Yahoo Finance

Revenue was $2.4 billion, up 19% sequentially, and adjusted corporate EBITDA was $347 million. Our results were the product of higher transaction days and a stable rate environment that remains well above pre-pandemic levels, and we believe no longer reflects a momentary surge of travel, but a more stable baseline of demand growth being witnessed across the travel industry. Our results also reflect our fleet being deployed at very elevated utilization throughout the quarter as we captured customer demand across multiple channels and continued to opportunistically harvest available gains on the sale of vehicles, consistent with our ROA-driven strategy. Volume across our business in the quarter was up 18% sequentially and 12% versus Q2 of last year.

Demand was strong in the US, Canada, and Europe, as each of leisure, corporate and Rideshare, continue to demonstrate momentum, with international travel benefiting both our US and European businesses. Our sequential growth in transaction days in the US outpaced TSA airport traffic and other indicators of broader growth in travel, and was generated with only 11% growth in fleet. While share of airport volumes remain constant, we experienced increasing volume across our other customer channels, including Rideshare, suggesting broader growth in the business. As they mature, we expect these initiatives to grow topline and to be accretive to margins in 2024 and beyond. In Europe, we are realizing results from our restructuring, with improvements seen in the second quarter, as volumes and rates showed strength and our delivery costs improved.

In all, travel held up in the quarter and has continued to demonstrate strength early into Q3. On the forward, we will look to benefit from a continuing tailwind in US inbound travel and further recovery in business travel. On pricing, RPD in Q2 was $61.14, up versus Q1 reflecting typical seasonality and aligning with our expectations. Although Q2 RPD was down year-over-year, you will recall that last year's second quarter RPD benefited from very tight fleet levels matched against surging travel coming out of Omicron, as OEM supply was limited, and car sales accelerated into an exceptionally strong residual market. Like many of our competitors, we were impacted by sellout conditions across a significant number of markets in Q2 of last year, as demand for cars outstripped excessively tight supply.

In Q2 of this year, while fleet was not as tight as last, we nonetheless ran at even higher levels of utilization, benefiting from operational productivity, including materially lower out of service, which provided opportunity for more cars to be profitably on rent. Our expectation on rate for the balance of 2023 is for year-over-year comparisons to improve from here. Looking forward, we expect to see a sequential uptick in both rate and demand into Q3, with rate holding at a material premium to pre-pandemic levels. With an early view into July to date, we have seen rate move higher versus Q2 by more than 5%. While OEMs have had more cars on offer this year, which historically would've given way to rate pressure, we have not seen such a dynamic to date.

For Hertz, we are thinking about our fleet differently than the company did in the past. As we have said previously, we believe a dynamic approach to managing the fleet and adherence to an ROA mindset, has contributed to our ability to keep RPD attractive, more stable, and capable of yielding healthy returns. To be clear, utilization is driving price and not the other way around, as had often been the case historically. Maintaining high utilization allows us to command better pricing and therefore produce higher revenue per unit and higher margin in the business. Operationally, we achieved fleet utilization of 82% in the quarter, 400 points higher than Q1 and 230 points better than year-over-year. And we anticipate further improvement from here.

Benefited by lower out of service, our monthly revenue per unit came in at $1,516, up 8% sequentially and reflecting both price and utilization as key components of financial return. As we continue to take costs out of the business, drive higher utilization of our assets, grow Rideshare, and our value-driven customer channels, we are confident that we will produce increasing margins for the business. As I noted, the company produced adjusted corporate EBITDA for the quarter of $347 million. Let me reflect on the components. Depreciation per unit came in at $195, favorable to the range laid out on our last call. As Alex will expand upon, we view depreciation as an output of many fleet plan decisions that we are making on a day-to-day basis throughout each quarter, including whether to add EVs or ICE vehicles, or new versus used cars, as well as vehicle cap cost, vehicle length of keep, vehicle condition and mileage, and vehicle rotation.

In Q2, each of these factors influenced depreciation, and our decisions ultimately resulted in a lower depreciation expense versus prior expectations. This is about careful management of the fleet. On expenses, we took actions on both our direct operating expenses and SG&A in the quarter. DOE per transaction day improved $2 sequentially, notwithstanding continuing inflationary influences on operational costs like labor and transportation. On SG&A, we took steps in the quarter to reduce corporate overhead, with a reduction of about $30 million on an annualized basis through attrition and reduction in force. Despite these reductions, we have work to do on cost. Going forward, we will continue to focus on key controllable cost items, both DOE and SG&A in an effort to drive productivity, offset inflationary cost pressures, and fund growth-related investments.

