Q1 2023 Hertz Global Holdings Inc Earnings Call
A question and answer session I would like to remind you that this morning's call is being recorded by the company I would now like to turn the call over to your host Johan Rowlinson Vice President of Investor Relations. Please go ahead.
Good morning, everyone and thank you for joining us by now you should have all of our earnings press release and associated financial information. We've also provided slides to accompany our conference call, which can be accessed on our website.
I want to remind you that certain statements made on this call contain forward looking information.
Forward looking statements are not guarantee of performance and by their nature are subject to inherent uncertainties.
Speaker 2: and answer session. I would like to remind you that this morning's call is being recorded by the company. I would now like to turn the call over to your host, Johan Rollinson, Vice President Investor Relations. Please go ahead.
<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. Additional information concerning these statements is contained in our earnings press release and in the risk factors.
Forward looking statements section of our 2022 Form 10-K, and our first quarter 2023 Form 10-Q filed with the ACC. These documents are also available on the Investor Relations section of the Hertz website.
Speaker 3: We've also provided slides to accompany our conference call, which can be accessed on our website. I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not a guarantee of performance and by their nature are subject to inherent uncertainties.
Today, we will use it and non-GAAP financial measures, which are reconciled with GAAP numbers in our earnings press release available on our website.
Speaker 3: actual results made defer materially. Any forward looking information related on the school speaks only as of today's date and the company undertakes no obligation to update that information to reflect change circumstances. Additional information concerning these statements is contained in our earnings press release.
Believes that these non-GAAP measures provide additional information about our operations, allowing beta evaluation of our profitability and the performance unless otherwise noted our discussion today focuses on our global business.
Speaker 3: and in the risk factors and forward-looking statement section of our 2022 Form 10-K and our first quarter 2023 Form 10-Q filed with the SEC. These documents are also available on the investor relations section of the Hertz website.
On the call. This morning, we have Stephen Scherr, our Chief Executive Officer, and Alex Brooks, Our interim Chief Financial Officer, I will now turn the call over to Steven.
Thank you Johan and good morning, and thank you all for joining US on this first quarter earnings call I want to begin by welcoming Alex Brooks to the call as you know Alex has been our chief accounting officer for several years and has now assumed the role of interim CFO .
Speaker 3: Today we'll use certain non- GAAP financial measures which are reconciled with gap numbers in our earnings press release available on our website. We believe that these non- GAAP measures provide additional information about our operations, allowing better evaluation of our profitability and performance.
Alex is a proven leader and under her guidance our team orchestrated a seamless close of Q1 in the context of the CFO transition, we look forward to naming a permanent CFO upon completion of our review process.
Speaker 3: Unless otherwise noted, our discussion today focuses on our global business.
With that let me turn to our quarterly results <unk> posted strong results in the first quarter, reflecting continued growth in demand across our customer segments and a stable pricing environment in both the U S and abroad.
Speaker 3: On the call this morning we have Stephen Scher, our Chief Executive Officer, and Alex Brooks, our interim Chief Financial Officer. I'll now turn the call over to Stephen.
Speaker 4: Thank you, Johan. Good morning and thank you all for joining us on this first quarter earnings call. I want to begin by welcoming Alex Brooks to the call. As you know, Alex has been our chief accounting officer for several years and has now assumed the role of interim CFO . Alex is a proven leader and under her guidance, our team orchestrated a seamless close of Q1 in the context of the
We guided Q1 revenue came in at $2 billion on the back of strong volumes, thereby breaking with seasonal expectations of softer demand in Q1 relative to Q4 importantly, we remain optimistic about our expected performance in Q2, our momentum exiting the first quarter continued into April with.
High utilization and solid rates, both holding across customer channels and international markets as we close in on the second month of the quarter. We remain focused on aggressively calibrating the fleet driving down delivery cost and aligning price to demand. We are quick to move in markets, where strong advanced bookings Warren.
Speaker 4: and a stable pricing environment in both the U.S. and abroad. As we guided, Q1 revenue came in at $2 billion on the back of strong volumes, thereby breaking with seasonal expectations of softer demand in Q1 relative to Q4. Importantly, we remain optimistic about our expected performance in Q2.
Looking beyond the levers we can control our optimism is further bolstered by the positive demand indicators coming from the broader travel industry as we move into the critical summer season to.
To provide a bit more detail on our top line revenue of $2 billion in Q1 was up year over year.
Particular note transaction days in Q1 increased 10% year over year, while average fleet was up only 5%, reflecting improved utilization and continued focus on ROA.
Higher churn on our fleet is reflected in the Q1 revenue per unit or our view of $1409 a meaningful improvement over the prior year on.
On a sequential basis the strength in transaction days was all the more impressive given the burden of elevated manufacturing recalls in the quarter, which have now largely been resolved coming.
Coming off historically high pricing across 2022, right in Q1 was flat year over year, reflecting relative stability as well as the impact of growth in rideshare and corporate travel on the calculation of our PD as both exhibit lower RPT than leisure.
