Q3 2024 Hertz Global Holdings Inc Earnings Call
Speaker Change: Welcome to Hertz Global Holdings third quarter 2024 earnings call. Currently all lines are in a listen-only mode.
Speaker Change: Following management's commentary, we will conduct a question and answer session. I would like to remind you that this morning's call is being recorded by the company. I would now like to turn the call over to our host, Johann Rawlinson, Vice President of Investor Relations. Please go ahead.
Speaker Change: I would like to remind you that certain statements made on this call contain forward-looking information.
Speaker Change: Forward-looking statements are not a guarantee of performance and by their nature are subject to inherent risks and uncertainties. Actual results may differ materially.
Speaker Change: Any forward-looking information relayed on this call speaks only as of today's date.
Speaker Change: and the company undertakes no obligation to update that information to reflect changed circumstances.
Speaker Change: Additional information concerning these statements, including factors that could cause our actual results to differ, is contained in our earnings press release and in the risk factors and forward-looking statements section in the filings we make with the Securities and Exchange Commission.
Speaker Change: Our filings are available on the SEC's website and the Investor Relations section of the Hertz website.
Speaker Change: Today we'll use certain non-GAAP financial measures which are reconciled with GAAP numbers in our earnings press release and earnings presentation available on our website.
Speaker Change: We believe that these non-gap measures provide additional useful information about our operations, allowing better evaluation of our profitability and performance. Unless otherwise noted, our discussion today focuses on our global business.
Speaker Change: On the call this morning we have Gil West our Chief Executive Officer, Scott Haralson our Chief Financial Officer and Sandeep Dube our Chief Commercial Officer. We are also joined by Darren Errington our Executive Vice President for Revenue Management.
I'll now turn the call over to Gil.
Gil West: Thank you, Johann. Good morning, everyone, and thank you for joining our third quarter earnings call. I want to begin by extending my deepest gratitude to our team.
Gil West: They've been hard at work behind the scenes here at Hertz. This summer, they were dedicated to helping our customers seamlessly reach their destinations while at the same time driving forward our strategic goals.
Gil West: balancing day-to-day operations during our peak with a focus on our vision.
Gil West: They have truly demonstrated the energy and resilience that define us.
Gil West: The unwavering commitment and resiliency of our people were also on full display during the hurricanes that impacted millions of people across the southeast, including many of our customers and employees in Southwest Florida.
which is home to our World Headquarters.
Gil West: Throughout the storms, our primary focus was on the safety and security of our employees while being there for our customers and community. We immediately activated our Employee Relief Fund.
Gil West: to provide critical aid to impacted team members, helped customers safely evacuate by providing one-way rentals, and collaborated with law enforcement to set up a command center at our headquarters so they were ready to serve the community. Additionally,
Gil West: We worked with the organizations like the American Red Cross to provide emergency services to those deeply impacted by the storms and provided in-kind vehicle rentals to our non-profit partner Team Rubicon to assist with post-hurricane cleanup and recovery.
Gil West: In a time of crisis, we demonstrated our commitment to being a responsible corporate citizen and upholding one of our core corporate values.
Gil West: putting people first. We will continue to support our employees and communities on the long road to recovering from those natural disasters.
With that said...
Speaker Change: I'd like to first spend a moment contextualizing Hertz as I see it. This is a world-renowned brand that was built on a legacy of service, innovation, and loyalty that in recent years hasn't lived up to its full potential.
Speaker Change: The first step in a turnaround is recognizing that. The next step is addressing it. And that's what we've been hard at work doing since I joined the company.
Speaker Change: In the last quarter, we solidified a best-in-class senior management team, and we've continued to up-level the talent throughout the organization.
We have developed a clear roadmap with actionable plans.
sustainable, long-term value for both our customers and shareholders.
And our back-to-basics strategy is built on three pillars.
our fleet, our revenue, and our cost management.
Speaker Change: and leverages key enablers around our people, technology and process. Our operational transformation is on track for completion by the end of next year and we are excited to share our progress with you.
Speaker Change: I'll start by covering the progress we've made regarding our fleet, and Sandeep will cover progress around revenue and customer service.
Speaker Change: Scott will then cover our Q3 results and provide an update on our direct operating cost in SG&A. He'll also give an update on our capital position. So let me start with the fleet.
Speaker Change: Through our analysis, we believe we can produce the same number of transaction days with less fleet, which will also benefit our cost structure. This includes maximizing asset returns by optimizing utilization.
Speaker Change: Our most critical asset is currently our biggest constraint and has the most significant impact on our business.
Speaker Change: To address this, we have accelerated our fleet rotation. And this quarter, we have established a new vertical dedicated to end-to-end fleet management.
Speaker Change: During the third quarter, we also recorded an asset impairment charge, which primarily affected our U.S. and European fleets, which Scott will cover in more detail.
Speaker Change: Our new management team is focused on three key pillars. First,
Buying the right vehicles at competitive prices.
Speaker Change: Ensuring a fleet mix that matches customer demand across different geographies and seasons, enabled by a proprietary data-driven platform.
Shocka You
Speaker Change: determining the right timing for rotating vehicles out of our rental fleet to sell them at the optimal point in the depreciation curve, and lastly leveraging our retail car sales channels to maximize net proceeds allowing for reinvestment into the business.
Speaker Change: turning the management of depreciation into a core competency as we take advantage of our fleet management capabilities.
Speaker Change: to manage to improved outcomes. The volatility in market conditions has masked the efficacy of our fleet management actions, which I believe this is now largely behind us.
Speaker Change: and it will become more apparent that we have fundamentally changed to be more agile. This proactive model provides us with greater stability and growth over the long term.
