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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to Hertz Global Holdings First Quarter 2022 Earnings Call. [Operator Instructions] I would like to remind you that this afternoon's call is being recorded by the company.
I would now like to turn the call over to your host, Johann Rawlinson, Vice President of Investor Relations. Please go ahead.
Good afternoon, 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 that can be accessed on our website.
I would like to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance and by their nature, are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of today's date and the company undertakes no obligation to update that information to reflect changed circumstances. Additional information concerning these statements is contained in our earnings press release and in the Risk Factors and Forward-Looking Statements section of our 2021 Form 10-K and our first quarter 2022 Form 10-Q filed with the SEC and on the Hertz website.
Today, we'll use certain non-GAAP financial measures, which are reconciled with GAAP numbers in our earnings press release available on the Investor Relations section of our website. We believe that our profitability and performance is better demonstrated using these non-GAAP measures. Comparisons discussed will exclude the effects of Donlen fleet leasing and management business, which we sold in March 2021.
On the call this afternoon, we have Stephen Scherr, our Chief Executive Officer; and Kenny Cheung, our Chief Financial Officer.
I'll now turn the call over to Stephen.
Thank you, Johann. Good afternoon, everyone, and welcome to our first quarter earnings call. This is my first call as the new CEO of Hertz, and I look forward to speaking and meeting with many of you in the coming weeks and months.
Let me start by saying how proud I am to be a part of this company. My first 60 days have been exciting and have provided me with valuable insights into the business, both in terms of what we do well and equally where we need to improve. I've spent considerable time with our senior leadership team as well as our colleagues in the field at locations across the country.
My initial impressions are uniformly positive and consistent with what attractive need to the opportunity to lead this company. Hertz possesses an extraordinary brand, a brand that is commercially powerful and that aligns well with other emerging leaders in mobility. It is also a brand that attracts talent, both in terms of retention and in bringing new talent to the company. Hertz benefits from an exceptionally resilient workforce with employees that have long tenure at the company with a deep appreciation for and relationship with our customers. These tenured employees, combined with new and innovative talent is a powerful combination.
Hertz enjoys an exciting first mover advantage with electric vehicles now deployed across more than 30 markets in RAC and TNC. A considerable portion of our fleet will be electric by year-end with promising economics as EVs command higher pricing and draw lower operating costs. We are benefiting from early performance analytics and a growing roster of OEM partners. And of significance, Hertz operates from a position of financial strength, following its reorganization with impressive cash flow conversion, a renewed focus on returns, low leverage and a disciplined fleet size that is more in balance with demand at better margins than where the industry has been historically.
I took the CEO seat at Hertz because this company has the potential to reimagine its customer offering, produce higher returns and grow through its participation in the mobility equation through improved technology and better use of data. Hertz will continue to move people and things as it has throughout its 103-year history, except we will do it now in the context of a changing mobility landscape. We are building a more diversified fleet, including electric vehicles and a wider set of customer channels, including individuals, corporates and ridesharing.
At its core and borrowing from my past, I have come to view Hertz as an asset management business that combines vehicle purchasing, renting and disposition into a single analytical framework against which we measure returns. With a renewed focus on customers and greater attention to return on our assets, the Hertz of the future will be fundamentally different from the Hertz of the past.
There is much to do, the journey to improve our technology is underway. From the use of mobile phones to the deployment of telematics to the incorporation of artificial intelligence, Hertz will be in a better position to serve our customers, to price our assets and to manage our business.
We are building in the cloud with API architecture to enable Hertz to partner with others. We will have nearly the entire North American fleet equipped with telematics by year-end. All technology need not be built by Hertz as we can embed existing advancements in our systems at lower cost. What's more, with a growing EV fleet and a network of charging stations on our premises expanding to 3,000 across 80 markets by year-end, we will participate in the development of a new large-scale charging network being conceived both in the U.S. and abroad. Interested parties include governments, private capital, energy companies and infrastructure investors. As the mobility ecosystem changes, Hertz will play in it and grow with it.
To accomplish our objectives, we must compete in the race for talent. On this score, we are beginning with an exceptional base. As I noted, I have met with some of our Hertz professionals who have been with us for 25, 40 and even close to 50 years. We are also attracting new talent with a focus on engineering, technology and product design to a new and exciting opportunity at Hertz, including our announcement this morning of a new Chief Product Development Officer and recently around a new General Counsel.
We also implemented a company-wide profit sharing program, which means now all Hertz employees will participate in our success and will be awarded with cash bonuses as we hit profitability and customer satisfaction targets. Combining young innovative talent with technology will be a priority for the company in the pursuit of our strategic objectives.
The results in the first quarter, which Kenny will detail, tell a story of 2 halves. The first 6 weeks of the quarter were softer than expected due primarily to the impact of Omicron and lower volumes. By late February, we began to see demand rebound and our results for the back half of the quarter compensated for the initial softness. March was the first month since the onset of the pandemic where revenue exceeded its 2019 level, and we are seeing that momentum continue into April.
