Q3 2022 Hertz Global Holdings Inc Earnings Call
Okay.
Welcome to Hertz Global Holdings' third quarter 2022 earnings call. Currently all lines are in a listen only mode.
Following management's commentary, we will conduct a question and answer session.
We'd like to remind you that this morning's call is being recorded by the company.
I would now like to turn the call over to our host Johan Ross and Vice President of Investor Relations. Please go ahead.
Good morning, everyone and thank you for joining us by now you should have all of the earnings press release and associated financial information. We've also provided slides to accompany our conference call, which can be accessed on our website.
I want to remind you that certain statements made on this call contain forward looking information.
Looking statements are not a guarantee of performance and by their nature are subject to inherent uncertainties.
<unk> 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 Adil.
Additional information concerning these statements is contained in our earnings press release and in the risk factors and forward looking statement section of our 2021 Form 10-K, and our third quarter 2022 Form 10-Q filed with the ACC. All these documents are available on the Investor Relations.
Section of the Hertz website.
Today, we'll use certain non-GAAP financial measures, which are reconciled with GAAP numbers in our earnings press release, we believe that our profitability and performance is better demonstrated using these non-GAAP measures.
On the call. This morning, we have our we have Stephen Scherr, our Chief Executive Officer, and Kenny Chang, Our Chief Financial Officer, and now turn the call over to Steven.
Thank you Johan and good morning, and welcome to our third quarter earnings call.
Before we begin our earnings discussion I want to focus for a moment on hurricane in which brought considerable devastation to southwest, Florida, just weeks ago, including to our hometown of a sterile having been in Florida with our employees customers local officials and relief organizations I've been struck by the resilience and perseverance of Hertz employees to be in the.
Service of our neighbors and customers Fortunately all of our employees in the affected areas were safe and our physical asset suffered little to no direct damage. The Hertz team is engaged with our community on its path to recovery.
Let me now turn to our financial results for Q3 Hertz posted another quarter of solid performance. Our results were the product of strong demand across leisure corporate and rideshare high utilization a stable rate environment and actions intended to further our stated strategy of managing fleet to suit demand we remain.
Focused on operational excellence and attractive financial returns.
Third quarter revenue was $2 5 billion up 12% year over year and up 6% quarter over quarter, we generated $618 million of adjusted corporate EBITDA, resulting in a healthy 25% margin.
Adjusted free cash flow of $505 million reflects a conversion rate of over 80% for the quarter Theres significant free cash flow generation enabled us to invest across our business as well as reduce our capital base in the quarter by 7% through share repurchases.
The third quarter was characterized by continued strength in rate across all customer segments with increased contribution of revenue from value added services, and particularly strong pull through of corporate demand.
Through the quarter, we experienced better than expected movement in revenue per day and revenue per unit with each up 3% and 5% respectively versus Q2.
Beyond positive volume trends, we also experienced improved operating performance as the quarter progressed, including a lower direct operating expense base fewer out of service vehicles and more active fleet rotation or focus on fleet consistent with the strategy around active fleet management discussed on our last earnings.
Call enabled us to capture healthier gain on sales earlier in the quarter against the declining residual price environment.
RPT in Q3 was $68.57 and <unk> was a record $1685 a results.
Reflected stronger performance than seasonal expectations would typically yield this should continue into Q4 as OEM production remains constrained and as we continue to manage fleet inside demand on rate, we expect to remain at elevated levels this quarter relative to historical norms with normal seasonal adjustment versus.
Q3.
Finally, as strong as our unit revenues were in Q3, our PD as a metric maybe less culling as we grow our TNC or rideshare business, where length of rental is longer relative to the conventional Iraq business.
Lower RPT in that customer segment should not mask tnc's impressive economic contribution to margin.
Lower implied RPT over a multi week rental alongside lower associated transaction transactional expense produce attractive EBITDA margins being the primary metric to which we manage our business.
In Q3, TNC rental volumes more than doubled year over year and our expectation is that this customer segment will continue to grow.
With respect to the business overall during the quarter across all geographies, we maintained our focus on customer service. Despite the peak summer season limited availability of vehicles high fleet utilization and elevated pricing, we improved our NPS scores sequentially from Q1 through Q3. This.
This is a terrific achievement and a testament to our employee focus on putting the customer first.
Our Q3 results reflect overall strength in our business and continued demand for our services there remains opportunity for further growth as we experience a return to volumes achieved prior to the pandemic.
This is consistent with what has been reported across the travel industry notwithstanding risk of economic slowdown we see no evidence of softness based on current bookings in fact revenue metrics for the month of October , including RPG and transaction days are up year over year.
<unk> domestic leisure travel remains elevated as we are now one month into Q4.
Corporate business reached 75% of pre pandemic levels in Q3 with forward bookings, reflecting a continuance of this trend into Q4.
While corporate activity from small and mid sized businesses demonstrated considerable growth across the first half of the year and into Q3 larger global accounts accelerated during Q3 as these customers have only begun to increase their travel volume.
In Q3, we renewed 100% of contracted corporate accounts open for renewal and 93% of these renewals contained a price increase.
