On Thursday, Hertz Global Holdings (NASDAQ:HTZ) discussed second-quarter financial results during its earnings call. The full transcript is provided below.
This content is powered by Benzinga APIs. For comprehensive financial data and transcripts, visit https://www.benzinga.com/apis/.
The full earnings call is available at https://events.q4inc.com/analyst/801751158?pwd=MrFxkOG4
Summary
Hertz Global Holdings reported a 10% increase in revenue year-over-year for Q2, with an adjusted corporate EBITDA of $81 million, marking a $63 million improvement from last year.
The company achieved a record-high Revenue Per Day (RPD) excluding the peak COVID year, with a strong focus on operational efficiency and fleet management to drive revenue growth despite a 1% smaller fleet.
Hertz emphasized strategic initiatives including expanding franchising, enhancing used car sales channels, and growing its Oro mobility platform, which is expected to generate significant revenue and scale in the coming years.
Management highlighted substantial progress in fleet management, achieving a young fleet age of under nine months, and efforts to improve labor productivity and customer service through technology and data insights.
The company is targeting $1 billion in adjusted corporate EBITDA by 2027, with a positive outlook on liquidity and strategic investments to support future growth and resilience.
Full Transcript
Gil West, Chief Executive Officer
Good morning everyone and thank you for joining us. I want to begin by saying thanks to the Hertz team. Quarter after quarter, their discipline and execution are what turned strategy into results. We are halfway through 2026 and it’s been more than two years since I stepped into this role. In that time I had the chance to get into the detail of every part of this business, the fleet, the operations and the economics that drive them. What’s become clear is that this transformation is about both fixing what wasn’t working and building for what’s next.
We’ve done that under real pressure over these two years. We’ve navigated tariffs, vehicle recalls, inflation, partial government shutdown, elevated TSA wait lines and storm disruptions on top of the normal volatility of the rental car industry. None of it has changed our approach. We’re staying focused on what we can control, our fleet cost, our revenue performance and the customer experience we deliver through disciplined execution. We’re building a financial footing strong enough to withstand whatever pressures today and tomorrow bring.
We’re both running our core rental business better and building a platform spanning rent a car fleet, service and mobility that diversifies and strengthens Hertz for the future. This quarter is more proof of that progress where our disciplined execution is showing up in our results, led by our continued commercial momentum. Revenue was up year over year with a 1% smaller fleet and came in ahead of both consensus and our latest guidance. By continuing to sweat the assets and increasing total fleet utilization by 80 basis points to 79%, we achieved this despite elevated recalls compared to the year before.
This performance was driven by our strongest second quarter RPD on record. Excluding the peak COVID year of 2022, RPD was up 9% and RPU was up 8% versus last year, coming in at $1,542. RPU exceeded our North Star target and we saw sequential improvements in both throughout the quarter. Adjusted corporate EBITDA came in at $81 million, a $63 million year over year improvement and above our latest guidance, driven primarily by an even stronger RPD in June than we anticipated.
We continue to execute on our annual DPU North Star target through our disciplined rotation strategy that is defined by our buy right, hold right and sell right approach. At $302, DPU remains in line with target. However, we did experience three quarter-specific items that caused the total gain on sale to be lower than originally expected. First, the seasonal decline was more pronounced than we anticipated as wholesale volume temporarily outpaced demand.
Second, our disposition channels were not as optimal as we would like given the volume of cars we sold, and third, during the quarter, we altered the mix of vehicles and prioritized older and certain models. These dynamics temporarily drove down the proceeds from sale, resulting in a lower gain on sale. However, this didn’t impact our go-forward view. The seasonally adjusted Mannheim rental index increased 3.5% month over month in July, recovering from the declines experienced during the second quarter and remaining strong, up 6.1% year over year.
The used car market is good and we’re set up well for it. At the end of Q2, our model year 25 and 26 units made up nearly 94% of our U.S. core fleet. We believe we have an exceptionally healthy fleet and we expect DPU will benefit as we rotate out of those vehicles over the coming quarters. Turning to cost, total DOE per day increased slightly, primarily driven by costs that were both revenue related and were margin accretive associated with stronger RPD performance.