The progressive improvement in rentable utilization from January through February into March, moving from 66% to 80% across the quarter was a good indicator of that momentum as well as a reflection of stability in demand and solid management of the fleet. Total revenue for the quarter was $1.8 billion, a 57% improvement from the prior year period and adjusted corporate EBITDA was $614 million, a margin of 34%. While a portion of our results are unquestionably attributable to positive market forces, they also reflect pricing disciplines, structural improvements made to the business and strength in the residual value of the fleet. Current conditions provide us with an opportunity to invest in our future and to reduce our equity base through share repurchases.
Like others in the industry, we are experiencing the impact of constraints on the supply of new vehicles as well as certain inflationary cost pressures. It remains difficult to source fleet to meet demand, and this dynamic may well persist into 2023. The recent industry dynamics of limited fleet supply, combined with rapid post-COVID recovery of travel have led to demand for rental cars materially exceeding available supply, which is reflected in pricing. Given these challenges, our organization remains operationally flexible and careful on the cost side.
We are keeping cars longer, buying low mileage pre-owned vehicles and infleeting new car supply, including electric vehicles more quickly than before. We are also being careful to dispose of older vehicles from the fleet so as to ensure quality of product. As our cars age, we are taking care to weigh elevated used car prices against potential rental earnings and time our dispositions to maximize asset returns. Notwithstanding strong top line performance, now is the time to get prepared for as and when market conditions turn.
Impressively, our strong results this quarter were achieved while corporate and international inbound activity remained considerably below prepandemic levels. Domestic leisure travel, nonetheless, remains strong, coming into the high summer season. As business travel returns, we are focused on serving the highest quality, highest margin demand offered in the market at any given time. In aggregate, we expect the return of corporate and international inbound activity to be accretive to our earnings and margins for the balance of the year.
In my first 60 days, we have established near-term work plans to address our core technology stack, systems architecture, changes to the app and various other components of the customer journey. Progress will be real and incremental, and we will report on it as such. As we enter the summer peak season, we have already initiated enhancements to the customer experience. Our objective is to provide customers with a seamless digital experience every step of the way, ensured to take the hassle out of renting a car. This begins with the app, which must be reimagined.
Early progress in technology won't always be visible to our customers, but the experience will get better over a manageable time period. We have multiple pilot programs currently underway to field test certain touchless exit gate and rental experiences. Learnings here will be invaluable as we scale these initiatives. We are also running a pilot to move our insurance replacement business from a heavily paper-based system onto a digital platform. Earlier this week, we announced that we will be collaborating with Amazon Web Services to modernize and digitize the Hertz customer experience and key components of our new mobility platform such as enhanced data analytics and vehicle telematics.
We're also engaged with Oracle on the upgrade of our back-end systems and with Stripe on improvements to our payment systems. These initiatives will improve the efficiency and integrity of our operations and equip us with the tools to improve customer experience.
On the topic of customers, I want to address the ongoing media coverage around the false arrest litigation. Let me first note that the overwhelming majority of these cases involve renters who have kept our vehicles well beyond the due date and ignore repeated requests from Hertz to return our cars. In those instances, we have a responsibility to secure our assets and protect the company. In the minority of cases where customers were negatively affected, through no fault of their own, as I have said publicly, we will do right by them. Our policies and procedures are designed to diminish the possibility of innocent customers being impacted in the future. While theaffected group is a fraction of a percentage of the millions of rentals we process a year, even 1 customer being negatively and unfairly impacted is too much. The task to fix this belongs with me as the CEO of the company.
Let me pivot to our strategy around electric vehicles, where our momentum continues. We've expanded our Tesla rental offering to more than 20 markets, and we intend to be in 40 markets with Teslas by year-end. Looking forward, we are excited to take in additional Model 3 and Model Y vehicles over the course of the coming quarters. Rentals for the Model Ys have commenced in California and the rest of the country will follow soon.
Our recent partnership with Polestar is yet another important milestone in our EV journey. This partnership stretches over 5 years and aims to bring 65,000 Polestar 2 vehicles into our fleet. We continue to talk to multiple EV manufacturers to accelerate the adoption of electrification of our fleet, while promoting a lower carbon footprint. And I would like to see more than 30% of our fleet being electric by the end of 2024.
Our EV partnership with Uber also continues to grow and stretches across over 30 markets in the United States. The utilization rates we are seeing on this portion of the fleet are well over 80% and we continue to experience strong driver demand, supported by the increased earnings these drivers can generate by renting from Hertz versus outright ownership. The longer rental periods typical of this segment means fewer vehicle turns and meaningfully lower variable costs. This channel also provides us with greater flexibility to pivot our vehicles between rental and ridesharing, so as to make better use of our assets.