Finally international inbound activity is showing signs of return, particularly end to the year end holidays, and despite a strong U S. Dollar while early and only by example international inbound bookings for Florida, and West Coast destinations are up over 50% and reservations for the Christmas holiday.
<unk>.
Before Kenny takes you through the details of our results I wanted to address four key areas of focus for our team as we progressed Q4 and look towards 2023.
They are fleet management cost structure strategic priorities and capital deployment, let me begin with fleet.
Last quarter I spoke at some length about our strategy of managing fleet size to expected demand.
Given market dynamics in Q3 with rental volume remaining elevated and residuals in decline our fleet strategy had to take account of aggregate fleet size as well as the composition of the fleet in.
In managing the fleet, we considered embedded equity value across the whole of the fleet as well as on a vehicle level basis, as we size for overall customer demand and made acquisition and disposition decisions.
In Q3, we began with a fleet size of 532000 and finished the quarter at 512000, which included a refresh as we bought back approximately 75% of the volume that we sold the process enabled us to maximize the harvest of embedded equity against the declining residual.
Value market, while at the same time rendering the fleet younger at lower price points and releasing capital to return to shareholders should residual price declines persist beyond Q3, we expect to continue monetizing the equity in our fleet and using that equity to subsidize the purchase of vehicles at reduced.
Prices.
While residual price decline was anticipated in Q3, the pace proved more accelerated than expected beyond broad indices are large used car retail footprint and partnership with Carvana provided us with real time pricing information, enabling us to make swift decisions on vehicles, most exposed to potential decline.
And value.
These platforms also enabled us to sell vehicles at a premium to the wholesale market.
Our Q2, and Q3 fleet actions mitigated our exposure to the normalizing market and positioned us tight on fleet going into the fourth quarter, exactly where we want to be with expanding option to buy cars to meet Q4 demand at more attractive prices.
Let me turn to our cost structure our.
Our ambition is to take our unit costs down to render her it's a more efficient operator in all markets. In Q3. However, we came into the quarter with elevated out of service levels, primarily because of higher recalls in the first half of the year and a reduced workforce, particularly among mechanics coming out of reorganization.
During the first two months of the quarter with parts procured we made the intentional decision to carry higher costs in our operations to effectively address the recalls bringing out of service down and putting vehicles back into the usable fleet.
As a result, our OE in the quarter remained higher than desired, but our cost based in September displayed better operating leverage than the prior two months and we are experiencing even lower unit costs in October as we open in Q4, we expect improving operating leverage throughout Q4, and we look to further improve.
<unk> in 2023.
We expect the Q4 cost reduction to be the product of several factors, including most notably a more pronounced reduction inexpensive third party labor and a continued pivot to hertz badged employees as well as the completion of our telematics installation across 100% of the Americas fleet are.
Our telematics investment is already contributing to superior recovery times on missing vehicles more accurate fuel readings upon return and timely service alerts, bringing real value to the customer experience and efficiencies in the field.
Next let me comment on our strategic initiatives our activity over the quarter reflects the strength of our commitment to the increasing electrification of our fleet. Both in terms of growing a more diversified fleet of evs and making progress on charging.
As you know we made two significant announcements in Q3 related to electrification first we announced our memorandum of understanding with GM to acquire up to 175000 electric vehicles over the next five years. The agreement encompasses EV deliveries through 2027 and spans a wide range of vehicle cat.
<unk> and importantly across various price points from compact and midsize Suvs to pickups luxury vehicles and more the arrangement will dramatically expand our EV offering and diversify our source of evs at ever more attractive price points, we will be able to drive increasing volumes and attractive margins.
With more electric vehicle choice at lower cap costs.
Of equal importance, we announced an infrastructure agreement with BP, which promises to increase the network of charging stations available to hertz customers and to improve the charge management of our EV fleet VP.
VP pulse a unit of BP will fund and install charging infrastructure across the Hertz location footprint. This partnership will enable us to expand the national charging network available to our customers at an accelerated pace and provide access to a growing number of charging networks to us at attractive pricing.
Likewise BP pulse will also customize energy management software for Hertz to ensure our growing fleet of Evs are recharged quickly and in a cost efficient basis and preparation for rental.
<unk> platform will allow us to optimize timing and usage of energy, thereby containing cost and ensuring our customers are provided an EV at an appropriate charge level <unk>.
Beyond electrification, our technology initiatives are progressing well telematics as I noted before in the early introduction of our new analytics platform are two hallmarks of our progress in Q3 in the quarter. We went live on the introduction of an analytics model designed by Hertz and Palin tier the model enables us to harness.
Our data in innovative new ways that will get our customers on the road more quickly improve our cost structure appropriately calibrate pricing against demand and reduce the complexities of operating our large diverse fleet. While early we believe the rollout across the U S will bring significant benefits to our business both from a.
<unk>, an operating cost perspective.
I'll wrap up with a few comments on capital deployment, we continue to invest in fleet and non fleet capex in the quarter and to repurchase our common stock. Our Q3 investment brought our net fleet Capex for the first nine months of the year to $672 million and our non fleet capex to just under $100 million.