Speaker Change: The largest market conditions, the latest market conditions combined with the strategy lay out a clear path for us to achieve DPU below $300, given that acquisition conditions are more favorable than our original expectations.
Speaker Change: Our expectations are supported by the expected economics of model year 25 purchases we've already secured. Ultimately, achieving this milestone will be the key to unlocking increased shareholder value.
Speaker Change: Aside from the rotation, we continue to build operational excellence in how we manage and maintain a best-in-class rental fleet for our customers.
Speaker Change: The key component is decreasing the number of vehicles that are out of service by quickly identifying constraints and working to remove them.
Speaker Change: Our vehicle sales and maintenance teams, leveraging process engineering, are focused on driving down work in process time and waste by
Speaker Change: Redesigning process flows to reduce cycle time which in turn decreases the number of vehicles in the queue that aren't generating revenue.
Speaker Change: increasing throughput in constrained areas such as maintenance and repairs, reconditioning, transportation, licensing, and marketing to accelerate vehicle sales and minimize out-of-service time.
Speaker Change: Reducing cumulative collision and repair times to improve damage cycle time and
Speaker Change: and leveraging fleet rotation tailwinds to further reduce out-of-service vehicles as newer model years generally require less maintenance and have a lower recall exposure.
Speaker Change: Eliminating waste and reducing out-of-service vehicles is fundamental to improving our vehicle utilization.
Speaker Change: The scale of this opportunity is considerable, given that reduced out-of-service could improve utilization by several percentage points.
Speaker Change: Throughout it all, our people and technology are fueling our progress.
Speaker Change: We are leveraging several new digital platforms that are focused on optimizing our fleet efficiency, improving depreciation costs, and maximizing the quality of our customer experience.
Speaker Change: Our frontline teams are celebrating these new tools and capabilities and are more engaged in the innovation process than ever before. Now, I'll hand it over to Sandeep.
Thanks, Gil, and good morning, everyone.
Sandeep Dube: In my first quarter leading our newly formed commercial team, we have defined our go-forward focus around three pillars that power our revenue engine. First, we are committed to delivering an exceptional customer experience.
which will drive greater demand and loyalty for our brands.
Sandeep Dube: Second, we aim to improve our ability to select, convert, and monetize the demand that we get today, resulting in a strong overall RPDM mix.
Sandeep Dube: And third, we intend to drive better utilization of our primary asset, our fleet, by driving same days with a smaller fleet.
Sandeep Dube: Our organization is doubling down on a customer-first approach, working collaboratively to drive continuous improvement in customer experience.
Sandeep Dube: In an ever-changing macro environment, whether faced with pricing shifts or supply-demand fluctuations, customer loyalty serves as the greatest buffer against all of that.
Sandeep Dube: Consistently delivering exceptional service creates loyal customers, driving durable demand into the future revenue funnel, supported by a strong family of brands and our loyalty programs.
Sandeep Dube: To achieve our long-term goals, we are implementing a rapid test-and-learn approach across the commercial team that delivers an undercurrent of ongoing performance improvement.
Sandeep Dube: We have improved the scale and speed of testing across revenue driving initiatives.
Sandeep Dube: which is further enhanced by a consolidated commercial team driving cross-commercial strategy and decision-making.
Sandeep Dube: Since the pandemic, Hertz has endeavored to keep vehicle supply within the demand curve with a focus on generating premium rates to maximize RPU.
Sandeep Dube: This continuous focus on profitable demand has allowed us to achieve sequential quarterly improvement in our year-over-year metrics in Q3 for both RPU and RPD.
Sandeep Dube: In addition, our focus is on improving operational utilization, not just by removing waste from our out-of-service fleet, but also through levers that aren't connected to pricing, like better operational execution between fleet and commercial,
Sandeep Dube: in Managing a Fleet Below the Demand Curve and Improved Execution Between Commercial and Operations in Managing Utilization at Non-Airport Locations.
Sandeep Dube: We are dialing up the sophistication and level of detail at which we manage our commercial business.
Sandeep Dube: To summarize, as a commercial team, we are operating with discipline, aiming to drive up consumer demand for our brands.
Sandeep Dube: keeping vehicle supply well within our demand curve and sweating our assets coupled with pricing discipline to maximize revenue per unit.
Sandeep Dube: We have just started the process of aligning our initiatives and our processes to deliver results across our three commercial pillars.
Sandeep Dube: This journey will be a focused commercial transformation, which over time is intended to be a flywheel that delivers incremental revenue growth.
Sandeep Dube: So far, I have been pleased with the velocity of progress as a freshly formed commercial team, but this is just the start. The full impact of our efforts will manifest over time, but I see signs of early progress.
Scott Haralson: On that note, I'll turn it over to Scott for his commentary.
Scott Haralson: Thanks Sandeep and good morning everyone. Let me begin with a huge thank you to the Hertz team for the resilience and strength demonstrated during the devastating storms. Our team is the lifeblood of this company and they once again showed why they are the best in the business. So a big thank you to the team.
Scott Haralson: Now, let me cover the financial results for the quarter. Revenue for the third quarter was $2.6 billion, and our adjusted corporate EBITDA was a loss of $157 million.
Scott Haralson: In terms of revenue, transaction days were down 4%, and RPD was relatively flat versus Q3 of last year. Lower market rates were supported by a deliberate strategy to drive better RPD mix.
Scott Haralson: Our results for the quarter were also impacted by a non-cash asset impairment charge of just over $1 billion.
Scott Haralson: The evaluation and accounting for the impairment was cumbersome and complicated and drove our earnings release date to push later than expected.
Scott Haralson: The size of the impairment charge was largely due to the decline in fleet residual values
Scott Haralson: which was primarily impacted by our recent accelerated fleet rotation initiative.
