Hertz Global Holdings, Inc. (NASDAQ:HTZ) Q4 2023 Earnings Call Transcript

Hertz Global Holdings, Inc. (NASDAQ:HTZ) Q4 2023 Earnings Call Transcript February 6, 2024

Hertz Global Holdings, Inc. misses on earnings expectations. Reported EPS is $-1.13725 EPS, expectations were $-1.02.

Operator: Welcome to the Hertz Global Holdings Fourth 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 like to turn the call over to your host, Johann Rawlinson, Vice President of Investor Relations. Please go ahead.

Johann Rawlinson: Good morning, everyone and thank you for joining us. By now, you should have our earnings press release and associated financial information. We’ve also provided slides to accompany our conference call, and these can be accessed through the Investor Relations section of our website. I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not a guarantee of performance, and by their nature, are subject to inherent risks and uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of today’s date, and the company undertakes no obligation to update that information to reflect changed circumstances.

Additional information concerning these statements is contained in our earnings press release and the filings we make with the Securities and Exchange Commission. Our filings are available on SEC’s website and the Investor Relations section of the Hertz website. I would also direct your attention to the Form 8-K that we furnished to the SEC on January 11th which includes information on our strategic decision regarding the sale of a portion of the EV fleet. Today, we’ll use certain non-GAAP financial measures, which are reconciled with GAAP numbers in our earnings press release and earnings presentation available on our website. We believe that these non-GAAP measures provide additional useful information about our operations, allowing better evaluation of our profitability and performance.

Unless otherwise noted, our discussion today focuses on our global business. On the call this morning, we have Stephen Scherr, our Chief Executive Officer; Alex Brooks, our Chief Financial Officer; and Justin Keppy, our Chief Operating Officer. I’ll now turn the call over to Stephen.

Stephen M. Scherr: Good morning and thank you for joining our fourth quarter earnings call. We have a good amount to cover this morning. On our performance, we will address the cost challenges that the business faced in the fourth quarter, which were a continuation of the challenges we faced throughout 2023, as well as the solid demand and stable rate environment we continued to experience. The core message we are sharing this morning as we begin 2024 is one of confidence on the forward. Our confidence is based on the continued stability of the demand and rate environment, the expected benefits of the strategic decision that we made in the fourth quarter regarding our EV fleet, which is also expected to reduce operational distraction, and the continued execution of our enhanced profitability plan.

All told, we expect that 2024 will be a transitional year for Hertz and we expect to regain our operational cadence and improve our financial performance with increasing effect into 2025. With that, let me turn to our Q4 results, both revenue and cost, and our progress on select initiatives. Justin Keppy will then share impressions from his first 90 days in his role as our Chief Operating Officer and the initiatives he is leading to enhance productivity with a particular focus on our goals for 2024. Alex will then conclude our prepared remarks with additional commentary on our financial performance, liquidity, and outlook before we turn the call over to your questions. On the quarter, revenue was $2.2 billion in line with our expectations and in line with sequential seasonality and up 7% year-over-year.

Our top-line performance reflected continued demand for our product, consistent with travel trends reported across airlines and hotels. Specifically, Q4 volume was up 12% year-over-year. The organization delivered Q4 revenue with a strong focus on rate. Revenue per day in the quarter came in better than expected at $58.09, which is slightly better than typical seasonality would yield. Year-over-year RPD reflected a moderating trend relative to prior quarterly comparisons, and the rate of year-over-year decline decelerated. Overall, this better than expected rate performance was the product of a relatively stable rate environment in the quarter and underscores that rate for the whole of 2023 remained 40% higher than rate in 2019. Our ability to capture this rate was not only a product of stable demand, but our prioritization of RPD.