We've been strategically replacing more expensive third-party labor in the field with Hertz employees. We've deployed telematics across the fleet to bring fuel costs down, reduce vehicle theft, and improve the speed and cost of car recovery. These cost initiatives will be supplemented by further actions taken over the next year as we migrate our business to the cloud and thereby reduce significant third-party spend that currently burdens our results. As in prior years, cash outflow in the first half of the year was driven primarily by the build of our fleet to meet the summer peak demand. Cashflow generation in the back half of the year is expected to improve materially as a result of the expected pace of business and the seasonal reduction in fleet following the summer surge.

Staying with Fleet for a moment, we are benefiting from increased operational productivity as evidenced by a material reduction in out of service and more efficient maintenance turns. Put simply, we are making more fleet available for more revenue-earning activities, which better enables us to serve base demand, as well as demand across our new ventures, including Rideshare and our revitalized value brands. Think of lower out of service as helping to fund growth in the business. As we open the third quarter, there is no current evidence of softening demand. Nonetheless, the risk of a weaker economy, albeit lessening, is to be acknowledged, and as such, we have changed our bias on fleet versus our thinking at the start of the fiscal year. Our objective is to always deliver profitable volume through high utilization.

nito/Shutterstock.com

As demand is driven by many factors, we do not use core rack pricing as a tool for demand creation, nor do we use price to chase market share. Risk of economic slowdown notwithstanding, we expect to benefit from a supportive business environment for the balance of Q3. As we said a year ago, travel trends are prevailing over the risks of an economic slowdown. Until that equation changes, we will continue to benefit from the former, and we'll be ready for the latter. Now, let me turn to progress on strategic initiatives where we have made significant progress across our wide range of opportunities. These initiatives, when taken together, will supplement the work we are doing to build a more robust baseline rack business, with an expectation of driving additional EBITDA generation in 2024 and beyond, further enhancing the earnings power of the business overall.

Let me begin with Dollar. In June, we launched our new website for Dollar as part of the revitalization of the brand. We are bringing forward new digital properties for Dollar designed to pursue profitable mid-market growth across both leisure and business segments. We believe that the new Dollar, when fully operational, will enable us to better access customer segments that we are not fully tapping today, including a younger value-driven consumer that comes to us directly or through online travel agencies, consolidators, tour operators, select airlines, and other partners. We also believe that our work on Dollar will enable us to deploy a higher number of lower depreciating vehicles, driving higher margin revenue to the business. While very early, the data since launch is positive.

In the first three weeks of July, and admittedly off a low base, the new Dollar website saw a pickup of 14% in conversion, a growth of 15% in revenue per visitor, and a jump of 12% in value-added service revenue per booking. The Rideshare business continued its growth in Q2, as revenue grew by 84% year-over-year and 14% sequentially, primarily on volume. Transaction days in the Rideshare business grew by 69% year-over-year and 17% sequentially. We believe that bringing greater scale to the Rideshare business and creating what is in essence a subscription business for drivers, will better position us to moderate the quarterly peak trough typically experienced in the leisure business, and to flatten the depreciation curve on our vehicles. While a multi-week rental may generate lower RPD, when coupled with lower transactional expense, the business produces accretive EBITDA margins.

Let me next spend a moment on EVs, where we are creating long-term value through our first-mover advantage in electrification. As you are aware, we are investing in the largest EV rental fleet in North America and one of the largest in the world. These are early days in a transition that hasn't happened in the automotive industry in a century. We are readying ourselves for an electric future, and are pleased with our progress on this strategy. First, the economic opportunities of EVs are compelling. EV maintenance is better than ICE vehicles, and while at present EV damage repair is stubbornly more difficult and expensive, we expect that the entry of multiple fleet-oriented OEMs to the EV space will bring the supply of parts and EV technicians up and cost down.