We are also continuing to see strong progress with our Carvana partnership. Several thousand cars have been sold through the Carvana platform, and we are very pleased with the results, providing us with a material uptick to prices found in the wholesale market. All these initiatives are expected to be earnings accretive for Hertz.
Looking ahead, we do not see demand for our services lessening anytime soon. And in fact, all indications point to an extremely busy summer. This, coupled with our high operating leverage and attention to the risks of supply chain and cost control gives me confidence that we are well positioned for the next quarter and the balance of the year.
I equally have confidence that we are taking the right steps to position this business for success in an evolving mobility landscape. From the cars we acquire to the customer experience and the products we offer to the expanding channels of customers with whom we engage to the increasing efficiency with which we price and manage our fleet to the way in which we dispose of our fleet. Hertz now has execution road maps and technology plans to elevate its competitive and strategic position.
Now I'll turn it over to Kenny to walk you through our results in more detail.
Thank you, Stephen, and good afternoon, everyone. We continue to execute on our strategy of focusing on profitable revenue growth, staying disciplined with fleet and size, utilization and productivity. Our first quarter adjusted EPS was $0.87 and adjusted corporate EBITDA was $640 million, a margin, as Stephen noted, of 34%.
Our revenue for the first quarter was $1.8 billion, 57% higher than in 2021. This was slightly higher than the estimate that I put forward on our last call and mask the fact that this was really 2 different periods within the quarter, as mentioned earlier. The first 6 weeks were weaker than originally expected due to Omicron, but March more than compensated for that. Our performance in the back half of the quarter was due in large measure to improved rates, primarily driven by leisure customers demand. Our disciplined pricing, together with structural improvements we've spoken about previously, led to revenue per unit per month of $1,326, up 26% from 2021.
Within Q1, our RPU sequentially increased from approximately $1,100 in January to over $1,600 in March, driven by sequential improvement in utilization and pricing. I should highlight that effective from Q1, we revised our calculation of monthly revenue per unit, or total RPU, to use average rentable vehicles as the denominator. Average rentable vehicles excludes vehicles for sale on the company's retail lots were actively being sold through other disposition channels and are, therefore, unavailable for rent. We believe this is a better measurement of productivity of our rental fleet as it is unaffected by fluctuations in our disposition activity. For clarity, the calculation of depreciation per unit remains unchanged and includes all cars in the fleet as these remain subject to depreciation.
As I've said before, we are keenly focused on generating healthy revenue that is more accretive to the bottom line, and we are deliberate about pursuing high-quality business. We've worked hard to permanently improve our business from a go-to-market standpoint, but market forces on pricing are a function of limited supply and recurring demand.
Depreciation per unit per month for Q1 was a gain of $40 instead of an expense, which is within the range we previously guided. As explained in detail on our Q4 call, this is a result of today's strong market for used cars. As we fleet up for our spring and summer peak season and as we rotate more expensive cars into the fleet, the number of fully depreciated vehicles will decrease. As such, we continue to expect monthly depreciation per unit to increase sequentially through the remainder of 2022, normalizing towards the end of the year.
For Q2, we expect depreciation per unit per month to be between $110 and $130. We expect full year monthly DPU to be between $175 and $225. Our quarterly estimates of depreciation are based on our fleet plan, composition, vehicle acquisition and disposal amounts and related holding periods. Present and future market conditions factor into vehicle cap costs and residual value and therefore, also impact depreciation. These factors are also relevant in assessing ROA in connection with both acquisitions and disposition of vehicles.
Now moving to cost more broadly. Like most companies in the U.S., and as Stephen mentioned, we also experienced inflationary pressure during the quarter, which impacted us primarily in 3 ways: first, higher vehicle acquisition costs, which increased gross depreciation; second, higher operating costs resulting from labor shortages and increased employee compensation; and third, higher maintenance costs for our vehicles due to increased pricing of parts and service labor. We see these as being industry-wide factors that need to be offset by pricing and other initiatives.
As we mitigate these challenges, we will emerge a more operationally efficient organization. Notwithstanding these immediate challenges, we have several ongoing initiatives to drive additional productivity and operational efficiencies, including hiring at the field level to avoid costly outsourced labor and bringing on more mechanics and leveraging partnership with vendors to meet the maintenance needs of the fleet. We anticipate that cost inflation will further promote industry discipline and ensure optimal allocation of resources across the board.
Overall, the permanent cost improvements we have made and are making to the business have helped us to mitigate these inflationary pressures. As a percentage of revenue, DOE and SG&A for the quarter were 800 bps or $145 million better than 2021 and 250 bps or $45 million better than 2019.
In terms of our capital structure and liquidity, our balance sheet remains very healthy, positioning us well to fund our strategic initiatives and return value to shareholders via our share repurchase program. As of March 31, our liquidity was $2.7 billion, and is comprised of $1.5 billion of unrestricted cash and nearly $1.2 billion available under the revolving credit facility.