We made some very intentional decisions in the quarter to forego lower margin business, even though it was at the expense of utilization. Further to utilization, we did carry more cars into quarter end than we had previously anticipated. Like all decisions regarding fleet, we are guided by an ROA or return on asset mindset with the central objective of keeping our supply of fleet inside profitable demand. Against declining vehicle residual values in the fourth quarter and what we might yield on sale, we saw the opportunity for greater returns and the continued deployment of these assets. As you are well aware, we have been focusing on growing customer channels like Dollar and Rideshare, both of which can accommodate higher mileage vehicles.

In addition, we are being very intentional about our choice of disposition channel. We continue to see the opportunity to increase vehicle sales through retail channels, including Carvana and our proprietary network. As compared to auction or wholesale, retail typically yields higher selling prices when residual prices are in decline. In Q4, for example, we saw a positive variance between wholesale and retail gross price in the range of 5% to 10%. This prioritization of more favorable economics related to continued rental versus immediate disposition and the selection of channel to optimize price reflects our continued attention to asset returns. Let me turn to vehicle carrying and operating costs. Quickly on carrying costs, weakness in residual values together with the charge we took on the held for sale EVs along with higher interest rates resulted in a higher than expected vehicle carrying cost for the quarter.

Alex will expand on this in more detail. With respect to operating costs, direct operating expense or DOE per transaction day was $36.92 in the fourth quarter. Excluding net collision and damage and adjusting for extraordinary litigation expense in the fourth quarter of 2022, DOE per transaction day was flat in Q4 versus a year ago and decreased by 8% for the year. We continued to experience elevated collision and damage in the quarter, largely driven by costs associated with running our EV fleet and perhaps more significantly, the challenge of the EVs had an impact on our operational efficiency more generally, further supporting the advisability of our EV sales plan. As Justin will speak to more, DOE is squarely in our sites. All told, fourth quarter adjusted EBITDA was a loss of $382 million, which includes the $245 million of incremental net depreciation expense associated with the EV sales plan.

To be clear, this bottom line result is unacceptable, but as I said at the beginning of my remarks, I have confidence in our trajectory, particularly with the bold but achievable cost out plan and our decision around EVs. The drivers of this outcome are understood and are being addressed and the opportunities before us are real. Our decision regarding the EV fleet is one driver of opportunity. As we discussed in our 8-K, we expect the consequences of our Q4 decision to be material and positive on the forward. We expect improved adjusted corporate EBITDA and cash flow over the next two years from that decision. We will also be positioned to better meet customer demand through higher utilization on fewer and less expensive ICE vehicles while maintaining an EV fleet where again supply better meets profitable demand.

And because we are eliminating a portion of the EV fleet that yielded the lowest RPD and exhibited the highest level of damage incidence, we expect to yield a disproportionately higher financial benefit over this year and next than the size of the fleet reduction would imply. The anticipated two-year payback on the charge taken in Q4 related to EVs in terms of aggregate benefit to adjusted corporate EBITDA production is to be understood as entirely separate and apart from the opportunity to generate an incremental $500 million of adjusted corporate EBITDA, which we have discussed on previous calls. This incremental $500 million opportunity falls into three areas. First, we have our project-driven initiatives, which are focused on the creation of profitable incremental revenue.

This includes growing Rideshare and improving our European and value brand businesses. In 2024, we will expand on the progress we made across each of these initiatives in 2023, which included on Rideshare growing revenue by 75% over the prior year. Uber drivers have now driven over 1 billion miles in EVs rented from Hertz. Our international business increased volume across key customer channels and grew annual revenue by 17% over the prior year. We also made progress in our dollar and thrifty brands where we now have new websites designed to enable improved direct bookings and enhance customer loyalty. Second, we have our efforts to enhance the yield on our core business and the assets deployed against it through a focus on improved revenue management.

Some specific progress to note, our team rolled out an improved skip the counter process across all brands in select airports during the quarter, reducing pressure on field employees and improving the customer experience with real opportunity to increase the sale of value added services or vast products through digital channels. And we started to roll out Apple Pay for the Hertz brand in select U.S. channels, providing our customers with an easy, secure, and private payment option. We are already seeing over 20% of eligible reservations completed with Apple Pay. Third and perhaps most in focus now is our disciplined approach on productivity to reduce cost throughout the business. Justin will speak to this cost out opportunity in more detail, but the work is well underway.