On share repurchases through nine months, we have repurchased $2 $1 billion of stock as of October 20th we had $1 $4 billion remaining under our $2 billion authorization our strategy around capital allocation continues to be one of investing on our business than using free cash flow to re.
Purchase shares.
As I turn the call to Kenny I want to put our results and our forward view of the business in the context of what others across the travel industry have communicated over the last two weeks like the airlines and hotels, we are experiencing undeniably strong demand for our services as we begin Q4 as I noted earlier demand is up across.
Leisure and corporate utilization remains elevated and neither is being driven by price concession that is not a forecast that is current reality. It is true that residuals on used cars declined precipitously as Q3 progressed, but I would distinguish supply driven factors that drive used car pricing from <unk>.
Demand driven factors that underlie the fundamental expression of activity being shown by our customers as a matter of risk management. We are prepared for a slowdown should one materialized, but for now the nature of demand. We are experiencing stands in contrast to the more negative tone underlying the economy and may well be fueled by change.
Travel patterns emerging out of the pandemic.
Whether this is specific to the travel industry or a signal for the broader economy remains to be seen regardless, we remain focused on maintaining the right fleet the right cost base and the right strategic deployment of capital to generate attractive returns for our shareholders over time.
I'll now turn it over to Kenny to walk you through our results in more detail.
Thank you Steven and good morning, everyone as Stephen mentioned demand for rentals was strong in the third quarter and our focus on profitability resulted in a high margin business, our third quarter adjusted EPS of $1 eight adjust.
Our adjusted corporate EBITDA was $618 million, reflecting a margin of 25%.
Revenue was $2 $5 billion in the quarter, a 12% increase compared to the prior year period, and a 15% increase on a constant currency basis.
Revenue and EBITDA were negatively impacted by approximately $70 million and $20 million, respectively. Due to currency changes about two thirds of revenue growth was attributable to volume and one third to rates. This RPT growth was driven by disciplined fleet management and accretive.
ROA mindsets are.
<unk> was $68 57 and.
Monthly <unk> was a record $1685 for the third quarter exceeding our second quarter RPT and slightly ahead of the expectations laid out on our previous call.
This constitutes a 5% increase over our second quarter <unk>.
Driven by continued quarter over quarter and year over year improvements in rates and volume and higher utilization versus Q2.
July is typically the strongest month of the year for our business and we achieve <unk> for the company of $1777.
Key driver of the post pandemic, our PD growth has been the growth and revenue from value added services. These ancillary customer services provide high margin revenue and what the international inbound returning we see room further growth.
Volume in the quarter grew 11% year over year, and 5% quarter over quarter in line with our expectations.
A 5% volume growth was achieved despite fleet, increasing less than 4% aided by tighter utilization.
It should be noted that transaction days for the quarter at about $37 million represents a post pandemic record most.
Most of the volume came from leisure rentals, which increased versus the previous quarter, our corporate and international inbound volumes continue their recovery in the quarter and increased from Q2 to 75% and 45% of 2019 levels respectively.
Utilization improved quarter over quarter to 80% and was enable by our investment in preventative maintenance and fixing our re cost to drive down our service levels as we noted earlier.
Our determined efforts the number of vehicles classified is out of service was materially reduced as a result, we were able to achieve a September exit rates of 81, 4% on utilization, which is an impressive operational achievement.
To put this exit rate into perspective. This is a 220 basis point improvement in utilization for the month versus 2021 and a 50 basis point improvement versus 2019.
Moving to fleet carrying costs.
We recorded growth depreciation per unit per month of $324 in the third quarter offset by net gains on sale of $137 net GPU for Q3 was $187, which was $22 more than the high end of the range we estimated on our.
Last call, primarily resulting from industry wide decline in residual values in August or September while we anticipated a reduction in used car prices in the second half of the year as Steven noted the decline was steeper than we expected the access and the Q3 depreciation expense over our guidance broadly.
Bounce to about $50 million or a reduction of $1 per vehicle across 50000 cars sold during the back half of the quarter.
Based on our recent review, we expect GPU in Q4 of 240 to $260, which will result in the full year <unk> of 110 to $130.
Back to continue to rotate out high mileage and fully depreciated vehicles to reduce the average age of our fleet.
Doing so will <unk> some of the unrealized gains in the fleet and manifest as an offset to gross depreciation.
We benefited in Q3 as a seller of cars and likewise benefited due to actions taken earlier in the year, which placed our fleet on the short side of demand we saw vehicles in the third quarter. Both at part of seasonal de fleeting and Thats part of proactive rotation discussed earlier and with the month over month declines.
And residual values, we were able to capture prices that were higher than they are today and looking forward. It's important to keep in mind that residual values are still up over 30% from 2019 levels.
We expect to continue managing our exposure to residuals in the following ways first.
We expect to keep the fleet tight so we are not long haul cars, while we have a standing preference for acquiring new vehicles to the extent, we need to if we vehicles to meet demand. We can do so at reduced cap costs through the used car market.
We continue to identify vehicles in our fleet with greatest exposure to falling residuals as well as older vehicles with more trapped equity and prioritize those for rotation the.
