Hertz Global : Q2 2022 Transcript

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EDITED TRANSCRIPT

HTZ.OQ - Q2 2022 Hertz Global Holdings Inc Earnings Call

EVENT DATE/TIME: JULY 28, 2022 / 12:30PM GMT

OVERVIEW:

Co. reported 2Q22 revenue of $2.3b and adjusted EPS of $1.22.

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JULY 28, 2022 / 12:30PM, HTZ.OQ - Q2 2022 Hertz Global Holdings Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Johann Rawlinson

Kenny K. Cheung Hertz Global Holdings, Inc. - CFO & Executive VP

Stephen M. Scherr Hertz Global Holdings, Inc. - CEO & Director

C O N F E R E N C E C A L L P A R T I C I P A N T S

Adam Michael Jonas Morgan Stanley, Research Division - MD

Chris Jon Woronka Deutsche Bank AG, Research Division - Research Analyst

Ian Alton Zaffino Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

Ryan J. Brinkman JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst

P R E S E N T A T I O N

Operator

Welcome to Hertz Global Holdings Second Quarter 2022 Earnings Call. (Operator Instructions) Following management's commentary, we will conduct a question-and-answer session. I'd like to remind you that this morning's call is being recorded by the company.

I'd now like to turn the call over to your host, Johann Rawlinson, Vice President of Investor Relations. Please go ahead.

Johann Rawlinson

Good morning, everyone, and thank you for joining us. By now, you should have our earnings press release and associated financial information. We've also provided slides to accompany our conference call, 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. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of today's date, and the company undertakes no obligation to update that information to reflect changed circumstances.

Additional information concerning these statements is contained in our earnings press release and in the Risk Factors and Forward-Looking Statements section of our 2021 Form 10-K and our second quarter 2022 Form 10-Q filed with the SEC. All these documents are available on the Investor Relations section of the Hertz website.

Today, we'll use certain non-GAAP financial measures, which are reconciled with GAAP numbers in our earnings press release. We believe that our profitability and performance is better demonstrated using these non-GAAP measures.

On the call this morning, we have Stephen Scherr, our Chief Executive Officer; and Kenny Cheung, our Chief Financial Officer.

I'll now turn the call over to Stephen.

Stephen M. Scherr - Hertz Global Holdings, Inc. - CEO & Director

Thank you, Johann. Good morning, and welcome to our second quarter earnings call. Our financial results for the second quarter were strong, reflecting the continued strength of our underlying business, positive market forces and high demand for our services.

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JULY 28, 2022 / 12:30PM, HTZ.OQ - Q2 2022 Hertz Global Holdings Inc Earnings Call

Revenue was $2.3 billion, up 25% year-over-year and up 30% quarter-over-quarter, and adjusted corporate EBITDA was a second quarter record of $764 million. Adjusted free cash flow in the quarter was $484 million, with the company demonstrating increased free cash flow conversion from the first quarter.

In the quarter, our performance facilitated continued investment in fleet and non-fleet CapEx as well as the repurchase of $890 million of stock through open market purchases, completing our initial $2 billion authorization. We also initiated purchases under a new $2 billion Board authorization, which we announced on June 15th of this year.

Overall, I am very pleased with our performance and the momentum of the business coming out of the second quarter, with strong results across the U.S., Canada, Europe and APAC. Demand for our services remains elevated as each of leisure, corporate and ridesharing continue to demonstrate improvement.

Getting into the specifics of the quarter, our operational performance was strong overall and, importantly, showed sequential month-to-month improvement, as the team capitalized on the heightened pace of the summer travel season. We achieved fleet utilization of just under 80% in the quarter, 5 points higher than in the first quarter, with June representing the highest utilization month for the year thus far at over 80%.

Similarly, our monthly revenue per unit hit a June record of $1,667. For the quarter, RPU was $1,606 on RPD of $67. Both metrics were up over last year.

I would point out that we achieved these results, despite elevated auto recall activity in the quarter, which we estimate depressed our utilization by 1 percentage point and negatively impacted revenue by $15 million to $20 million. Looking ahead, we are seeing the momentum built over the course of the second quarter carrying through to the busy summer season of late July into August.

With respect to EBITDA and free cash flow generation, each represents a second quarter record for the company and were impressive notwithstanding upward inflationary pressure on expenses, particularly labor costs. Although much of these inflationary costs are being passed through in elevated RPD, we nonetheless continue to drive expense discipline, including a reduction in our reliance on more expensive third-party labor sources.