The team is energized and sees the opportunity and is working to deliver, a perfect add to the team who is already putting us in an improved position is our new Chief Operating Officer, Justin Keppy, and I’m pleased to turn it over for his comments. Justin.

Justin Keppy: Thank you, Stephen and good morning, everyone. It’s been an exciting first 90 days at Hertz, learning the business, visiting our larger operations, and meeting the field operations teams who make it happen. Their engagement and passion to support our customers and move the business forward is inspiring. We have a great foundation to pivot towards improved profitability. Looking forward, I see the road to profitable growth by getting back to the fundamentals in line with the three areas as Stephen referenced. In partnership with our leaders, we are bringing greater operational discipline and focusing on what immediately matters, getting cost out. It’s clear that we need to take bold action on both fixed and variable costs and accelerate productivity across our operations.

We aimed to get $250 million in benefit this year in addition to the benefit we expect to achieve from the EV reduction. While the company has been successful in tackling costs, we believe we can do more. Our productivity and cost benefit efforts fall into five core areas. Let’s start with staffing and third party spend across our business. We have taken a first step in right sizing and reducing third party spend and are assessing further actions. Within our fleet operations, we are enhancing our workforce planning process to better align staffing to volume and location. We expect meaningful benefit from these actions. Footprint is our second core focus area. We have assessed our network and we expect to reduce the cost of our physical off-airport real estate footprint as we exit underperforming locations.

These actions are designed to provide more focus and enable the redeployment of over 10,000 vehicles to more attractive use without the detriment to the robustness of our remaining network. We expect these network actions to be initiated within Q1. Third, we are attacking operating costs and improving field productivity. Collision, damage, maintenance, transportation, fuel, and out of service are the prime targets. We are rolling out to the field new digital tools to improve visibility and decision making. During the quarter, we began to deploy digital capabilities into the field to enable more real time and simpler documentation of damage upon a vehicle’s return to the lot. This tool promises to capture an increasing number of damage incidents with better precision and ultimately yield better reimbursement outcomes.

The fourth area is procurement, a big opportunity with an addressable spend of nearly $3 billion. We have started centralizing consolidate spend to reduce consumption and buy more effectively. We will continue to explore opportunities to accelerate our progress in this key area. The final area is technology. Technology is critical to what we do. As we have previously mentioned, we are well underway in modernizing our infrastructure, moving solutions to the cloud, and retiring legacy software platforms. We have made real progress and will start seeing benefit in 2024, including a year-over-year reduction in spend as previously highlighted. To ensure progress against our $250 million target for the year, we are developing detailed action plans with KPIs and implementing a governance process run by a newly formed and expanding program office.

In addition, and separate from the $250 million benefit I just outlined, we are progressing our efforts to reduce collision and damage across EVs more broadly. These include active discussions with key OEMs to get access to parts and labor more quickly and at a better pricing, leveraging our digital tools and insights to improve underwriting and collections, and in Rideshare specifically, lowering driver churn and expanding our EV charging network. To wrap up, I joined Hertz to make a real impact. My first impressions of the business are positive and I’m excited to capture the opportunities ahead. We know what to do and are organized to do it. In future calls, I look forward to providing you with updates on our progress. Now, let me turn it over to Alex.

Alexandra Brooks: Thank you, Justin and good morning, everyone. Let me start by covering our full 2023 results. Revenue was $9.4 billion, up 8% year-over-year. Although down 4% year-over-year, rates remained healthy at $60.62. This was about 40% above 2019, as noted earlier. Volume for the year was up 13%, compared to 2022, with meaningful growth across leisure, corporate, and Rideshare. Our fleet size grew only 9%, resulting in utilization that was 190 basis points higher than 2022, primarily driven by improved out-of-service levels. Strength in utilization of the fleet meaningfully contributed to RPU of $1,479 in 2023, down slightly versus 2022. DPU of $307 for 2023 was broadly in line with our expectations at the start of the year, notwithstanding the $245 million of incremental net depreciation expense resulting from our EV plan of sale.

