Q4 2021 Hertz Global Holdings Inc Earnings Call
Welcome to Hertz Global Holdings fourth quarter, and full year 2021 earnings call.
Currently all lines are in listen only mode.
Following the presentation, we will conduct a question and answer session.
I would like to remind you that this afternoon's call is being recorded by the company.
I would now like to turn the call over to our host Johan Mallinson, Vice President of Investor Relations. Please go ahead.
Good afternoon, everyone. Thank you for joining US are now you should have our press release and associated financial information.
We've also provided slides to accompany our conference call can be accessed on our website.
I want to remind you that certain statements made on this call.
Forward looking information.
Are we looking statements are not guarantees of performance and by their nature are subject to inherent uncertainties.
Yes.
Actual results may differ materially.
Any forward looking information relayed on this call speaks only as of the state and the <unk>.
Company undertakes no obligation to update that information to reflect changed.
Yes.
Additional information concerning these statements.
Our earnings press release and.
In the risk factors and forward looking statement section.
Sanctions about 2021 .
Got it.
And on the Hertz websites.
Today, we'll use certain non-GAAP financial measures, which are reconciled with GAAP numbers in our press release, we believe that our profitability and performance is basic demonstrated using these non-GAAP metrics.
Comparisons discussed will be against 2019, and Leif stated otherwise because we believe it provides a more relevant benchmark, but not unusual impact.
<unk> on all of the business in 2020.
For comparisons to our 'twenty 'twenty results. Please refer to our press release and 2021.
Comparisons will exclude the effects of the dominant peak leasing and management business, we sold in March 2021.
Cold today focuses on its global Holdings, Inc. The publicly traded company.
The oldest softening we have more yields our interim chief Executive Officer, and Kenny Chang, our Chief Financial Officer.
I'll now turn the call over to Mark.
Thank you Johan and good afternoon, everyone and welcome to our fourth quarter 2021 earnings call I'm very excited to speak with you today as we reflect on a very transformative year in <unk>.
Contemplate an exciting road ahead for Hertz.
On today's call I'll be providing a high level review of our business initiatives and an update on our strategic initiatives.
He will then provide a review of our financials before we open up the call for Q&A.
Before I begin I'd like to take a moment to recognize some exciting news around our search for a world class permanent CEO as.
As we announced a few weeks ago, we're pleased to welcome Stephen here to the Hertz family as CEO effective February 28.
Thrilled to have someone of his caliber taking the reins and to continue purchase commitment to being at the center of the modern mobility ecosystem.
Stephen was chief financial Officer of Goldman Sachs and in that role he developed and light Goldman's all digital consumer banking business, which was built to enable customers to save borrow and spend on a clean digital platform.
I plan to work closely with Stephen to ensure a smooth transition and I very much look forward to staying involved with hertz in my capacity as a member of the board of directors.
I would also like to start off by recognizing the very hard work and efforts of the entire Hertz team that enabled us to report these results to you today.
Now turning to our results.
<unk> structural improvements on both the top and bottom line contributed to a strong performance monthly revenue per unit rose, 31% from the fourth quarter of 2019, driven by a 35% increase in revenue per day.
Maintain discipline in our fleet planning and our pricing.
Lined our fleet, although demand and we do not chase unprofitable business, our fourth quarter adjusted corporate EBITDA exceeded guidance, we achieved record first.
Our record fiscal year, adjusted corporate EBITDA of $2 1 billion and a margin of 29%, which resulted in adjusted earnings per share of $4.39.
Our leaner cost structure also contributed meaningfully to our results.
We previously mentioned that we realized $300 billion in annual cost savings and our results this quarter reflect just that.
We're becoming more efficient and agile and as a result, we're a healthier stronger business.
During the quarter, we unveiled how curt's is positioning itself at the center of the modern mobility ecosystem announcing transformative initiatives with Tesla Uber and Carvana.
We also completed a listing through a secondary offering of our common stock now publically trades on the NASDAQ Global select market as you are warrants.
We redeemed one 5 billion of preferred shares for less than a 30% premium originally contracted and are currently executing on our board approved a $2 billion share repurchase program, which is incremental to the 300 million repurchased in conjunction with the NASDAQ listing.
As you can see it was a busy but exciting quarter for our business.
Last fall, we did lay out five key priorities that would serve as the foundation behind everything we do to position <unk> for long term success and as noted on slide seven. These priorities include excellence and executing on the fundamentals committing to a customer first mentality innovating relentlessly, leading and the adoption of <unk>.
Electric vehicles and investing in our future.
Our teams around the world are guided by these priorities and they act as a driving force behind the execution of our key strategic initiatives, which are summarized on slide eight.
Bottom line is we're positioning ourselves at the center of the modern mobility ecosystem and discussed this in the context of our recent partnership with Tesla Uber and Colorado.
So let me take you through a few highlights on the progress that we're making with these partnerships.
