Hertz Global Holdings, Inc. (HTZ) Earnings Call Transcript & Summary

All right. I think that we are back, and our next guest needs no introduction to this building, but hopefully is an exciting new face for everyone in the travel and leisure space. His reputation also precedes him with virtually everyone who I think I've known who has worked for you or with you, has generally sung praises. So it's truly an honor to be joined by Stephen Scherr, Chief Executive Officer of Hertz Global Holdings.

Thank you very much. Thank you.

Maybe starting with just the path that got you to Hertz. I would love to hear...

First came through here.

Right. So what drew you to this opportunity? I imagine there were a lot of things that you were evaluating, some of them I saw in the public press.

Yes, that's true. So not long after the announcement of my impending retirement as CFO of Goldman effective last December, sort of came out, I got approached by the financial parties that took ownership and took Hertz through restructuring. And it kind of caught my curiosity. What ultimately drew me was a couple of things: one, it's rare that you see a company with a better brand than it has a business. Hertz is a 103-year-old kind of iconic brand and candidly has been deserving of a better business. And it's almost always the opposite. You spend an awful lot of money to build a business in the hope that you get brand value. And so there was the cover of what you could do with this company with the brand that it had. Secondly, we were at a moment in time in and around mobility as a broad concept and the introduction of electric vehicles and what Hertz could do and what role it could play. Obviously, first, to sort of get the 4 walls of its core business in line, but what it might do on the forward in terms of fleet management and other sources of revenue that might be more fee-driven than they would be in the way in which the business was there. And I think we're playing now with kind of new sets of technology we don't need to invent but that can we can use, whether it's the phone or otherwise to, I think, dramatically remake the customer journey, which, by and large, is a poor one and I think has room for considerable improvement. So those are the issues that kind of captured my imagination around the business.

So then, I guess, you alluded to this then, the perception was better brand than operations. So then once you came on and started meeting with folks, what's then surprised you over the first few months?

Well, I would say the one real surprise I had no appreciation for is the longevity of people that actually are in the field. We have a large number of people in field operations who have been at Hertz 20, 30, 40, even more years. And to me, the combination of that kind of experience in the industry, relationships with clients and customers, married up with new talent that we're bringing into the organization, particularly around product development, marketing, technology, all of which are new hires to Hertz that we've made in the last, call it, 90 days, I think that's a powerful combination. But the surprise has been the longevity and quite honestly, the customer following that is out there for people who have been at locations a long time. I've made it my business in the first 3 months of sitting in the seat to be out in locations around the U.S. and abroad. And you can really get a sense -- this company knows how to manage the logistics of its business. It knows how to move cars. It knows how to take in new fleet. It knows how to manage fleet. And I knew that to be the case, but perhaps not as profoundly competent as I have found it.

So you've got a company that can move cars, they're great at logistics, a strong brand, an opportunity in mobility, so walk us through how you're thinking about the strategy and the milestones that we should be measuring you against as we think about progress.

Sure. Well, against core operational competency, there were 2 things that I felt I do feel we need to bring to the table. One is a risk management overlay. Running a rental car business, and I've said this publicly and to many people, to me, is like running an asset management as in this building, okay? It's a risk business. You are buying and selling cars. Cars are the commodity. What you do with those cars as and when you own them is kind of the 4 walls of your business. So we needed to and are introducing a risk overlay to that. And I think we should be measured at how well we are doing, how well are we sizing fleet into demand. And this is not an easy moment to do it, but this is where we will either do well or not in that regard. The second, again, overlay to the baseline logistics of this business is what I was talking about, which is we need to rethink the way in which the customer experience is driven. So we've hired a new Chief Product Development Officer that I recruited out of Ford. He's a young serial entrepreneur, sold a business to Ford. We took him out of Ford. We will soon hire a Chief Marketing Officer. We have a CIO who precedes me by a couple of months. That combination of people will help us develop kind of the technology underpinnings both to run the business better and to make the customer experience a better one. And those are two, the latter being measured by consumer scores and surveys, NPS scores and the like, I think will be good KPIs, right, by which you can measure us.

And then there's the longer term, which you also mentioned in your opening remarks, this potential to create fee streams and maybe even pivot the business around mobility. So what are some of those opportunities? What does that look like? How do you create those businesses or even plant the seed to create those businesses in the future?