Now this brings me to a broader point. The North Star metrics have given our teams a steady compass over the last two years, but as the business evolves, it’s important to recognize that these metrics do not operate in isolation. As revenue grows, a portion of our DOE naturally grows alongside it, and many of those costs are tied to higher revenue and stronger profitability. As a result, we’re also increasingly focused on the relationship between those metrics and we expect our performance framework to evolve as our transformation continues.
So while DOE was higher, our RPD to DOE per day spread improved by 17% year over year and it was our third consecutive quarter of year over year spread expansion. We remained extremely focused on managing core operating cost and the improvements we’re seeing are the result of productivity initiatives encompassing people, processes and technology. One of our biggest levers we have is labor productivity. Supported by Palantir, our new labor planning model aligns staffing with real time, reducing overtime, third party labor and improving workforce planning.
We’re also leveraging technology and AI-driven data insights to improve throughput and productivity across our operations to reduce our vehicle turnaround time. Additionally, we’re making progress in leveraging our supply chain network, expanding part-out capabilities, strengthening collections recovery and improving maintenance processes, all to drive greater productivity with existing resources while lowering unit costs. Although these results demonstrate the progress we’ve made in strengthening the economics of the business, recalls remain a significant headwind.
Recall volume was up 300% in Q2 from the year prior, impacting an average of 15,000 vehicles per month across the first half of 2026. Recalls represented more than a $55 million EBITDA impact and we’re pursuing regulatory, operational and contractual solutions to address this issue. More importantly, our ability to deliver this level of performance despite that headwind reinforces our confidence in the path to our long-term targets. That said, while 2027 and $1 billion of adjusted corporate EBITDA are important milestones, they’re not the final destination.
As we’ve shared, we are focused on something bigger. We are applying our commercial, operational and fleet management capabilities across the four strategic areas of our platform to drive greater efficiency, create diversified growth engines and strengthen the company for the future. Our platform is the unlock to the next phase of value creation, deleveraging the balance sheet and growth. And one of the greatest opportunities to grow is by more effectively leveraging the power of the Hertz brand.
Hertz is an iconic, century-old brand recognized the world over. It’s one of the most valuable assets with a strong reputation that we believe is under-monetized today. One way that we think we can use the power of our brand is in franchising. It is a strong asset-light, capital-efficient part of our business with attractive and predictable economics. It’s not new either. Today, more than 25% of the Hertz-branded revenue is generated by franchises.
However, we haven’t grown it in years and it hasn’t received the level of focus necessary to realize its full potential. We’re now changing that and we’re evaluating near-term opportunities across global footprint through both white space expansion and conversion activity and thinking strategically about whether Hertz should look more like our partners in the hotel industry. If our goal is to achieve higher quality earnings, stronger free cash flow conversion, more durable shareholder returns and improved balance sheet franchise there.
In the next area of our platform, fleet, we are building on our unique competitive advantage of one of the largest used car dealers in the country, enhancing the capabilities of our used car factory. We’re continuing our journey of moving from primarily wholesale disposition towards more lucrative channels. We expect that expanding our ability to move additional car sales volume through these higher-yielding channels will have a significant effect on Net DPU and we’re working to unlock those opportunities.
We’re exploring how we build strategic relationships with the leading used car companies, creating more mutual value and structurally reducing our cost of sale. Alongside new partnerships with best-in-class retailers, we also continue to make progress on our direct retail channel. Wins this quarter included growing direct retail sales volumes, reducing reconditioning costs, delivering strong F and I performance. In mobility, Oro is gaining momentum.
For over a century, Hertz has mastered the ability to operate complex fleets reliably, efficiently and at scale. Today, Oro is extending those capabilities to a new era of mobility, filling a critical gap in the industry’s transition towards commercially operated driver-led and autonomous fleets. The capabilities we built from acquisition and financing to efficient fleet management and maintenance would be incredibly difficult and costly to replicate from scratch.