While pricing was softer sequentially in Q1 right in March as we exited the quarter was up versus the whole of Q4.
As I mentioned, our momentum coming out of the quarter bodes well for Q2 performance of note nearly 40% of transaction volume in the quarter was generated in March we exited Q1 with March <unk>, well above January pricing and March <unk> materially higher than January .
With Q2 now underway, we remain disciplined around fleet and see rates sustaining particularly in certain high demand markets.
Further to our results for Hertz produced adjusted corporate EBITDA of $237 million, reflecting a 12% margin adjusted corporate EBITDA also reflected lower than expected depreciation and a positive contribution of steps taken to monetize interest rate caps associated with our ABS facility.
Depreciation in Q1 came in lower than anticipated at $381 million or $252 per unit per month, primarily related to an uptick in pricing on used vehicles and to a lesser extend fleet mix and optimization, we expect our work relative to the dollar and thrifty brands as.
Well as our rideshare channel to give rise to longer expected length of keep on portions of our fleet.
On expenses our per transaction day was up very modestly on a sequential basis versus our expectation of flat due primarily to elevated collision expenses and to a lesser degree recall related maintenance in the quarter keep in mind that even though the Oems bear the direct cost of completing a recall related repair.
Recalls burden our operations by increasing expense and reducing transaction days as we noted in our Q4 call. We remain confident that we will reduce our unit expenses through the rest of 2023.
Finally regarding the interest rate caps adjusted corporate EBITDA in the quarter included an $88 million positive contribution from the monetization of interest rate caps associated with our ABS facility.
In managing our liquidity and rate risk, we brought forward interest savings attributable to the caps expected over the next four quarters into EBITDA in Q1.
Given the move in rates since the inception of the caps in 2021, we saw opportunity to monetize the embedded value of those recaps and realize the cash for reinvestment in our operations.
Given where rates have moved since transacting the monetize value exceeds the additional expected fleet interest over the relevant period by more than $15 million as such we expect this will be a net benefit to full year EBITDA in 2023.
Let me turn now to free cash flow and capital allocation in Q1 based on investments in both fleet and non fleet Capex, we experienced an adjusted free cash outflow of $83 million as you know investment in fleet is more heavily weighted to the first half of the year as we position ourselves to meet expected demand.
And over the summer months.
To that end, we expect returns on our fleet investment to be attractive and free cash flow generation to turn meaningfully positive in Q3, and Q4 that said, we remain committed to our strategy of growing fleet to fit inside expected demand and underwriting investment decisions through the lens of returns over the prescribed.
Period of car ownership.
Measuring return on asset is not limited to fleet and includes other company assets, including our real estate portfolio to that end in Q1, we sold a large parcel of real estate adjacent to La <unk> and produced net cash proceeds of $139 million.
Sales should be understood in the context of the ROA mindset, taking hold across the company. Our team is increasingly focused on undertaking a continuous review of assets to ensure they are accretive contribution to the overall return profile of our business with an eye toward creating opportunity to buffer cash consumption, where it makes the.
T J <unk> to do so.
Reflecting on our performance in Q1, let me speak to two trends as they relate to the opportunity that sits in front of US first on the macro environment as we move into Q2. The travel industry is positioning itself for a strong summer. We are doing the same already we have experienced seasonal acceleration with a strong spring break and.
Easter week, bringing us forward to memorial day, and we have some good demand indicators with respect to summer.
Airlines and hotels are both forecasting robust demand and have reported strength in advanced summer bookings in their earnings calls for Hertz. There is a particular opportunity around international inbound travel, which has been a significant component of rental revenue. It remains only 60% back to pre pandemic levels.
Through Q1.
Recall that this customer segment traditionally demonstrates higher margin on elevated our PD international inbound business from Latin America is pacing strong European travel, which is much improved from the troughs of the pandemic continues to build it is not yet back to pre pandemic levels, creating opportunity.
And perhaps most significantly Asian inbound business is only beginning to show improvement with Covid rules relaxed, we believe inbound travel from Japan Korea, and eventually China will yield positive returns for our business.
Second on continued strength in used car prices the team's focus in 2022 to monetize and redeploy excess equity in our fleet is again relevant as residual values rose through Q1. This trend means that we are again presented with the opportunity to harvest gains on the rotation of our fleet.
To subsidize growth and acquisition of course, there is no certainty of this trend continuing and it may yet reverse but this early price action was better than forecasted despite uncertainty in the economy and higher interest rates, which may indicate a fundamentally stronger supply demand balance in the core markets.
With that let me turn to our strategic priorities with a focus on execution first on electrification.
At the end of Q1, we had about 50000 electric vehicles in our fleet comprising approximately 10% of total cars, we have begun taking delivery of GM and other OEM evs.
Thereby providing more options for our customers to experience EV models at various price points are.
Our fleet acquisition costs are generally align with vehicle delivery timing as a result, we have been benefiting from recent price declines from EV Oems. We are forecasting nearly 2 million EV rentals in 2023, approximately five times the number of the prior year.
In terms of charging our proprietary network charging stations continues to grow so as to service our fleet.
