Hertz Global : Q1 2024 Transcript

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EDITED TRANSCRIPT

HTZ.OQ - Q1 2024 Hertz Global Holdings Inc Earnings Call

EVENT DATE/TIME: APRIL 25, 2024 / 12:30PM GMT

OVERVIEW:

Company Summary

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APRIL 25, 2024 / 12:30PM, HTZ.OQ - Q1 2024 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

Alexandra Dawn Brooks Hertz Global Holdings, Inc. - Executive VP & CFO

Darren Richard Arrington Hertz Global Holdings, Inc. - EVP of Revenue Management & Fleet Operations

Johann Rawlinson Hertz Global Holdings, Inc. - VP of IR

Justin R. Keppy Hertz Global Holdings, Inc. - Executive VP & COO

Wayne Gilbert West 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

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

Christopher Nicholas Stathoulopoulos Susquehanna Financial Group, LLLP, Research Division - Associate

Elizabeth Dove Goldman Sachs Group, Inc., Research Division - Research Analyst

Harold Antor Jefferies LLC, Research Division - Equity Associate

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

John Michael Healy Northcoast Research Partners, LLC - MD & Equity Research Analyst

John Plimpton Babcock BofA Securities, Research Division - VP

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

Operator

Welcome to Hertz Global Holdings' First Quarter 2024 Earnings Call. (Operator Instructions) 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.

Johann Rawlinson - Hertz Global Holdings, Inc. - VP of IR

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, and these can be accessed through the Investor Relations section of our website. I would like 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 risks and 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, 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. Our filings are available on the SEC's website and 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 and earnings presentation available on our website. We believe that these non-GAAP 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.

On the call this morning, we have Gil West, our recently appointed Chief Executive Officer; Alex Brooks, our Chief Financial Officer; and Justin Keppy, our Chief Operating Officer. We are also joined by Darren Arrington, our Executive Vice President for Revenue Management and Fleet. I'll now turn the call over to Gil.

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APRIL 25, 2024 / 12:30PM, HTZ.OQ - Q1 2024 Hertz Global Holdings Inc Earnings Call

Wayne Gilbert West - Hertz Global Holdings, Inc. - CEO & Director

Well, thanks, and good morning, and thank you all for joining the call today. I want to acknowledge right upfront that this was a challenging quarter for Hertz. We have a lot of work still to do, and I'll get to that shortly. But since I'm new to most of you, I want to take a few minutes to introduce myself before we dive into the numbers. So let me start by saying that I'm excited to be here. And there's a lot of reasons for that. And first, this is a great company with an iconic brand. Hertz invented the car rental business and has introduced many innovations over the years. .

I've been looking at the brand data and talking to customers, and I'm struck by how many of them have been fiercely loyal to the brand. And I've been one of those customers for a long time. Customer loyalty is the key to success in a business like ours. I'll come back to that point. Second, I'm deeply impressed by the Hertz people I've met: at the airport rental counters, in our behind-the-scene operations, in our call centers, and at our headquarters here in Estero. They are committed to the business and want to win. They are full of good ideas and have a deep desire to serve our customers.

Third, I see enormous potential for the company. Hertz has over 100 years of experience managing physical assets and operations at scale. We acquire nearly 20 million unique customers a year, operate over 11,000 global locations, drive 80% utilization of assets, and have over 0.5 million vehicles. And this creates a powerful platform that positions our company well for the future. Fourth, and this is personal, but I love cars. I got my start in my father's auto parts store when I was a kid. I've repaired, traded, collected and raced cars as a hobby my whole life. So leading a company that's in the business of cars is a dream come true for me. As I've said at the beginning of the call, we have a lot of work to do. So getting ahead of our challenges is what we owe our customers, our people, to our investors. And I look forward to leading the team to make it happen.

As I'm settling into my new role, there are a number of key priorities I'm focused on. It starts with having the right fleet. So balancing short-term decisions with long-term implications to drive a better return on assets. This includes making sure that we have the right supply and demand balance of our fleet, at the appropriate capital cost. Decisions around our fleet are based on return on assets and the discipline of fleeting inside the projected demand curve to ensure we achieve favorable revenue per day and revenue per unit performance, along with better managing our residual value risk.

