elevated levels. And so I think there's a supply demand, sort of calculus that's playing there. You hear about demand and volumes across airlines and hotels, obviously that plays and feeds into what we experience. And so demand is there against what I would describe as a still kind of more limited supply of cars themselves. I would just also reflect maybe with a little…

Great. Thanks, Stephen. That was super helpful, very comprehensive.

Sure.

As a follow-up, you've talked about EVs and your -- I think you're getting the pricing that you hoped for, and then some on the rentals, including the rideshare piece of that. And you're also now seeing pricing come down on the purchase side of EVs. Does that make you want to lean harder into that and try to go above your -- you've talked about that 25% target by the end of next year? Do you want to accelerate or go further on that?

Well, I would say that demand and the pricing dynamics are there, which would lead me to answer your question, yes. But I equally need to be mindful of just the practical implications and limitations of growing. We are currently at about 10% of our fleet EV. Our ambition is to get to 25% by the end of next year. That's a big move. And it has sort of collateral sort of challenges in that we need to make sure that charging both on our airport locations and elsewhere is developing. And I'm quite confident that we are seeing that sort of develop, as I spoke about in the remarks. I think the drop in price on EVs is an encouraging proposition for us. In that if I'm 10%, moving to 25%, and I'll get higher from there, I'm obviously a happier and a better buyer at a lower price point than not. And I'm equally pleased that the prospect that while I continue to buy Tesla's and Polestar's, are now taking delivery of the GM EVs, which will be at varied price points and offer our customers greater choice. And I think diversification from a risk point of view is inherently a good thing. So the drop in price is good. We benefit from that price drop as and when we buy these vehicles. There's a lot more to buy. I'm excited about where rate dynamics are both in TNC and leisure. I think adoption will sort of continue to take hold. And I would say that in the case of Uber and Lyft, and other rideshare, you read about requirements that are on the come in a variety of cities across the country, that will require that those networks be follow electric by some date in the not too distant future. This is 5 or 7 years from now. And I would say to you that I think Hertz and our EV fleet is the most affordable entry point for drivers to get into those electric vehicles and use them. The driver benefits, the company benefits by meeting the requirements that the cities are putting in place. And needless to say, I'm happy and that we get more of these EVs on rent at attractive rates, but maybe most importantly, at attractive margins in terms of what we see happening.

Great. Thanks so much, Stephen.

Great. Thanks, Chris.

Thank you. And one moment for our next question. Our next question comes from the line of Ian Zaffino with Oppenheimer. Your line is open. Please go ahead.

Hi, thank you very much. Can you guys just talk a little bit about what you're seeing in a competitive environment as far as larger players, smaller players? And if you look at again, I know you talked about or touched upon a downturn, but or what you would do in a downturn. But what do you think about how the competitors would react basically, from what you're seeing now? And then maybe what you know about them from the past? Thanks.

Sure. So to be clear, we are not seeing indicators as we sit here today coming out of Q1 or into Q2 of a downturn. But as I noted in my remarks, I think it's incumbent upon the company and as a point of departure from the way in which we and the industry was managed in the past to sort of think about and contemplate and set yourself up and for us fleet is the lever to sort of play to the extent that the market changes. Look, it's hard for me to know with precision what others are doing, but I can tell you that I watch behavior as it relates to rate, and it's been stable across the board. I think it's worth noting that the supply of cars has been constrained and more limiting for all players in the industry, not just any one player. And that presents sort of a practical governor on any one company's ability to sort of be aggressive to the low side on price, meaning in any given market, if somebody was to take price down, there's a limited number of cars available through which that would happen. And so it would have a more limited impact to the broader market. And I think that while I commented before that there are more cars now than there were a year ago, we're nowhere near back to the availability of cars new or used, by the way. And I think that will have a dampening effect on the ability of any one player to sort of play an outsized role or a destructive role in price. And I personally think that carries through the end of '23 and into '24. It's important to remember, I mean, you all know and follow the…

Okay, thanks. And then for, Alex, just sort of [indiscernible] numbers very quickly, but maybe can you talk about: number one, the cadence of maybe EBITDA, as we think about second, third and fourth quarters. It looks like you are kind of imputing a pretty big back half of the year. And then also maybe talk about the recognition and timing of the industry cap sale, please? And that’s it. Thanks.