Through our partnership with BP pulse, we are accelerating the build out of EV charging infrastructure at Hertz locations in major U S cities.
Both our customers and the driving public.
In addition through our public private partnership for its Electrifies, we've signed up Denver, Houston, and Atlanta and other cities are in process, all with the objective of increasing even utilization and the targeted build out of charging stations to serve the public and importantly, our rideshare and other customers across metropolitan areas.
Next on rideshare rental volumes to rideshare drivers for both ice vehicles and Evs continues to grow transaction days in fleet associated with these rentals for Q1 doubled year over year with notable increase in pricing.
To promote further growth in this business, we are working to optimize the rental process for these drivers by offering remote renewals and streamline payment processing all to ensure ease of rent longer length of keep lower cost to serve and reduce churn among drivers.
Rideshare drivers renting an EV from Hertz can increase their take home economics by 10% to 15% relative to a nice rental operationally I would observe that our growing rideshare business is creating greater volume and the potential to buffer the modulation of quarterly peak to trough typically experienced in the leisure business.
As I noted on our prior call we have begun a project to revitalize our value brands dollar and thrifty and to do so on a cost basis that provides an attractive margin for hertz.
In a departure from the past, we intend to engage customers on a lower cost digital basis with a dedicated fleet of lower depreciating cars and on an overall cost infrastructure that produces elevated margins in that context, we've begun to co develop a digital forward customer experience, including direct channel Digi.
The property is designed to provide customers with a touchless experience at an affordable value point, we are looking to an early launch of the project in the summer with early select operations at a limited number of airport locations as we own the operations more generally.
Finally on Europe in the second half of 2022, and now entering 'twenty three we reset the priorities of our European operations, which are now under new leadership as a reminder, in 2022, our European business produced record revenue and adjusted EBITDA in our performance in Q1 is also up significantly versus a year.
Year ago in terms of our strategic priorities, we are increasing our EV penetration, we extended our Uber partnership to Europe , and we have taken steps to rightsize, our expense base and improve our operational cadence in each of our European markets with changes in motion, we anticipate considerable growth from here.
As these initiatives continue to mature over the course of 2023, we will be in a position later in the year to share a more specific view on our expectations for their financial contribution to the company.
Before turning the call to Alex It is important that we acknowledge the uncertainty in the market and the view that near term strength in consumer demand may be unsustainable and a weakening economy. What we are prepared to meet the opportunity of a strong summer we are equally positioned defensively to manage against a weaker set of <unk>.
<unk> conditions are.
Our fleet plan is dynamic and can be right sized to sit inside wherever the demand curve moves we can alter fleet quickly and without repercussion. What's more we are not positioned long cars right now as our utilization is running high.
So our actions in a slowdown would focus on reducing buys more than accelerating sales.
We will not chase unprofitable volume, we're running hurts differently and believe the industry is transforming as well challenging times should they arise we'll evidenced this and underscore the importance of agile fleet management as the cornerstone of running the business better than before.
With that let me turn the call to Alex to provide you added detail on our quarterly financial performance Alex over to you. Thank you Steven and good morning, everyone. The Harris team delivered another quarter of progress following our record fiscal 2020 tail solid rate continued strength in leisure demand and growth in corporate and international inbound.
And behind with our dynamic fleet strategy contributed to year on year growth in revenue in both the Americas and international segments.
Fortunately topline momentum continued into the start of Q2 with bookings over the Easter holiday period up year over year. In fact April has seen several days of post pandemic records in terms of the number of vehicles on match.
Revenue in Q1, with 2 billion up 13% versus Q1 2022 at reported transaction days were up 10% year over year, while pricing remained firm over the course of the quarter either lengthen improved from 72% in January to 81% in March and has continued to show momentum early into Q2.
We believe that the post pandemic recovery in the Americas is substantially complete for domestic leisure and corporate and international inbound have progressed to 80% and 60% of 2019 levels respectively.
Recovery in the international segment, which has lagged the Americas continues to build momentum and we expect further growth from here as Steven noted earlier.
To break this opportunity down further and our international segment leisure and inbound business, 50% of 2019 level, while corporate is at 75% of 2019 level.
Adjusted corporate EBITDA with $237 million for Q1, 2023 at 12% margin margin in the Americas business in Q1, which is typically lower than the balance of the year with 15% for.
International adjusted EBITDA, nearly doubled year over year and produced a 17% margin for the quarter.
On a year over year comparison Q1, EBITDA production reflects the more normalized level of gains on sale of vehicles relative to the prior year period, which carried very elevated gains on sales.
Business Scott.
With regards to fleet average fleet size grew to 505000 vehicles in the quarter as we begin to gear up for the expected spring and summer demand.
Faced with the intention of maintaining fleet inside the demand curve.
Net GPU for the quarter with $252, which was below the low end of the range. We quoted on our last earnings call. A $300 differential was primarily primarily driven by residual values, which demonstrated a consistent uptick throughout the quarter, although still lower than their peak in 2022.
Now, let me turn to our operating costs.