Next is delivering operational excellence, which is fundamental and leads to best-in-class unit cost and a superior customer experience and, in turn, higher unit revenues. We must leverage our products, our fleet, our brands and our customer experience to keep customers coming back, and delivering a value proposition which commands a higher yield. We also must deliver on our operational cost and productivity initiatives that you heard about on our last call. And I'm an operations geek and have been for most of my career. For me, operational excellence is essential, and execution is the key.

So in my prior life with the airlines, I was part of the team that transformed the industry from leveraging operational excellence and our products to deliver a better customer experience. And through that customer loyalty, we were able to deliver unit revenue premiums to the industry, and combined with our obsessive cost management, achieved unprecedented profitability. Putting those same pieces together here at Hertz will unlock premium revenue and put us in control of RPD to drive growth, profitability and value.

So while it's early days for me, I'm eager to look further down the road at more ways Hertz can compete and win. But none of that is to take our eyes off the short-term operational priorities. Our quarterly results were unacceptable and reflected the impact of a decline in forward residual values used to determine vehicle depreciation, coupled with our EV rationalization and elevated cost structure. And to go a step further, while overall demand for travel remains strong, our RPD remains well above pre-COVID levels. Our revenue performance is not fully capturing the opportunities available to us.

This is also immediate focus area for the team. And as we've said previously, 2024 will be a transition year for us. The necessary work is already underway. And I know Hertz people wake up every morning eager to run the best operations possible to delight our customers, win their loyalty, create value, manage cost, and win in the marketplace. That's why -- that's really why I'm energized to be here, and that's why I'm so optimistic. I look forward to your questions later in the call. But first, I want Justin to bring you up to speed on our delivery against our operational commitments, and then Alex will do the numbers. So Justin, over to you.

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APRIL 25, 2024 / 12:30PM, HTZ.OQ - Q1 2024 Hertz Global Holdings Inc Earnings Call

Justin R. Keppy - Hertz Global Holdings, Inc. - Executive VP & COO

Thank you, Gil, and good morning, everyone. Revenue for the quarter was $2.1 billion, and we recorded negative adjusted corporate EBITDA of $560 million, heavily impacted by higher-than-usual depreciation expense and EV charges. Alex will go deeper into Q1 financial performance. As Gil stated, we have challenges to address. We have a broad understanding of the drivers pressuring performance. Over the last 3 years, anomalous supply events in the auto industry impacted our business in various aspects of the P&L, including elevated maintenance, higher cost of collision and damage, and most recently, elevated vehicle depreciation.

Coming off of peak residuals and new vehicle purchase prices of 2022, used car prices have decreased over the last 12 months and new vehicle cap costs are only recently moderating. We expect this moderation to continue and that the elevated P&L impacts will subside. But in the interim, these events exposed other opportunities in the business beyond the acute EV impacts, which we are addressing with a concerted focus on rotating the fleet mix towards lower mileage and lower cap vehicles which will have a direct positive impact on reducing vehicle depreciation and DOE.

On that note, let me share a few updates on our fleet and strategic initiatives prior to providing status on our productivity progress. Starting with our fleet. As discussed in the Q4 earnings call, we entered January at an elevated level. And for the quarter, our global average fleet was up 9% year-over-year. We depleted throughout the quarter and by March, our core rental fleet was tighter, up only 2% year-over-year. We plan to maintain tighter as we move into the summer season, which we expect to correlate with improved RPD performance, coupled with easier year-over-year compares.

Looking at the composition of our fleet, we are addressing the mix to lower the average cap cost and reduce the tail of higher mileage vehicles. Elevated cap costs are the consequence of a relative vehicle shortage and higher trim levels and MSRPs, which characterized recent vehicle purchases, inclusive of preowned vehicles. As we refresh the fleet, the cost and age profile is expected to reduce with corresponding improvements in vehicle depreciation and DOE.