All of these operational improvements, which are delivering clear results for our shareholders, are rooted in our enhanced focus on driving an ROA mentality in all that we do. The cornerstone of this approach is how we view and manage our fleet. Our second quarter results reflect our ability to run higher utilization, while protecting rate. Put simply, we are generating more EBITDA and more cash flow with fewer cars.

On an ongoing basis, this ROA mindset means that our fleet decisions are dynamic and are guided by changing economic circumstances and customer demand. By sweating our assets, we are making careful decisions regarding additions to the fleet and equally prudent decisions about the volume and manner by which we dispose of our vehicles, and we will continue to do so.

Running the fleet tight and inside expected demand curves has and, we expect, will continue to produce higher free cash flow on the back of lower net fleet CapEx. This was on display in the second quarter, as demand for travel across airlines, hotels and rental cars remain strong. And as I noted, we expect the balance of the summer to continue to carry sustained demand for our services, with strong pricing resulting from ongoing supply/demand dynamics.

Our strong performance in June carried forward into July. We are not seeing a pullback in forward demand, as reservations for August and September are currently in line with seasonal expectations. In all, we remain confident in the fundamentals of our business.

That said, like all consumer businesses, we are attuned to external indicators of future economic activity, particularly when they don't comport with what we are currently seeing in our business. Our business offers us immense flexibility to quickly adjust to changing demand.

The used car market is liquid and provides us with a valuable option to buy and sell cars to meet marginal demand on short notice. This complements our strong OEM relationships, which ensure a steady baseline supply of new cars, which keep the fleet current and young.

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JULY 28, 2022 / 12:30PM, HTZ.OQ - Q2 2022 Hertz Global Holdings Inc Earnings Call

It is also a distinguishing characteristic of the rental car business as our assets can be bought and sold quickly, they can be moved to deeper pockets of demand and managed with flexibility to maximize returns.

Beginning in the second quarter, we challenged ourselves as to the level of fleet we would target for the balance of the year, taking stock of high current residual pricing on used cars and questions about more modest demand late in the year. With the possibility of more seasonal demand patterns in Q3 and Q4, rather than outsized growth that we experienced coming out of COVID, we are availing ourselves of the option to buy and sell cars quickly that is unique to our business, rather than preemptively remain at elevated fleet levels.

We are choosing to safeguard rate and optimize utilization, so as to generate higher EBITDA and cash flow. The result is that by fiscal year-end, our fleet size will approximate where we opened in 2022. If elevated demand were to persist, we will flex the fleet quickly and responsibly, as the spot market for low mileage, good condition used cars remains available to us.

This approach also carries the ancillary benefit of reducing the average fleet age, which has already been lowered by 2.5 months year-to-date, as well as freeing up maintenance capacity to address out-of-service vehicles. To put numbers to all of this, you will recall that on our last earnings call, we provided a range of net fleet CapEx of $1 billion to $1.5 billion. We view that number now to be between $750 million and $1 billion.

All of that said, for the balance of the third quarter, we expect to continue to benefit from a market that is supportive of our business, continued high RPU on the back of high utilization and elevated rate. As others have noted, travel trends relating to the recovery from COVID are prevailing over the risks of an economic downturn. Until that equation changes, we will continue to benefit from the former and will be ready for the latter.

Let me now turn to progress on certain business and operational initiatives that are growing contributors to revenue growth and cost containment. On the TNC side, Uber and Lyft driver demand for both EV and ICE vehicles remained strong in the quarter, and we have nearly doubled our TNC fleet size year-over-year.

With respect to EV specifically, over 15,000 Uber drivers to date have rented a Tesla from Hertz at a minimum rate of $334 per week, comprising over 0.5 million transaction days. Driver feedback has been positive, and they remain drawn to the opportunity as gasoline prices remain elevated and demand for the service among Uber customers is strong.

Our Teslas enable Uber drivers to differentiate themselves and to improve upon the quality of the rider's experience, and that translates into higher earnings for them. We're also excited that on the back of our recent success, we have now expanded our Tesla-Uber partnership into Canada.

