Yahoo Finance Hertz Global Holdings, Inc. (NASDAQ:HTZ) Q1 2024 Earnings Call Transcript
Hertz Global Holdings, Inc. (NASDAQ:HTZ) Q1 2024 Earnings Call Transcript April 25, 2024
Hertz Global Holdings, Inc. misses on earnings expectations. Reported EPS is $-1.28 EPS, expectations were $-0.45. Hertz Global Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Hertz Global Holdings First Quarter 2024 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. 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 Gil West, our recently Chief Executive Officer; Alex Brooks, our Chief Financial Officer; and Justin Keppy, our Chief Operating Officer.
We're also joined by Darren Arrington, our Executive Vice President, Revenue Management and Fleet Acquisition I'll now turn the call over to Gil.
Gil West: Thanks and good morning and thank you all for joining the call today. I want to acknowledge right upfront that this was a challenging quarter for Hertz. We have a lot of work still to do and I'll get to that shortly. But since I'm new to most of you, I want to take a few minutes to introduce myself before we dive into the numbers. So, let me start by saying that I'm excited to be here. And there's a lot of reasons for that. First, this is a great company with an iconic brand. Hertz invented the car rental business and has introduced many innovations over the years. I've been looking at the brand data and talking to customers, and I'm struck by how many of them have been fiercely loyal to the brand. And I've been one of those customers for a long time.
Customer loyalty is the key to success in a business like ours. I'll come back to that point. Second, I'm deeply impressed by the Hertz people I've met: at the airport rental counters, in our behind-the-scene operations, in our call centers, and at our headquarters here in Estero. They are committed to the business and want to win. They are full of good ideas and have a deep desire to serve our customers. Third, I see enormous potential for the company. Hertz has over 100 years of experience managing physical assets and operations at scale. We acquire nearly 20 million unique customers a year, operate over 11,000 global locations, drive 80% utilization of assets, and have over 0.5 million vehicles. And this creates a powerful platform that positions our company well for the future.
Fourth, and this is personal, but I love cars. I got my start and my father's auto parts store when I was a kid. I've repaired, traded, collected and race cars as a hobby my whole life. So, leading a company that's in the business of cars is a dream come true for me. As I've said at the beginning of the call, we have a lot of work to do. So, getting ahead of our challenges is what we owe our customers, our people, to our investors and I look forward to leading the team to make it happen. As I'm settling into my new role, there are a number of key priorities I'm focused on. It starts with having the right fleet. So, balancing short-term decisions with long-term implications to drive a better return on assets. This includes making sure that we have the right supply and demand balance of our fleet, at the appropriate capital cost.
Decisions around our fleet are based on return on assets and the discipline of fleeting inside the projected demand curve to ensure we achieve favorable revenue per day and revenue per unit performance along with better managing our residual value risk. Next is delivering operational excellence, which is fundamental and leads to best-in-class unit cost and a superior customer experience and, in turn, higher unit revenues. We must leverage our products, our fleet, our brands, and our customer experience to keep customers coming back and delivering a value proposition which commands a higher yield. We also must deliver on our operational cost and productivity initiatives that you heard about on our last call. And I'm an operations geek and have been for most of my career.
For me, operational excellence is essential and execution is the key. So, in my prior life with the airlines, I was part of the team that transformed the industry from leveraging operational excellence and our products to deliver a better customer experience. And through that customer loyalty, we were able to deliver unit revenue premiums to the industry, and combined with our obsessive cost management, achieved unprecedented profitability. Putting those same pieces together here at Hertz will unlock premium revenue and put us in control of RPD to drive growth, profitability, and value. So, while its early days for me, I'm eager to look further down the road at more ways Hertz can compete and win. But none of that is to take our eyes off the short-term operational priorities.
Our quarterly results were unacceptable and reflected the impact of a decline in forward residual values used to determine vehicle depreciation, coupled with our EV rationalization and elevated cost structure. And to go a step further, while overall demand for travel remains strong, our RPD remains well above pre-COVID levels. Our revenue performance is not fully capturing the opportunities available to us. This is also immediate focus area for the team. And as we've said previously, 2024 will be a transition year for us. The necessary work is already underway. And I know Hertz people wake up every morning eager to run the best operations possible to delight our customers, win their loyalty, create value, manage cost, and win in the marketplace.