<unk> per transaction day in Q1 with $36 I should note that in the current quarter, we changed our presentation for damage recoveries to be reflected in revenue rather than an offset to the OE.
The change to revenue and AOI was immaterial and resulted in a two dollar impact to both RPT and Coa per transaction day with no impact to our earnings or cash flow.
Let me now turn to our capital structure and liquidity.
With respect to our balance sheet net debt at the end of the quarter with $2 1 billion.
Our net corporate leverage for Q1 was one one times comfortably below our target of one five times.
At March 31, our available liquidity with $2 2 billion, including $700 million of unrestricted cash in March we increased the aggregate committed amount under our revolving credit facility from $1 9 billion to $2 billion on our corporate debt there are no meaningful maturities until 2026.
With respect to the ABS facility, we issued $760 million of medium term notes under the Hbf three ABS facility in March at our combined fixed rate of about 6%.
At March 31, we had capacity under our ABS of $3 7 billion in the U S and $1 $8 billion internationally.
Our vehicle debt portfolio remains approximately 75% fixed rate, which mitigates the impact of a rising rate environment and our maturity ladder is well structured materially commencing mid 2024.
We maintain sufficient equity cushion and ABS at quarter end.
Turning to our cash flow and capital allocation for the quarter.
Adjusted operating cash flow with $104 million in the first quarter fleet Capex in Q1 was $317 million and non fleet capex with an inflow of $130 million impacted by the sale of the property adjacent to La <unk> discussed earlier.
Adjusted free cash flow was an outflow of $83 million as we noted our cash flows tend to follow a pattern that aligns with our seasonal in fleeting and de fleeting, we're continuing to fleet up for peak demand, which translates into additional fleet investments in Q2, and the back half of the year as we achieve peak earnings and fleet down.
After the summer surge, we expect to generate the majority of our annual free cash flows.
Our capital priorities of investing in our fleet funding, our strategic initiatives and returning excess cash to shareholders remains unchanged. Despite the cadence of our free cash flow, which reflected our investment in fleet and non fleet projects.
Q1, 2023, we the like the $100 million to repurchase five 7 million shares currently we have approximately $1 billion remaining under the board authorization for share repurchases.
Lastly, let me give some color around our forward looking expectation.
Q2 revenue, we're expecting sequential growth approaching 20% on strong seasonal demand that is consistent with prior years on a global fleet, we expect levels to increase from the end of Q1 by approximately 15% into the summer peak. We then expect a corresponding reduction in fleet in the second half of the year at all.
Always this remains subject to demand materializing as planned with considerable flexibility in the fleet plan to accommodate.
On depreciation reset residual value strength, notwithstanding we expect net GPU to settle in the range of $260 to $280 in Q2 with depreciation trending higher longer term.
Finally, our fleet interest in our cap rate monetization, we expect quarterly fleet interest expense to approximate to approximate $100 million in Q2 and will come down with fleet size and the rate curve in subsequent quarters, we expected net cash benefit to the company through year end inclusive of the upfront monetization proceeds.
In closing as we head into the spring and summer months I am pleased with our momentum as we enter Q2 rate and demand continues to hold across the whole of our business and utilization is improving transactional activity related to international inbound is also accelerating our dynamic fleet strategy and focus.
Maximizing returns to the lifecycle of a vehicle are working well for our business as is the extended scrutiny on the ROA hurdles for non fleet assets.
We expect further improvement in our operating leverage as we continue our focus on productivity and a lean cost structure with that let's open the call for Q&A.
We will now open the lines 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 telephone if you wish to cancel your question. Please.
Press Star one again, one moment for our first question.
Our first question comes from the line of Chris <unk> with Deutsche Bank. Your line is open. Please go ahead.
Great. Thanks.
Stephen So thanks for all the comments so far in <unk>.
I think you spoke of a stable pricing environment I guess can you maybe talk a little bit about the underpinnings of that and also along those same lines I guess.
Kind of laid out for us what you might do in a downturn.
Give us a sense for what you are.
What your view is on prospects for the balance of 2023.
Sure. Thanks, Chris I appreciate that so maybe I start with pricing on.
On pricing, we're obviously well north of where the pricing regime was pre pandemic sort of going back to 2019, but.
More relevance to this quarter in this environment in the U S. We've seen very stable pricing pricing has been holding particularly in the U S market.
And we have seen a pickup in pricing dynamics, particularly in the European market, So very attractive.
Rates coming in and higher utilization, that's driving that business.
If you look at.
What we spoke about in terms of increasing sequential month over month performance in the quarter.
Looking at <unk>, because it shows both where rate is going in what's happening with utilization. We saw a 15% increase from January into March meaning March was 15% higher than where we were in January and again, that's on the back of utilization running kind of just north of about 80%.
So we're seeing strength in leisure.
Strength in corporate where renewals continue and often at higher negotiated price and I spoke about PNC kind of doubling in volume, but we're also seeing rate increase there and so.
Cross those three elements if you will.
Strength is there so what's driving all of this I mean, I would say that.