Scott Haralson: The process of evaluating an impairment includes comparing the carrying value of the collection of long-lived assets as a whole to the undiscounted future cash flow projections during the remaining hold period of the primary asset.
Scott Haralson: The increase in value of some of our non-fleet assets offset decreases in values in other assets.
Scott Haralson: The result is that the impairment charge doesn't completely correct the book value to market value dislocation of our fleet.
Scott Haralson: Therefore, we will still have some excess depreciation to push through the P&L in future quarters. It will just be a much smaller number than before the impairment. Again, this is a non-cash charge that doesn't affect any other financing, covenants, or cash comparisons for our business.
Scott Haralson: In Q3, the impairment was recognized as of August 31st, so our Q3 results include two months of non-impairment depreciation amounts, plus the impairment charge, and then one month under the post-impairment depreciation rate.
Scott Haralson: DPU for Q3 was $537 per unit per month, and we expect Q4 DPU to be in the $350 to $375 range.
Scott Haralson: This also doesn't affect the timing of when we expect to get to our targeted run rate DPU levels, which is still at the end of 2025.
Scott Haralson: But we have since contracted a significant portion of our model year 2025 purchases and we now expect our run rate depreciation to be less than $300 per unit per month, providing an even stronger platform for the transformation.
Scott Haralson: In addition to lower DPU in the future, we believe we can operate the business with less vehicles overall.
Speaker Change: As Gil pointed out, driving improved asset utilization in an asset-intensive business like ours is a critical unlock for cost efficiency that is large but probably underappreciated. In fact, reducing our fleet 1% while producing the same number of transaction days
Speaker Change: could reduce our expenses by more than $30 million per year and reduce our cash outlay by more than $20 million and reduce our debt by more than $100 million. There are not many actions that we can take in our business that produce that kind of benefit.
Speaker Change: Regarding non-fleet expenses, we also continue to see progress in driving long-term structural cost efficiencies in maintenance, collision, supply chain, facilities, and personnel.
Speaker Change: We still have headwinds in areas like insurance and revenue related expenses, but the scale is starting to tip in our favor.
Speaker Change: We still have a lot of wood to chop, and this is a journey, not a one-time cost reduction exercise. This is driving long-term sustainable efficiencies in the business.
Speaker Change: We do, however, need to continue to efficiently produce units, or in our case, transaction days, to take full advantage of our structural cost improvements over the next year or so.
Speaker Change: But we can already see core cost improvements in our Q3 results. Quarter over quarter, DOE is down almost 2%. The business is aggressively addressing the inefficiencies and the results we're starting to show.
So now let me talk about liquidity and cash flow.
Speaker Change: I'll be brief and commenting on the May Cullen post-petition interest claims arising from our bankruptcy as that litigation is still ongoing
Speaker Change: There are published opinions and briefs available, as well as a detailed disclosure in the 10-Q we filed this morning.
Speaker Change: We intend to appeal the Third Circuit's decision, which overturned the Bankruptcy Court's decision that was in our favor, to the U.S. Supreme Court. In the meantime, we accrued an additional approximately $290 million in the third quarter.
Speaker Change: We ended the quarter with liquidity of over $1.6 billion, comprised of over $500 million of unrestricted cash, and over $1.1 billion of available capacity under the revolving credit facility.
Speaker Change: We continue to forecast that our low point of liquidity will be around the middle of 2025, given seasonal cash needs and the progress of our fleet rotation.
Speaker Change: While I feel comfortable that our liquidity, or with our liquidity, and do expect these levels to be sufficient, I still would like to have more cushion for unexpected volatility in the market. So we will probably look to be active in the capital markets in the coming months.
Speaker Change: We do also have other levers to generate cash inflows or moderate the cash outflows that give us flexibility, but I think it's prudent to take advantage of favorable capital markets when the opportunity is available.
Speaker Change: Regarding our ABS, we have seen an equity cushion start to build in the facility. As we flagged on our prior call, we made a $100 million incremental lease payment into the structure in August.
Speaker Change: If you recall, residual values in June had decreased about 5%, and though the July residuals came in positive, they weren't enough to offset the impact. Since then, residuals have stabilized, and as we bring in new vehicles, we are beginning to build some cushion.
Speaker Change: With more stable residuals and new vehicles at better purchase prices, we currently don't expect the need to make additional unscheduled payments into the facility.
Speaker Change: Regarding the U.S. vehicle debt maturing by the end of the year, our term ABS notes amortized in the six months prior to their final maturity date.
Speaker Change: As of the end of Q3, $1 billion of the $2 billion of maturities had already been retired. In addition, at quarter end, we maintained available commitments under our VFN of $2.2 billion.
Speaker Change: Sufficient capacity to refinance the remaining 1 billion dollars of maturity nets.
Speaker Change: On the corporate side, we do not have any meaningful maturities until mid-2026.
Speaker Change: So in summary, this quarter produced an improving year-over-year variance in almost every important metric, EBITDA, RPD, DOE spread, DOE per day, and others.
Speaker Change: We are clearly not done, but improvements are visible, and we are optimistic about where we're heading. We are still targeting our run rate metrics of DOE per day in the low 30s, RPU above 1500, and now a new run rate DPU below $300.
Speaker Change: In regard to guidance, outside of our expectations around Q4 DPU in the 350 to 375 range, we are not yet in a position to provide more formal guidance, but are working towards making this a regular feature in 2025. Now let me hand it back to Gil for a closing comment.
Gil West: Thanks, Scott. In closing, we're clear-eyed about the challenges ahead, but we're hitting them head-on, and our employees and management teams are energized.
Gil West: I've seen this before. We have more opportunities in front of us than challenges.
Vehicle market conditions have normalized, which benefits our fleet rotation.
The global travel macros remain strong.