That's why -- that's really why I'm energized to be here, and that's why I'm so optimistic. I look forward to your questions later in the call. But first, I want Justin to bring you up to speed on our delivery against our operational commitments, and then Alex will do the numbers. So, Justin, over to you.
Justin Keppy: Thank you, Gil and good morning everyone. Revenue for the quarter was $2.1 billion, and we recorded negative adjusted corporate EBITDA of $560 million, heavily impacted by higher than usual depreciation expense and EV charges. Alex will go deeper into Q1 financial performance. As Gil stated, we have challenges to address. We have a broad understanding of the drivers pressuring performance. Over the last three years, anomalous supply events in the auto industry impacted our business in various aspects of the P&L, including elevated maintenance, higher cost of collision and damage, and most recently, elevated vehicle depreciation. Coming off of peak residuals and new vehicle purchase prices of 2022, used car prices have decreased over the last 12 months and new vehicle cap costs are only recently moderating.
We expect this moderation to continue and that the elevated P&L impacts will subside. But in the interim, these events exposed other opportunities in the business beyond the acute EV impacts, which we are addressing with a concerted focus on rotating the fleet mix towards lower mileage and lower cat vehicles which will have a direct positive impact on reducing vehicle depreciation and DOE. On that note, let me share a few updates on our fleet and strategic initiatives prior to providing status on our productivity progress. Starting with our fleet. As discussed in the Q4 earnings call, we entered January at an elevated level. And for the quarter, our global average fleet was up 9% year-over-year. We depleted throughout the quarter and, by March, our core rental fleet was tighter, up only 2% year-over-year.
We plan to maintain tighter as we move into the summer season, which we expect to correlate with improved RPD performance, coupled with easier year-over-year compares. Looking at the composition of our fleet, we are addressing the mix to lower the average cap cost and reduce the tail of higher mileage vehicles. Elevated cap costs are the consequence of a relative vehicle shortage and higher trim levels and MSRPs, which characterized recent vehicle purchases, inclusive of preowned vehicles. As we refresh the fleet, the cost and age profile is expected to reduce with corresponding improvements in vehicle depreciation and DOE. With our recent vehicle purchases, we are having more influence on make and model mix, and trim and option configurations, which is bringing down our cap costs.
We expect this trend to continue and we'll continue to manage this critical input, in line with our ROA focused approach to our vehicle purchase decisions. Within our RAC fleet, we expect to reduce vehicles with higher mileage by 75% and complete the rotation out of preowned vehicles by early 2025. This fleet refresh is expected to result in lowered vehicle depreciation, lower direct operating expenses, and deliver an improved customer experience. Turning to EVs. We previously announced our plan to reduce the EV fleet by 20,000 units. And by the end of Q1, we sold about half of them. Given this progress, we increased the EV disposal plan by another 10,000 units, bringing the combined reduction to 30,000 vehicles, which we expect to complete by the end of the year.
Upon completion, we anticipate that the remaining EV fleet will be better aligned with attractive demand for EVs with a priority on our rideshare business. Alex will discuss the impact of these sales during the financial overview. Now, let me transition to our profitability initiatives. To echo Gil, our profitability initiatives are designed to improve unit economics through revenue, as well as costs, with an opportunity to generate an incremental $500 million of adjusted corporate EBITDA. They fall into three categories. First, we are focused on the creation of profitable incremental revenue by growing ride share and improving our European and value brand businesses. Second, yield enhancement on existing assets. These are initiatives designed to improve the yield on our core business and the assets deployed against it through a focus on improved revenue management.