During the quarter, we increased our RCF capacity by $220 million to nearly $1.5 billion, which creates additional financial flexibility and enhances our corporate liquidity. We also raised approximately $2.5 billion through the issuance of medium-term notes as part of our ABS structure. The proceeds were used to repay existing revolving ABS debt, which in turn, freed up incremental capacity for future growth. We also increased the commitments under the variable funding notes by $200 million to $3.2 billion.
Turning now to our cash flow for the quarter and our capital deployment strategy more broadly. There are several possible uses of our cash, which needs to be considered together and assess on a relative basis. They are not mutually exclusive. We consider investments in our revenue-generating asset base, our fleet, and these positions are based on long-term calculations on growth and return on investments.
Capital allocation requires that we are mindful of the balance between size and capacity to demand and return on asset. In making an investment decision on fleet, we consider the potential for a differentiated return on investment as between EVs and ICE vehicles as an example, whereby the return on EVs may prove higher because of elevated RPD, lower operating costs, and the possibility of extended depreciable life.
We also consider non-fleet capital expenditure, which mainly consists of information technology and infrastructure, all consistent with the strategy of improving customer experience and operational efficiency that Stephen spoke to earlier. Here again, we focus on ROI of these investments in terms of improving fleet deployment and customer experience.
As we have over the past several quarters, we consider the return of cash to shareholders. Given our net leverage governor of up to 1.5x and our current cash generating ability, we are in a position where we can invest in growth and return cash to shareholders without placing pressure on the balance sheet. As of April 21, we purchased approximately 55 million shares under the $2 billion plan with approximately $800 million remaining to spend. Before we exhaust the current plan, we will be approaching the Board with proposals around subsequent plans.
Turning now to some specific cash flow numbers for the quarter. Our adjusted operating cash flow was $677 million, our nonfleet CapEx was $29 million, and net fleet CapEx was $569 million, resulting in adjusted free cash flow of $79 million this quarter. As we rotate our older cars and broaden new or high-quality preowned cars, we fund those at about 20% equity. We generated sufficient cash flow to fund our fleet growth and the reduction in liquidity was related to share repurchases.
Let me explain for a moment on how I see cash flow playing out for the full year. We expect that cash taxes and working capital will be approximately 10% of EBITDA and that our non-fleet CapEx will be around $250 million to $300 million for the year. Given the investment in fleet we are making this year, we expect our net fleet CapEx to be between $1 billion to $1.5 billion, depending on market conditions to reflect the equity component of our fleet rejuvenation and growth investments. Bear in mind, this is mostly funded by the gains realized upon disposals of other vehicles, which are reflected in our reported depreciation and therefore, embedded in EBITDA.
We know that people are acutely focused on our view of EBITDA and cash flow once the market normalizes. As we have told you in the past, we continue to believe that at prepandemic demand levels and industry-wide depreciation rates, our normalized annual EBITDA generation would be approximately $1.5 billion, excluding initiatives such as the transition towards EVs, [supplying] a ridesharing fleets and our Carvana and Amex GBT relationships.
From that EBITDA baseline, we will normally expect free cash flow conversion of at least 70%. This is because once our aggregate fleet value and depreciation return to a more normal levels, we expect that EBITDA will adequately reflect the entirety of our fleet expense and net fleet CapEx will be minimal.
Finally, with a view forward and consistent with what we are seeing across the travel industry, the positive trend we saw in March is continuing into Q2, where month-to-day RPU is similar to the strength we saw in March. We generated 20% more EBITDA in March than we had originally expected due to fleet tightness and strong demand. We do not see any abatement of the limited vehicle supply, as Stephen mentioned earlier. With the current geopolitical environment impacting the supply chain constraints, I believe industry fleets will continue to be tight and that pricing and residual value will remain elevated as a result.
Q2 revenue has historically been higher than Q1 by about 20% due to seasonality, given the momentum we are seeing in our business, we expect our performance for Q2 to exceed Q1 by 30% to 35%.
With that, let's open the call for Q&A.
[Operator Instructions] Your first question comes from the line of Chris Woronka from Deutsche Bank.
Stephen, yes, there's a mention of the $1.5 billion kind of as a normalized EBITDA range, which I think most people think of as 2023 or beyond. I mean, as new CEO, what do you -- what are some of the kind of the opportunities and threats to that number?
Yes, sure. So thanks, Chris. I appreciate the question. Kenny, in his prepared remarks, talked about normalized EBITDA in the context of '19 as a reference point. So let me come at it slightly different angle, which is let's look at current conditions kind of as a delta to where we think normal is. So let's look first at the demand side.
On the demand side, notwithstanding how elevated it is, we're still shy of where I think normal demand will sit. So you look at leisure in the RAC business, it's at about 90% of where it was in '19, so limited amount to see there. But if you look at corporate and you look at inbound, so these are international travelers coming to the United States, is considerable demand that can be recovered to get us to a normal state of affairs.