Gil West: Both TSA and ARC ticketing data reflect positive growth from here, and the readouts from the airlines are positive.
Gil West: As I look at the broader picture around our transformation, I like the path we're on and the progress we've made. This is not about just improving our financials. It's about fundamentally reimagining how we operate. We're laying the groundwork now for sustainable, long-term success.
Gil West: Our focus will remain on building momentum with a clear vision and dedicated team. We're excited about what's ahead and look forward to updating you on our progress in the coming quarters. With that said, let's open the call up for questions.
Speaker Change: 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 1 on your phone. If you wish to cancel your question, dial star 1 a second time. Our first question today comes from the line of Chris Woronka with Deutsche Bank. Please go ahead.
Hey, good morning, guys, and thanks for taking the questions.
Speaker Change: Gil, yeah, and Scott, you mentioned an expectation that BPU can get down under that $300 range in the future. Can you maybe expand upon that a little bit and give us a little bit of color as to what's going to go into that and I guess your level of confidence? Thanks.
Speaker Change: Yeah, thanks, Chris. I'll start and feel free to chime in if you like, Scott, but yeah, we definitely see a path to get to sustainable sub-$300 DPU and really just getting back to historic levels, our fleets, our economic engine, as you know.
Speaker Change: The market conditions have normalized and the Six Sigma noise from COVID is subsided.
Speaker Change: that we've made to date, give us a line of sight.
Speaker Change: to DPU below $300. So in addition to the market conditions normalizing,
Speaker Change: We've really changed fundamentally how we manage the fleet. So our fleet management strategies change and we're turning it into a core competency.
Speaker Change: We've got an end-to-end fleet management team now in place. We buy right, so we've got targeted unit economics, we're thoughtful about getting the mix right, and we've got an eye towards reselling vehicles at maximum return on asset.
We've got a we've got
Speaker Change: targeted processed to sell vehicles at the optimal point of the depreciation curve. And that's at a make and model level because those curves differ, as you know, for each.
Speaker Change: And, you know, so the approach we're taking generally shortens our hold periods.
Speaker Change: Then it optimizes our economics and gives us less exposure to fluctuations in longer-term residual values. We also want to grow the retail sales channels we have. That will maximize our gain on sales.
Speaker Change: And, you know, we're effectively a used car factory to leverage. So that's the mindset that we're creating.
Speaker Change: And then, as I think several of us noted earlier, we want to run a higher utilization and reduce our non-productive fleet that are out of service.
Speaker Change: whether it's in the sales channels or for maintenance. And we'll have tailwinds from a younger fleet in that respect.
Speaker Change: And then I'd also point out that we've got a partnership with Palantir that gives us a leg up with a proprietary tool to kind of better manage and plan our fleet.
Speaker Change: So, a lot of benefits with the fleet strategy, of course, lower DPU, got lower maintenance cost, sweating the assets harder, and then retail sales growth, and a better customer experience on top of that.
So we're, you know, we're confident in the path forward.
Speaker Change: Okay, well, thanks Gil. As a follow-up, you know, you talked a lot about kind of being able to do more with less in terms of, you know, the savings you might get from reducing your fleet by 1%, but still doing the same number of transactions. So, increased utilization, and I know you've got other costs focused.
Speaker Change: focuses as well. But, you know, I guess this is a scalable business, right? So, I mean, I guess, is it...
to stay smaller and not, you know, kind of...
Speaker Change: Think about the benefits of scale and going back to, say, your 2019 fleet size, just any thoughts on how to kind of jive, you know, cost-cutting with the fact that there is some scalability of operations here, right?
Thanks.
Speaker Change: Yeah, yeah, no, it's fair point. Look, scale matters. We recognize that. But we also want to continue to operate the fleet inside the demand curve. We've been very disciplined with that and finding, you know, I think we've still got work to do to find that right balance between pricing and days and, you know, the team's wholly
Speaker Change: focused on that. But, you know, there's a demand generation piece on top of this. I'll turn it over to Sandeep. He can talk more about that. But, you know, we're also very focused on creating demand, and then that enables our ability to continue to scale.
Sandeep Dube: Yeah, this is Sandeep here. I think heavy, heavy focus on driving demand in the right segments, like when we talk about premium RPD.
Sandeep Dube: What are the factors that drive that incremental demand and how do we generate that with customer experience, of course, being a key focus there?
Sandeep Dube: But there are other strategies in play there as well. But while we are in this transformation stage,
Sandeep Dube: we are heavily focused on RPU. And part of that equation is actually being comfortable letting go of some of that lower margin brand agnostic.
Sandeep Dube: demand that comes our way which we are pretty certain that in future if from a scale perspective we want to gain that we can we can gain that back but a heavy focus on customers who choose to do business with us.
Okay, very helpful. Thanks guys.
Sandeep Dube: Our next question comes from the line of Ian Zepino with Oppenheimer. Please go ahead.
Speaker Change: Hi, great. Can you guys maybe talk about some of the rate trends in October and November, you know, what you're basically seeing there and how do we think about it, you know, maybe even going into next year? Thanks.
Sandeep Dube: Yeah, Ian, this is Sandeep here. Let me talk a little bit about that. So I think, in general, let me talk a little bit about demand and supply in the industry in Q4 and late Q3, and then I'll come specifically to pricing.
and Rhys.
So, overall, you know, rates is...
A Consequence of Demand and Supply.
Sandeep Dube: Demand in the industry overall is still pretty strong, whether you look at overall transaction days, whether you look at forward-looking airline booking data through AHRQ, it's pretty strong and continues to be consistently strong.
Sandeep Dube: From a supply perspective, when I look at it in the tail end of Q3 and so far what we've seen in Q4, yes, there is slightly higher supply at the airports, and you can see that impact on rates.