Well there are more cars.
Saleable across the industry. This year relative to last we're certainly not back to sort of more elevated levels and so I think there is a supply demand sort of calculus thats playing there Hugh.
Here about.
Demand and volumes across airlines and hotels, obviously that plays in feeds into what we experience and so demand is there against what I would describe as they still kind of more limited supply.
Cars themselves.
I would just also reflect maybe with a little more specificity that two things one we're seeing cities, which are now coming out of season. So think about south Florida think about a city like Phoenix and we're not seeing softness commensurate with what you would expect as those cities become off six.
And as what we have seen before and so that's encouraging I would also say that the comments I made about inbound travel will speak well both to rate.
And support rate, particularly Asian, inbound coming into the markets like Hawaii, and the West coast of the United States.
And I would also just finally say that.
We have been able to see price leadership or demonstrate price leadership and are following in and around markets that have shown higher advanced bookings and so we've been taking advantage of that kind of in an appropriate way. So that's sort of what's framing out around the underpinnings of price.
<unk>.
Sort of on the forward.
I would say that I am speaking as I did in the remarks, the kind of two things that are playing out. Okay. One is I feel very good about our ability to sort of take advantage of an opportunity. This summer to really take the hill so to speak which is demand indicators are strong we're in a position both with <unk>.
And otherwise to sort of seize that opportunity.
And the second is while the summer is in front of us in all demand indicators are strong and there is no sensibility of the consumer turning.
As I said in my remarks, as a risk manager and running this business differently through a risk prism I am and we are set up in the event that a view that is in the market should materialize and we see softness and if we do the biggest lever that we will play with is fleet.
And we would adjust fleet based on where those demands are so on one hand ready to take the opportunity of the summer and seeing no abatement, but not blind to the proposition that there could be softness and sort of positioned well to do it.
So my view on the year I would say.
We're not minded to give guidance, but I would just give you directionally that.
I'm confident.
By virtue of the exit velocity by which we're leaving the first quarter. So again month over month better within the first quarter and April print, playing stronger and we're seeing that in rates stability elevated demand and a favorable depreciation outcome by virtue of where residual prices are on cars.
So I think that's important.
Second I would say our confidence is bolstered a bit in the context of <unk>.
The rideshare business developments in Europe , and our efforts around dollar Thrifty, which I think will show some signs later in the year of being accretive to the outcome for the year, but most of those will inevitably be more manifest in 2024.
And so again, not giving guidance, but I know I know of estimates in the market place for the year later in the one two to $1 3 billion zoned for EBITDA for 2023, and sitting here, obviously, having experienced one quarter with a view into one month in the second quarter I would say those estimates are.
Lower than the distribution of outcomes that I think about right for the business for this year.
And I'm, even more optimistic about the projects that we're working on delivering in 2024 from there and so.
That's how I would frame both price on the first part of your question in kind of a general outlook for the balance of the year.
Great. Thanks, Thanks, Steven.
Super helpful very comprehensive.
As a follow up you've talked about Evs and you're I think you're getting a pricing that you hoped for and then some on the rentals, including the rideshare piece of that.
We're also now seeing.
Pricing come down on the purchase side of Evs does that make you want to lean harder into that and try to go above your you've talked about that 25%.
By the end of next year do you want to do you want to accelerate or go further on that.
Well I would say the demand and the pricing dynamics are there, which would leave me to answer your question, yes, but equally need to be mindful of just the practical implications and limitations of growing. We're currently at about 10% of our fleet EV. Our ambition is to get to 25% by the end of next.
At year, that's a big move and it has sort of collateral sort of challenges in that we need to make sure that charging both on our airport locations and elsewhere is developing and I'm quite confident that we are seeing that sort of develop as I spoke about in the remarks.
I think that the drop in price on each of these is an encouraging proposition for us in that.
If 10% moving to 25% and I will get higher from there obviously are happier and a better buyer at a lower price point than not.
I'm equally pleased that the prospect that well.
While I continue to buy Tesla and Pollstar I'll now taking delivery of the GM, Evs, which will be at various price points and offer our customers greater choice and I think diversification from a risk point of view is inherently a good thing.
So the drop in prices good we benefit from that price drop as and when we buy these vehicles, there's a lot more to buy.
Im excited about where rate dynamics are both in P&C and leisure.
Adoption will sort of continue to take hold and I.
I would say that in the case of Uber and Lyft and other rideshare.
You read about.
Requirements that are on the come in a variety of cities across the country that will require that those networks be all electric by some date in the not too distant future. This is five or seven years from now and I would say to you that I think hertz and our EV fleet is the most affordable entry point for drivers to get.
Into those electric vehicles and use them the driver benefits the company benefits by meeting the requirements that the cities are putting in place and needless to say I'm happy.
We get more of these visa <unk> on rent at attractive rates, but maybe most importantly at attractive margins in terms of what we see happening.
Great.
So much Stephen.
Great. Thanks, Chris.
And one moment for our next question.
Our next question comes from the line of Ian Zaffino with Oppenheimer. Your line is open. Please go ahead.