The equity cushion in our ABS facility remained at over $2 billion at the end of Q3, the equity cushion provides insulation from any potential need to inject equity collateral into the ABS.
We do not foresee a need to make any such contribution.
The stability of this question notwithstanding the accelerated decline in residuals was a product of our various factors.
First select the purchases of new vehicles in Q3 at below MSRP provided a fair value question almost immediately.
The selling of vehicles considered to have elevated exposure to falling residual values based on granular model and trim level data and third the presence of Evs are evs proved beneficial on a relative basis as our residual values were generally more resilient.
Turning now to our cost structure.
During the first two months of the quarter. The company ran with intentionally elevated operating costs to address out of service levels as Steven mentioned earlier.
As a result of these efforts by the end of the quarter out of service levels have decreased thereby increasing utilization going forward. We are focused on improving our cost base and we are closely monitored.
<unk> per transaction day, as a metric to evaluate our progress in.
In Q3, or <unk> <unk> per transaction day was about $35 within the quarter, we experienced month over month decline as Steven noted October is showing further improvement.
We have several initiatives in place to reduce overall.
Some of which we mentioned earlier around labor and telematics. Additionally.
Additionally, as the P&C business grows and as we increased the number of Evs and our fleet with the lower maintenance profile, we expect transaction economics to improve with lower cost.
Let me now turn to capital structure and liquidity.
Our balance sheet remains healthy and we ended the quarter with a leverage of <unk> seven times.
At September 30, our available liquidity was $2 6 billion.
Comprised of $1 billion in unrestricted cash and the balance available under the revolving credit facility.
During the quarter, we increased our rcs capacity by $55 million to.
To almost $2 billion, creating additional financial flexibility and enhancing our corporate liquidity.
We also increased the commitments under our variable funding notes by $65 million to over $3 9 billion.
Our balance sheet and ABS structure remains exceptionally well positioned for a change in residual environment.
Turning now to our cash flow and capital allocation for the quarter adjust.
Adjusted operating cash flow was $572 million for Q3, a 93% conversion from EBITDA non fleet Capex was $41 million for the quarter and Nestle Capex was $26 million, the resulting adjusted free cash flow was a strong $505 million.
A conversion of over 80% of EBITDA or.
Our capital priorities of investing in our fleet funding, our strategic initiatives and returning excess cash to shareholders remain unchanged.
During the quarter, we repurchased 27 million shares for $500 million.
Overall.
We allocated nearly $570 million towards capital investments and share repurchases during the quarter all funded from operating cash flow Lastly, let me touch on what we are expecting for Q4.
On demand as Stephen mentioned apart from seasonal expected adjustment, we've seen no lessening of volume through year end in fact in Q4, we would ordinarily observed about 15% seasonal volume reduction relative to our summer peak in Q3, given current trends we expect arc.
Q4 reduction and transaction days to be closer to 10%.
On fleet, we expect it to remain tight and largely consistent with our fleet size as we began the year, we will selectively add vehicles as demand warrants and we'll also continue the rotation of fleet.
Rotation enables us to harvest residual equity realized in the form of gains on sale, while simultaneously reduce the age of our fleet.
Our current fleet plan in Q4 will render the fleet younger by over two months in.
In the context of that rotation, we now expect net fleet capex for the year to be at or about the lower end of the previously discussed range of $750 million and $1 billion.
And our rates Q3 to Q4 typically reflects a seasonal softening of around 8% to 10% and we expect this year to follow historical patterns.
Our Q3 exit rates on utilization.
<unk> bookings positions us well for Q4 and will permit us to continue operating with the momentum experienced to date with that let's open the call for Q&A.
We will now open the line for questions. Please limit your questions to one question per speaker and one follow up if needed to ask a question. Please dial star one on your phone. Please hold while we compile the question.
Our.
First question comes from Chris where Ranke Deutsche Bank, Chris Your line is open.
Hey, good morning, guys. Thanks for taking the questions.
Good morning.
Stephen I think you mentioned in the prepared comments.
Distinction between factors that are driving used car pricing and factors that kind.
Kind of drive demand for <unk>.
Our railcars I mean could you maybe give us a little more color on the distinction between those those factors.
Sure sure. Thanks for the question so let's start with the used car side, so used car prices.
Are largely driven by supply factors, so as Oems produce more cars and increase the supply of those cars that tends to soften demand for used cars and therefore softens pricing.
At the moment.
The prospect of increased OEM volume, maybe more than the reality, but the prospect of it is influencing used car residuals.
And the reality is the demand for used cars false.
As the prospect of a new car becomes more affordable and available.
As an aside I would point out that rising interest rates also dampened demand for used cars and therefore, the residual price falls and Thats, obviously, the reality of the moment bye.
By contrast, the increased supply of new cars as a driver of used car pricing doesn't dampen demand for rental cars. The demand for our product is driven by a whole range of different factors for leisure travelers.
There are post COVID-19 travel patterns appetite for experience over hard assets corporate travelers are largely expressing demand is a function of commercial activity.
And the TNC drivers of the Rideshare are driven demand is driven largely by the profitability associated with renting a car as opposed to owning it. So it's a different set of factors, but <unk>.