So thinking about corporate travel. Corporate is now running at about 63% of where it was in '19 and inbounds are running only at about 35%, and that will change as COVID measures and the like of entry into the United States will change. So on the demand side, there's still room, right, for improvement to get us to a normalized state.
Then you look at the supply side, right? Typically through fleet, and I think as we've said, more limited conditions around supply, much as we will get our fair share of it, I think, persist in through '23, maybe a bit beyond. And so there, I think as fleet comes on to more normalized levels, you'll see us grow our fleet but grow it in the context of demand that's there, so fleet will increase. I think we can sustain utilization at levels that we're seeing now in March and in through the second quarter.
Let's assume there's some softness in price, it's not going to stay as elevated. So if one assumes that we take a 20% or 25% reduction, right, to what we're looking at on rate and then get to more normalized depreciation, the fact is that at more modest margins, okay, we're going to produce $1.5 billion.
The upside to that, okay, because as Kenny referred to it, we haven't included, is look at both sources of incremental revenue and cost reductions. So we're not thinking about ridesharing to Uber growing or what we can sell through on an increased basis through Carvana or collaborative marketing efforts that are out there or for that matter, the benefit we're going to get as more electric vehicles come in and the RPU on those are higher than what we're seeing on ICE.
And on the cost side, much of what I talked about in the context of certain technology developments and the like, will have a better pricing engine. We'll take our out-of-service down. Cloud migration of our overall platform will generate meaningful cost reduction in the context of what we spend on older generation technology, so those are a bit of puts and takes. I'm just giving you kind of my own take looking both at supply/demand and what increment we can generate to there. And again, 2019 is a good gut check, but I just wanted to offer you a slightly different perspective than just to simply revert back to '19.
Yes. Stephen, very helpful. And just as a follow-up, like kind of on the fleet side, and you mentioned that the RPU of the things you're bringing in, which you have a lot of EVs coming into the fleet, does that make you reconsider wanting to get the total fleet even back to '19 levels even if demand gets there? Is there a case to be made that you could be smaller with different fleet because the fleet -- the cost of that fleet is going to look a little bit different? And so therefore, really totally zone in on RPU and not on matching the fleet to the demand, to the liquidity?
Yes. I mean, my view on this is that this is managing a set of assets, okay, and sweating the ROA on your fleet. So unless focused on the aggregate amount of fleet, I'm more focused on making sure that I'm sizing fleet into demand. And that the composition of the fleet as between electric vehicle and ICE is taken into consideration in part because I think the ROA on the EVs will be higher. They will be higher because they attract a higher rate and they carry with them appreciably lower operating costs with respect to maintenance and otherwise.
And I think on the forward, there's more good to be had on depreciation of those vehicles because I think we're operating with very limited history. But in the end, I think the life of those vehicles will be longer and the depreciation less. So my point to you is that I'm not looking to go back to a prescribed fleet number. I want to grow fleet in the context of sweating the ROA, meeting the demand that's there and looking at the mix of fleet in the context of where I can harvest the greatest margin on the fleet itself.
And your next question comes from the line of John Healy from Northcoast Research.
Big picture question for you, Stephen and Kenny. Just getting a lot of questions about where we're at in the cycle and what's happening with the economy. Would just love to get your view of how Hertz is thinking about the economy? And maybe how Hertz is different relative to historical periods as maybe we encounter some potential economic turbulence? So I would just love to hear your thoughts on kind of leading economic indicators and how you're planning the business? And maybe how the business might be more or less resistant to those pressures that come about cyclically?
Hey, John, yes, it's Kenny, I'll try to answer this one first. So thanks for the question. A few things come to my mind as I think about your question right? The potential downturn, economic pressure. I'll say 2 things here, right? First and foremost, we can fleet up and down our fleet very, very quickly, unlike other travel and hospitality peers who can now with their fixed asset. The name of the game for us, regardless of any environment, recession or no recession or pressure, is to match fleet to demand, right below the demand curve, right, to maximize profit.
The second thing I'd say is we are a very nimble company, right? 70% of our cost base is variable and that provides flexibility as volume flexes up and down. And remember, this is combined with the fact that we have a very strong book of business off year, which is resilient as proven at the peak of the pandemic.
The second thing I'd say is that people talk about inflation, right? My view is we don't view inflation as necessary a bad thing for us as this creates more discipline across the industry in terms of pricing and asset allocation, which you can see currently.
The second thing I'd say is that in an inflationary environment, car rental is not a bad place to be at. As you're utilizing an asset purchase that today slash historical value and monetize them against the backdrop of rising rate environment.
And the last thing I'd say about inflation is that we continue to drive productivity, optimize business processes and drive operational efficiencies to offset that.
And then the last thing I'd say around the current environment is interest rates, right? As I mentioned in my prepared remarks, we have a really strong balance sheet. But if you think about debt profile, right, our debt stack, 70% of our total debt is fixed rate, so we are largely insulated from interest rate hikes. And we have caps in place as well on the VSN standpoint.