Sandeep Dube: with them being down a little bit at the first, so far in Q4.
That being said...
Sandeep Dube: Overall, when you look at the industry, I would say supply is still in balance, right? Balance is a range, it's not a specific number. So by and large, when we look at demand and supply, it's still in a very balanced state. And when we look at overall pricing, and you compare and contrast to 2019, we are still up in the upper 20 percentage mark when it comes to rates.
Sandeep Dube: So, overall, I'd say both the demand side of the equation as well as the supply side of the equation is generally in balance and we feel pretty comfortable with the trends.
Speaker Change: Okay, great, thank you. And then maybe a question for Scott. Can you maybe just talk through some of the key considerations related to the impairment that was announced? Thanks.
Yeah, hey Ian, thanks for the question.
for monitoring, evaluating, and calculating.
Speaker Change: You know, if an impairment is triggered, so we've been monitoring to see if we triggered an impairment in prior quarters, and we did not. And during our Q3 review, we found that we did trigger an impairment and began working through the complex and thorough accounting process to calculate it.
Speaker Change: As I mentioned in my prepared remarks, the timing of that impairment was driven by the cash flow generation of the business over the holding period of our primary fleet asset, which in turn was impacted by the accelerated fleet rotation initiative.
Speaker Change: The size of the impairment was largely driven by the gap.
Speaker Change: you know between book values and the current market value of vehicles. I think that's that's fairly obvious to most people. And it affected about 70 percent of our fleet so this is not isolated to anything individual.
Speaker Change: The impairment charge doesn't fully align the book value to market value difference, as I mentioned in the prepared remarks as well. It'll just be a smaller value, and again, I'll mention that it's a non-cash expense.
Speaker Change: You know, our ABS facility already marks to market the value of the vehicles in the facility, so you could say that the impairment has already been pushed through on the cash side.
Alright, thank you very much.
Speaker Change: Our next question comes from the line of John Healy with North Coast Research. Please go ahead.
John, your line might be on mute.
Fleet Tots being down, call it, maybe.
Speaker Change: 20% versus Q4 levels over the next 12 to 18 months or so, you've got interest costs going lower.
Speaker Change: You also have dealers with a lot of cars and manufacturers trying to figure out what demand is so like if you think about cars being available to the industry
Speaker Change: and then just the input cost of actually carrying the cost being lower. Do your models call for pricing to be at these levels, or do you think we should expect RPD levels to move closer to...
Speaker Change: 2019 levels rather than stay at these levels over the next two or three years.
John, this is Sandeep here. I'll take that question.
Speaker Change: See, I think I'll go back to what I mentioned earlier on, right, where in general, I would say that both the supply side of the equation and the demand side of the equation seem to be pretty much in balance.
Speaker Change: That being said, I want to actually pivot a little bit to our focus, right? Our focus is ensuring that we continue to improve our PU.
Speaker Change: And the way we are doing that is by ensuring that we fleet inside the demand curve.
and make sure that we go after that premium RPD.
And now.
Speaker Change: For us, the one opportunity I do want to state as we look ahead is sweating our asses more.
Speaker Change: And I think Gil alluded to that from an aspect around improving the work-in-progress inventory and reducing that from a sales and maintenance perspective. The opportunity that we see on the commercial side, actually, that we've uncovered over the last couple of months.
Speaker Change: is a tighter coordination between the fleet team and the commercial team.
Speaker Change: We've realized that basically as we operationally execute in trying to to fleet under the demand
Speaker Change: There's a scope for better coordination and scope for better execution there, where we can extract a point or two of youth there and still gain the same number of days by utilizing a smaller fleet.
Speaker Change: So I think there's scope for us to continue to sweat our assets more and thereby manage our pricing to a better extent. So there's scope for improvement for us there.
Speaker Change: Okay, and then just a question on just kind of right-sizing the fleet a little bit. You guys made progress, but just kind of curious on where you're targeting demand for next year and what areas of the...
Speaker Change: Rental market, are you willing to give up share? I mean when I think about your business, you've got Airport, you got off airport, you got ride hail, you've got commercial leisure, you could also cut it by Hertz dollar and thrifty
Speaker Change: Do you plan on like taking a piece of the business and getting that smaller or is it more kind of universal thing? Hey, we're gonna take X amount of fleet, you know throughout all geographies out. I'm just trying to understand kind of
Speaker Change: where you're going to try to reduce the size and the presence of the business to get to those goals.
Speaker Change: Yeah, John, at the end of the day, what we're focused on is contribution and making sure we, you know, based on the assets that we allocate, we get the right contribution back, right? And so from that perspective, what you're talking about and what we are doing is essentially optimizing the business.
Speaker Change: Taking a look at where demand is coming in, taking a look at the pricing trends, taking a look at how demand for our own brand on our assets is growing.
Speaker Change: And then essentially ensuring that we have the right fleet at the right location, right? There's no fundamental change in our business model. What we are talking about is a transformation where, on an ongoing basis, there's continuous improvement in the way that we operate, so that we keep driving up that contribution margin. So it's not a fundamental difference. It's an ongoing continuous improvement and optimization.
Fair enough, thank you.
Speaker Change: Our next question comes from the line of Joan Babcock with Bank of America. Please go ahead.
Speaker Change: Good morning, thanks for taking my questions. I just wanted to go back to the DPU side of things, you know, you lowered the target, you know, from 325 now into the low of 300, actually even potentially below 300 range.
Speaker Change: But I want to get a sense, I mean, you know, when you think about this...
Speaker Change: Is this being driven in part by some of the incentives that OEMs are currently offering, or is this, you know, what you're seeing right now in terms of normalization? Is that something that you believe is more sustainable over the longer term? And then also, if you could just talk about if there's been any shift in mix, you know, associated with those vehicles that you're buying right now, that would be helpful.