Today we’re putting those capabilities to work through Oro’s driver-led business model where we own, maintain and operate vehicles on rideshare platforms. Oro is now active on the Uber platform in four markets: Atlanta, Los Angeles, San Francisco and Northern New Jersey. We’ve expanded into these new offerings on the app, including Uber Black in New Jersey and Uber Teen in San Francisco and Los Angeles, and our drivers have logged more than 6 million miles today.
This business validates our ability to deliver high-quality and turnkey fleet solutions safely and at scale, supporting an enhanced customer experience. At the same time, we’re developing the operations, processes, systems and infrastructure that directly translate to operating AVs at scale. Earlier this year, we announced our first AV partnership with Uber’s Robo Taxi program supporting Lucid vehicles equipped with Neuro autonomous technology. We’re on track to begin operations later this year in the San Francisco Bay Area.
We continue to see encouraging traction as we scale this part of the business. Oro already has meaningful scale and momentum through these offerings and the existing rideshare rental business. We expect it to generate more than $600 million in total revenue this year, with the ability to grow dramatically over the next decade. Opportunities for expanding capabilities, new partnerships and new avenues for value creation are emerging and we’re focusing our resources on unlocking that growth.
This quarter is an exciting proof point in Hertz transformation. We’re making tangible progress across the business and we’re focused on execution and accelerating the improvements ahead of us. As I look at the quarter, there are four key takeaways I’d highlight. First, our core rental car business continues to improve and our commercial momentum is strong. The actions we’ve taken over the last two years are driving better unit economics, creating a clearer path to stronger margins and potentially more than $1 billion of adjusted corporate EBITDA run rate in 2027 and beyond.
Second, our fleet buy right, hold right, sell right strategy should continue to yield strong near-term results and solidify our ability to deliver Net DPU below $300 per month. Third, our strategy to expand the franchise portion of the rental car business has the potential to accelerate that progress. We see it as a way to generate consistent earnings, strengthen free cash flow, unlock liquidity for growth initiatives and ultimately create a more durable value for shareholders whilst also supporting deleveraging.
Finally, Oro may be new, but it is rapidly emerging as a meaningful growth platform. We believe it will continue to scale in revenue this year across all of its business lines and we have a plan in place that we think can reshape Hertz growth trajectory for years to come. The opportunities in front of us are significant. We’re encouraged by the momentum across the business and the opportunities ahead. Ultimately, results speak louder than words and we’re focused on continuing to execute and demonstrating that progress quarter after quarter.
With that, I’ll turn it over to Sandeep.
Scott Haralson, EVP& CFO
Thanks, Andy. Good morning, everyone, and thanks for joining. Before I get into the financial results, I’d like to step back for a moment. In any transformation, it’s easy to become consumed by the next quarter, the next milestone, or the next challenge, and lose sight of how much has already changed. While we’re not declaring victory today, we are seeing a business that is executing with increasing consistency operationally, commercially and financially.
Every successful transformation reaches an inflection point where the conversation begins to change early on. The question is, can this company recover? Eventually, through consistent and disciplined execution, the question becomes, how do they do that? We believe that shift comes through consistent execution over time. We believe we are doing that, and this quarter represents another meaningful step in that journey, not because of any one single metric, but because the underlying economics of the business continue to improve.
We recognize that it’s hard for the market to fully reflect the progress we believe is occurring inside the business. That’s understandable. We recognize that investors remain focused on our capital structure and upcoming debt maturities. That’s appropriate. Strengthening the balance sheet remains one of our highest priorities. What gives us confidence is that the business supporting our capital structure today is fundamentally different from the business of two years ago.
We have continued to improve our fleet, the customer experience and operating efficiency, which has resulted in better operating performance and strength in free cash flow. Plus, we continue to create additional strategic options. Our focus remains on continuing that progress while thoughtfully addressing our capital structure in a disciplined manner. And while this quarter’s results are a really good outcome and they are important, we believe the more significant story is the trajectory of the business and the strategic initiatives that are beginning to reshape our earnings profile.