Perhaps to answer the more important kind of component to your question.
New car supply will not put at risk the pricing of our product. Okay put aside demand we control the size of the fleet and the supply of cars that are available to rent and this runs obviously to the very core of the strategy that we articulated on the last call and executed this quarter I mean, it is true if you look at <unk>.
Three the industry historically lacked disciplined and.
Around fleet sizing and often found itself in a position, where we would size up fleet for a robust travel season demand would not materialize that would lead to lower <unk> and lower residuals.
Rental car companies defeated so you had a kind of a double effect lower RPT and lower residual that's not where we are running the business. Now in contrast, we now source cars and grow fleet to sit inside where we perceived demand to sit and because we control the supply of the cars, we can meet that demand and safeguard price.
And so I think.
That's really the differential if you will supply side versus demand side on the two sides. If you will.
The equation.
Yeah. Thanks, that's very helpful. Steve and then as a follow up I guess.
Could we maybe get a little bit more color on kind of the EV plan for for next year not looking for specific guidance, but all the moving parts in terms of how many you think you can.
<unk> next year, and what impact that's going to have on.
Depreciation and stuff like that.
Sure. So a couple of things one as you know we've targeted roughly a quarter of the fleet to be EV by the end of 2024 over.
Over the course of 2023, we will begin to take in.
GM electric vehicles, which will come in at very attractive price points and across a range of models.
On one hand, we will be a positive because it will give.
Our customers.
Our selection and a choice.
Enable us to operate any even higher margin in the context of renting those vehicles and obviously the dep rate will fall and go lower as we are buying cars at a lower cap cost and so I think the open of that valve. If you will the supply of evs to add to what we're doing around Tesla.
And Pollstar I think will be a positive both in terms of customer experience and in the overall economic picture around depreciation.
For our product set.
Hey, Chris It's Kelly So let me just add a little bit color to your last part of the question right. So first and foremost I'll say, we are excited that the <unk> are coming in as expected and is validating our long term view of the economics being accretive to the <unk>.
Ice vehicles and into our business.
In terms of the P&L impact itself on the revenue side.
We are seeing customers willing to pay a premium offer these rentals right now the RPT spread between the EV vehicle and ice is roughly $30 right. So again, 85% flow through down to EBITDA as Stephen mentioned, we are seeing NPS scores literally 10 points higher than the average ice vehicles right now for for Evs and the utilization we are <unk>.
Moving each and every single day.
As Stephen mentioned depreciation and in my prepared remarks, <unk> is a bit more resilient right now given the changing residual landscape and right now the depreciation as a percent of cap cost is between eight 5% and 1% as you may remember crest, usually used up around one five so it's about.
25% lower than ice vehicles. So right now all of the revenue sides. Appreciate you decided coming in some cases better than how we model that on the expense side, we are seeing maintenance costs being 50% less at ice vehicles right. So we're seeing some of the productivity as well on the <unk> side.
Okay, great very helpful. Thanks, guys.
Thank you please.
Please hold for our next question.
Our next question comes from Ian Zaffino with Oppenheimer. Ian Your line is open.
Alright, great. Thank you very much.
Quarter, good glad to hear all of the other strong commentary you guys are providing thank you for that.
I wanted to ask it.
Building on the last question as far as depreciation thank you for giving us the near term depreciation outlook.
But if we look longer term in the context of like fluctuate residual values also like the mix of the fleet going forward, how should we actually be thinking about.
On the depreciation on a longer term basis.
Thanks, and have a follow up.
Hey, Yes, Kenny pay for the question so no.
A few thoughts.
First I'd say, we don't think about depreciation in isolation, because frankly, that's not the way that Steve and I manage the business.
Managed by driving margin and ROI. So depreciation is just one input or said differently. It's just one knob on the dashboard right. So as Stephen IMAX the business revenue depreciation EBITDA margin all of that is directly linked and related and all of that has been considered when making fleet does.
Sessions. So let me give you. An example, as I just mentioned to Chris about Evs, yes on face value as of right now the EBIT depreciation is relatively higher than ice vehicle, obviously that may change as we diversify our fleet, but as of right now they are higher depreciation. If you just looked at that metric to be misleading because it <unk> right now has.
A higher RPT attachment has a lower maintenance cost profile. Therefore, it's accretive to our business and to our margins. So just to kind of wrap it up from my end.
While I cannot tell you exactly what depreciate depreciation rate is going to be because it's a function of what vehicles, we buy or keep which was informed by what revenue with demand. Hence margins. We expect to earn from those vehicles. What I can tell you is this right. If you bifurcate net depreciation you have growth in <unk>.
Over time, we expect gross and net to converge with the modest spread as we saw a significant numbers of vehicles through our retail channels, including Carvana, which as you know it's accretive to wholesale.
Okay, great. Thank you and then also I just wanted to go over in the fourth quarter, a little bit more.
Maybe from an RPT standpoint can you just remind us what the comps look like in any given any commentary for October .
But I do believe as we got into later in the year.
You probably have easier comps can you just remind us about what the cadence is for the quarter.