So long story short, while the current environment is dynamic, as you pointed out, our business model is resilient across a wide range of circumstances. And by the way, we are -- we've been battle-tested and we are students of the business. We analyze and study all aspects of the auto market. Since quite frankly, we participate in all aspects of it. So we are prepared for all scenarios.
John, it's Steven. The one other perspective I'll offer you is that I think rental car -- the rental car industry and the travel industry more broadly is going to be the beneficiary of what I would describe as a delayed consumptive response, meaning if you look across a range of other industries, stimulus led to increased consumption in the back half of 2021. If you think about travel, travel has not had that opportunity just yet, largely by virtue of COVID and restrictions that have been in place.
If I look at our forward book of bookings in the summer, what it's suggesting to me is that we may see delayed consumptive patterns around travel, and we will be the beneficiary of that. And as I said in response to the question that I was answering for Chris, just look at where we've yet to pick up the demand that indicates there's some delay to it. So think about what's left on corporate demand to come through. And impressively, what's left on the inbound international traveler to the U.S., which is a very profitable segment for us.
And so I think there's an element here where stimulus came through, we saw that in the consumptive behavior of consumers, but it didn't necessarily materialize in the way in which I think it will in this summer. And so that's just a broad perspective to offer you in the context of what the forward holds for the industry.
Great. That's really helpful. And just 1 follow-up question, Kenny. Could you run us through the math on the view on fleet cost for the year again? Was that a -- were those just U.S. comments? Or was that company-wide? And I was just hoping to try to sketch out kind of the $175 to $225 number because it's, to be in size, maybe a number like 300 at the end of the year?
Okay. So yes, so let me go a bit deeper since I'm sure I'll get more questions on depreciation, so I'll hit it right now. So if you think about this quarter, right, call it negative 40. If you bifurcate between gross depreciation, which is simply your recorded depreciation of the vehicle, and then your gains on sale, if you bifurcate that, you're roughly $223 of gross depreciation per car per unit per month and $263 of gains per car per month per unit, that's negative $40, right?
So as you work your way into, call it, Q2 now, your fully depreciated vehicles will decrease, as I mentioned in the prepared remarks. And then essentially, if you do the math, right? If Q2 was, call it, $100 or $120 and change, then that means your back half will normalize, right, closer to the $300 mark in terms of depreciation. So -- and then the number I've given for the full year, that is a global number.
And next up, we have Stephen Grambling from Goldman Sachs.
My first question is a big picture question for Stephen. There are a lot of views about what the future of mobility looks like. And obviously, there are a lot of moving parts. But as you were attracted to this opportunity, what was your own framework for what that future looks like over the next, call it, 3 to 5 years? And how are you balancing moving the company towards that view, while also staying nimble if the future goes in a bit of a different direction?
Sure. Thanks, Stephen. I appreciate it. So I'll answer that on a couple of levels. First of all, my view was that Hertz sits with an extraordinary brand, perhaps a brand that was worthy of an even better business, which I think we can build, and that doesn't often happen.
In the context of mobility, there are enough really impressive players that are in and around those changes where I think Hertz can align itself quite comfortably. And we're already doing that, obviously, in the context of Tesla and Uber and Carvana and the like. And I think there's more to do there.
For me, the forward path around mobility is all about us thinking now about the way in which we diversify the composition of fleet and equally think about diversification of our customer channels. So in the context of fleet, obviously, it's about combustion engine and electric vehicle, and what that will mean and what that carries, okay?
On the customer side, it means not just playing direct, but also thinking about corporate and equally ridesharing and the forward view on what that might mean for fleet management overall.
In the context of corporate, there's an interesting developing phenomenon, which is that the electric vehicle is turning out to be a great appeal to our corporate customer. They need to rent cars to their employees, but they're equally through EV, satisfying their own ESG and carbon footprint objectives. And that's sort of an interesting dynamic there.
On the Uber side and translate that over through to Lyft or to a variety of other fleet players, imagine where Hertz is in a position, in this case, to take EVs and rent them, changing the consistency of product delivery and the economic dynamics to the driver, what could we do with other fleets and other fleet management in the context of electric vehicles there. And so there's a forward path, right, that we can achieve.
I think all of these is meant to be achieved for a company that sits on an extraordinary mine of data, we have yet to sort of tap into it, and we haven't consumed it and analyzed it such that we can find ourselves in a much better position to sort of manage a fleet and serve interests that are ever-changing: electric fleets, corporate customers and the like. And so I think the forward here is really quite real and our ability to do it in ways that embed existing technology.
So think about the mobile phone. The phone can be used in a way to meaningfully improve the customer experience of an individual. We can now geo-locate cars. We can access the car. We can use the phone as the key fob to start the car. By the way, we can identify you because your identification on the phone will change. All of that changes the dynamic of what Hertz can do with the rental business today with a forward view to mobility.