First hertz customers can now rent teslas and multiple major markets across the United States, including but not limited to Atlanta, Fort Lauderdale, Los Angeles, Atlanta, San Francisco, and Washington D C.
Initial learnings from this rollout have been invaluable and we're already starting implementing them into our standard operating procedures.
For instance, onsite customer training is proving to be very important.
Our website and App have an expedited E V. Wendell booking process and include digitize guidance to educate customers about the EV to get them on their way quickly.
We're currently ahead of plan and building out our charging infrastructure.
We have over 700 <unk> level, two chargers installed across 65 markets globally.
Our purpose built infrastructure consists of charging stations across airport suburban locations and shared mobility rental locations and we are accelerating our plans to install level three DC fast chargers into our top markets in 2022.
As we've explained a significant number of our Tesla electric vehicles are dedicated to our strategic initiatives with Uber.
Seeing strong driver interest and participating drivers are generating higher earnings.
The program is launched in over 30 markets, including but not limited to Los Angeles, San Francisco, Chicago and Atlanta.
As we grow the EV fleet and continue to build out our infrastructure, we're committed to being an agile and always learning team.
Learnings will improve our operations and in my view will give us a huge competitive advantage in the industry.
Seen several of our OEM partners announced EV launches in the coming year, and we're having active ongoing discussions with our OEM partners and evaluating all available models for inclusion into our fleet.
Our partnership with Carvana is exceeding initial expectations as we work to rubber lungs choice fleet management.
Leveraging carvana is customer dedication technology and nationwide first party network allows for a more efficient direct to consumer sales channel, providing hurts the opportunity to increase its retail focused disposition channels.
We are ramping up the program with several thousand vehicles listed on the Carvana platform, which are converting very well into sales.
As we mentioned in conjunction with our listing all of these initiatives that I. Just went through remained margin accretive relative to our view of our normalized earnings power.
Our ability to execute effectively on each of these initiatives is of course highly dependent on a skilled and motivated workforce.
Given the current challenges in the U S labor market. This has never been more important.
Recognizing this we recently began implementing a series of further enhancements to our workforce hiring and retention practices to ensure we have the right people in the right place at the right time.
These include the use of analytics for local pay and competitive benchmarking leveraging technology to improve the candidate experience during the interview and communication process and more closely aligning workforce planning to fleet fluctuations.
In addition to supporting employees Hertz is prioritizing being environmentally conscious on our path to lead the future of mobility.
We're actively working towards establishing short and long term science based greenhouse gas emission reduction targets.
Ongoing investments in growing our global EV fleet, and robust charging infrastructure will be critical to achieving future targets and improving customers' access to zero emissions transportation options.
Last quarter, we emphasized our focus on modernizing our technological offerings, delivering innovation and growth and connecting our entire fleet.
We originally anticipated having a substantial portion of our fleet connected by the end of 2022.
We're now partnering with a leading telematics supplier and continue to work with various OEM partners, where select vehicle models, our telematics enabled from the factory.
These developments have accelerated our telematics rollout timing and we now expect to have a majority of our U S fleet connected before the end of the summer.
To make that data then workforce. We've also developed and implemented a technology platform that ingest data from these connected cars to promote fleet and operational efficiencies.
Amongst others. This data can tell us where a car is it moves to a location should not be in the charge level of the vehicles battery or triggering of the engine service indicators.
We expect this data to further improve fleet efficiency and reduce our operating costs.
On the international side of the business. We recently invested in an early stage company with a customer centric platform built around our fully digital EV rental experience.
The technology is supported by our fleet management system to assist in the deployment and management of our EV fleet, which combined with Hertz into house initiatives could ultimately be scaled globally.
These efforts will further our capabilities to leverage the best transportation and logistics management alongside a strong digital backbone.
We're also busy with several initiatives that we believe will enhance the customer experience and streamline the car rental process.
These include a touchless experience for renting vehicles and enhancements to the Hertz mobile app.
Customers will start to see improvement with the App by next month and a series of enhancements will follow them through the rest of the year.
This will allow us to deliver more personalized customer experience will help us attract and retain new customers and drive loyalty.
We've expanded our customer experience team to better coordinate and oversee these activities and as I mentioned earlier, taking a customer first approach is central to how we run the business.
Finally, before turning things over to Kenny I want to update you on what we're seeing thus far in 2022.
The omicron variant for a new wave of cases and had a near term impact on the travel industry.
Throughout this period the industry has remained fairly disciplined.
The weakness we saw was localized to January and the first half of February .
Industry pricing for the remainder of the quarter is significantly stronger than the first half of the quarter.
As a result of this relative industry discipline. The recovery has been Swift and Kenny will provide more specifics on this in a few minutes.
As a reminder, our 2021 results were heavily driven by leisure travel demand in the U S.
Rebound for international leisure inbound and business travel is yet to take shape, but we stand ready.