For the fourth quarter, DPU was $498, inclusive of the incremental depreciation, and $350, excluding the charge. As you’re aware, DPU is driven by a variety of factors, including fleet mix, mileage, and condition, as well as views on forward residual values, and our historical sales experience. The combination of these factors drove Q4 DPU higher than we expected. We’re closely watching residual values entering Q1, particularly in light of our plans to rotate fleet over the course of 2024 to a materially younger composition. As Stephen shared, we bring a return on assets mentality to our fleet plan, and that includes our central tenet of maintaining fleet with unprofitable demand. Regarding operating costs, DOE per transaction day in 2023 was consistent with our prior year, excluding net collision and damage in both years and litigation settlements in 2022.

DOE per day was down 8%, reflecting progress on our cost initiatives. Both vehicle and non-vehicle interest expense was higher in 2023 compared to 2022, driven primarily by the macro rate environment with modest impact from fleet size. Adjusted corporate EBITDA for 2023 was $561 million, a 6% margin, which reflected a drag of several hundred basis points related to the EV headwinds previously discussed and further burdened by the charge related to the EV sale plan. Turning to our capital structure and liquidity, with respect to our balance sheet, net corporate debt at the end of the fourth quarter was $2.5 billion, resulting in net corporate leverage of 4.5 times at year end. While this is well above our long-term leverage ambition of 1.5 times, we intend to de-lever over time as our operational initiatives yield improved profitability.

Our available liquidity at December 31st was $2 billion, comprised of $764 million of unrestricted cash and the balance available under the first lien revolving credit facility. Our corporate debt maturity ladder is well-structured with no material maturities until 2026. At December 31st, we had $2.6 billion of capacity under our vehicle debt facilities globally, with a portfolio that was approximately 70% fixed rate. We maintained sufficient equity cushion in our global ABS facilities at the end of 2023. Of note, $2 billion of medium-term notes under our U.S. ABS facility mature in December of 2024, and we intend to refinance those notes in the normal course of business with the exact timing subject to market conditions. Turning to our cash flow and capital allocation.

Adjusted free cash flow for the year was an outflow of $321 million, primarily comprised of adjusted operating cash flow of $44 million, offset by $358 million of net fleet growth. Net fleet growth supported a $1.6 billion increase in revenue-earning vehicles on slightly lower than anticipated vehicle dispositions. Our non-fleet CAPEX for the year was minimal, as expenditures were offset by asset sales, including the previously disclosed sale of real estate adjacent to LAX in Q1. Lastly, in 2023, we repurchased $291 million of our common stock. We enter 2024 with followed demand in a stable rate environment. We expect demand to track to historical seasonal patterns and anticipate supporting RPD through initiatives, such as better monetization of upgrades, incremental value-added services revenue through digital channels, and improved price capture in our value brands.

Regarding vehicle carrying costs, we expect the dynamic residual environment to be an important macro trend for the industry in the year ahead. It will influence, but not dictate, a return on asset-based approach to fleet rotation and of course, depreciation. We plan for normal seasonality in the used car market, notwithstanding our view that the market is structurally short used vehicles in the near to medium term. On productivity, we look to achieve $250 million in benefit over the course of 2024, as Justin covered earlier. More broadly, we expect adjusted corporate EBITDA to benefit from improvements associated with the strategic sale of a third of our EV fleet, as well as the benefits of our productivity and cost initiatives, and as referenced, a focus on the fundamental and improved operational discipline.

In closing, I look forward to the future of our business and bringing the opportunities we discussed today to fruition. With that, let’s open the call for Q&A.

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

See also 12 Best Asian Dating Sites Without Payment and 15 Best Gay Dating Sites and Apps of 2024.