Yes. Sure, Ian. Absolutely. So, yes, you're absolutely right in observing the cadence of EBITDA. So Q1 is typically a lower earnings quarter for us. So January and February we start the year off, and then we start to build up over spring break, and entering into spring and summer. Our summer peak in the June, July and August timeframe is when we get most of our earnings. So as we noted, we're expecting an increase in volume between Q1 to Q2 to the tune of about 20%. So -- and that's pretty consistent with what we've experienced over the longer term in terms of prior year metrics. And that EBITDA cadence is also going to be the cadence with which you'll observe our cash flow. So again, typical in-fleeting early in the year in Q1 and during the first part of Q2, and then the fleet will remain at those elevated levels through the summer peak. And then in Q4 with de-fleeting we'll have positive cash flow. So moving to your second question, then as it relates to the interest rate cap sale. So as we noted, the adjusted corporate EBITDA in the quarter included an $88 million positive contribution from the monetization of the interest rate cap. And this is related to the floating [ph] portion of our ABS facility. So, as you'll remember, 75% of the ABS facility is fixed rate, and 25% is floating. So this is really related to that 25% of the debt that's floating. By selling the caps, we essentially brought forward the interest savings that we expected to realize in Q2 through Q4 this year into Q1. And the gain we realized is more than the additional fleet interest that we expect to incur over the remainder of the year to the tune of more than $15 million. So we brought cash into Q1 and we can reinvest that into the business early in the year. So all around a great transaction.

Okay. Thank you very much.

Thank you. And one moment for our next question. Our next question comes from the line of John Healy with Northcoast Research. Your line is open. Please go ahead.

Great. Thanks for taking my question. Just wanted to ask a clarification question on RPD. Could you just dive into a little bit the accounting change that I think you guys said that lifted RPD by about two bucks. And just thinking about the expectations for Q2, I think you said revenues up 20% on a sequential basis and [indiscernible] you just said 20% transaction growth just to the previous question. So does that imply that pricing in terms of RPD is flat in Q2 year-over-year? And is there an RPD benefit just from this accounting change as we flow through the next couple of quarters? So theoretically, I was just hoping to kind of get an apples-to-apples comparison there.

Yes. Sure, John. So let me dive into it. So we changed our presentation as it relates to cash recoveries that come from customers, from damage to vehicles. So because it's a cash collection to a -- from a customer, we thought it was better represented in the revenue line versus as an offset to DOE, which were -- was previously presented. It's an immaterial change and it's neutral to EBITDA and it's cash neutral. In terms of its effect, I would think of it as $2 to both RPD and to DOE. So an increase to RPD by $2 and an increase to DOE by about $2 just from changing the geography on the income statement.

Makes sense. And then Stephen, I was hoping you could dive in a little bit more on the Dollar Thrifty kind of reboot. Curious there in terms of how you think you'll reach the customer with that reboot. And will you continue to be on some of the online travel sites with those brands? And then secondly, does a reboot of those brands in your mind bring elevated risk to competition and maybe what might happen at the low end of that pricing structure?