With our recent vehicle purchases, we are having more influence on make and model mix, and trim and option configurations, which is bringing down our cap costs. We expect this trend to continue and we'll continue to manage this critical input, in line with our ROA focused approach to our vehicle purchase decisions. Within our RAC fleet, we expect to reduce vehicles with higher mileage by 75% and complete the rotation out of preowned vehicles by early 2025. This fleet refresh is expected to result in lowered vehicle depreciation, lower direct operating expenses, and deliver an improved customer experience.

Turning to EVs. We previously announced our plan to reduce the EV fleet by 20,000 units. And by the end of Q1, we sold about half of them. Given this progress, we increased the EV disposal plan by another 10,000 units, bringing the combined reduction to 30,000 vehicles, which we expect to complete by the end of the year. Upon completion, we anticipate that the remaining EV fleet will be better aligned with attractive demand for EVs with a priority on our rideshare business. Alex will discuss the impact of these sales during the financial overview.

Now let me transition to our profitability initiatives. To echo Gill, our profitability initiatives are designed to improve unit economics through revenue, as well as costs, with an opportunity to generate an incremental $500 million of adjusted corporate EBITDA. They fall into 3 categories. First, we are focused on the creation of profitable incremental revenue by growing rideshare and improving our European and value brand businesses. Second, yield enhancement on existing assets. These are initiatives designed to improve the yield on our core business and the assets deployed against it through a focus on improved revenue management. And third, our relentless focus on productivity and cost, reducing both direct operating costs and SG&A.

Overall, of the $500 million in the recurring adjusted corporate EBITDA improvement, we expect approximately 2/3 to be cost driven and 1/3 to be revenue-driven. I will briefly highlight some of the progress on our revenue activities before going deeper into cost. Starting with our value brands. We are focused on improving both NPS and RPD. In Q1, we launched new digital tools that enable skip the counter, reducing wait times and improving customer satisfaction. We plan to roll this capability out to our top airports prior to peak season.

Direct booking momentum is building on our dollar.com website, and recently, we launched a nonrefundable prepaid booking option, which is gaining traction by our customers. Our Q1 expansion of Dollar Thrifty brands to our North America off-airport network is also showing promise

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APRIL 25, 2024 / 12:30PM, HTZ.OQ - Q1 2024 Hertz Global Holdings Inc Earnings Call

and offers adjacent complementary growth beyond our airport locations. Turning to our rideshare business. We are well positioned, and I am pleased to report that we've renewed our partnerships with both Uber and Lyft. Rideshare presents an attractive demand for both EVs and ICE vehicles, and offers an adjacent growth opportunity, lessening the impact of seasonality in the core RAC business.

With revenue management, we saw double-digityear-over-year improvements of our VAS, or value-added services revenue through enhanced offerings, with a focus on selling upgrades. We expect to have further innovation within our VAS product offerings to be a tailwind going forward. Lastly, we launched our Hertz and Dollar brands and T-Mobile's Magenta Status program, and we recently renewed our long-standing strategic relationships with the Air France-KLM Group and Marriott. We are also excited about our expanding relationship with Signature Aviation in the private aviation space.

Shifting to operating costs, direct operating expense, or DOE, per transaction day was $37.08 in the first quarter, flat versus Q4 despite seasonally reduced transaction volume and inflationary pressures. We anticipated that Q1 would be a period where we ramped up our productivity and cost benefit activities, resulting in $250 million of savings realized in 2024, which are realized through the year but are back-end weighted.

So where are we on the productivity and cost benefit journey? We are seeing momentum building on these efforts, and I believe we are on track to achieve our 2024 targets. We have detailed action plans, a governance process, and are in full execution mode. During March, we saw progress on these cost items, and our DOE per day showed sequential monthly improvement. Our March DOE per day was $35, 5% lower than the quarterly result and 2.5% lower than Q1 of 2023. I foresee the run rates on the actions initiated so far will account for more than half of our annual target, but we are far from done and expect accelerating momentum into the second half.