Alright, Thank you very much.
Can you guys just talk a little bit about.
You are seeing on the competitive environment.
As far as larger players smaller players.
And if you look at again I know you talked about.
Upon a downturn, but or what you would do in a downturn, but but but what do you think about how the competitors would react based on from what Youre seeing now and then maybe what you know about them from the past. Thanks.
Sure.
So to be clear we are.
We're not seeing indicators.
Indicators as we sit here today coming out of Q1 or into Q2 of.
Of a downturn, but as I noted in my remarks, I think it's incumbent upon the company and as a point of departure from the way in which we and the industry was managed in the past just sort of think about and contemplate and set yourself up and for US fleet as the lever to sort of play to the extent that the market changes.
Look it's hard for me to know with precision what others are doing but I can tell you that.
I watch behavior as it as it relates to rate and it's been stable across the board.
It's worth noting that the supply of cars has been constrained and more limiting for all players in the industry not just any one player.
And that presents sort of a practical governor on any one company has ability to sort of be aggressive to the low side on price, meaning in any given market. If somebody was to take price down there is a limited number of cars available through which that would happen and so it would have a more limited impact to the.
Broader market and I think that what.
As I commented before that there are more cars now than there were a year ago, we're nowhere near back to the availability of cars, new or used by the way.
And I think that will have.
A dampening effect on the ability of any one player to sort of play an outsized role or a destructive role in price and I personally think that carries through the end of 'twenty three and into 'twenty. Four it is important to remember I mean, you all know and follow the numbers of the Oems in terms of new car production.
But bear in mind that the used car market is itself being depleted because there are no off lease cars that are coming into the U S entity into the used market, meaning cars were not in production in the depths of Covid at the end of 'twenty and the beginning of 'twenty, one and that is spilling over because.
There are no off lease cars or fewer of them that are coming in so that we'll have again, a more depressive effect on the availability of cars and I think that ultimately is going to be the governor and so.
On the part of your question about larger versus smaller I would say my comments applied to all but but the relevant parties theyre going to be larger competitors, because I think that smaller competitors are have less relevance in the market or may be relevant to a particular market, but not all.
And I think equally.
Those of us that are.
Our global and have opportunity for one way rental and and alike.
You looked at what happened during the Christmas season around travel we were in Hertz was in a position like other large rental companies, but unlike the smaller ones to be responsive to the needs of customers in that level of service I think is important and sets us apart from some of the smaller niche players that are there.
Okay. Thanks, and then.
Alex.
Just kind of a continent numbers.
Very quickly, but maybe can you talk about number one.
And so maybe EBITDA as we think about second third and fourth quarters.
It looks like you can kind of imputing, a pretty big back half of the year.
And then also maybe talk about the recognition and timing of the interest rate cap San please.
And that's it thanks.
Yes, sure Ian absolutely, so, yes, youre absolutely right in observing the cadence of EBITDA. So Q1 is typically a lower earnings quarter for us so.
January and February we start the year off and then we start to build up over spring break and entering into spring and summer our summer peak in the.
June July and August timeframe as when we get most of our earnings. So as we know that we are expecting an increase in volume between Q1 to Q2 to the tune of about 20% sell and Thats pretty consistent with what we've experienced over the longer term in terms of prior year.
Your year metrics.
And that debt EBITDA cadence is also going to be the cadence with which the outlet there are cash flow.
Again typical and fleeting early in the year and in Q1 and during the first part of Q2 and then the fleet will remain at those elevated levels through the summer peak and then in Q4 with de fleeting.
We will have positive cash flow.
Moving to your second question then as it relates to the interest rate cap sale. So as we noted the adjusted corporate EBITDA in the quarter included an $88 million positive contribution from the monetization of the interest rate cap.
And this is related to the floating portion of our ABS <unk>. So.
As Youll remember, 75% of the ABS facility is fixed rate and 25% is floating. So this is really related to that 25% of the debt that's floating by selling the cap. We essentially brought forward the interest savings that we expected to realize in Q2 through Q4 this year.
<unk> into Q1.
And the gain we realized is more than the additional fleet interest that we expect to incur over the remainder of the year to the tune of more than $15 million that we brought cash into Q1, and we can reinvest that into the business.
Early in the year.
So all around a great transaction.
Okay. Thank you very much.
Thank you and one moment for our next question.
Our next question comes from the line of John Healy with Northcoast Research. Your line is open. Please go ahead.
Great. Thanks for taking my question just wanted to ask a clarification. The clarification question on RPT could you just dive into a little bit.
Owning change that I think you guys said that lifted our <unk> by about two box and just thinking about the expectations for Q2, I think you said revenue is up 20% on a sequential basis, an analysis of data set 20% transaction growth.
The previous question, so does that imply that pricing.
In terms of RPT is flat in Q2 year over year and is there an RPG benefit just from this accounting change as we flow through the next couple of quarters. So theoretically I was just hoping to kind of get an apples to apples comparison there.
Yes, sure John So let me dive into it so we changed our presentation as it relates to cash recoveries that comes from customers.