Well, at the risk of getting ahead of myself because it's not lost on me that the only basis on which we can and will do that is that we get the core business right. But if we do that, there are a couple of aspects that would put us in a position, for example, to manage third-party fleets, okay? We will have the network effect of what we do, we will have fleet management tools that will be effective. We will have experience around electric vehicles, and I think that more midsized and large-scale corporates are going in that direction. Managing a fleet of electric vehicles will be different. Sort of the geometry of it is just simply different than ICE vehicles. And I think if you look at the companies with whom we contract from a rental side, and you look at midsized companies that we get, for example, through Amex GBT, these are all ripe for fleet management. If you look at midsized businesses, the plumber or the electrician that has a fleet of about 10 cars or the florist that has 15 vehicles, they're not interested in managing that themselves. They'd soon have a price input, and I think Hertz can be a manager of those third-party vehicles on their behalf and look to engage in more of a fee sort of generating business. Again, this is not tomorrow, but in answering your question, what's out there for us. I think third-party fleet management, large and small, is there for us to take as and to the extent we sort of get right what we're working to do.

Right. I think that, candidly, some of my own background working at not only Goldman, but in the past life, GE Capital and the leasing business was that, and I hear this from investors was that these leasing type businesses are more like financial services, which you said asset manager questions, what does that multiple then look like, and I think that the historical pushback has been that the earnings stream is too volatile and it's...

Yes. Although if you look forward to what a third-party fleet management business might look like, it's -- I don't mean to sort of predetermine that we necessarily need to be the owner of the fleet. We could be. We could be asset heavy, we could be asset-light. It could be that the likes of FedEx or Amazon or Verizon or AT&T are owners of their fleet and simply look for us to manage it any more than we could be in a position to lever our own balance sheet in the context of the way in which we finance vehicles to be the owner. So again, it's in the forward field of vision, but I don't think it's at all preordained which side of the financing side that we play on.

Even on the core business and looking maybe near term, how are you generally thinking about the normalized EBITDA and free cash flow? And what are the big puts and takes that might move that around?

Well, I think we're operating in a moment now where there's a good deal of wind at our back. I'm under no false illusion that, that will last forever. And so there will be pressure. We're managing a fleet now, consistent with what I said to you, at a moment in time where it's difficult to know kind of where demand curves are going to be. And if I'm mindful to manage fleet size into demand curve, I kind of know what's in front of me in the summer. And there's almost limitless supply that I could put on the market that would get picked up. But I don't know where the economy lands. I don't know the magnitude of softness, even shy of a recession. And so I need to manage that. And I'm managing that in the context of thinking about new OEM cars as a source of rejuvenation, managed against sales of the older fleet out, but what sits in the middle are playing a very active lever around new used cars, which I can buy in the spot market to meet more immediate near-term demand. Long way of answering your question to say, I think we've talked about $1.5 billion of EBITDA as a number that has been out there, whether you work that in a step function chart off of '19 or you work yourselves back from it. Personally, I think we can be more aspirational around that, both because I think that there are sources of revenue that we can pursue again, more out of Amex GBT, the likes of Expedia, Travelocity and others, which are not necessarily embedded in that. I think we can do better. As we have publicly said, we're working with Palantir around pricing engines, which I think will source even more. And then I think we're quite mindful around what we can do around cost reduction. We've been running a little high in part because we've been deploying third-party labor that's quite expensive. That will fall off. But there are a variety of other ways in which we're reducing costs, including a younger fleet, which will require less maintenance. Electric vehicles are playing to a lower maintenance cost true to the modeling that was there and commanding higher premium. But I think the most notable cost change, if you will, which will yield better free cash flow in the end will be 1 year to 1.5 years migration from data center to the cloud. And I think that will free us of a fairly sizable expense around consulting that we use and have been using historically like many in the travel space with older tech stacks to keep your systems up. We have systems that are 20-and-plus years old, and they're data center driven and they're being managed and stood up by consultants. And we'll do better than that, certainly once we're up in the cloud.

You alluded to an opportunity for price -- taking price or even yield management, it sounds like and using technology to do that. I think in our conversations with investors, a lot of times are looking at supply and demand framework, and that's it. And certainly, fleets have come down. There's restrictions that are coming back. But are you seeing any change in the competitive dynamic? And who really sets...

You mean in the rental space?

Correct.