To share some examples of progress across the business. We have taken headcount actions and reduced third-party spend with line of sight to $100 million year-over-year improvement. In Q1, we closed 125 underperforming locations. We are in the final stages of contract negotiations for providers of our major commodity categories and anticipate productivity as we consolidate the spend. We continue to reduce the size of our EV fleet, resulting in lower operating costs, specifically with a reduction of transportation costs associated with remote charging. We rolled out enhanced workforce management tools to our top airports, tightening our third party and overtime by nearly 400 FTEs in North America.

While damage and collision are showing inflationary headwinds, we are mitigating full impacts through digital vehicle incident reports and counter collections, and we expect to start seeing benefits of the EV defleet and overall fleet rotation as we head into the second half. All cost areas are being assessed and new opportunities are being added to the pipeline, with March productivity exit rates providing a good baseline to build from. The entire organization is mobilized both on revenue and productivity to deliver improved profitability. Now let me turn it over to Alex.

Alexandra Dawn Brooks - Hertz Global Holdings, Inc. - Executive VP & CFO

Thank you, Justin, and good morning, everyone. Revenue for the quarter was $2.1 billion, slightly up year-over-year, driven by an increase in volume. We recorded an adjusted corporate EBITDA loss of $567 million, which is disappointing and unacceptable. Although we continue to be impacted by elevated costs, which Justin covered, the key driver of the loss is the increased vehicle depreciation, which has increased $588 million year-over-year.

For the first quarter, DPU was $592, of which $119 was due to incremental vehicle depreciation expense related to the EVs held for sale. We recorded a charge of $195 million to recognize a fair value adjustment for EVs remaining in our inventory at quarter-end, and to recognize losses on those units sold. DPU, excluding the EV charge of $473, is elevated due to declining forward residual estimates. Taking a closer look at revenue, revenue per day of $56.68 followed typical sequential seasonal trends. The year-over-year decline narrowed as we moved through the quarter. January RPD was down 10%, while March was down only 3% year-over-year. And we see the March trend continuing through April. We believe this rate performance to be the consequence of intra-quarter seasonality and the tightening of supply.

Volume for the quarter increased by 9% compared to 2023, driven by higher volume in leisure and rideshare. Exiting the quarter, our RAC fleet was up 2% compared to the prior year, which demonstrates the deliberate action we took to adjust our fleet level. Fleet tightness improved month-over-month as we systematically disposed of excess vehicles that we carried into the quarter. As a result of early overfleeting in the quarter, utilization was down 120 basis points year-over-year.

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APRIL 25, 2024 / 12:30PM, HTZ.OQ - Q1 2024 Hertz Global Holdings Inc Earnings Call

Overall, for the quarter, our adjusted corporate EBITDA reflected elevated vehicle depreciation, which was further burdened by the nonrecurring EV charges and an elevated cost structure that does not yet include the benefit of our various cost initiatives. In particular, the natural rotation of our fleet expected to occur fully over the next 18 to 24 months will allow us to materially reduce vehicle cap costs and better match vehicle type to demand. This rotation will drive a decrease in DPU to the low 300s and a corresponding reduction to collision and damage expense as well as maintenance expenses, both of which burdened DOE.

Turning to our capital structure and liquidity. With respect to our balance sheet, net corporate debt at the end of the first quarter was $3.25 billion. While this places us above our long-term leverage ambition, we intend to delever over time as our operational initiatives yield improved profitability. I would remind you that our net corporate leverage ratio is not comparable with our first-lien covenant ratio, which only applies to our first lien debt. In terms of the first-lien debt, earlier this week, we announced an amendment to the financial maintenance covenant in our credit agreement for the first-lien revolving credit facility to temporarily increase the consolidated first-lien leverage ratios. We took the opportunity to create additional operating flexibility for the company as we work through the fleet rotation and improved profitability initiatives.