With respect to electric vehicles in our airport and off-airport fleet, we've recorded over 160,000 transaction days using Tesla cars, booked at premium rates that are typically $30 to $35 in excess of comparable average rates. Customers are enjoying the Tesla EV experience, which is being expressed in NPS scores that are 10 points higher than our global average. We are continuing to expand the electric vehicle offering through the regular delivery of Tesla cars and now Polestars.

We're also negotiating with other OEMs to purchase electric vehicles at attractive price points. What's more, as we accumulate additional data on the Tesla fleet, we expect to see higher residual values than originally anticipated.

On the corporate side of our rental business, we continue to work with Amex GBT to enhance our share across its customer portfolio. For example, as corporate travel has been rebounding, June generated more than 2x the revenue we recorded from Amex GBT in January, and we expect this momentum to continue.

In addition, we expect to leverage Amex GBT's acquisition of Egencia, a corporate travel management firm, to accelerate our capture of the profitable mid-market travel segment. Overall, we anticipate the corporate segment to grow, particularly as more companies return to travel.

With regard to the disposition of vehicles, we have sold thousands of vehicles on the Carvana platform during the first half of the year, and we expect further growth from here. This disposition channel remains active, provides us with granular market intelligence on pricing dynamics away from more conventional indices and perhaps, most importantly, offers us a material premium to prices we would otherwise realize through wholesale

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JULY 28, 2022 / 12:30PM, HTZ.OQ - Q2 2022 Hertz Global Holdings Inc Earnings Call

channels. Our ambition is to increase the use of Carvana and similar channels as our systems around fleet pricing and management continue to mature.

I also want to speak about technology, which is obviously a significant area of nonfleet investment for us. As an example of technology investment benefiting financial performance, we are making progress with Telematics. In the Americas, over 285,000 of our cars are now connected. That's around 75% of the fleet. We are on track to have nearly all of the Americas fleet connected by year-end.

Telematics are promoting higher fleet uptime, reducing theft and bad debt, improving damage monitoring and providing for more accurate fuel measurements. By example, repossession recovery times are reduced by 50% on connected vehicles. At an RPU of more than $1,600 per month, that time savings matters. As we mature the program, we will add more features to leverage Telematics data to improve our inventory management and planning practices.

Lastly, regarding technology broadly and our migration to the cloud, as I have said before, this is foundational to the company. As we progress our move to the cloud over the next 18 to 24 months, we will operate more efficiently and realize very tangible cost reduction as it relates to expenses associated with our legacy platforms and physical data centers.

Operating with SaaS providers like Oracle as an example and running our business in a safer and more cost-effective cloud environment will reduce operating expenses and lower our reliance on third-party consultancy.

Together, we estimate all of these business and operational initiatives in their mature state, both on the revenue and cost side, can contribute in excess of $500 million of incremental EBITDA not now reflected in the business.

As I turn the call to Kenny, I'll close by saying that I am increasingly confident in our ability to execute on our core business plan and excited by our strategic initiatives, which position Hertz for success in an evolving mobility ecosystem.

As we work through an extremely busy summer season, I would also like to recognize members of the Hertz team for their tireless efforts and especially acknowledge the teams in the field as they look after customers and produce increasing Net Promoter Scores and positive financial results.

Now I'll turn it over to Kenny to walk you through our results in more detail.

Kenny K. Cheung - Hertz Global Holdings, Inc. - CFO & Executive VP

Thank you, Stephen, and good morning, everyone. As Stephen mentioned, we had a very strong second quarter, and our continued focus on asset yields paid off.

Our adjusted EPS was $1.22, and adjusted corporate EBITDA was a second quarter record of $764 million, reflecting a margin of 33%. Revenue was $2.3 billion, up 25% from 2021 and up 30% sequentially, well above the historical seasonal uptick of 20%.

While auto recalls burdened utilization in the quarter, we also experienced a modestly negative foreign currency impact mainly from the euro conversion to dollars, impacting revenue by about $20 million or roughly 1% quarter-over-quarter. That notwithstanding, our results reflected our operational focus and price discipline.

Monthly RPU was above $1,600 for the quarter, in line with March as we exited Q1. We experienced an almost 20% increase in volume compared to last year driven by continued strong demand in leisure rentals. Corporate and international inbound customer demand have yet to fully return to pre-COVID levels, but have shown improvement.

International inbound travel, for example, only began to benefit from relaxation of U.S. COVID testing requirements and mask mandates late in the second quarter. However, we did see the volume gaps begin to close during the quarter.

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