Q&A Session

Chris Woronka: Hey, good morning everyone. Hey Stephen. So since you made that announcement regarding the planned reduction in the EV fleet, I guess the question is, at what point do you kind of evaluate your progress on that and what would be the kind of markers that might cause you to possibly accelerate that further, just trying to get a sense for how you’re going to evaluate the success of it and when you might decide you need to do more if you need or want to do more?

Stephen M. Scherr: Sure. Thanks for the question, Chris. Look, this is a dynamic. I mean we are assessing the movie we made all of the time, not just simply on the disposition of the cars, but equally on the residual EV fleet that we had. We obviously took and are taking 20,000 cars out. That’s largely to bring supply inside demand. And the frame of reference as to whether there’s more to do or whether we’re content with the fleet we have is going to be an ROIC, a return on invested capital assessment on the EVs. In taking the 20,000 out, think about it this way, we have effectively clipped the lowest rung of demand in terms of RPD and candidly, the most defensive component of demand as it related to damage. And so our view is that while we’re taking a third of the fleet down, our expectation is that we will capture close to half, if you will, of the economic drag that’s posed there.

So where does that come from? We obviously told you in the 8-K that we expect over the two years in the aggregate to recapture about $250 million of EBITDA and free cash flow of about $250 million to $300 million. So what’s embedded in that? And what are we going to look at as we harvest this? Well, first of all, there’s a reduction in fleet carrying cost, there’s lower operating costs relating to collision and transport and charging and labor. And then we expect enhanced revenue in the context of deploying fewer cars at higher utilization than the cars we’re taking out. And on the reduced carrying cost, I mean, that’s in front of us. The depreciation is captured. That’s for us to take. What we do in terms of unit economics will be a function of the fact that we’re going to only replace 15,000 of the 20,000 cars taken out.

So these are less expensive cars, lower depreciation, lower vehicle carrying costs, operating at higher utilization so that will produce much higher margin dollars to us. And the operating costs just simply around collision transport and labor will be there. And so, A, we need to sell these cars, and we’re on pace to do that at or around where our mark was at December 31. Two, we need to capture the cost savings through EBITDA and realize the cash flow that we’ve laid out to go get. And third, we need to make a constant reassessment. If at the end of the day, the returns that we are modeling for the balance of the fleet against the demand that we believe to be there doesn’t show, then you should assume we will take more action than none. The other aspect around this, I would point out, and this runs the kind of the expense initiatives that Justin has, is I think we have dramatically derisked the ability to go at costs unrelated to the EVs. Meaning away from the sort of clear categories of expense that we are relieving ourselves in the sale of the EVs, we are reducing kind of the operational distraction in the field in a very meaningful way.

And in doing that, we will position the field to action some of the cost reduction that Justin has and will take you through. And I think that’s an important variable in this. And so look, we’re about providing choice to customers. We think we’ve landed on an EV fleet that meets demand. But I can assure you if those numbers don’t scratch to an adequate return, then we will take further action against that fleet, again, always with a mindset of keeping supply inside demand. And I think the lesson of this, if you will, is that incremental steps to wrestle down the cost elements of the EVs were not going to work and we’re not going to work with the speed of execution that we were comfortable with. And as a consequence and as evident in the fourth quarter, the need to take a big bite out of this issue was one that was in front of us and we took it.

And if that’s not enough, we’ll do more. If it is, we’ll play forward with attractive returns on the deployment of those vehicles.

Chris Woronka: Thanks Stephen, that’s really helpful. I guess as a follow-up, I’m curious about how you’re thinking about fleet sourcing. And this is both for kind of the 15,000 or so ICE cars that you want to backfill the EV sales with, but also just kind of your natural rotation. I mean, are you willing to lean more into the used car market now that given the current pricing environment there, is that something that’s more on the table this year?