Business travel tends to be more concentrated towards the beginning and middle of the week, which is where our utilization rates are currently at their lowest.
Return of business travel is expected to improve revenue per unit as midweek utilization rates improve.
On the fleet side, we're still experiencing a constrained supply of new vehicles and the manheim data for December showed that units in inventory was still down over 20% compared with 2019.
We expect that the vehicles shortage will persist for several quarters to come.
We believe we're getting our fair share of new vehicles, and we continue to supplement our fleet with good quality pre owned vehicles.
In light of these conditions, we maintain strict discipline on fleet size Mat fleet size management and pricing.
Historically, there was a tendency at hertz to chase utilization and fleet size, which led to excess fleet and lower monthly revenue per vehicle.
We're managing this business differently and I believe were healthier and a more sustainable business as a result.
Looking ahead in addition to focusing on our key priorities, we will continue to build our brand strength and global fleet management expertise combining it with new investments in technology electrification shared mobility and a digital first customer experience are.
Our key fleet management capabilities will allow us to diversify and profitably grow in new areas of the mobility.
Bottom line, we have a view on where mobility is headed and we're very excited on executing on our strategy to put us firmly in the middle of that so with that I'll turn it over to Ken.
Thank you Mark and good afternoon, everyone join our last call I talked about our strategy to deliver profitable growth and cutting first optimizing our market segment and network distribution to drive this improvement second managing our fleet capacity with rigor and discipline.
<unk> continued execution on productivity.
As we discussed around the time of our listing last year, our focus on enhancing the topline combined with cost discipline.
Positive impact on our earnings.
<unk> revenue improvement at <unk> at $300 million.
Sample cost reductions are management actions, which have resulted in a healthier more profitable business.
We have significantly transformed our business from 2019.
Turning to slide 11.
In Q4, we remain focused on our plan and deliver strong results.
We recorded 91 cents.
The diluted EPS.
$628 million and adjusted corporate EBITDA, and EBITDA margin of 32% and adjusted free cash flow of $509 million.
<unk> was a fourth quarter record and increased 31% in the fourth quarter of 2019.
The key driver for the RPC increase was RTD, which increased 35% from the fourth quarter of 2019 monthly depreciation per unit came in slightly better than guidance at $57.
We ended the year with liquidity of $3 2 billion, which is which was ahead of our guidance after adjusting for the redemption of our preferred share and common share repurchases, both which I'll cover in more detail shortly.
Adjusted operating cash flow for the quarter with $573 million or 91% of adjusted corporate EBITDA, and we expect that ratio to be around 90% going forward.
In the fourth quarter, we continued to demonstrate how management actions such as corporate contract changes.
Optimization and further in the sale of ancillary products contributed to create some <unk>.
Our total RPG for Q4 was $326 higher than the same period.
<unk> thousand 19, driven by a combination of management actions and market forces.
As I mentioned multi depreciation per unit was $57 during the quarter slightly better than our guidance range of 60 to $70.
This is a result of today strong market for used car, which has two principal effects on our income statement.
First lower growth depreciation expense on our vehicles and second gains off vehicle disposition let.
Let me take you through this in a bit more detail.
Depreciation is simply a recorded depreciation of our vehicles, while they are in our fleet broadly.
Broadly speaking the growth depreciation rate at any given time is the difference between our book value expected disposition value the bottom by our anticipated hold period.
The starting vehicle value is our acquisition cost and book values reflect periodic depreciation at the vehicle is utilized in our fleet.
When used vehicle prices rises so do our expected disposition values. When this happens the gap between our book value and disposition value closes and our anticipated growth depreciation falls.
We have seen this trend reflected in our results over the past few quarters.
Lastly, when we sell a vehicle a bump is depreciated book value, we recognize a gain which offsets the growth depreciation expense in our income statement.
Given the continued strong residual values there a vehicle for which our current book values are below expected selling prices.
These fully depreciated vehicles.
Because we do not report any further depreciation on these vehicles their presence in the presence of near fully depreciate vehicles as well reduces our average depreciation rate and skews. The fact that there are many cars within our fleet on which we are experiencing more normal growth depreciation.
When these vehicles are sold and a resulting gain on sale further net depreciation amplify this effect in Q4, we booked $224 million of growth depreciation expense and $146 million of net gain on sale, resulting in a $78 million that you see on our income statement.
Keep in mind that we rotate more vehicles out of the fleet and our Q4 and Q1 trough periods. Thus.
Thus far in 2022, we are continuing to see residual value strength and generating exceptional gains.
Given these dynamics again, the strong residual environment and the heightened frequency of outsized gains on sale, we expect Q1 depreciation to actually be a gain or a negative expense of 40 to $50 per vehicle per month.
Looking beyond Q1, we expect these factors to abate as the fleet up for our spring and summer peak seasons, we will be rotating more expensive cars into the fleet and both our number and proportion of the fully depreciated vehicles would decrease.