Gil outlined the takeaways for where we are today. I’d like to spend a minute discussing one on his list, and that’s franchising, because I believe it represents one of the most underappreciated value creation opportunities within our business. I believe that our business today is ripe for an increasing level of franchising. It’s already a consistent contributor to our adjusted corporate EBITDA results, and we haven’t capitalized on this side of the business in the way that we should and will.
Over the last two years, much of our work has been focused on transforming the operations. Increasingly, the next phase of our strategy is about transforming the quality of our earnings. Franchising has the potential to accelerate that evolution through a more capital-light model that enhances margins, free cash flow generation, returns on invested capital and financial flexibility. It could give us more flexibility to allocate capital toward higher-return opportunities across the platform while also providing meaningful deleveraging benefits.
We have already started down this path and will likely start to see evidence of this progression in the near future. Taken together, the near-term benefits of a more focused franchise strategy plus the opportunities in our fleet business for retail car sales as well as the longer-term potential in ORO on top of a consistently improving rental car business gives us a broader set of levers to improve margins, strengthen returns on capital and enhance how Hertz creates value over time.
We recognize there is significant work ahead, but we have been building towards this for some time and we expect to share more as these initiatives progress. With that, let me pivot back to the Q2 results. I’ll also cover liquidity and insights into Q3, the full year and a bit on 2027. For Q2, we generated revenue of $2.4 billion, up 10% year over year, notably with a 1% smaller fleet. This was driven by strong pricing performance with RPD up 9% year over year and total fleet utilization was 79%, up 80 basis points even with a nearly 200 basis point headwind on utilization due to continued elevated recalls.
This utilization increase allowed us to keep transaction days at prior-year levels even with less available vehicles for rent. Also, despite elevated recalls, RPU surpassed our expectations, reaching $1,542, up 8% year over year. GAAP net income for the quarter was $64 million and diluted GAAP EPS was $0.05 with an adjusted net loss of $47 million. GAAP net income benefited from gains on the sale of real estate locations on which we completed sale-leaseback transactions as well as revaluations of other exchangeable notes and warrants issued in prior years.
Adjusted Corporate EBITDA was $81 million, representing a $63 million year-over-year improvement and coming in at the top of our most recent guidance. Adjusted corporate EBITDA margin improved by 260 basis points to 3.4% from 0.8% in the second quarter of last year and, in line with our guidance expectations, these results included a total impact of recalls of approximately $55 million on revenue and $30 million in EBITDA. Despite this, we still produced a strong year-over-year improvement in EBITDA.
Turning to cost, adjusted DOE per transaction day was $37.49, slightly higher than our expectations and higher year over year primarily due to higher revenue-related variable cost and higher expenses related to sale-leaseback transactions. When normalizing for these factors and the days impact of recalls, adjusted DOE per day improved approximately 2% year over year. While these dynamics can make DOE appear less favorable in isolation, a large portion is tied to revenue growth and are adjusted corporate EBITDA accretive.
In fact, approximately 25% of our DOE cost structure is influenced by RPD movements, including airport facility costs or concessions, commissions, credit card processing fees and fuel-related expenses. Because of this, the spread between RPD and DOE per day is a key measure of the value we create from each vehicle day and the effectiveness of our commercial and operational execution. This quarter our RPD to DOE per day spread was approximately $24.36, up 17% year over year, and it’s the third consecutive quarter that spread has increased.
SG&A increased slightly year over year, driven primarily by investments in sales and advertising, which contributed to this quarter’s strong RPD growth. As a percentage of revenue, SG&A declined from 11.3% to 10.8%, reflecting improved operating leverage. Gross depreciation per unit per month was $298 during the quarter. Net DPU $302, reflecting an incremental $4 per unit per month driven by the loss on sale of a concentrated mix of older vehicles and pressure on the wholesale market dynamics that have since normalized.
With that said, we’ve seen the overall Used Car Index and Rental Car Index both show positive signs of stability, and year-to-date gross DPU has been fairly stable. We now have our youngest rental car fleet in over a dozen years at just under nine months and believe those vehicles are well positioned for good economics over their life cycle. Our 2027 fleet acquisitions have been picking up steam, and while total volumes are still an unknown at this point, what we have secured to date are at similar economics to the 2026 model year vehicles.