Well, I think there's an exogenous circumstance, which is the limited supply of new cars, some OEMs, which is notwithstanding the kind of misbehavior of the industry over the last -- for however many years, and it was. There's now a governor on the ability if you're so inclined to sort of grow up your fleet notwithstanding where demand sits. I'm not of that mind, that circumstance, notwithstanding, which is, I think it would be okay for us to have a smaller, more profitable fleet. You always need to keep an eye out for where you stand with respect to market share and don't disadvantage yourself. But I think we're far from that being kind of a governor, if you will, on the behavior of being more disciplined around fleet. And so I think the industry has taken back a little bit of the pricing leverage that otherwise was in the consumer's court for a long, long time because fleet is being now husbanded in a more disciplined way than where it was before. How long that lasts? It's hard to know, but I think we can watch it. I also think that at Hertz, and here I speak for ourselves as opposed to the industry, we put in place certain things that have buffeted the risk of somebody being a bit of a wildcatter on fees, okay? So we now have a more diversified fleet to include electric vehicles. We won't be there alone forever, but the learnings are real in the context of what we have, okay? We also have diversified customer channels. So we are a leisure -- we have leisure customers. We now have corporate customers, and we have rideshare. Corporate customers are interested, perhaps more than we thought around electric vehicles because they're satisfying their own carbon footprint objectives. And the rideshare is proving to be very interesting because certainly, at this price for gasoline, Uber drivers and the like are quite incented to get into an electric vehicle. And we like those because they rent for a 4-week period. And in the context of that, we don't touch that car 5 or 6 or 7 times during that period and, therefore, avoid quite a bit of the cost, right, that's there.

Makes sense. One of the -- we were talking about this before we got on stage about whether there's a futility in trying to predict the future. But as you try to plan the business, what are the things that you're looking for in the macro that might define how you think about pivoting around, whether it's a fleet or cost.

It's not dissimilar to when I was here. You don't have a crystal ball. You don't have an ability to sort of forecast either in financial services, any more than in the rental car space kind of where your demand sits deep out past your field of vision. So it means you need to be agile. It means that you need to think about what are the sources for in-fleeting and where you can reduce your fleet and make sure you keep them. So for us, again, new used cars, those that are coming low mileage off-lease are attractive. It's a spot market, I can take up without committing myself on a longer-term basis. I don't think that the residual value on used cars will stay here forever. It will not be the only asset class that holds its value in the world if, in fact, we dip into a softer economy even shy of a recession. So you need to watch that. And you need to have agility across these customer segments to move your fleet around, and you need to be able to move your fleet around from one market to another. We're not hotels. So they can't move a hotel room from St. Louis to Chicago. I can move my car. And I also am availing myself of new channels to sell cars, the likes of Carvana and others, which are proving to be really interesting. I think at some level, to answer your question and to manage in a very agile way, the whole fleet is for sale at any given day, okay? It doesn't mean I want to see the fleet sold, but I'll create price curves to reflect where I think I ought to be and see what part of my asset base is moving off. Getting more rigor around that analysis will help me to do it and help me to do it faster and to be ever more responsive in the context of what the market is showing me.

And just to be clear, it sounds like you already are more agile than maybe Hertz was in prior recessions, but then on top of that, you're trying to get even better.

I think that's true. I mean I'm more agile than where we were, but not as agile as I'd like to be. And so building tools around fleet management, around pricing mechanisms and the like will all put us in a position to be as quick off the mark when we see these demand curves shift about.

Can you talk a little bit about the Tesla strategy? And then how you think about, one, what the economics could look like in a real bull case of some of these vehicles? And then how quickly you could fleet up or down within that?

Well, my view on electric vehicles is not at all limited to Tesla in as much as we've obviously been a big committed buyer upfront. We're taking delivery now of the Polestar electric vehicles that we announced. And I have every intention of buying electric vehicles from GM and Ford, and those will be at different than attractive price points, which will be attractive to the company. Equally, I don't want to over-index to any one OEM. No comment on Tesla, so much as I would make that comment about anybody. You don't want to be subject yourself to being subject to recall or various other sort of issues that could come up. I think that Tesla has built a remarkably interesting vehicle. Their go-to-market direct-to-consumer, I think, is the envy of the OEMs. I think that our experience with the Tesla vehicle has been true to what we modeled in that we're experiencing maintenance costs materially lower than ICE vehicles. They run a little hot on tires because the car is heavy. But obviously, in all other respects, we're not experiencing the kind of maintenance that we do on an expected basis with ICE vehicles. And I think the premium pricing that we're getting in the leisure market equally in the corporate and on the rideshare is attractive. And I suspect it will last on. But again, we won't be the only car rental company with EVs, but I do think the ability to weaponize first learning, right, to put us in a position with corporates and others that have gotten their employees and our customers up that learning curve is not unimportant in the context of maintaining kind of your position around them.