As such we expect monthly depreciation per unit to increase sequentially throughout the remainder of 2022 normalizing towards the end of the year.
Given how strong the used car market as investors are rightly focused on sensitivity to falling residual values over time.
First from a cash flow perspective, the ABS is well funded.
Cushion of over $2 5 billion, which would insulate the ABS from the 25% drop in residuals.
And critically we do not think that falling vehicle residuals needs put deflationary pressure on rental pricing.
Pricing is fundamentally reflective of supply demand for rental cars and as Mark mentioned, we are keeping the fleet supply slightly below expected demand.
Although it's only one single case study the industry pricing behavior around omicron is indicative of responsible growth, which is reflecting the world's recovery from the pandemic, but not outpacing it.
We continue to expect that FERC will realize strong RP do enable partly by these industry factors, but also evolution in our technology fleet ancillary offerings and segment mix, we will continue to be disciplined on pricing.
Turning now to our operating expenses.
Execution on productivity drove an improvement of <unk> SG&A as a percent of revenue up more than 600 basis points will compare to 2019.
As previously disclosed we implemented cost reduction in the business, which on a comparable basis will have enhanced full year 2019, adjusted corporate EBITDA by approximately $500 million. If you want to include the impact of lower interest rates on vehicles that.
We expect $300 million of cost reductions to be permanent.
Our journey to improve the bottom line continuous as we seek to optimize business processes and drive operational efficiencies.
In terms of our capital structure and liquidity.
Our balance sheet remains extremely healthy and we are well positioned to fund our strategic initiatives, including the share repurchase program and grow the business as demand fully recovers.
During the fourth quarter, we issued $1 5 billion.
Our notes in a private offering.
We used the proceeds plus cash on hand to redeem all of the preferred shares outstanding at a reduced premium of 25% achieving a $75 million savings.
Redeeming the preferred shares eliminate the 9% dividend and will save the company over $90 million annually $60 million annually on a net basis.
At December 31, our corporate net debt position was approximately $550 million and we have no material corporate debt maturities until 2026.
At December 31, our liquidity was $3 2 billion or.
Our $4 3 billion when you exclude the capital structure activities.
Quiddity, it's made up of $2 $3 billion.
Unrestricted cash and $925 million under the available first lien Rcs.
Company established <unk> repurchase plan, which allowed us to continue share repurchases within specific parameters during a restricted period.
As of February 17th we had executed repurchases amounting to $1 1 billion or.
A 48 million shares.
We have about $1 $2 billion remaining under the $2 billion.
As planned we.
We continue to believe the share repurchase plan, it's an excellent way to return cash to shareholders and simultaneously capitalized reconsider it to be a very attractive buying opportunity.
We believe <unk> share prices below fundamental value and that view is based on our high quality of earnings are strong earnings to cash conversion, a low corporate leverage the sustainability of underlying fundamentals driving our earnings pricing discipline, and our growth strategy and the content.
E mobility ecosystem.
Turning now to what we're seeing for the first quarter. Historically, we tend to see a decrease from Q4 Q1 revenue of about 10% to 15% due to normal seasonality.
Based on what we are seeing so far we expect the quarter to be towards the favorable end of this range as Mark mentioned the industry has remained fairly disciplined throughout this period and prices for the remainder of the quarter is trending upwards based on our forward bookings.
All indications are the effects of <unk> are behind us and we feel confident about the remainder of the quarter as countries reduce travel restrictions. We believe our international <unk> segment results will continue to recover.
As this is the high value segment, and we will continue to rising global RPG contributor Globalizing <unk>. We expect the continued rebound in business travel to contribute to rising <unk> well with that I'll turn it back to Mark. Thanks, Kenny So I hope from this afternoon's call. It's clear that Hertz has made great strides in that the company is well positioned.
For profitable growth.
Purchase establish strong momentum since its restructuring enlisting successfully executing on the fundamentals and starting to execute on the strategic partnerships, we have forged with mobility leaders.
Hertz excuse me Hertz is poised to play a central role in the evolution of the modern mobility ecosystem, leading the electric vehicle fleet transition and creating a digital first experience for business and leisure travelers around the world.
Thrilled to have been part of hurts at such a pivotal time for an iconic brand like ours and I look forward to staying close to the business and support.
I can tell you the hertz teams around the world are energized about the future and together, we look forward to capitalizing on the significant opportunities ahead.
With that why don't we open up the session for Q.
We will now open up the lines for questions.
If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
Please limit your questions to one question per speaker and one follow up if needed.
Our first question comes from Chris <unk> with Deutsche Bank.
Hey, good afternoon, guys. Thanks for thanks for taking the questions.
Maybe we could talk just for a second about fleet and drill down a little bit into <unk>.
How you think the fleet normalizes incentive in the sense of your <unk>.
Typical kind of buying in disposition.
Cadence, because I know youre off Youre, a little bit off pace right now in terms of seasonality is there any way for us to think about as we get towards the end of the year.