Yes, so for third quarter. So so let me backtrack a little bit so during during the last call our guidance with <unk> to be flat given that the dynamics as Steven mentioned, we saw a strong demand and strong pricing so quarter over quarter RPT was up 3%.
Year over year, it was up closer to 4% year over year.
Stephen mentioned.
Right now for October we are seeing that trend tick up even higher on a year over year basis.
I'd also just point out just as we look out at the fourth quarter I think the expense profile as we both indicated is going to change dramatically as I noted, we purposely incurred what I would describe as more onetime cost around elevated recalls and the like and that probably <unk>.
<unk> to kind of a $50 million to $60 million number in the context of what our run rate run rate was we've obviously brought that down. So we look now in October at Bowie per transaction day at being roughly 10% lower than where we were and equally that was.
In decline right sequentially month to month within the quarter just to sort of frame this out.
That cost probably is two points of EBITDA margin and if you think about the revenue that we brought in excluding that incremental 50 or $60 million of expenses, we were probably experiencing 70% contribution margin on the incremental revenue and the point to incurring that <unk>.
<unk> was really to bring 20000 cars at a monthly <unk> of $600 for the balance of the year So call. It four months.
That's a $130 million top line in exchange for the expense that we were incurring and so I just wanted to frame that as you think about to your question of looking forward to the fourth quarter. The pull through in the business is improving and will improve relative to where we were in a one time expense and currency.
So I just think it's important to understand that in the context of thinking about expense as it was in Q3, why we incurred on the exchange for incremental revenue and putting that fleet back into productive use and then equally are returned to a much more significant contribution margin on incremental.
Our revenue as we bring Bo per.
Per transaction day down.
That's great color. Thank you guys and congratulations on the quarter again.
Thank you thanks.
Please standby for our next question.
Yeah.
Yes.
Our next question comes from Ryan Brinkman with J P. M. Ryan Your line is open.
Hi, Thanks for taking my questions. It would be great to get your latest thoughts on the potential impact of hurts from the inflation reduction Act I think there are a number of unknowns still here, including or at least until the treasury issues. It's clarifying regs, whether the tax credits will be treated as a credit against tax owed or whether it might instead be treated as a rebate.
Reducing the price of the vehicle I listened with interest as the CEO of Ford last night expressed his view that the electric commercial vehicle tax credit was been underappreciated, because police fleets and local municipalities could take advantage of these credits of course local governments don't pay income taxes. So you seem to believe that the credits would essentially be treated.
Well listen it is certainly captured our attention and as much as it has yours right. So.
The details around this obviously it takes effect as of the first of the year and.
We will get treated as a corporate different than individuals. So let me just focus on the corporate side. So you are right to say there is a tax credit of up to $7500 per electric vehicle now there is some rulemaking to come so.
This is this is going to be determined extensively on the lesser of 30% of the vehicle price.
And the Delta between an electric vehicle and a comparable ice vehicle exactly the measure of comparability kind of not yet known okay.
<unk>.
In a positive vein because this legislation removed the preexisting cap.
Vehicle production cap of 200000 cars. It now renders Tesla and GM of particular note to us as being eligible right for this tax credits so important to sort of take stock of that there is some talk about recapture in the like at the end of the day.
This will be a credit that will offset corporate tax or corporate minimum tax. It has a carryforward life of about 20 years and so it will be of considerable value to us.
Exactly how you are meant to look at it as an offset to price and the like hard to know in the rule, making is hard to know, but this is a consequential.
Piece of legislation as it relates to the attractiveness of the economics around the vehicles themselves.
Okay, great. Thanks, and you address the decline in used car prices, which fell somewhat precipitous is also maybe not that surprising given how precipitously. They rose previously I wanted to check in on the other big driver of your higher than historical results, which is revenue per day, which has also risen a lot just to what extent.
Do you feel like the elevated trend in revenue per day.
It is likely that maybe holding better than used vehicles as they inevitably normalized lower I had Ken you mentioned that ancillary services.
We're a big if not the biggest driver of higher RPT I had imagined that may be the semiconductor chip shortage, resulting supply and demand imbalance for rental cars was the biggest driver along with just the general increase in consumer prices. It sounds like you think ancillary services could keep rising from here still benefiting RPT what is your outlook for the back.
Once a supply and demand for rental cars, we've been thinking maybe the supply of vehicles on the retail side on dealer lots that could normalize maybe by the end of 'twenty three years or so.
Only then with the automakers look to sell more aggressively to the rental fleet, suggesting that.
There could still be imbalance for rental cars well into 'twenty four with the implication of RPT could still be abnormally high then what are your thoughts along these lines and what do you think.
New normal of RPT might be once the dust settles from some of these unusual industry and macro factors sure well there's a lot in your question, let me try to address it and maybe I'll just start with the following which is a little bit of insight into the month of October okay. So, we're seeing plus 5% rate.
<unk>, 5% volume so both volume and rate transaction days in rate are showing continued strength in promise right in the context of where we are now.
As I talked about in the prior question.
Apply of new vehicles, or perhaps the prospect of the supply of new vehicles. I think was one of several contributing factors to a down draft in the residual price of used cars.