And third, our relentless focus on productivity and cost, reducing both direct operating costs and SG&A. Overall, of the $500 million in recurring adjusted corporate EBITDA improvement, we expect approximately two-thirds to be cost driven and one-third to be revenue-driven. I will briefly highlight some of the progress on our revenue activities before going deeper into cost. Starting with our value brands. We are focused on improving both MPS and RPD. In Q1, we launched new digital tools that enable skip to counter, reducing wait times and improving customer satisfaction. We plan to roll this capability out to our top airports prior to peak season. Direct booking momentum is building on our dollar.com website, and recently, we launched a nonrefundable prepaid booking option, which is gaining traction by our customers.
Our Q1 expansion of Dollar and Thrifty brands to our North America off-airport network is also showing promise and offers adjacent complementary growth beyond our airport locations. Turning to our rideshare business. We are well-positioned and I am pleased to report that we've renewed our partnerships with both Uber and Lyft. Rideshare presents an attractive demand for both EVs and ICE vehicles, and offers an adjacent growth opportunity, lessening the impact of seasonality in the core RAC business. With revenue management, we saw double-digit year-over-year improvements of our VAS, or value-added services, revenue through enhanced offerings, with a focus on selling upgrades. We expect to have further innovation within our VAS product offerings to be a tailwind going forward.
Lastly, we launched our Hertz and Dollar brands and T-Mobile's Magenta Status program, and we recently renewed our long-standing strategic relationships with the Air France-KLM Group and Marriott. We are also excited about our expanding relationship with Signature Aviation in the private aviation space. Shifting to operating costs, direct operating expense, or DOE, per transaction day was $37.08 in the first quarter, flat versus Q4 despite seasonally reduced transaction volume and inflationary pressures. We anticipated that Q1 would be a period where we ramped up our productivity and cost benefit activities, resulting in $250 million of savings realized in 2024, which are realized through the year but are back-end weighted. So, where are we on the productivity and cost benefit journey?
We are seeing momentum building on these efforts, and I believe we are on track to achieve our 2024 targets. We have detailed action plans, a governance process, and are in full execution mode. During March, we saw progress on these cost items, and our DOE per day showed sequential monthly improvement. Our March DOE per day was $35, 5% lower than the quarterly result and 2.5% lower than Q1 of 2023. I foresee the run rates on the actions initiated so far will account for more than half of our annual target, but we are far from done and expect accelerating momentum into the second half. To share some examples of progress across the business. We have taken head count actions and reduced third-party spend with line of sight to $100 million year-over-year improvement.
In Q1, we closed 125 underperforming locations. We are in the final stages of contract negotiations for providers of our major commodity categories and anticipate productivity as we consolidate the spend. We continue to reduce the size of our EV fleet, resulting in lower operating costs, specifically with a reduction of transportation costs associated with remote charging. We rolled out enhanced workforce management tools to our top airports, tightening our third party and overtime by nearly 400 FTEs in North America. While damage and collision are showing inflationary headwinds, we are mitigating full impacts through digital vehicle incident reports and counter collections, and we expect to start seeing benefits of the EV de-fleet and overall fleet rotation as we head into the second half.
All cost areas are being assessed and new opportunities are being added to the pipeline, with March productivity exit rates providing a good baseline to build from. The entire organization is mobilized both on revenue and productivity to deliver improved profitability. Now, let me turn it over to Alex.
Alexandra Brooks: Thank you, Justin and good morning everyone. Revenue for the quarter was $2.1 billion, slightly up year-over-year, driven by an increase in volume. We recorded an adjusted corporate EBITDA loss of $567 million, which is disappointing and unacceptable. Although we continue to be impacted by elevated costs, which Justin covered, the key driver of the loss is the increased vehicle depreciation, which has increased $588 million year-over-year. For the first quarter, DPU was $592, of which $119 was due to incremental vehicle depreciation expense related to the EVs held for sale. We recorded a charge of $195 million to recognize a fair value adjustment for EVs remaining in our inventory at quarter-end, and to recognize losses on those units sold.