Can you get back to more of a normal seasonal pattern and does that allow you to possibly take.
Take fewer used cars into the fleet and then buy on a more normalized schedule.
Yeah. Thanks, Chris So let me take that first so just as we've said in the past from a fleet standpoint, our strategy around fleet as we mentioned is to match it to our view of demand going forward. So.
Our approach maybe in the past has been to have the biggest fleet. Our approach now is to have the most profitable fleet and match it match capacity to demand in terms of the kind of the seasonal pattern.
As you know the industry. The car industry is still having a lot of significant challenges with the supply chain and making their production schedules and as usual just like we do with every OEM, we work with them on that so part of your question of getting back to seasonality part of that will also obviously would be very dependent on the.
Ability for the Oems to get back to a normal operating pattern in their plants.
But again, we're going to in terms of the fleet, we're going to match demand. So we can have a lot of pricing discipline.
And in the time being we're taking new vehicles, but also as Kenny mentioned, we are being very active in high quality purchasing high quality pre owned vehicles to ensure that we have the right fleet for the right level of demand.
Okay great.
So market follow up kind of related to that which is.
Obviously since this whole process began call it two years ago.
So it's several iterations of what what you might look like and in the future, but on the on the kind of on the demand side.
How do you think.
You look at the World now versus 18 months ago, 12 months ago or six months ago. Do you think there's more of an opportunity is the <unk>.
Of the pie growing or do you or do you think Kurt I was just going to take more market share than you than you might have originally thought.
Well first off I would also just on your question on market share. Our view is making sure we have healthy market share, which means profitable market share I think in.
In the near to medium term.
We're seeing a lot of pent up demand that was it's only exacerbated by home across and I think that's going to that's going to bode well for our business because in the short to medium term.
I think consumers are under traveling mood and thats good for our business.
When we think about the business aspect of our travel and our.
Our business, obviously pre COVID-19 .
Still down substantially importantly, we're starting to see green shoots we are starting to see every quarter of last year, we saw sequential improvement.
Year over year in terms of its comparison to 2019 was improving so businesses were starting to travel again of course AUM across.
And that but as Kenny mentioned any increase in business travel is going to be good for our business because that tends to be in the early part of the week, where our utilization rates are the lowest.
Even if businesses decided to travel less than they did pre COVID-19 .
I think we're well positioned not only because of what I just mentioned, but also we renegotiated and actually exited a number of unprofitable contracts and so our actual if you look at our business as part of our travel not only was volume up versus 2021, but our rates were up not only versus 2021.
But also versus 2019 because of those actions.
So.
Bottom line is I think in.
In the short to medium term, we're going to see I think a bigger pie just because of the pent up demand and then going forward. It will be best position no matter, where the market goes given some of the operational improvements that we went through today and also our discipline around fleet planning.
Yeah, Chris it's Kevin just to add to Mark's point as Mark mentioned as we implement a structural improvement to our business, we've been deliberately and walk away from businesses that were not profitable margin accretive. So if you think about our fleet versus 2019 on paper, it's down about 30% of half of that was business that we walked away from so as a result because of that we are now.
Now a much stronger business with sustainable earnings higher margins and strong cash conversion.
Okay very helpful. Thanks, guys.
Okay Chris.
Our next question comes from Bill <unk> with Morgan Stanley .
Doug Thanks for the question.
Mark you stay Hudson's positioned for the future mobility, and I don't doubt that but the truth is today.
100% of revenues from car rental and that's got its own cyclical drivers.
Question is when will some of these long term initiatives play out in the financials.
On that point.
Can you point us to the one we're in a more normalized environment on pricing and fleet cost.
When you look like in terms of EBITDA with all the positive actions you guys have taken is it closer to $1 billion or is it closer to $2 billion because I think that's the key debate on the stock and it's really hard for investors to look past. Some of these cyclical near term drivers the focus on the long term and I'm very excited of the long term initiatives I just want to make sure that.
Normalized EBITDA is under.
Thanks, guys.
Yes, great.
Thanks, Bill So on your question around one of these initiatives starting going to start to bear fruit.
I would tell you that they already are when you look at our initiatives around leading in and Evs.
Our our Tesla business.
Early days, we've launched in nine markets here in the U S for retail customers.
Customers to rent vehicles, we're in over 30 markets now with what we call our TNC business, which is basically our business offering with Tesla vehicles to Uber drivers and the bottom line is the early again early innings. The demand is very healthy.
Our retail customers are are willing to pay a premium versus the same size as another.
Ice vehicle and then customer satisfaction levels are very good and in the case of Uber. There is theres strong demand for that and the good news is if you recall, we said one of the benefits we thought that would accrue to the Uber drivers is that they would be able to make more money and that's that is the case, but on both of those if you will.
Call when we were going through their road show on the.
Yeah.
Re listing we said that all of these actions would be mark profit margin accretive to the company and be profitable for us and they are and we plan to build on that going forward.