We foresee the supply of OEM production to sort of hit its stride much before 2024, so there will be new cars. This year, but not to the extent that I think is being contemplated as it relates sort of plays into the used car market. So we were a seller as we said in the management.
<unk> of our fleet earlier in the quarter the objective to try to capture the gain that was most at risk Okay, and we did that more on the front end than on the backend of the quarter to capture that gain the.
The decline in the residual value of used cars plays positively to us as and to the extent that we continue to look at the used car market as an area, where we can meet marginal demand beyond that which we in fleet in terms of new cars. So the fact that that pricing is coming down is a benefit we get in.
Two new used cars are good condition used cars at a lower price points than where we were okay. In the context of overall revenue and the strength. Obviously the primary factor is demand and demand is out there across leisure, it's across corporate and it's across the rideshare or Uber.
And Lyft driver, Okay on the leisure side as we pointed out very strong sort of Christmas holiday bookings from inbound travelers.
Seeing equally deferring travel patterns, among our leisure customers right, where people are extending business trips into leisure trips. So somebody goes for a meeting in a different city Tuesday through Thursday, They decided to work remotely on Friday. They are taking our car for Friday Saturday and Sunday, That's obviously a positive.
For us on the leisure side on the corporate side, we're seeing as I said very strong demand among large corporates and we're also seeing them look to put their employees in evs to satisfy their own ESG footprint, and then Uber and Lyft drivers are taking up in increasing numbers.
The available rental cars, because it's proving to be more profitable for them more profitable for Uber and quite profitable for us and so I'm just pointing out to you kind of a breath right of demand dynamics that are out there the strength of those dynamics and the fact that even through October we're seeing strength in rate and <unk>.
<unk> not falling off as.
As might otherwise be anticipated arrived Kenny you mentioned value added service in my prepared remarks that is true right. Now we are seeing record level of that RTD across my transaction days and I think thats fairly impressive given the fact that international inbound which is usually the biggest buyers of value added services has not fully returned.
As I mentioned at 45% of 2019 in terms of that segment and historically, that's not me its roughly call it 10% to 15% of my business. So thats not fully back yet. So I do think there is upside at imbalance comes into play I remember right, we are achieving and invest not by luck or accident. This is a structural improvement in our vast structure as I mentioned earlier.
And the year in terms of what you did to incentivize our employees with the right comp plans as well as we are embedding that into our digital apps as well I think the second thing I'll say, it's more general I think RPT is a good proxy, but as Steven mentioned in his prepared remarks, <unk> margins could be more relevant down the road. Let me give you an example, PNC make.
Carry a lower RPT by nature right than a rack leisure business. However, given the low touch time and the fact that the drivers have them with me at high utilization margin, maybe at a better metric in our Q4.
For us, which is what we track very closely.
I think a combination of lower expense lower cap Ross, Okay are all going to be drivers of our sustainable if not increasing margin right to sort of how we run our business over the longer term.
Very helpful. Thank you.
Sure.
Please hold for our next question.
Okay.
Our next question comes from John Healy with Northcoast Research John Your line is open.
Thanks for taking my question I wanted to pivot a little bit more to the balance sheet.
Obviously rising rates are going to have an impact on all sorts of financing businesses next year.
Is there a way county to kind of think about how much. The ABS market has changed on a year to date basis, and what that might suggest kind of your longer term fleet expand our fleet interest expense maybe over the next three to five years as those ABS maturities kind of role and what sort of headwind are we thinking about for next year kind of on a run.
Matt basis, if you could help us there.
Yeah, Hey, John Thanks for the question. So I think as I mentioned earlier, our balance sheet right. Now is extremely strong from all aspects liquidity leverage the cushion on the ABS like if you look at our balance sheet very very strong right now.
To your question, specifically around our debt profile, our debt stack right. If you take a step back the 70% to 75% of our debt is fixed. So we are largely insulated from any near term interest rate hikes.
If interest rate hikes.
The 1% for our business the annual impact on our floating debt will be roughly $30 million and let me remind you right now most of our ABS maturities is not so I'll call. It post 'twenty four 'twenty five right. So we are well ladder at this stage, especially with <unk>.
The term note.
Terms of the <unk> right there the floating part of the ABS, but roughly 30% would you have cast in place to limit exposure at the rates as well on the corporate debt side I think I mentioned on the last call we have no.
Debt maturities until 2026, so again, we are well later on that thought as well.
Great.
Stephen I wanted to ask a little bit about the <unk> development.
In terms of how youre thinking about technology usage across the enterprise.
Could you maybe help us talk about how that product positions us differently.
Maybe the <unk>.
Benefits in the skills gained with it and then just from an implementation in the cost side of things is there any kind of wildcards here.
As we should think about rollout into this year into next year. Thank you sure sure maybe I'll start at the last part of your question. So.
Part of the reason to partner as opposed to build up our own is that it's a much more cost efficient means of putting this type of technology and engineering talent to work, meaning we don't need to build and in fact with <unk> offers by way of a foundry platform enables us to avoid the cost of harm.