Speaker Change: Yeah, thanks Sean. I'll take this feel free to chime in but yeah, I think there's two parts here that give us Confidence that we can run
Sub-300 DPU
Speaker Change: One, the market conditions themselves, right, have normalized, I think, back to more or less historic levels. Clearly, the dust has settled from COVID there. The deals we've done for model year 25, which, you know, is a sizable number of
deals relative to our fleet objective.
Speaker Change: piece of that, but I really, you know, harken back to our fleet strategy changes.
Speaker Change: fundamentally are different and that gives us the ability to sustain that level you know beyond 25 just the current deal environment which is normalized but we think
Speaker Change: On a going forward basis, it's sustainable. Again, we've got an end-to-end team now, and it focuses...
Speaker Change: really on a whole return on asset mindset with the fleet.
buying with an eye towards selling, optimizing our hold periods.
Speaker Change: planning the fleet. Sandeep talked about it, but you know, we want to sweat assets.
better than we've ever had.
Speaker Change: And then, you know, in the sales side, you know, again, with our fleet strategy changes,
Speaker Change: We've got shorter hold periods, and we're focused on the sale side of that at the optimal point, and then through the right channels. So market conditions coupled with fleet strategy changes, I think, give us the ability to sustain sub-300 debt.
Speaker Change: Okay, thanks. And then just two quick follow-ups here, you know, first of all, you did, I think, mention last quarter that you're about 30% through the fleet refresh, if you could just...
Speaker Change: provide an update on how how far along you are now, you know. And then secondly, if you could just comment in terms of, you know, returning to the capital markets, you know, what sort of additional liquidity cushion you might be looking for to the extent you can provide that.
Speaker Change: Thanks. First on the fleet rotation, we continue to make progress. We're north of 40%. I just reference you to some of the material we've got published on the presentation site. That'll give you some...
some better definition of that.
Speaker Change: Yeah, I think maybe another add to that is that, you know, now that we've, you know, have a different run rate DPU, it's probably better to think about
Speaker Change: The rotating fleet probably in a model year view versus a percent of the fleet that's at a certain depreciation level. And so as Gil said, we're about 40% or so that are in the model year 24 to 25 range. And that's probably how we'll sort of view it going forward. So I think that's probably the wrong way to look at it going forward from here.
Thank you. Bye.
And then on the low-quality front.
Can you repeat that? Can you ask the liquidity again?
to add there.
Speaker Change: yet still unsure right now what what level at which you know we'll we'll play in the capital markets but you know I think it's my desire to to probably do that over the next couple of months we'll figure out the amount and the vehicle by which it looks like it'll it'll happen through but you know I think it's just prudent to go ahead and do that
Okay, thank you.
Speaker Change: Our next question comes from the line of Brian Brinkman with J.P. Morgan. Please go ahead.
Alright, thanks for taking my questions.
Speaker Change: Firstly, with regard to the impairment, will the charge count against the amount of equity versus debt in your fleet as calculated by your ABS lenders, and what are the implications for any capital that you might be required to put into the plans to maybe top up fleet equity as a result of the charge?
Speaker Change: Hey, yeah, thanks for the question. Yeah, this is a non-cash charge, doesn't affect any of the financing, it's neutral to the ABS facility, so no impact to any of that.
Speaker Change: Okay, very helpful. Thank you. And then just another one on the impairment, you know, will the impairment that I guess was excluded from adjusted EBITDA in 3Q, will it benefit adjusted EBITDA going forward via lower ongoing vehicle depreciation? Is that one of the factors helping you to now target DPU below 300 versus low 300s prior?
Speaker Change: So the impairment is an expense that we hit in the period,
Speaker Change: We will have less excess depreciation to push through the P&L.
Speaker Change: And so I mentioned the Go Forward DPU, the Q4 DPU, is in the 350 to 375 range. We'll continue to work the remaining excess depth.
Speaker Change: out of the fleet through the end of 25. So we said our below 300 is our sort of targeted run rate, which we expect to get to by the end of 25. So you could sort of straight line from 350 to 375 to the sort of sub 300 level by the end of 25.
as you model it out.
Speaker Change: Got it. Thank you. And then just lastly, you know, the follow up on the comment about looking to be active in the capital markets in coming months.
Speaker Change: And understanding that you're not sure how much you might want to raise, but just sort of like considering where your debt is trading right now, where your equity is trading right now. What's the general thought process for trying to think about, in the interest rate environment, whether you might want to raise equity, equity linked versus debt capital?
Speaker Change: Yeah, I think the focus now would be to raise debt capital. I don't think there's an appetite for equity capital at this point.
Very helpful, thank you.
Speaker Change: Our next question comes from the line of Lizzie Dove with Goldman Sachs. Please go ahead.
Speaker Change: Hi there. I think you mentioned with the impairment that there's kind of less to push through going forward, but you may not quite be done. Could you kind of quantify and help size that a little bit, especially in terms of, I don't know, how many EVs are left after the markdown or anything that can kind of provide some color there?
Speaker Change: Yeah, so look, I think you can sort of get to the excess depth from, you know, this sort of 350 to 375 range down to, you know, call it sort of 300 for easy math. That differential we would sort of call the excess depth.
Speaker Change: And so you can use that as your marker for calculating, you know, the excess debt. I think that's a good way to do it. And then, sorry, what was the back end of the question there? Can you repeat that?
Speaker Change: on the EV side of things, like kind of how far through that you are now. Right, right. Yeah, I mean, right. As we've mentioned before, I mean, the EVs are less than 10% of the fleet today. So we've sort of rotated through, you know, a vast majority of that move. The remaining EVs are strategically placed in our fleet, so we're happy with those levels. So I think it's really about the ICE being the large portion of the impairment, and as we think about DPU.