So the younger demographic need not rent a car where Hertz has a location. We can preposition a car for them in another location. They can access it. It can be a seamless proposition and all of that is using existing technology and embedding it in the customer journey. So I think there are many ways that we can tap into the forward mobility prospect and the ability to do that with others is quite real. And that was and is an exciting proposition for me, and I think holds the promise of realizing consistent and impressive financial returns to the company.
That's helpful and interesting. As a follow-up on the fleet side of your response, is there any sense for how electric vehicle pricing has trended as you've rolled out more? And you kind of alluded to this, but maybe it's too early to really see this in terms of differences in uptake between consumers versus business customers? And then how you're just generally thinking about the pricing umbrella of these vehicles versus the base they become more ubiquitous?
Sure. Well, I think what we're seeing in the early introduction of electric vehicles into the fleet is consistent with what we had analytically modeled in making the decision that the ROA on this segment of the fleet was attractive. That is, we're seeing elevated pricing certainly into RAC and equally into ridesharing.
On the ridesharing side, it carries the extra benefit of those rentals being longer, 4 weeks. It means our touch point into those cars is appreciably less, meaning we won't touch the car 3, 4, 5 times in the way in which we would in the normal fleet. So the operating cost associated with that is much lower.
The maintenance, while it's early, the maintenance is lower. We expect those maintenance costs to continue to be lower and utilization, as an expression of demand, in both the corporate segment as well as in ridesharing and RAC would suggest to us that the demand is really impressive. I mean we're seeing waiting lists among Uber drivers to take these cars, and we're seeing very, very quick uptake, again, at high utilization levels across the consumer and the corporate side.
Hey, it's Kenny. I mean, from a financial standpoint, I'm excited to say that the Teslas coming in is validating our long-term view of the EV economics being accretive to ICE vehicles. So our view was having a first-mover advantage here is invaluable here as the learnings are improving our daily operations and giving us a huge competitive advantage.
Steve, I would also say one other thing, which is if one harbors a view that there will be forward softness for a variety of reasons, right, in price, I think the EVs present as they grow within our fleet, a pretty defensive floor, if you will, as to where that pricing will go, meaning we have a first-mover advantage. They are a scarce component of the fleet just on a relative basis. Therefore, the ability to hold price, I think, is higher. And so it's just an exciting proposition for us as we take more of these vehicles in and look to partner with more OEMs on the intake.
Next up, we have Brian Johnson from Barclays.
I just want to talk a little bit more about the depreciation, in particular, around not just used car sales and pricing outlook, but used car acquisitions as I'm sure you're probably aware there's some well-known used car resellers who were seen by the market in their most recent earnings results for buying used cars earlier in the year or late last year 1 price and then selling them in another.
So 2 questions. One, can you give us some sense of how your activity in the used car acquisition market was, how that factors into your depreciation outlook? And then number two, it's comforting that you're guiding to about 110 next quarter, the 1,500 number, very similar to what's in our model and other analyst referenced. We do have depreciation of normalizing as part of that. But how do investors get some comfort that as used car prices moderate slightly, there isn't an overshoot in your depreciation numbers?
So why don't I let Kenny start and then we'll come back.
I think one of the questions that I think you're alluding to, Brian, is that how do we think about a normalized depreciation rate going forward, right? As you know, right now, the back half, the exit rate close to $300 as I alluded to earlier. Here's how I think about it, right? When you look at depreciation, it's unfair to look at it in silo, right? You have to look at it in conjunction with other dynamics. RPD, residuals, cap costs, just to name a few, right? So let me give you a quick stat.
It's not a coincidence that RPD, residual cap cost right now, at this very moment, is all up by 30% to 40% versus prepandemic, right? So simple math is, if DPU, right, use an example, right, went up to $500, you may say, "Wow, that's really high." But RPU falls to 2,000, I'd take that economics all day and all night, right? So I think it's important to really look at depreciation in conjunction with other variables. And that goes back to the point about return on assets that Stephen mentioned, right? So I don't know, Stephen, if you have anything else to add on?
No, no. I mean I think the point that Kenny is making is the right one, which is, obviously, we need to be mindful of depreciation and think about it in the context of how we manage the fleet, and I'll come back to that.
But I think when Kenny and I manage the business, we're looking at a dashboard that has multiple indicators on it, okay? We're looking at the rate we're charging. We're looking at utilization. We're looking at depreciation and you need to take those all in tandem.
Now my adherence to sort of ROA as a good framework is we want to sweat the asset. And therefore, all of these are inputs to the return that the fleet is ultimately going to yield to us. Now in the context of our own behavior in the used car market, we are, at the moment, both a buyer and a seller, okay? So we are buying low mileage, high-quality used cars because the returns are attractive in a market that's displaying the kind of demand relative to supply that it is.