<unk> random aspects of data into a single point that can then produce output that guidance decisions. So as an example, and this goes to the first part of your question.
As we build our pricing tool, okay, a pricing tool can look at anomalous circumstances in a given market and it can help guide price up or down right to meet certain circumstances. It can read whether data. It can read airline cancellations. It can read sudden surge in hotel bookings all of that.
Can be rather disparate it comes together and kind of a coherent formed through Palin tier and then produces output to us that we can then action on an automated basis.
It takes the whole process of managing the fleet pricing the fleet et cetera to sort of a new level sort of more akin to what you know to be the case for airlines and otherwise and it elevates the level of sophistication for us that I think is very meaningful consequence, just in terms of not just how we run the business, but at what price point and with the <unk>.
Economics are of how we run the business.
On the operational side, it takes seemingly random and somewhat mundane sort of actions and makes them infinitely more efficient just take registration of new vehicles. It's a very cumbersome process. Okay. It requires that a registration comes in you identify the car often that car is.
Adam service right for a day or a week until that registration as a fixed they can help us sort of track cars and locations and meet delivery of registration put it on the car and like this.
This all sounds rather mundane but.
Over our fleet as large as ours days and weeks matter and that too will improve the operating efficiency and the return on the asset base that we have and so I think doing this in partnership.
Is a cost effective means of doing it it doesn't require we build and our time to market. So to speak on putting this technology in place is much faster right when partnering with someone like palin tier than it would be for us.
Great. Thank you guys.
Sure. Thanks, John .
Please standby for our next question.
Yes.
Our final question today comes from Adam Jonas with Morgan Stanley .
Adam Your line is open.
Yes.
Thanks, everybody.
Guys, it's very impressive what you are.
What you're executing here.
I just wanted to start by saying that.
Hello, Stephen we've heard Hertz.
<unk> approximately 17000 vehicles to enterprise.
At the end of September is an interesting move.
Going into this.
Out of the third quarter can you confirm this.
And what drove that decision.
Well I'm going to refrain from kind of confirming or denying kind of particular transactions suffice to say that.
Consistent with the fleet strategy that we have okay. You can't just look at aggregate fleet number into demand, which we do.
But in a market that express the kind of price volatility on residuals that we saw we needed to be really fast on our fleet our feet to look at the composition of the fleet itself, which is to say we look early on in the quarter at where embedded equity was highest and therefore most at risk.
In the context of a decline an expected decline in the residual value of used car prices.
And in doing that and in identifying that component of the fleet. We engaged in fleet rotation, where we sold high and had opportunity later to bring cars back in at lower prices.
Whether we sell those cars in the wholesale market retail to another rental car company or through Carvana. We're just simply looking to optimize the price that we get and and Thats, what we did and we did it through all channels that we could obviously pacing well north of what the wholesale market.
Would avail us so what we saw through Carvana and retail was plus five 6% with the wholesale market was and any other buyers that were there that wanted to offer premium pricing in the context of the way. We ran our business you can be assured that we looked and entertain those kinds of opportunities as well.
Thanks, David I appreciate I know, it's not the first time that you would have again, it not mentioning enterprise, specifically, but selling vehicles to a competitor.
But kind of feeding feeding a competitor that's known for reducing prices when they do have sufficient vehicles, which is something I'm sure. Your team has taken into consideration amongst the other channels.
Look I look out over the I look at it over the industry, Adam and I will say to you that.
Across enterprise and <unk>, the number of markets in which the various rental car companies were out of out of market okay, meaning.
They had rented all vehicles they had.
<unk> is a pretty important consideration in the context of how I think about.
What the pricing dynamics look like and there is stability at very elevated levels in part and part in part because of that and then each in each rental car company has its own <unk>, including some like enterprise, we have a very strong insurance replacement market different than what dominates our business and so.
You need to think about that in the context of competitive dynamics as well.
Thanks, just final follow up for me.
Would you take on debt to fund the buyback.
I mean <unk>.
Now.
I kind of like where our balance sheet is yes, do I think we have the capacity to take on modest incremental leverage I do.
I don't find this market to be particularly attractive and I'm certainly not with my back against the wall to do it given the ample liquidity that I have.
But depending upon what return profiles look like in terms of fleet and equally non fleet capex.
There is an opportunity to take on incremental leverage I wouldn't say, it's designated exclusively for the purpose of share repurchase, but theres modest leverage we could put on this business, but again, we're in the luxury of being in a position to be more judicious about the market in which we issued debt than just being compelled.
Issue.
Thanks, David.
Sure.
This concludes today's Q&A session I would now like to hand, the call over to Stephen Scherr, Chief Executive Officer. Please go ahead.
Thank you all for your participation today I am pleased with the progress, we're making on strategic and operational advancements and encouraged by how adaptable our business and management team and employee base has been and will continue to be to fluctuations in demand and in other circumstances in the industry and look forward to sharing further updates with you.
On our next call and until then stay safe and.
And operator, I'll turn it back to you.
This concludes the Hertz Global Holdings' third quarter 2022 earnings conference call. Thank you for your participation.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
Okay.
Yes.
Sure.