Speaker Change: Got it. Okay, and then switching gears a little bit for my follow-up, you know, clearly for you guys and Avis as well, transaction days have been down as you're both kind of prioritizing that high-value business. But TSA volumes are still up. It seems like maybe there's just some higher competition from other players as well. And I think as you
Speaker Change: kind of look to defleet more. What is the right level to kind of think about for next year's transaction dates? Is it fair to say that can kind of continue to be down and how much is kind of competition from say enterprise kind of a factor here?
Sandeep Dube: Yeah Libby, this is Sandeep here. I'd say we're not formally giving any guidance for for 2025 including anything on on transaction days.
And our strategy remains unchanged, right, in going after RPU.
Speaker Change: as such, and while still maintaining scale. Yep, and just to add then, I also think, you know, we can produce the same number of days with a much smaller fleet, so that really is our focus, is to drive utilization.
Speaker Change: okay and anything on the state of competition whether that's kind of increased or not
Nothing that's fundamentally different in the industry.
Okay, thank you.
Speaker Change: Our next question comes from the lineup Stephanie Moore with Jeffries. Please go ahead.
Hello, this is Harold Rawlinson on for Stephanie Warren.
Speaker Change: I think the last time we spoke, you guys spoke about improving RPD through dynamic pricing. So I guess, so far, has this yielded any results? Could you just walk through some of the early progress you've seen on that front?
Speaker Change: Sorry, what was the question around, just to repeat the question, RPD through dynamic pricing?
Askin: Yeah, this is Askin. You know, as you implemented this process, have you seen any results or could you walk through any success through this pricing strategy that you've seen so far?
Askin: example I can use out there with where we've driven success is basically in our value-added service you know that's that's a place where there's significant sensitivity from a customer type perspective
Askin: and from a location perspective. And so we've gone ahead and actually executed that from a dynamic pricing first, big executed dynamic pricing.
Askin: in value-added service, and we've seen significant gains from that strategy, right? We're going to continue to be, as a commercial team, heavy into a test-and-learn approach across the board, whether it's dynamic pricing, whether it's other elements of driving
Askin: So, what I can say is, as a commercial team, we've increased the frequency as well as the quantity of testing that we're doing across the board, with dynamic pricing just being one example of that. So I expect significant improvement in our ability to monetize our assets as we move forward.
Speaker Change: And then I guess, on the impact of the hurricanes, if you could, you know, quantify any impact that we should think about that happened within the quarter or what happened in 4Q, that would be really helpful. Or how you guys are thinking about that.
Speaker Change: Yeah, so in terms of the impact of the hurricane, you know, we had, of course, two significant hurricanes. One, which just preceded the quarter, and then the other one that fell in the first half of October.
Speaker Change: And, generally speaking, what you would see is demand goes down just preceding when the hurricane hits, of course, with customers basically not, flights being canceled and customers not wanting to travel.
Speaker Change: other than the customers who want to leave some of the locations that are affected. And so we supported a lot of that through one-way rentals out of the regions, especially in Southwest Florida.
Speaker Change: And then what you see is, basically in the following days, you see an increment in activity in those locations. First, through first responders, which we ensure that we have vehicles made available to them. And then, even from the local population, as you see more rental demand come through.
Speaker Change: So, net-net, I'd say not a significant impact on the quarter, and overall pretty benign.
Thank you.
Speaker Change: Our next question comes from the line of Dan Levy with Barclays. Please go ahead.
Speaker Change: Hi, good morning. Thanks for taking the questions. I wanted to follow up on one of the prior questions on the fleet refresh.
Speaker Change: Has the liquidity dynamic in any way impacted the fleet refresh that you've done with regard to sort of mix by segment, mix by OEM?
Speaker Change: Do you think that you've approached that refresh in a really sort of unencumbered manner to really get the fleet to be fully in line with the type of business that you want, you know, with maybe a little less regard for the type of deals that are being offered out there, which are the types of things that maybe have
skewed the refresh that you've done in past years.
Speaker Change: Yeah, thanks, Dan. I'll start. Scott, you probably want to comment as well. But no, we're certainly taking a long view of the fleet rotation because it's fundamental to the business model.
economic engines.
Speaker Change: We've approached this in terms of, what does that rotation look like optimally? And, you know, while liquidity is always something we have to manage, it has not really changed the way we are the approach that we've taken to rotate the fleet or the deals that we've done. No, that's right. We've talked about being conservative with liquidity, so it's not a restrictor in our ability to optimize the fleet in the timeframe we want to do it.
Speaker Change: To date, that has not been an issue. We're being very strategic about what we buy and how we buy it, so no.
Speaker Change: Great, thank you. Maybe we could also just talk about the the DOE per transaction day and you know your guidance of getting to low 30s.
Speaker Change: How much of this is systems optimization that you need to do in sort of refreshing your overhaul systems? And what's the type of resource outlay that you'll need to dedicate to get the systems in line to unlock that low $30 DOE per day?
Speaker Change: Yeah, Dan, so that's a multi-level question to sort of answer, and systems are a lot of things to us.
Speaker Change: So I'll try to do the best I can and we'll have, you know, Gil and others try to chime in, too, but, you know, from a systems perspective, I think you're talking IT, but for us, it's really about process is, I think, the key unlock for us across the board. We've already seen considerable progress in all operating components. We're actually down...