Right. I mean, that's interesting, too, because it could be a lever where if things were to soften in any given category because you have this differentiated growing portion, maybe you'd offset some of that you wouldn't even see it.

True. I mean, again, I don't think it's going to dollar-for-dollar offset that challenge in the market. But as I said before, I view these as buffers. These are mitigants, right, against some of that happening. By the way, I should say -- and this is not an anecdote, this is hard experience. Simply, the experience of in-fleeting electric vehicles is different than ICE vehicles, okay? The mode you take them, how you transport them, where you put them, how you put them, what you do to sort of get them into a position to have people in, like between the first and successive waves of these cars coming in, our team has shaved 2 and 3 and 4 weeks of the time between delivery and customer in seat paying to rent the car. That doesn't happen by accident. It happens because again, it plays to sort of the very strong logistical underpinnings to this business, but there are inherent learnings that are idiosyncratic to electric vehicles.

And can you remind us if there's some CapEx or infrastructure investments that are still on to come? Or how we should think about that over a couple of years?

Well, charging stations. So just to be clear, I am not of a mind that Hertz should be deploying its capital against the nationwide charging network. That's not where I think we need to be. What we have built in 2,000 and 3,000 and maybe 4,000 charging stations on our proprietary sites is only to maintain early kind of the fleet and the fleet size and maintain an ability to keep 80%, 90% utilization on that fleet. To me, there's enough money running around in the world right now targeted toward nationwide and global networks that Hertz doesn't need to be in that. We've got IP and customers to put against that. I would sooner be a very reliable kind of take-or-pay customer on behalf of my customers than a situation in which I need to deploy my own capital to be a proprietary owner of that network. And that money is coming from, in the U.S., for example, the federal government. It's coming from private equity. It's coming from infrastructure funds and the like. And I don't mind being a rider, if you will, right, on those premises.

You can sweat their assets.

Yes. I can sweat their assets, exactly.

One other one just on Tesla, as we were thinking about the unit economics, too, a big kind of unknown is around residual values in these vehicles. Is the general assumption that those residual values will come down versus what we've seen so far? Because it does seem like they've been able to, at least so far, hold residual values remarkably well?

Yes. Well, listen, we're obviously depreciating them consistent with accounting rules. But I think practically speaking, we're probably over depreciating, meaning I think we will hold these cars for an extended period, maybe as long as 5 years. The battery will last us. We'll rekit the interior and keep the car. I think, therefore, what we are depreciating is probably inflated. Now in fairness, the accounting firms don't have a history yet, right, to determine why your depreciation should be better, right, or more positive than as against ICE vehicles. But I think over time, that experience will play itself out, and we'll see a good, if you will, right, embedded in that.

Makes sense. One of the other big themes I think, at this conference and just more broadly has been the recent spike in some ways in rates. To what extent do you think about higher rates impacting the business.

Listen, I think the rate outcome is itself a by-product of supply-demand. Yet, I don't think rate is at a level that it is what I would describe as demand defeating, meaning, I don't think the rate to rent the car even now, even at elevated levels, is at a level that is necessarily changing the basis on which a customer across any of those channels is out there, okay, in renting. And I say that in the following context, take leisure. The leisure customer is spending a lot more on airline on hotel than they are in the aggregate on rental, even at these elevated prices. The business customers out there, okay, doing business if the business requires. This to me is a bit of an incidental, okay? I don't mean to minimize it, but it's a bit of an incidental in the scheme of it all. And on the ride share, I think we've hit a price point which suits the Uber and Lyft driver. It is lower on a per diem basis than what we're getting from the leisure. But again, it's offset by the lack of our required touch on that car. So net-net, net against a much better sort of cost perspective, we're realizing sort of as attractive margin there. So I don't I don't see it as being demand destructive in a way in which it might be at a -- in other industries within your coverage universe where that's possible. Hotels could get expensive. Airline tickets could get expensive such that they're demand destructive. I don't see us being kind of at that level.