Our available liquidity at March 31 was $1.3 billion, comprised of $465 million of unrestricted cash and the balance available under the first-lien revolving credit facility. At March 31, we had $2.7 billion of capacity under our vehicle debt facilities globally, with a portfolio that was approximately 70% fixed rate. We maintained sufficient equity cushion in our global ABS facilities. Earlier this month, we extended the maturity on our $3.8 billion U.S. ABS variable funding note facility from June 2025 to April 2026. We believe we have sufficient liquidity to execute the fleet refresh discussed earlier.

Turning to our cash flow. Adjusted free cash flow for the quarter was an outflow of $729 million. Although the first quarter is seasonally a negative cash flow quarter, the size of the outflow was driven by the quarterly results. Despite the challenging quarter behind us, I believe we are pointed in the right direction, and we have credible plans to achieve success. We're operating in a constructive travel environment with demand showing continued year-over-year growth. We will not add vehicles to the fleet simply because they are less expensive. Instead, we strive to stay inside projected demand. We know that the value of the business is enhanced by a disciplined approach to fleet management.

A final comment. We have outlined the meaningful initiatives that are in place to improve the financial results of the company. As we work through the implementation of those initiatives, we will hold off on formal quarterly guidance. I'm going to hand back to Gil for closing remarks before we go to Q&A.

Wayne Gilbert West - Hertz Global Holdings, Inc. - CEO & Director

Thanks, Alex. Yes, before we go to questions, I'd like to leave you with a view of what a transition year means for us. And it's about setting ourselves up for long-term success in 2025 and beyond. It's about being great at the basics. So operational excellence, customer service, and using that as a springboard for productivity and revenue growth.

We're setting up the fleet to move DPU from being a headwind to a tailwind by rotating the fleet, lowering vehicle cap costs, optimizing fleet mix, and increasing retail sales and mitigating residual value risk. This is also the year of growing premium revenue, getting Dollar Thrifty on RPD and NPS parity with the marketplace, and creating a unit cost advantage.

Lastly, it's about using technology and leveraging it as an enabler for all the things I just mentioned. Staying focused and executing on these things throughout the year positions Hertz for success going forward. I'm energized to be leading Hertz. We know we have big opportunities, and we're attacking them in order to drive the unit economic improvements for RPD, DOE per day and DPU. As an operator, I'm going to be obsessed with execution as we move forward. So with that, let's open up the call for Q&A.

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APRIL 25, 2024 / 12:30PM, HTZ.OQ - Q1 2024 Hertz Global Holdings Inc Earnings Call

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions) Our first question will come from line of Chris Woronka from Deutsche Bank.

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

Gil, welcome to the company. I guess, look, I know it was a rough quarter and, Gil, you're very new to the seat, you've been there, I guess, a little over a month. But I wanted to start off with just kind of maybe you can give us a general overview of kind of where you see this business going. And if you want to draw parallels to the airline business or something else. But just your higher-level views on where this business could get to. And then I have a follow-up.

Wayne Gilbert West - Hertz Global Holdings, Inc. - CEO & Director

Yes. Okay. Well, first, thanks for the welcome, Chris, and the question. So yes, first, I see a lot of potential for Hertz. And I think we've got to stay focused on unit economics for the business. So there are many inputs, of course, but the combination of the vehicle depreciation rate, unit costs and unit revenues are the most influential on our earnings. So as we're sitting here, right, our DPU is over $400, our DOE per day is at $37, and our RPD at $57, which is not where we want to be for our business. So we're highly focused on our operations and our customer experience and products along with our go-to-market approach and our fleet management to achieve more sustainable combination of the input.

So we want to create a business that's resilient and can be successful in a wide range of macro and other economic scenarios. And the best way to do that is to optimize our unit economics. And the way I'm looking at it is -- and of course, I'd preface it by -- I've been here a little over 3 weeks. But the way I'm looking at it is RPD and DOE per day have the ability to improve faster than DPU. So even though the residual values and new vehicle prices can normalize quickly as we've been seeing recently, DPU ultimately requires a fleet rotation. And then that's a function of our hold period. So timing is just naturally going to lag.