Speaker Change: Quarter over quarter and year over year and all of the operating components of DOE Oddly enough that the headwinds are happening on revenue related Expenses and some of the the license and tax pieces, but the biggest is insurance
Speaker Change: you know a fairly sizable year-over-year increase in insurance costs and claims that we have to manage like no no excuses for it I mean that's part one of the things I mentioned before is that we have to manage the entire P&L but that is a significant headwind
Speaker Change: But the things we're focused on operationally, around process and data, and making sure we can unlock waste that Gil pointed to, we're seeing good progress. But these things are not snap-your-fingers fixes. So we're taking them in chunks, the businesses aggressively looking at all of the things we can do in the short run with a long-term view around sustainable cost efficiency.
Speaker Change: We're excited about the progress, but there's a long road ahead for getting all of these things unlocked. But operationally, we're excited about the process improvements, and that's the systems. I mean, there it's gonna take some IT and data progress, but it's not a large...
Speaker Change: Yeah, it is fundamental change in the way we're approaching unit calls. So, foundationally, we spent a lot of time...
Speaker Change: having the reviews, the ability to cut the data, to action it.
Speaker Change: and it's closed loop and it never ends, right? So those management operating systems, which are foundational to everything we're doing, cost being one of those, we stood up.
Speaker Change: There's buckets that we've talked about before that we continue to make progress in. Maintenance costs, supply chain, productivity, real estate, collisions, all those things.
Speaker Change: And then there's the tailwinds really from a newer fleet that we were rotating into and higher utilization. All those things we would expect to positively affect unit costs. But Scott alluded to it, but to me the enablers are also really important to double down on. People first of all, having the right team that are responsible, that can manage results and unit costs being one of those.
Speaker Change: Leveraging tech, to your question Dan, I think is another big opportunity for us. We've got great partners on the tech side, by the way. We've also got a great internal development team.
Speaker Change: Candidly, we're playing a little catch-up here, but we've got the ability to leapfrog, I think, in a number of areas, and that's our focus. And then process, you know, in terms of process engineering, because that's a big lever for us. You know, that's a lever for utilization as an example, but for everything, kind of rethinking from a process engineering, how we're doing business.
Great, thank you.
Speaker Change: Our final question will come from the line of Christopher Spatholopoulos with Susquehanna. Please go ahead.
Wayne Hedgerstead
Thanks for taking my question. So I guess.
Speaker Change: Gil or Sandeep, I want to just better understand that the efforts around utilization so
Thank you.
Speaker Change: you know, driving the same or higher transaction days on a smaller fleet. Maybe if we could, I'm just thinking of what that might entail and if you could speak to, does that involve ships around peak versus off-peak, brand, regions, technology, and then, you know, really as we think about
Speaker Change: monitoring that. Should we expect that to materialize more fully in RPD, DOE? Where should we ultimately see that benefit on the unit metric side? Thanks.
Sandeep Dube: Yeah, go ahead, yeah. First of all, this is Sandeep, I'll take that and then Gil, please add on to it, right? So, when you think about driving utilization, I'll talk about like basically three components that come into play and then there are likely more than that, right? First is the, when you look at overall total utilization, right? It's basically the waste in the process when it comes from a sales.
Sandeep Dube: vehicles that are out for sale, as well as what we have out of service, right? So Gil already referenced that in his prepared remarks, but we see significant
Sandeep Dube: process improvement that removes that waste in the system and that's just fleet that basically we can do without right because it's it's not being productively utilized in today's today's environment. Then we come to all the
The rentable vehicles, right?
Speaker Change: And from that perspective, I think I alluded to it in my prepared remarks, where essentially when you look at the newly formed integrated fleet team, fleet management team that Gil referenced,
Speaker Change: and their coordination with the commercial team, I think there's scope for improvement there, right? Because we talk about fleeting under the demand curve.
Candidly, there's work to be done there.
Speaker Change: There's work to be done there where there's better coordination between fleet and commercial in working truly to basically...
Speaker Change: fleet behind and below the demand curve and to be more agile when we see any differences.
come through from a demand perspective, right?
Speaker Change: So there's work that has started on that, we're in the midst of that.
Speaker Change: Anytime you make a change that's related to fleet and the process around fleet, there's a lead time before that comes into play.
Speaker Change: but we've recognized that opportunity and we are working through that.
Speaker Change: And then the third component I'll mention is this dynamic that you referenced to Christopher, which is essentially better managing the off-peak elements.
Speaker Change: And so there are components that our commercial team can engage on in terms of how they segment our offerings and the teams working through that, as well as their efforts towards incremental demand generation.
Speaker Change: for those off-peak periods which come into play. And lastly, there's of course, where your vehicles are located regionally and you can optimize that as well. So those are just some components. They're all...
Speaker Change: I would say transformative. They're all a work in progress, and some of those will take some time. At the end of the day, what our end objective is, is driving contribution and improving our RPU. And I think these things will help on that.
Speaker Change: Okay, as a follow-up, Gil or Scott, I don't think you've communicated a
Speaker Change: A total cost, I know cost is the third part of your back to basics plan, if you formally communicated a total dollar amount, or you could perhaps, you know, just give some color on where you are in that part of the plan. Thanks.
Scott Haralson: Yeah. Hey, Chris, I'll start. This is Scott. We haven't given formal guidance for 2025 on a dollar or a DOE per day unit cost metric. We've talked about our target run rate of sort of the low 30s for DOE, so I think we would sort of leave it at that. I think a couple of pieces of color is I think we're exiting 24 at a better rate than the average of 24, but we still have a lot of work to do to sort of get to our run rate levels. But, you know, there's incremental gradual progress that we're targeting. Like I said, this is not a snap your fingers fix.
Scott Haralson: These things are going to just continuously improve until we get to our run rate. So I think you would sort of start at that level and sort of gradually walk it down, you know, over time.
Okay, thank you.
Speaker Change: This concludes the Hertz Global Holdings third quarter 2024 earnings conference call. Thank you for your participation. You may now disconnect.
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