So the simple answer is it starting now we're going to build on that going forward.
In terms of what the business is going to look like and you know on a normalized basis kind of you want to take that yes. So I think the easiest way to think about the affiliate I think 2019, EBITDA as a quote unquote normal year, and so we had $649 million of EBITDA and to be fair, let's back up just to be fair about $100 million.
EBITDA, so you're left with about five.
$550 million of EBITDA unless factor in the $300 million of structural cost reduction that we made to our business and Thats also a factor in the $95 of <unk> benefit and structural improvement for our business as well right. So if you do the math its $6 49.
Minus 100 per dollar plus 300, plus roughly 600 for the <unk> side, you get to a roughly one 5 billion of EBITDA number again, if you do the math, it's roughly a 17% margin business I will say this though this excludes.
Any of the.
Any of the mobility plays that we have with Tesla will break from motto. This excludes a favorable residual environment that we're currently operating in right. Now this excludes a favorable market forces that we believe some wacky stick going forward from a pricing standpoint. So again think of this as right now of the Florida not the ceiling.
Okay. That's really helpful. Just one quick follow up what's the assumption that is used for.
Unit fleet costs to get to that $1 5 billion in the U S is at around $250 or is it based on current market rates no.
Yes, you're spot on it's based on our historical death rate was roughly around $300.
Got it thank you very much.
Absolutely.
Our next question comes from John Healy with Northcoast research.
Great. Thank you.
Wanted to ask a question or two about fleet cost.
Would love to get your view on the value of the fleet.
But you see today versus what it is on the books.
Got it.
Daniel taken in Q1, that's probably going to be north of $200 million. So it was just kind of wondering.
How much more gains are left in the system.
And when when do those fall off and when you look at the fleet today I got to imagine that it's a pretty diverse mix of model year vehicles, I guess 18.
2019, 2021 'twenty two is all in there so I'd love to kind of get your thoughts as you look to 2003 how.
How much more will you or acquisition costs.
Of your fleet and 23 B.
Compared to maybe what you've seen historically.
Okay. So let me try to be couple of question and answer it a few pieces. So I think your first question was how do you think about the the fair market value versus the value of the vehicles on our books and as I mentioned right now the ABS is roughly a $2 5 billion to our equity question. So said differently if residual fell off.
On slide 25%.
It wouldn't have any ABS collateral requirement on these vehicles right, so and that leasing to I guess your second question around the games.
I think so so John let me try to answer it this way and I think this may help you.
<unk> been through.
Our gains going forward right. So let me take Q4, as an example, and bifurcate and dig a bit deeper on the $57 a death rate and I think that I think John that would help you think through the remainder of the.
For the year. So as you think about the $57. There is the growth depreciation piece of it right. That's roughly blended right now as of Q4 $160 per month per car and if you. If you split up with 160, you have a meaningful amount of cars that are fully.
Created right, so they're dumping at almost zero.
<unk>.
The rest of the vehicles are actually depreciating closer to historical norms of roughly $300. So again zero 300 blended $1 60, that's a gross line of the house the.
The second piece is the gains line, which you asked about <unk>.
Right now per vehicle, we have roughly a $103 per car of gain per month, so $1 16 minus the model three that's the 57.
Most of the 103 per car gains are driven by the fact that we.
These fully depreciated.
Assets on our books, so as these cars rotate out of our fleet.
Gains were surely decrease right and that the growth depreciation line, what normalized towards that $300 monthly depreciation, which we've seen in the past call. It five years, one caveat, though right the $300 if on a like for like basis. There are factors that will impact depreciation such as fleet costs.
That's a whole period fleet mix and market residual values. So you can expect the gains to narrow throughout the rest of the year, especially these <unk> are out of R. R.
Our fleet and that you expect normalized gross depreciation to be close to 300.
And I think the other pieces.
Thinking about the relationship between residual value gains in that purchase price right. I think we all know versus 2019 residual value has risen 25% to 30%, but right now my other vehicles that are not fully depreciating are still getting a 300 and the reason why because usually purchase price of residual have a direct correlation.
Therefore, therefore, the glide path depreciation doesn't get impacted.
No that's helpful and I guess, just a follow up on that is there a way to think about how much different the 'twenty threes, Mike talked to you versus what you've had in the past if you look at that.
Retail prices, what the dealers are putting up.
It seems like those prices when it necessarily compare to what you've seen historically and what you've purchased for I guess my question is is that 300, I'm, sorry, $300, a month number and thats still a relevant number as we look to 'twenty three and beyond.
Well I think I wish I had a good crystal ball on this but this is going to be market driven and so.
We will work with our OEM partners I would just I would just say whatever that market prices that we would be offered will be offered to our competitors as well so it would be relatively.
Not a big impact on the industry at least between competitors, but tough to and as you know its tough to predict the market pricing.