So from everything I've seen so far, and as I think about the business longer term, I think we've got to work towards kind of the following North Stars. So we've got to be able to pass through inflation and other cost pressures in revenue. So pushing RPD into the low 60s. And then as our fleet plan changes start to land as we've discussed, DPU reduces to the low 300s. And with the product initiatives that Justin updated us on, DOE per day should reach the low 30s. So I mean these are attractive unit economics that produce financial outcomes that are far better than where we sit today.

So we've got to pull all the levers to achieve these metrics over time, of course. And we've got to be disciplined around fleet and prioritize rate. And then I also think we've just got to run leaner and continue to improve utilization. We've got to better align our fleet mix with the core demand. Of course, grow retail vehicle sales through -- I mean, one, our footprint, with the partnerships that we have. And beyond that, I see additional growth opportunities beyond our core RAC business. But we've got to stay focused on the basics first. So thank you.

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

Okay, very helpful. And then a follow-up, and it might be -- maybe it's a little bit more for Justin or Darren since it's a little more detailed on fleet related, which is trying to square the, I think, the commentary that you exited March up 2% on fleet. I mean, as you're trying to grow fleet less than demand, I mean how should we look at that over the balance of the year at a high level? I mean is there going to be less -- it almost implies like you would grow demand, that you would have demand less than 2%. Just trying to square. And then on the fleet really, just how do you get there? If you're selling EVs, how many more, I guess, ICE cars? Is it a one-for-one refresh? Or any kind of color we could get on that, just kind of square how you see the utilization playing out over the balance of the year?

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APRIL 25, 2024 / 12:30PM, HTZ.OQ - Q1 2024 Hertz Global Holdings Inc Earnings Call

Darren Richard Arrington - Hertz Global Holdings, Inc. - EVP of Revenue Management & Fleet Operations

Sure. So this is Darren. Thanks, Chris. So you've got it right on the fleet. We exited the quarter with our core fleet up only 2%, which we feel like we made really good progress through the quarter to get that fleet under control. You can expect that we will keep that tight and underneath what the indications are as to where travel is. We see travel indicators, including data from the airlines and ticketing data on the advance, that are up in the mid-single-digit range. And you can expect that our fleet plans right now have a similar gap in terms of our growth relative to that as we go through the peak here. So we believe it's very important to keep the fleet well underneath where the demand is at and that's going to give us the best chance to work our mix optimally so that we can get good yielding opportunities.

We also -- what I'd say on the fleet, you asked how do we get there? We're selling EVs. Are we replacing them one for one? We're not replacing them one for one as we take them out of the fleet. We realized lower utilization than what we really want to be at on the EV fleet that we have. And so as we think about the rotation of EVs out of the fleet, which were producing lower utilization and replacing that with an ICE car, which we believe will run higher utilization on, we do not need to replace them one for one. We also receive a cap cost benefit from doing that as the prevailing cost on EVs are higher than what they would be on a replacement ICE car.

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

Okay. Very helpful.

Operator

And our next question will come from the line of Ian Zaffino from Oppenheimer.

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

So Gil, [just have similar question here], since you've been there for so long. But I guess as new CEO, what are you going to be prioritizing as investors and analysts -- any type of major changes or shifts in strategy we should expect? I know there was some talk on the prepared comments about some premium. I mean what does that mean? How do you get there? What does it take to do that? And then I have a follow-up.

Wayne Gilbert West - Hertz Global Holdings, Inc. - CEO & Director

Yes. Thanks, Ian. You were breaking up a bit. But as I understood the question, really around priorities and strategies kind of as I come in. So I'll talk about that a bit. I think I mean the focus I'm driving really starts with being what I would call great at the basics. So it's about operational excellence and customer experience. And then those 2 things really, again, unlock the unit cost and premium revenue opportunities. So we'll have a renewed focus on just rebuilding the foundation, right? And that never ends from my perspective. We can always do better and better and better and never be satisfied.