Sure. Well, obviously, we took Dollar Thrifty at a moment in the industry several years ago when there was broad consolidation. And I don't think we did a particularly good job at integrating them because I think that there was kind of a [indiscernible] fleet across all of this and there wasn't kind of regimen to cost in the way in which it ought to. And so the revitalization of these brands will put us in a position where we can have a more dedicated fleet of lower depreciating cars. We can be defensive about the brand value of Hertz being our high-end brand with service and loyalty and the like, that are not necessarily elements of the product in Dollar Thrifty that the customer is looking for. We unquestionably will continue to play through the OTAs. But I think we'll have a more active direct channel with digital properties that are dedicated to Dollar and Thrifty. And the process itself will be more digitally delivered, including around VAS products. So this will be lower cost, lower human touch point, experimenting with kiosks and other things. And we're not offering that side of the customer base choice. So you will get kind of a dedicated spot to which you will go, that'll be your car you move, and our ability to offer that out to our customers at a lower price point relative to Hertz, but at a very attractive margin based on where the cost inputs fit, I think will prove to be an interesting proposition. And I would say to you that this was an enormous and growing addressable market, and one that I didn't feel confident that we were tapping into. And I think the ability to get at this with a refresh sort of digital approach, again, at a proper margin level and managed appropriately with cost allocation, and so forth, I think will lead us to kind of an interesting opportunity set. And again, all the while going to rebasing the value of the Hertz brand where I think it belongs as being at the upper end. I'd also point out that I think building identity around Dollar Thrifty will be important and that it will open up other partnership channels that I don't think have been available to us. So there's obvious demand for partnership based on customer segmentation with Hertz. But I would say to you that there are other brands, lower cost, mass market, retail, travel and other brands were a partnership with Hertz didn't quite fit. But a partnership with Dollar Thrifty will be more in keeping of that particular brand. And I think the ability to drive sort of volume through that, not necessarily with price or leading with price, if you will, I think is another encouraging or sort of motivating element to sort of why we're going down this path.

Great. Thank you so much.

Yes, sure.

Thank you. And one moment for our next question. Our next question comes from the line of Adam Jonas with Morgan Stanley. Your line is open. Please go ahead.

Hi. This is Diego Ortega Laya on behalf of Adam Jonas. I have a quick one again on the interest rate caps. You already talked to them a little bit, but I still wanted to touch on the $88 million. Should we expect similar monetization in the upcoming quarters or expect to have additional hedge gains this year. And then as a follow-up to that, what should be our assumption for go-forward interest rates expense? Thank you.

Ladies and gentlemen, one moment. We're experiencing technical difficulties. Our conference will begin -- will resume momentarily.

Hey, Michelle?

Johann, you guys can continue. Adam, can you please restate your question, sir?

Yes, yes.

Hey folks, it's Stephen. I -- hey, Adam, I apologize. We had a -- for some reason that line drop. So we're back with you now. Thank you for your patience.

No worries. So this is Diego Ortega Laya on behalf of Adam. So I just had a quick one, again, on the interest rate caps, you already touched on it briefly. But I wanted to see whether we should expect similar monetization in the upcoming quarters or expect to have additional hedge gains this year? And then what should be kind of like our or what will be your assumption for the go-forward interest rate expense? Thank you.

Sure. So we monetized the rate caps that we had put on in 2021. And because we're obligated in the ABS to have them, we replaced those rate caps. The maturity of the existing ones were through the end of the second quarter of next year. I don't foresee any expectation that there would be further monetization as we exhausted the rate caps that were present and put new ones in. The overall interest rate expense should probably go up to about $100 million, which is about $25 million more per quarter and that will decline. So it will be the highest in Q2 and then decline from there. The comments that Alex made earlier is that in the monetization of the rate cap, the EBITDA, if you will, that we took in, in the first quarter, given where rates have moved since we did this monetization, would put us in a position where we expect EBITDA to be more than $15 million greater than the incremental cost of the interest expense in the ensuing three quarters of the year. So I wouldn't expect any further monetization. I would expect net gain in EBITDA occasioned by this. And this was really advancing those three quarters into the first quarter, just given where market dynamics were.

Great. Thank you.

Sure.

Thank you. And one moment for our next question. And our next question comes from the line of Christopher Stathoulopoulos with SIG. Your line is open. Please go ahead.