But I guess from a debt standpoint and interest rates, specifically on whether it's ABS debt or the corporate side, do you think that, that's something that you would just be able to pass through in terms of pricing to the consumer?

Yes. Bear in mind, 70% to 75% of my debt structure, including ABS, is fixed. So it's not going to be an enormous consequence to me. Therefore, what it is that I need to pass on is not going to be so significant, so as to be of great detriment.

Can you just remind us of how you're thinking about the right balance sheet then for this business and then how that dictates your own capital allocation priorities?

Yes. I mean we're levered now at about 0.5 turn. I think we've said, as an internal governor, 1.5x. We're obviously not there being at the lower end. I think we'll need to be mindful of where the boundaries of EBITDA generation sit, equally take stock of what our fleet requirements are and what our nonfleet CapEx is. But I think we're living in a moment, candidly, of riches that enable us to sort of satisfy what we need to do fleet and non-fleet CapEx and still look to be at attractive prices, an active purchaser of our stock, perhaps not as active as our competitors. But still and all, I think, out there and active. And I would be minded to continue to do that to the extent that we see the intake as significant as it is and the opportunity set as robust as it is.

And to be clear, I think earlier you referenced the kind of $1-billion-plus normalized EBITDA. I realize there's a moving target with like 1.5 but...

More like 1.5.

$1.5 billion, so 1.5x that would be maybe the framework.

Roughly speaking. But I think it's very hard to sort of forecast with precision in the context of the conversation we've been having about the absence of very credible foresight across the whole of the industry on a long-dated basis. But I think people should expect that we will be active buyers of our stock in a moment where we can do that alongside fleet and non-fleet CapEx that we're engaged in.

Makes sense. I've got a couple of other, but I want to make sure that we get some active engagement, if we can. If anybody has -- is brave. Otherwise, I'll jump back.

Of course we're meeting a lot of people in the one-on-ones so I wouldn't...

Yes, understood. All right. So maybe turning to some of the partnerships. You've talked about some of these, but I'll start off with maybe Amex GBT, how do we get comfortable with the upside from that? Or how do you think about how that will impact the business near term and long term?

Remember, a lot of our corporate business is contractual, particularly among larger corporates. Amex GBT has opened up the midsized corporate sector in a very meaningful way, and I think that's attractive. Hard to put a number to it just yet, but we're seeing good and reasonable flow out of that. And I think it's a good precursor to what we were talking about in terms of on and after businesses around third-party fleet management and the like, meaning, I think sourcing a good sort of component of midsized businesses will inherently be a good thing for us.

So that partnership changed such that it's both new opportunities and then also...

In here and now, and I think holding option value, if you will, on where our relationship with those midsized businesses could come.

Got it. And then on Carvana, maybe if you can talk to what you ultimately think you can kind of push through that channel and what the difference is?

Listen, we really like the channel. I mean that channel, along with our own proprietary retail, used car channel, yields 5% better than what we get in the auction. So I'd love to do more with Carvana. I'd love to do more with business models like it. It runs into that sort of category of how can you do business in a very active engagement where you can price your fleet and you can get into a rhythm like we are with Carvana. With a picture and description, price, they have access to your fleet and you just move cars that way. And so it's quite attractive. I mean I'm mindful of sort of the capital market and market challenges they have. But from a pure execution point of view, we still see Carvana as being a viable and very viable channel for us.

And maybe a follow-up on that. Do you -- what amount of data do you share back and forth? And can it ultimately dictate even through better data analytics what cars you want to buy and better matching?

Listen, I mean we sit on and have access to enormous troves of data. Historically, I don't think we've mined it effectively and certainly haven't used it effectively. And I think all of these sensors, if you will, whether it's telematics on our fleet, what we pick up from Carvana, what's coming through channels like Amex GBT, they're all indicators that we need to be digesting in the context of how to manage fleet and so forth.

Awesome. Well, we are out of time. Next up will be the lunch keynote panel. So there are actually lunches outside, if people want to grab them, and then we'll be meeting back here. Stephen Scherr, thank you so much for all the time.

Thanks. Great to be here again. Thanks a lot.

Thank you.