DPU, excluding the EV charge of $473, is elevated due to declining forward residual estimates. Taking a closer look at revenue, revenue per day of $56.68 followed typical sequential seasonal trends. The year-over-year decline narrowed as we moved through the quarter. January RPD was down 10%, while March was down only 3% year-over-year. And we see the March trend continuing through April. We believe this rate performance to be the consequence of intra-quarter seasonality and the tightening of supply. Volume for the quarter increased by 9% compared to 2023, driven by higher volume in leisure and rideshare. Exiting the quarter, our RAC fleet was up 2% compared to the prior year, which demonstrates the deliberate action we took to adjust our fleet level.
Fleet tightness improved month-over-month as we systematically disposed of excess vehicles that we carried into the quarter. As a result of early over-fleeting in the quarter, utilization was down 120 basis points year-over-year. Overall, for the quarter, our adjusted corporate EBITDA reflected elevated vehicle depreciation, which was further burdened by the nonrecurring EV charges and an elevated cost structure that does not yet include the benefit of our various cost initiatives. In particular, the natural rotation of our fleet expected to occur fully over the next 18 to 24 months will allow us to materially reduce vehicle cap costs and better match vehicle type to demand. This rotation will drive a decrease in DPU to the low 300s and a corresponding reduction to collision and damage expense as well as maintenance expenses, both of which burdened DOE.
Turning to our capital structure and liquidity. With respect to our balance sheet, net corporate debt at the end of the first quarter was $3.25 billion. While this places us above our long-term leverage ambition, we intend to delever over time as our operational initiatives yield improved profitability. I would remind you that our net corporate leverage ratio is not comparable with our first-lien covenant ratio, which only applies to our first lien debt. In terms of the first-lien debt, earlier this week, we announced an amendment to the financial maintenance covenant in our credit agreement for the first-lien revolving credit facility to temporarily increase the consolidated first-lien leverage ratios. We took the opportunity to create additional operating flexibility for the company as we work through the fleet rotation and improved profitability initiatives.
Our available liquidity at March 31st was $1.3 billion, comprised of $465 million of unrestricted cash and the balance available under the first-lien revolving credit facility. At March 31st, we had $2.7 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. Earlier this month, we extended the maturity on our $3.8 billion U.S. ABS variable funding note facility from June 2025 to April 2026. We believe we have sufficient liquidity to execute the fleet refresh discussed earlier. Turning to our cash flow, adjusted free cash flow for the quarter was an outflow of $729 million. Although the first quarter is seasonally a negative cash flow quarter, the size of the outflow was driven by the quarterly results.
Despite the challenging quarter behind us, I believe we are pointed in the right direction, and we have credible plans to achieve success. We're operating in a constructive travel environment with demand showing continued year-over-year growth. We will not add vehicles to the fleet simply because they are less expensive. Instead, we strive to stay inside projected demand. We know that the value of the business is enhanced by a disciplined approach to fleet management. A final comment. We have outlined the meaningful initiatives that are in place to improve the financial results of the company. As we work through the implementation of those initiatives, we will hold off on formal quarterly guidance. I'm going to hand back to Gil for closing remarks before we go to Q&A.
Gil West: Thanks Alex. Yes, before we go to questions, I'd like to leave you with a view of what a transition year means for us. And it's about setting ourselves up for long-term success in 2025 and beyond. It's about being great at the basics. So, operational excellence, customer service, and using that as a springboard for productivity and revenue growth. We're setting up the fleet to move DPU from being a headwind to a tailwind by rotating the fleet, lowering vehicle cap costs, optimizing fleet mix, and increasing retail sales and mitigating residual value risk. This is also the year of growing premium revenue, getting Dollar and Thrifty on RPD and NPS parity with the marketplace, and creating a unit cost advantage. Lastly, it's about using technology and leveraging it as an enabler for all the things I just mentioned.
Staying focused and executing on these things throughout the year positions Hertz for success going forward. I'm energized to be leading Hertz. We know we have big opportunities, and we're attacking them in order to drive the unit economic improvements for RPD, DOE per day, and DPU. As an operator, I'm going to be obsessed with execution as we move forward. So, with that, let's open up the call for Q&A.
Operator: [Operator Instructions] And our first question will come from line of Chris Woronka from Deutsche Bank. Your line is open.
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