And then I think there's the 3 pieces that we've touched on, but it's probably worth just reiterating them again. Fleet, first of all -- and it's -- and to me, again, it's moving it from a headwind to really a competitive advantage. So we got to rotate out of our inflated vehicle cap cost, but do that in an orderly fashion as the market normalizes and continues to move from what was a seller's market during COVID, to a buyer's market and rationalize our EV fleet. But then we also need to continue to work on the demand side of that and improve our product market fit. So we're -- as Darren alluded to, we've got to optimize our EV allocations really into the right segments. So we're fortunate, and we'll optimize those in terms of ride-hail business, off airport operations, and then airport, really in that order.

And then we've got to continue to optimize our fleet mix more in line with the core customer demand as we rotate out the fleet. And then there's big opportunities to keep growing our retail sales channels. And as we're experiencing now, we've just got to mitigate our residual value risk as we go forward. So that's the first big one. Revenue, again, we just got to up our game in revenue management and grow premium revenues. So that starts again with the customer experience. So we can create that differentiated sticky customer experience.

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APRIL 25, 2024 / 12:30PM, HTZ.OQ - Q1 2024 Hertz Global Holdings Inc Earnings Call

And then we just -- we've also got to really elevate our RM tools, tech, talent as needed. And then as we talked about the -- we got to elevate the value brands: in Dollar Thrifty, experience, net promoter score, and achieve RPD parity with the marketplace. It's a really big opportunity for us. We'll keep driving profitable growth in ride hail, we'll keep driving growth in international, in particular, in the EU with [Elias'] leadership, and then keep growing our value-added services. And then, of course, finally, cost, and as I mentioned earlier, we've got to run excellent operations, continue to do that, and never be satisfied there. And then that really drives productivity.

And then we've got, as Justin went through, an extensive and growing list of initiatives. And we got to keep accelerating those. And kind of me coming in, it's another set of fresh eyes. So I've seen a number of new opportunities that we're adding to the list. And then, of course, we've got to leverage our tech as an enabler for those. The fleet rotation too will give us a tailwind on the direct operating costs that we need to take advantage of. And then we've got to also exploit our supply chain management. We've got $3 billion of spend there. So a big opportunity to go after.

And I mean, the way I would sum the cost piece up is, I'm a unit cost fanatic, so I think we need to create a competitive cost advantage here and have the opportunity to do it. We've got to always -- look, I mean there's always factors that we can control and those we can't, at least in the short run. I think you can control virtually anything over the long term. But we've obviously got to prioritize our focus around the factors more in our control and cost is the variable we can control the most. So I'm confident we can bend that curve. But everything comes down to execution, and that really is a key part of my priorities, is that we execute strongly here, and we over-index there. Thank you.

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

Okay. Great. That was very helpful. And then can you guys just maybe briefly talk about what you're seeing of the ICE versus EV performance maybe, from a depreciation perspective, direct OpEx, and how are they kind of tracking with each other, are they not? And then as far as the divestiture of the incremental 10,000 vehicles, what kind of precipitated that? Is it a more liquid market than you had thought? Are you getting higher prices than expected? Maybe help us understand what's driving that.

Alexandra Dawn Brooks - Hertz Global Holdings, Inc. - Executive VP & CFO

Why don't I -- this is Alex. Why don't I kick off with the question on ICE versus EV residuals, and then what kind of tag-team here and kick it over to Justin. So we did see EV residuals declining at a more severe rate than ICE vehicles during the quarter. And I think you saw that in the adjustments we made to the EVs held for sale. So we recognized a loss on the EVs that were disposed of during the quarter relative to what we marked them at, at the end of the year. And we also had to recognize a mark-to-market loss on the EVs that we were holding in inventory. The combination of those was about $81 million and is accounted for in depreciation expense for the quarter. So that's the impact you see there. And of course, we would have made appropriate adjustments to the EV fleet that is part of our regular fleet and that held for inventory as we look at forward residuals. With that, I'll turn it over to Justin to comment on the movement of the 10,000 vehicles.