At the same time, we are looking at selling portions of our fleet because they are high mileage cars, they're of deteriorating value. It's not a product that we want to put a customer in. And when we do the math and we do the analytics, harvesting at the current elevated residual level or car price on that through Carvana or any other channel is in excess of the present value of the rental revenue that we're otherwise going to take in. That's the kind of dynamic we need to go through as both a buyer and a seller. And so I think that answers your question, but that's how we're thinking about this more broadly.
Okay. So you're not worried that you bought -- basically what you're saying is used car acquisitions are an alternative in a tight market to new car acquisitions and can follow depreciation curve? And obviously, you're renting them in the meantime?
I think that's right. And I think that equally, I'm not standing in a static position, meaning if we start to see the market move, okay, so something happens in the relationship, if you will, between new car prices and where we're taking in expensive vehicles and what we're doing with respect to the residual on the use, my view is that it's unlikely to move at a beta of 1. And equally, it's not going to move on an overnight basis.
And so because we study this all the time, we're going to act, right, on where those numbers sit. So the calculus that we do about you keep the car or do you sell the car is in the context of a spot price relative to where we can earn rental money on the property itself. So we're going to be quick on this should these dynamics change. But again, I think ROA is the broader context within which to think of it.
And our next question comes from the line of Ian Zaffino from Oppenheimer.
As far as -- and I know you guys mentioned Carvana saying you got an uptick, is there any more color you could maybe give us surrounding that? Maybe how much was the uptick? Or do you expect to see continued upticks? And how many vehicles do you think you could actually move through that channel? How do we think about that?
Sure. Well, I think we need to stay away from the specifics of the arrangement for a host of different competitive reasons, but let me shed a little bit of light on it. What we're seeing in Carvana is a material uptick to what we could harvest in the wholesale market. Carvana, therefore, provides us with an incremental channel alongside the Hertz used car retail channel that we have to sort of provide us with really interesting economics on the sale of the used car fleet.
I'd also point out, particularly relevant to the last question and the last exchange, anytime you avail yourself of an incremental channel to move used cars, you therefore provide yourself with added flexibility to be quick and agile as and to the extent that there's changing circumstance in the market or pricing. But what we are seeing through Carvana is perhaps more elevated in terms of volumes than what we had initially imagined. And it's a good, robust channel for us that's suiting us in the context of materially elevated prices relative to what the wholesale market provides.
Ian, this is Kenny. Just to kind of dimensionize potential, how you think about volume, right? In a normal year, usually, we sell 1/3 of our vehicles through our retail channel and 2/3 through the wholesale auction channel. Carvana is not cannibalizing the retail side of the house, which is the highest margin for us, right, from a disposition standpoint. It's really taken away from the wholesale auction side. So again, it's accretive for our business and our margins.
Okay. Great. And then as a follow-up question, I know we had a nice discussion about ROA and investment in either the business or the fleet. But I know you still have about $800 million left in your buyback. But based on kind of like your leverage ratios that you're talking about, you can take on incremental leverage just to reach your target. And with that excess call it cash or capacity, where do buybacks fit in that?
And again, I know you have some left on there, but are they mutually exclusive? And how do we exactly think about that going forward?
Sure. So let me just say the following. First, in the context of what we were doing in the first quarter, we were in kind of an elongated blackout, and therefore, what we were doing by way of volume was a prescribed volume. Obviously, the opportunity for us to recalibrate the volume and reevaluate the volume of shares that we'll repurchase happens now, occasioned by the fact that we're having this earnings call and the earnings release, and therefore, we are free to sort of recalibrate the volume that we want to do, and we will do that.
And my view is we will exhaust the existing program, and we will roll into a new program as we pick up just the aggregate amount with among the management team and the Board. So that's just the mechanic of it.
As a philosophical matter, I think repurchase stands alongside what Kenny had articulated, which is we have opportunity to invest in fleet. We have opportunity to invest in the business to render it more operationally efficient. And we have the opportunity, particularly in this market, to look at share repurchase, and all 3 are always on the table in the context of yielding attractive returns. And so that's the philosophy we'll continue to take. I think given the largest of the market in which we're in, we can do all 3. We will do all 3. And I think we'll take up the pace of that repurchase now that we have earnings behind us.
And your math is right. We're 1 turn away from a governor number, so this shows you that we have a lot of optionality and flexibility when it comes to capital allocation.
And that was our last question. I will turn the call over back to our CEO, Stephen Scherr for closing remarks. Sir?
Okay. So I want to thank you all for participating today. I hope that today's call provided you with a better sense of the progress we've made, the dynamics we're seeing in the industry and the market and a better appreciation for the improved financial condition and prospects for the company. I look forward to sharing further updates with you on our next call and obviously meeting and visiting with many of you now sitting in my new seat.
So with that, we thank you again for joining us.
Thank you, presenters. This concludes the Hertz Global Holdings First Quarter 2022 Earnings Conference Call. Thank you for your participation, and good afternoon.