Damage to vehicles, so because it's a cash collection to from a customer we thought it was better represented in the revenue line versus as an offset to <unk>, which where it was previously presented its an immaterial change and it's neutral to EBITDA and it's cash neutral.
In terms of in terms of its effect I would think of it as $2 to both our PD and to do so and increase the RPT by $2 and an increase by.
By about $2 gets from changing the geography on the income statement.
Makes sense and.
And then Steven I was hoping you could dive in a little bit more on the dollar thrifty kind of reboot.
Curious there in terms of how you think you'll reach that customer with that reboot and.
Will you continue to be on some of the online travel sites with with those brands and then secondly does the reboot of those brands in your mind bring elevated risk to competition and maybe what might happen at the low end of that pricing structure.
Sure will.
Obviously, we took dollar thrifty at a moment in the industry several years ago, when there was broad consolidation and.
I don't think we did a particularly good job at integrating them because I think that.
There was.
Kind of a blurring of fleet across all of this and there wasn't kind of regimen to cost in the way in which it ought to and so the revitalization of these brands.
We'll put us in a position where we can have a more dedicated fleet of lowered depreciating cars.
We can be defensive about the brand value of Hertz being our high end brand with service and loyalty and the like that are not necessarily elements of the product and dollar thrifty that the customer is looking for.
Unquestionably, we will continue to play through the Otas, but I think we'll have a more active direct channel.
With digital properties that are dedicated to dollar and thrifty and the process itself will be more digitally delivered including around vast products. So this will be lower cost lower human touch point.
Experimenting with kiosks and other things and we're not offering that side of the customer base choice. So you will get kind of a dedicated spot to which will go that'll be your car you move and our ability to offer that out to our customers at a lower price point relative to hurts, but at a very attractive margin based on where the call.
The inputs it I think will prove to be an interesting proposition and I would say to you that this is an enormous and growing addressable market and one that I didnt feel confident that we were tapping into and I think the ability to get out of this with a refresh so the digital approach again.
At a proper margin level and managed appropriately with cost allocation and so forth I think will lead us to kind of an interesting opportunity set and again all the while kind of re basing the value of the Hertz brand, where I think it belongs as being at the upper end.
I'd also point out that I think building identity around dollar thrifty will be important in that it will open up other partnership channels that I don't think have been available to us. So.
There's obvious demand for partnership.
Based on customer segmentation with Hertz, but I would say to you that there are other brands lower cost mass market retail travel and other brands, where our partnership with Hertz didn't quite fit but a partnership with dollar thrifty will be more in keeping of that particular brand and I think the ability to drive.
Volume through that not necessarily with price or leading with price. If you will I think is another encouraging or sort of motivating element to sort of why we're going down this path.
Great. Thank you so much.
Yes sure.
Thank you and one moment for our next question.
And our next question comes from the line of Adam Jonas with Morgan Stanley . Your line is open. Please go ahead.
Hi, This is Diego, Ontario lie on behalf of Adam Jonas.
Quick one again on the interest rate caps, you already talked to them a little bit, but I still wanted to touch on the $88 million.
Should we expect similar monetization in the upcoming quarters or expect to have additional hedge gains. This year and then as a follow up to that what should be our assumption for go forward interest rates. It makes sense. Thank you.
Ladies and gentlemen, one moment, we're experiencing technical difficulties our conference will begin will resume momentarily.
Joe.
Johan you guys can continue Adam can you. Please restate your question Sir.
Hey, Steve.
Steven.
I apologize we had a pause.
Some reason align drop so we're back with you now thank you for your patience.
So this is gigawatts I rely on behalf of Adam.
I just had a quick one again on the interest rate caps already touched on it briefly but I wanted to see whether we should expect similar monetization in the upcoming quarters or expect to have additional hedge gains. This year and then what should be kind of like are or will be euro assumption for the go forward interest rate expense. Thank you.
Sure so so.
We monetize the rate caps that we have put on in 2021 and because we're obligated in the ABS to have them, we replace those rate caps the maturity of the existing ones were through the end of the second quarter of next year.
I don't foresee any expectation that there would be other monetization as we exhausted the rate caps that were present and put new ones in.
The overall interest rate expense should probably go up to about $100 million, which is about $25 million more per quarter and that will decline. So it will be the highest in Q2 and then decline from there.
Comment that Alex made earlier is that in the monetization of the rate cap. The EBITDA. If you will that we took in the first quarter.
Given where rates have moved since we did this monetization.
Would put us in a position, where we expect EBITDA to be more than $15 million greater than the incremental cost of the interest expense in the ensuing three quarters of the year.
So.
I wouldn't expect any further monetization I would expect net gain in EBITDA occasion by this and this was really advancing those three quarters into the first quarter, just given where market dynamics work.
Great. Thank you.
Sure.
Thank you and one moment for our next question.
And our next question comes from the line of Christopher <unk> with <unk>.
Your line is open. Please go ahead.
Good morning, everyone. Thanks for taking my questions.
So there is some concern.