Particularly in this environment as the Oems kind of work through their supply chain issues, and then have to first and foremost.
Restock their retail network before they get to us.
Yes, I won't comment on the Capex how much.
Depreciation of a one of the quarters at one 5% is kind of how we've modeled it ourselves.
Our next question comes from Ryan Brinkman with Jpmorgan.
Alright, thanks for taking my questions.
First wanted to ask on the partnership with Tesla, including how many vehicles you may have.
From Tesla, so far how many you hope to or expect to take delivery of this year or in total by the end of this year and also are you able to comment at all on the <unk>.
Trend in revenue per day or per unit. So far for your Tesla vehicles relative to your fleet average are you seeing maybe any trends in demand for renting electric versus ice vehicles from leisure versus commercial customers. For example, I'm not sure maybe corporate customers might like to see their employees rent evs when possible.
Better pursued their ESG initiatives or just anything else to keep in mind.
Yes, Thanks, Ryan for the question, so I won't get into specific numbers on Tesla just like we don't get into specific numbers.
Any of our OEM partners suffice it to say that as I mentioned the launch is going very well I mentioned, we were at nine markets here in the U S.
For retail rental.
A couple of markets like Germany, Italy, and France in Europe , and the demand is good.
There is a premium that customers are paying versus as I mentioned.
Comparably sized ice vehicle and the satisfaction is really good.
Combine that with the demand we're seeing from the <unk>.
<unk> drivers and the fact that theyre, making more money, where we're very bullish on our ability to grow this business as the vehicles are delivered to us in the bottomline as vehicles are flowing.
We.
I mentioned in my remarks, we're actually kind of front loading our charging infrastructure rollout.
We're now in 65 markets.
With this I mentioned 700 level two chargers. So we're anticipating to further rollout as we continued to get vehicles delivered from Tesla, but where.
We're quite pleased with the.
With the rollout and to your question around kind of leisure and business travelers. The simple answer is yes. We're seeing that there is customers are very excited and happy about their experience renting a tesla from hertz and they're willing to pay for it and encouragingly in the early stages of the recovery of business.
Travel, we're seeing corporate business travelers actually take a lot of interest and having their their business travelers renting from us.
Very interesting. Thank you and I heard you mentioned, a very strong 90% conversion of EBITDA into FTF at least for this year can you maybe talk about some of the puts and takes there I imagine you may be benefiting from the <unk>.
Improved loan to value of the existing fleet given the strong used car price environment, there by allowing you to perhaps grow the fleet in unit terms without additional dollar investment right sort of benefiting FCS is that the case and how long would you.
That dynamic to persist and how should we maybe think about.
FCS conversion thereafter.
Yes, so just.
A correction at 90% to Ocs, both operating cash flow right. So that's the that's the stat that way.
Referencing so about walking EBITDA and then you have a bit of working capital, which again given the fact that we are healthier from a infrastructure standpoint, a footprint standpoint as well as the fact that we are generating <unk> drag on working capital last right. So that drives the 90%.
C F conversion the Fcs.
I won't give.
A lot of details in terms of.
How many cargo buying selling et cetera.
I will save US right and that's a growth line on a single part of your the economics right.
The buying and purchasing sulfonic, given the fact that we have equity.
Traffic was up vehicles. However, as I mentioned in my prepared remarks, we are rotating our fleet right now and that will have a cash need from a basket standpoint, so obviously that will impact us.
Okay perfect. Thanks, and then just my last question is on.
The allocation of that cash flow.
I expect share repurchases to take up by far the lion's share including for all the reasons that you mentioned towards the end of the prepared remarks, there, but I saw the UFO drive announcement and all.
Small in the context of your ample Fcs, but I'm just curious are there many other similar opportunities for investment or what other M&A opportunities could be out there of course car rental itself is already highly consolidated but I'm not sure. If there maybe certain currently outsource functions you could in source or maybe you might look.
To grow via organic or inorganic investment to maybe offer third party of certain functions you do today like fleet management or for example, selling would you ever sell vehicles in your retail stores that are not coming out of your fleet.
Capitalized upon Europe already vertically integrated direct to dealer auctions to maybe stand between buyers and sellers of auction vehicles or just anything else.
Maybe it makes sense to just keep hammering away at the repurchase given where the share prices, but just curious what other priorities or opportunities you feel it might be out there.
Thanks, Brian So first off I would just characterize our growth strategy is not dependent on significant M&A. We think we have lots of ample opportunity to grow given our strategic initiatives that we've outlined that being said.
We're always going to be looking for.
Interesting tuck.
Tuck in types of M&A that could further our strategy and gives us opportunities to further grow.
I do think other other things we're doing in the business that we've talked about in the past.
We are investing a significant amount of money in our it infrastructure.
We're doing it in a different way that we've done in the past different past, we tried to boil the ocean all at once now we're being very targeted and have business owners for each one of these investments, but I think the good news is given our business performance and given kenny's comment around what we see is the free.