Stephen M. Scherr: Well, I would say a couple of things on the fleet. First of all, on the ICE vehicles to sort of substitute in for the EVs, recognized that as we reduced down unprofitable network locations, okay, as Justin noted, we are redeploying fleet, mostly ICE vehicles back to airports and other locations. So part of the 15,000 will be vehicles that we’re capturing from other locations where utilization is not sufficient, number one. Number two, we are this month at our lowest out of service. We’re going to continue to drive out of service down and redeploy and use those vehicles, right, where we can. Third, in deference to cash, we’re going to look to sort of manage between purchases and sales and modulate that, again, based on kind of the return profile of what those activities have.

So the point I was making was that it will take 15,000 cars to replace the 20,000 cars that we’re taking out in the EVs. Again, lower-cost ICE vehicles used at a higher level of utilization. We do not need to go out and buy 15,000 additional cars to make that happen. Part of that will be lower out of service. Part of that will be redeployment of the fleet around the overall network particularly as we pinch off unprofitable locations. And I think we’re quite comfortable with what’s there in our ability to sort of backfill for demand.

Chris Woronka: Okay, understood. Thanks a lot Stephen.

Stephen M. Scherr: Yeah, of course

Operator: Thank you. One moment please. Our next question comes from the line of Ian Zaffino of Oppenheimer. Your line is open.

Ian Zaffino: Great. Thank you very much. Thanks for all the details on the cost savings. And just conceptually, I’m trying to understand here, when you think about your normalized EBITDA number, I guess, where do you think that is? And then you’ve stated it previously, so now is this cost savings on top of that normalized earnings number or EBITDA number or is this what you need to get to that number? Thanks.

Stephen M. Scherr: So thanks for the question, Ian. Here’s what I would tell you. You need to separate out what we’re forecasting in terms of EBITDA benefit from the EV sale, which we believe to be $250 million of EBITDA uplift, over two years such that, that’s a round trip, if you will, relative to the charge that we took in the fourth quarter. So set that aside and let’s call that the normal as it were, adjusting for the EV move. On top of that, we are coming back to the $500 million that we’ve spoken of before, which is a combination of new projects like Rideshare and otherwise. Second is realizing higher yield on the assets that we have, so sweating the fleet in a way that we can. And the third and perhaps the most important in the context of this call is an ability to gain productivity and pull costs out of the business.

The combination of those three things; projects, yield and cost amount to a $500 million go get. It’s within that $500 million that Justin has talked about $250 million of that $500 million being realized through productivity and cost in 2024. So again, separate out the EBITDA benefit that comes back to us on the EV sale, focus then on $500 million of EBITDA addition. And within that $250 million that is a very definite productivity and cost out in 2024. And Justin can give you kind of his take on what’s the makeup of that $250 million of cost out this year.

Justin Keppy: Sure, thanks, Stephen. Ian, if you look at it, I’ll say just the majority of our planned $250 million productivity benefit for the year is cost out. So it’s spend reduction, taking costs out. If I look across the categories, and we’re looking globally, it’s just not an Americas effort, we’re working across all of our businesses. First thing within staffing and third party, we’ve already taken action. So we’ve got head count actions that are benefiting us coming into the year. We’re locking down hire-new requests. So any new adds are being scrutinized, and we’re only adding where essential. And third-party spend, took a tough look first thing when I came in, and we’ve already identified over $30 million of spend reductions.

And I can tell you, we’re not done yet. On footprint, we’ve closed year-to-date, eight of our lower-performing retail locations as we expand our relationship with Carvana and others. And we’ve completed an assessment of our off-airport rent-a-car locations, looking at the ones that are underperforming. And as Stephen highlighted, it gives us the ability to free up vehicles to reallocate to on-airport or other more profitable locations. We expect a sizable portion of those actions to be complete here in Q1. On field productivity, I’m pleased to say the team is energized, it’s going. Technology that we launched last year has taken hold. We’re rolling out the digital tool on collision I mentioned before. Also on the telematics, seeing real progress on the fuel that’s been talked about before.