From investors around the airlines.
With respect to U S domestic travel.
Slowing not.
Not by much but there is some data out there that would support that and also.
With blended travel.
Skewing seasonality, just making it more difficult.
For R&D teams and our like the plan going forward. So if we look at the airline schedules here domestic capacity through the second quarter trends are fairly mixed. So I was wondering I know you spoke to a very healthy overall demand outlook into this summer, but if you could give a little bit more of a nuanced view with respect to domestic bookings into the summer and then also.
Youre seeing.
Blended travel.
Phenomenon, if you will persist.
How is that is that making it a little bit more challenging.
To kind of tease out where core demand might be for you. Thank you.
Sure. Thanks for the question so.
Let me address the last one first which is on blended travel.
We continue to see blended travel I E. The blend of both business and leisure playing forward.
We see it play forward in the context of corporate customers that are asking us about split billing knowing that and employee maybe on a trip and the trip maybe one part business in one part leisure.
I think that's a net benefit for us and we will continue to be I say that because.
You have.
<unk> that travels from New York to Los Angeles for meetings on a Wednesday and Thursday.
That person in all likelihood pre pandemic would fly back Thursday night. The fact that they are staying with the latitude to work Friday remotely in law and My example, and then spend the weekend at three days to the rental I suspect the hotel chains are benefiting from that as well, whereas the airline has a round trip no matter.
The date on which it plays so for us.
The blended travel is a positive and I see no particular reason for it to sort of fall off on.
On the question that you raised about the forward for airlines domestic travel and the like.
Look I think thats, a reference marker for us it has been.
<unk> positive it therefore bodes well in the context of what we think forward performance would be but airlines alone are not the basis on which our customers come to us. It is true that they come to us at airports and the like but I think.
Quite honestly to the extent that domestic capacity, particularly around shortfall becomes gear the option to use a rental car and take your vacation or take your business trip within reasonable driving distance becomes a reality so in a certain way I would say that we would benefit from limited capacity on short haul.
<unk> as an alternative means of travel.
General proposition of whether there will be a downturn.
Comments I made in the script I think hold as it relates to your question, which is we don't see evidence of that happening it's not on the horizon, we are admittedly a more <unk>.
Short booking cycle relative to airlines or hotels.
But I would tell you that.
I find us to be in a good solid defensive position should that materialize in part because we have an asset base that can move meaning I can move it from one market to another I can sell it if it's not sort of yielding the kind of returns I want it's different than airlines, which need to park planes in the <unk>.
Desert is different than hotels that don't have an ability to.
And sort of eliminate three floors or a move of hotel from one city to another so I've got a mobile asset base more versatile and I can defend against the downturn or changes in market dynamics pretty quickly in that regard.
Okay. Thank you and my follow up so in your prepared remarks, you talked about.
What you it sounds like you're fairly optimistic that this current supply demand dynamic is going to persist for at least four in your near to midterm and I was just wondering as we take apart the moving pieces of that with the Oems to the used car market and then what's happening with supply chains.
Particularly with the semi chips are there are there are certain areas. It sounds it sounded like you were a little bit.
Really weighing that sort of view on that.
The OEM side, but if we could.
Give a little bit more of a nuanced view here across these three different channels. What gives you the confidence that this dynamic is going to persist.
In the midterm.
Well I think that I think that dynamic persists I'm not saying it persists.
Kind of.
Without limiting to the future, but in the context of the balance of 'twenty three and into 'twenty. Four I think it does persist now we see more cars and are seeing more opportunity to buy cars. This year than last year, but still well below so just to sort of set that down as a baseline.
I think that the Oems are dealing with a number of issues. Okay number one there has been supply chain, which I think is lessened, but nonetheless sort of persists number two theyre dealing with.
The uncertainty of the economic conditions and how much supply they want to put in assuming they have the capacity to do it.
And I think equally.
We're in the midst of a transition from combustion engine to electric vehicle and all of that sort of create some friction in the production of new cars on the used car side I would reiterate the comment I made before which is look this is a very deep very liquid market and so take my comments and.
That context, but in the narrow segments of that market that is good condition low mileage off lease cars. We're now entering the period, where the lack of production over the course of 2020 into 2021 will bear out on a more limited number of cars coming off lease and they are.
Therefore, entering the used market and so I think we're coming into.
Again, a more limited supply in the used piece again, having addressed sort of the OEM side and so I think that's implied dynamic while it won't last forever I do think it persists through 'twenty, three and I think in through 'twenty four.
Okay. Thank you.
Okay.
Thank you. This concludes today's question and answer session and I would like to hand, the call back over to Stephen Scherr, Chief Executive Officer. Please go ahead.
So I want to thank you all for your participation and your patients just given the small technical delay we had.
Before we close the call I want to thank the more than 20000 employees of <unk> for their continued service and their attention to our customers, particularly as we enter the busy summer season, we look forward to sharing further updates with all of you on our next call with that I'll turn it back to the operator.
This concludes Hertz Global Holdings first quarter 2023 earnings conference call. Thank you for participating.