Second, running a large EV fleet brings unique operational demands that we believe are not easily turned on overnight. We are building an embedded first mover advantage in the area of EV fleet management. From charging stations, both proprietary and through partnerships, to training employees around EVs, Hertz will be better positioned longer term to pursue adjacent fleet management opportunities, whether in the form of managing electric fleets for others, or even adapting to the growing prospect of autonomous vehicles now in early commercial development. And third, we are positioning Hertz as the unique provider of EVs across multiple customer segments, leisure, corporate, and Rideshare, all the while providing choice for our customers. To assist those who might be trying an EV for the first time, we provide robust digital and other educational content, and we have deployed EV ambassadors at key airport locations, and last week we held one of the nation's largest EV test drives at LAX, the first in the series, where hundreds of people came to Hertz for an introduction to EVs of various makes and models.

Taken together, what you are seeing at Hertz is an evolution of readiness and smart investments that are not easy to replicate quickly. Finally, we are creating value through our investments in technology. Customers want more seamless experiences, and we are leveraging leading edge technology and partners with industry leaders to deliver. At the same time, we are rebuilding the foundational elements of the technology on which we run. I'm pleased to share a few updates on our progress. First, we are just past the midway point of our migration to the cloud. We are moving our reservations, fleet, finance, and other systems to the cloud, and expect to demise our European data center by the end of 2023, and our US data center to follow in early 2025.

Once complete, we expect a benefit from all that comes with being in the cloud, including, as I mentioned, a significant reduction in the cost of third-party service providers that we have been using to support our systems. Second, we are progressing more agile pricing pools, modernization of our revenue management system, and the build of a broader fleet control tower, all with an eye to capturing the most profitable demand available in the market at any given time. We will optimize VIN-level fleet decisions to maximize ROA across the portfolio, including whether to rent, move buy, sell, or repair a car. For context, a modest price improvement of $1 in a daily rate brought about by better fleet allocation and or more dynamic pricing would boost revenue by $150 million across an equal number of transaction days per year with our current levels of margin pull-through to EBITDA.

Third, on the customer-facing side, we've made improvements to the Hertz mobile app. For iOS users, Q2 saw us taking 42% more reservations versus last year, with an uptick attributable to a revamp booking experience and broader customer engagement. In Q2, we saw an 84% increase in downloads of the Hertz app versus last year, as improved customer experience elevated the app standing in the Apple store. We have also launched new functionality for Android users. Fourth, with respect to the deployment of AI, we intend to use natural language AI in our operations, starting with customer care and at the front end of our digital customer engagement. On customer care, we are working on an initiative to deploy natural language AI for call center and reservation queries.

We believe that a significant majority of our call center and reservation inquiries can ultimately be handled through AI, freeing our call center agents to focus their time more productively on the needs of customers whose requests are more complex. On the front end of commerce, there is also opportunity to embed natural language AI into our digital properties, enabling a customer to ask simple questions about an upcoming reservation or rental and being more efficiently directed to the most relevant information, giving rise to higher transaction conversion and improved customer experience. Fifth and final on technology and further the customer experience, we are excited to work with Apple across a range of initiatives, starting with payments.

We are on track to begin accepting Apple Pay on our US e-commerce and mobile platforms by year-end, making Hertz one of the first major companies in the travel industry to do so. While more details are to come later this year, we're looking forward to working with Apple to deliver a better customer experience by enabling a convenient and secure way for our customers to pay online and in the app. What is clear across these initiatives is that our ROA mindset is producing tangible results and becoming part of the fabric of Hertz. Moving into the second half of this year and beyond, I'm confident in our ability to build on this progress and continue forging a new way of doing business at Hertz, with a perspective that is both grounded in risk management and motivated by the expansive possibilities that lay before us.

With that, let me turn the call to Alex.

Alex Brooks: Thank you, Stephen, and good morning, everyone. As Stephen noted, we had a strong second quarter that reflected continued positive momentum and demand for our services. Revenue was up in both the Americas and international segments, and totaled $2.4 billion, an increase of 19% sequentially. Both volume and rate met our expectations for the quarter as we laid out on our last call, with volume up 18% and rate up 1% versus Q1. International inbound volume continued to improve and was at 78% of 2019 levels for the quarter. We also experienced growth in Rideshare rental volumes, which were 69% above Q2 2022. We expect our Rideshare margins to be accretive as the business benefits from longer length of keep and reduced direct cost, notwithstanding lower RPU days.