Justin R. Keppy - Hertz Global Holdings, Inc. - Executive VP & COO

Yes. Thanks, Alex. So first of all, I'd like to say that we're about providing our customers with choice, and we do see attractive demand for EVs. Natural markets are the rideshare, which continues to grow, is up over 50% year-over-year from a quarterly basis. And also on the off-airport as well as airport, we do see demand. That said, our mantra has been our ROA mindset and keeping supply inside of demand. And we're moving forward with the further rightsizing the incremental 10,000, bringing the total population of EVs that are being looked at to sell to 30,000.

And it's kind of the decision of why is our progress here in Q1, we've sold about 10,000, which puts us on track to certainly meet the 12-monthhold-for-sale sale period, and continue with that momentum. And if we rightsize this EV fleet, we expect a couple of things. One, it will be better aligned with demand, which we expect to improve both utilization as well as RPD as we align it with customers that are seeking out the EVs.

And also, it's going to eliminate a portion of collision with renters that are not familiar with the operations of driving a new EV who otherwise would have chosen to take an ICE vehicle, which, unfortunately, what they're needing to take an EV based on the fleet mix. So again, with the benefit from a reduction of fleet carrying costs, the lower operating costs also are with maintenance and transport, as you think about things with remote

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APRIL 25, 2024 / 12:30PM, HTZ.OQ - Q1 2024 Hertz Global Holdings Inc Earnings Call

charging, we see a combination of benefits by further taking down an additional 10,000 that will rightsize demand with our supply. Thanks for the question.

Operator

(Operator Instructions) Our next question will come from the line of John Babcock from Bank of America.

John Plimpton Babcock - BofA Securities, Research Division - VP

I guess, my first question is just on the liquidity front. I mean we've gotten a lot of questions from investors on this. And I was wondering, first of all, if you could just talk about what tools you have to boost liquidity. That would be useful. And then also just generally how you're thinking about it, particularly in line with refreshing the fleet and how you'll execute on that and whether that potentially entails reducing the fleet. You did talk about keeping supply below demand. So maybe that's the answer. But maybe you can just talk broadly about that and how you'd guide investors. That would be useful.

Alexandra Dawn Brooks - Hertz Global Holdings, Inc. - Executive VP & CFO

Yes, John, this is Alex. Thanks for the question. I said it in my prepared remarks, but it's worth repeating, that we believe we have sufficient liquidity to complete the refresh as we have planned for it. So let me just put that out there. In terms of our tools to manage liquidity, you're absolutely right in pointing to our fleet management as being the most pervasive tool we have. So we do have a plan for a fleet rotation that includes deleting some of our higher cap cost vehicles that enables us to purchase new vehicles come in at a lower cap cost. When we do that, that actually improves our liquidity because the debt that we take on during that will be less than the debt we have outstanding now on these higher cap cost vehicles. So that rotation improves liquidity. And we have line of sight to what we need to do for the end of this year and maintain sufficient liquidity.

John Plimpton Babcock - BofA Securities, Research Division - VP

Got you. And then next question, and I know you're not providing any sort of quarterly guidance, but I was wondering if you might be able to provide some either qualitative or ideally quantitative, but at least qualitative, guidance on how we should think about fleet costs over the year because it's very unpredictable from quarter-to-quarter as we've seen, particularly in light of the decline in used prices. So any sort of color you could provide on that, whether it's going to go up, whether it's going to go down, or if there are certain factors we should be paying attention to get more color on that? That would be helpful.

Alexandra Dawn Brooks - Hertz Global Holdings, Inc. - Executive VP & CFO

Yes. I think Darren's comments around where we expect fleet size to be relative to overall demand and how we're running a tight fleet should provide an overview of what we expect to happen just with our -- the size of our fleet. So taking into account the size of our fleet, and as I mentioned, rotating out higher cap cost vehicles and replacing those with lower cap cost vehicles, is we expect the expenditures on fleet to be relatively stable through the end of the year.

Operator

And our next question will come from the line of John Healy from Northcoast Research.

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