Cash flow conversion is going to give us lots of opportunities to look at many of the things that you just mentioned and that'll be an ongoing process.
Great. Thanks for all the color.
Okay.
Our next question comes from Brian Johnson with Barclays.
Thank you.
Just wanted to talk a little bit about the corporate travel you talked about the trends the impact on midweek utilization that would clearly healthy RPE metric, which we appreciate.
But in <unk> results.
<unk> talked quite a bit of a headwind from corporate and drilling down it seems in particular that there are large corporate travel accounts.
That have rates that were negotiated pre COVID-19 pre chip shortage.
Hence are significantly under the retail market more so than the typical arbitrage can you give us a sense you do talk about that roll off.
Unprofitable contracts during the restructuring about whether you face the similar kind of issues, maybe it would be those large contracts and then just as a follow on how the amex global GPT relationship would play into that particularly if you have more pricing leverage with SME.
And the large corporates I did note that 75% of the big four accounting firms have many left.
Are using DVT my impression that they would still have the.
Contract rates as opposed to the global business travel right. So maybe talk about that aspect of corporate pricing.
Yes, thanks, Brian good set of questions. So on our corporate contracts I can't speak to what our competitors are facing I can just kind of speak to what we're seeing.
We mentioned, obviously, we do.
During our restructuring we were able to either exit or renegotiate.
Almost all of our contracts so.
The highest level, we view as corporate and business travel returns that's going to be a favorable tailwind for us because as you know and as we've mentioned.
They tend to travel in the beginning of the week, where our utilization is low so that will improve our revenue per unit quite substantially.
In terms of whats going on with.
With SME and large corporates and Amex first off as you know our partnership with Amex is extremely important to us and we.
We expect to grow our share versus historical levels, and we're starting to see that when.
When it comes down to kind of SME and large corporates I won't get into too much details, but on Smes the rates are more attractive which is good as they start coming back to the market and traveling and on the large corporates would they provide us is not only volume but also stability.
And then when you combine that with the fact, we have renegotiated all of those contracts I think we're.
We're quite pleased with that business.
Coming back as it comes back over time, and even if it doesn't come back to the levels than it was pre COVID-19 , we're still going to be in pretty good shape.
And just a quick follow on I get the utilization point in terms of overall days, but.
As our business travels often took us too.
The Hartford's didn't do that Bliss, Columbus, Ohio, which are not Miami, Los Angeles Denver.
Phoenix or other vacation spot.
How does the utilization impact of corporate change when you need more cars at those kind of mid tier business airports.
Well, that's normal course of business for US right as we as we manage our fleet.
To that end I think when you look at some of the examples and I think I mentioned this in my prepared remarks around better managing our fleets to demand.
Things like telematics that we're putting into our business I mean that gives us a lot better data in terms of availability for our vehicles and be able to match that to forward bookings and manage our fleet.
Where where the customers are so.
And that's also part of the investments as you know.
Ryan we mentioned in the past that we're making.
Our it infrastructure to continue to improve our fleet and revenue management.
Okay. Thanks.
You bet.
Our next question comes from Stephen Grambling with Goldman Sachs.
Hi, Thanks, I am sure that Stephen Scherr will want to provide his own thoughts on the strategy and financials of the company and what drove them to enroll next quarter, but I'm curious from a board standpoint, what aspect stood him apart from others you looked at recognizing maybe his reputation precedes them.
That might impact the strategic direction, if at all for the company.
Great well first off as we mentioned, we're very excited to get Stephen onboard listen what Stephen brings is not only great.
What kind of strategic skills, because he ran goldman's strategy for quite some time. He is also an operator as well having.
Having basically started it up and let the consumer banking business for them in market. So we think both of those things are quite important skills as we look at navigating the future here at Hertz and as I mentioned he is very supportive of the strategy and as I said like every CEO theyre going to come and bring their perspective.
But it's not going to be.
Student body left it's going to be about building on the momentum we have going forward.
Great and then as an unrelated follow up you mentioned that you wanted to be the most profitable fleet not the largest suite how do we think about how that plays out from a competitive standpoint.
Here's are more willing to add supply faster and are there scale benefits that could theoretically drive more aggressive pricing or perhaps that's another way what dictates pricing more macro or competitive dynamics. Thanks.
Great.
Think from what Youre seeing in the marketplace right now.
<unk> is really delivering delivered being driven by supply and demand and to your point around let's say again I can't speak to any of my competitors. This is really about our strategy of matching capacity to demand I do think that for the foreseeable future, it's going to be very difficult for any.
Rental car company to fleet up substantially and Thats driven by the production issues you are seeing at Oems et cetera, So I think thats.
A bull case, if you will around the pricing environment going forward at least in the.
Near to medium term.
Great. Thank you I'll jump back in the queue.
Alright, thank you.
This concludes the Hertz global Holdings' fourth quarter and full year 2021 earnings conference call.
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