We believe that progress here will demonstrate that revenue per unit for RPU, when coupled with lower direct operating costs, is a better measure of margin creation than is RPD, and a better reflection of our focus on ROA. Adjusted corporate EBITDA was $347 million in the second quarter, a margin of 14%. Growth in global travel and Rideshare were large contributors, with continued strength in leisure. Americas and international generated impressive margins of 16% and 23%, respectively, while maintaining a tight fleet. In terms of fleet, we held an average in Q2 of 560,000 vehicles, which was managed to be inside the demand curve as demonstrated by utilization of 82% for the quarter, thereby enabling us to hold rate and generate healthy returns.

Depreciation per unit for Q2 was $195 and was below the range we laid out on our last call, primarily due to an increase in the number of fully depreciated vehicles in our fleet, as well as favorable fleet mix. Turning to our operating costs. As Stephen noted, we continue to focus on key controllable cost items in the quarter, driving productivity and mitigating inflationary cost pressures. Our DOE per transaction day in Q2 is $34, a $2 improvement sequentially. About half of this improvement was the result of improved internal labor productivity and reduced third-party labor costs. As we have noted on prior calls, we expect DOE per transaction day to continue to improve through the back half of the year. SG&A expenses were $285 million in the second quarter, reflecting slightly higher marketing spend on a sequential basis, ahead of the summer surge.

We expect SG&A in the back half of the year to fall below $500 million as actions taken in Q2 take hold. Let me turn to our capital structure and liquidity. With respect to our balance sheet, net corporate debt at the end of the quarter was $2.6 billion, and net corporate leverage for Q2 was 1.7 times, modestly above our target of 1.5 times, and in line with expected seasonality, mainly as a result of our net fleet CapEx during the quarter. We expect net corporate leverage to come down over the second half of the year, given anticipated performance and projected fleet reduction. At June 30, our available liquid liquidity was $1.4 billion, which includes $682 million of unrestricted cash. During the quarter, we took a variety of actions in the normal course of business to extend the maturities and increase the aggregate commitments related to our ABS facilities globally in June, and as planned, we drew $500 million on our revolving credit facility, which funded vehicle purchases and seasonal working capital, as we fleeted up for peak demand.

We expect to pay this down in the second half of the year as cash flow turns meaningfully positive. We also amended our first lien term loans B and C to transition from LIBOR to SOFR as the primary underlying benchmark index. At June 30, we had capacity under our ABS of $773 million globally, and our vehicle debt portfolio was approximately 67% fixed rate, which mitigates the impacts of a rising rate environment. We also maintained sufficient equity cushion in our ABS at quarter end. Overall, we continue to maintain a well-structured debt maturity ladder. We have no material corporate debt maturities until 2026. Turning to our cash flow and capital allocation. For the second quarter, we recorded adjusting operating cash flow of $91 million, fleet CapEx of $437 million, and non-fleet CapEx of $77 million, resulting in free cash outflow of $423 million.

As we begin our de-fleeting cycle in the third quarter, we expect free cash flow generation to turn meaningfully positive for the second half of the year. In addition to our investments in fleet and non-fleet CapEx in Q2, we repurchased 6.3 million shares of our common stock for $100 million dollars. At quarter end, we had approximately $950 million remaining under the board's authorization. Finally, let me give some color around our forward-looking expectations. On Q3 revenue, we expect a sequential uptick from Q2, consistent with seasonal patterns, with continued growth in demand, seasonally improved RPD, and continued improvement in utilization. On our global fleet, we will begin a reduction in fleet in Q3 off of a July peak, with the current intention of bringing our fleet size at year-end to stand modestly higher than where we began the year, subject as always, to demand indicators, but with a tighter bias as we see some risk to residual prices into the back half of the year.

On fleet carrying costs, we expect a Q3 depreciation rate per unit of $275 to $300, reflecting current market conditions. We expect global fleet interest, not limited to the US, to be about $140 million in the third quarter, reflecting both fleet size and the rate curve. On operating expenses, we expect DOE per transaction day to continue to decline, and for the back half SG&A to total less than $500 million. In closing, we believe the strong results in the second quarter, and the early momentum in July, position us for a strong second half of the year. Longer term, we expect our growth initiatives to continue to mature as contributors to both the top and bottom lines, as Stephen noted. All the while, we stay focused on driving productivity and efficiency to contribute to our margin expansion objective.

We're confident that these dynamics, along with a strong balance sheet, will contribute to long-term shareholder value. With that, let's open up the call for Q&A

See also 12 Stocks with Biggest Upside Potential According to Analysts and 15 Best Stocks Under $15.

To continue reading the Q&A session, please click here.