Good morning, everyone. Thanks for taking my questions. Stephen there's some concern from investors around airlines with respect to U.S domestic travel slowing, not by much, but there's some data out there that would support that. And also with blended travel, skewing seasonality, just making it more difficult for [indiscernible] teams and alike to plan going forward. So if we look at the airline schedules here, domestic capacity through the second quarter, trends are fairly mixed. So I was wondering - I know you spoke to a very healthy overall demand outlook into the summer. But if you could give a little bit more of a nuanced view with respect to domestic bookings into the summer. And then also, if you're seeing if this blended travel phenomenon, if you will, persist, how is that? Is that making it a little bit more challenging to kind of tease out where core demand might be for you? Thank you.

Sure. Thanks for the question. So let me address the last one first, which is on blended travel. We continue to see blended travel, i.e. the blend of both business and leisure playing forward. We see it play forward in the context of corporate customers that are asking us about split billing, knowing that an employee may be on a trip and the trip may be one part business and one part leisure. I think that's a net benefit for us and we'll continue to be. I say that because if you have a professional that travels from New York to Los Angeles for meetings on a Wednesday and Thursday, that person, in all likelihood pre-pandemic would fly back Thursday night. The fact that they're staying with the latitude to work Friday remotely in LA in my example, and then spend the weekend adds three days to the rental. I suspect the hotel chains are benefiting from that as well whereas the airline has a round trip, no matter the dates on which it plays. So for us the blended travel is a positive, and I see no particular reason for it to sort of fall off. On the question that you raised about the forward for airlines domestic travel and the like. Look, I think that's a reference marker for us. It has been positive, it therefore bodes well in the context of what we think forward performance would be. But airlines alone are not the basis on which our customers come to us. It is true that they come to us at airports and the like. But I think quite honestly to the extent that domestic capacity, particularly around short haul becomes dear, the option to use a rental car and take your vacation or take your business…

Okay, thank you. And my follow-up, so in your prepared remarks, you talked about what you -- it sounds like you're fairly optimistic that this current supply demand dynamic is going to persist for at least for the near to midterm. And I just wondering as we take apart the moving pieces of that from the OEMs to the used car market and then what's happening with supply chains, particularly with the semi chips, are there certain areas. It sound -- it sounded like you were a little bit really weighing that sort of view on the OEM side, but if we could get a little bit more of a nuanced view here across these three different channels, what gives you the confidence that this dynamic is going to persist in the midterm? Thank you.

Well, I think the dynamic persists. I'm not saying it persists kind of without limit into the future, but in the context of the balance of '23 and into '24, I think it does persist. Now, we see more cars, and are see more opportunity to buy cars this year than last year, but still well below. So just to sort of set that down as a baseline. I think that the OEMs are dealing with a number of issues, okay. Number one, there has been supply chain, which I think is less than, but nonetheless sort of persists. Number two, they're dealing with the uncertainty of economic conditions and how much supply they want to put in, assuming they have the capacity to do it. And I think equally they are in the midst of a transition from combustion engine to electric vehicle. And all of that sort of creates some friction in the production of new cars. On the used car side, I would reiterate the comment I made before, which is, look, this is a very deep, very liquid market. And so take my comments in that context. But in the narrow segments of that market, that is good condition, low mileage off these cars, we're now entering the period where the lack of production in the -- over the course of 2020 into 2021, will bear out on a more limited number of cars coming off lease and therefore entering the used market. And so I think we're coming into, again, some more limited supply in the used piece, again, having addressed sort of the OEM side. And so I think that's implied dynamic, well, it won't last forever. I do think it persists through '23 And I think in through '24.

Okay. Thank you.

Thank you. This concludes today's question-and-answer session. And I would like to hand the call back over to Stephen Scherr, Chief Executive Officer. Please go ahead.

So I want to thank you all for your participation and your patience just given the small technical delay we had. Before we close the call, I want to thank the more than 20,000 employees of Hertz for their continued service and their attention to our customers, particularly as we enter the busy summer season. We look forward to sharing further updates with all of you on our next call. With that, I'll turn it back to the operator.

This concludes Hertz Global Holdings first quarter 2023 earnings conference call. Thank you for participating.