Our young fleet gives us a lot of flexibility to be picky about model year 2027 vehicles and consider growth. Given we can extend the life of vehicles a little further or sell during peak periods to monetize gains, this could be a useful lever going into 2027. Turning to liquidity, we ended the quarter with $984 million of liquidity, which includes cash and cash equivalents and the available capacity under our revolving credit facility. This was in line with guidance of just under $1 billion, and in June we completed an exchangeable senior first-lien secured notes offering for a total of $350 million, which used capacity created through expiring revolving commitments as well as from term loan amortization. In addition, we added another $30 million of notes offering in July as part of the exercising of the green shoe, which would bring our pro forma liquidity post-transaction to slightly over $1 billion. As mentioned on prior calls, we had anticipated refinancing the first-lien capacity that was being freed up from the reduction in revolver capacity at the end of June. With that in mind, let’s discuss guidance for liquidity.
We expect to end the year between $1.0 and $1.4 billion with sufficient levers to fund strategic growth initiatives. This contemplates some amount of free cash flow generation in the back half of the year as we enter the peak Q3 period, balanced with a somewhat off-peak Q4 period. The broad range contemplates the potential for strategic transactions, including franchise-related agreements that could take place during the back end of the year. It also includes the payment of the remaining $200 million portion of our December 2026 maturity in cash.
This is also slightly lower than our previous guidance due to the fact that we removed proceeds from the ATM from our forecast. However, it will remain available should that become a viable option in the future. An additional potential benefit to 2027 liquidity, we’re also evaluating the seasonality of our fleet moves as we reflect on what we’re seeing throughout 2026 across the supply-demand, rental car pricing and used vehicle pricing. We’re taking a fresh look at the timing of our fleet investments and how we manage fleet levels throughout the year, particularly as it pertains to working capital.
Recognizing that decisions around fleet timing and seasonality can have a nine-figure impact to the timing of cash flows in the year. This analysis balances the fact that peak demand for rental cars overlaps heavily with the peak periods to sell vehicles for profitability. We expect Q3 adjusted corporate EBITDA production to be between $275 and $325 million with positive earnings per share for the quarter. Transaction days should be up approximately 1% year over year and net DPU is expected to be in the $285 to $295 per unit per month range.
Also, for the full year, we expect EBITDA to be in the $225 to $275 million range with net DPU at approximately $300 and transaction days up approximately 2% year over year. For 2027, we continue to target $1 billion of adjusted corporate EBITDA, but we will need some scale for that number to be within a reasonable reach. However, at a minimum, we do expect that in 2027 we will finally reach full-year net income profitability and we will be free cash flow positive for the full year.
We expect our year-end cash balance together with our projected 2027 profitability to provide the liquidity necessary to support some modest growth in ’27. Any liquidity above the midpoint of our guidance range could be deployed toward additional growth investments. This highlights perhaps the most meaningful change in our business. We are increasingly shifting our conversations from how we finance the business to how we allocate capital to create the greatest long-term value.
This is an important distinction and it’s one that we believe reflects the progress the business has made. I’ll leave you with one final thought. Every quarter tells part of the story, but transformations aren’t defined by individual quarters. They’re defined by the accumulation of hundreds of operational decisions, disciplined and smart capital allocation, consistent execution, and an organization committed to improving every day. That is exactly what we believe we are building here at Hertz.
I’ll now turn it back to Gail for closing remarks.
Gil West, Chief Executive Officer
Yeah, thanks, Scott. We’re proud of the progress we made in our transformation to date. We made great strides in shoring up our core rental car business. Adjusted Corporate EBITDA improved $1.2 billion in 2025 and another $200 million in the first half of 2026. We are on track to deliver more than 500 million of year-over-year adjusted Corporate EBITDA improvement and positive margins this year. That would represent nearly 2,000 basis points of margin expansion in just two years, with more to come in 2027.
This quarter, our commercial momentum and operational initiatives continue to translate into results. Looking forward, we know exactly where the work is: revenue, depreciation, cost, and customer experience. Sustaining our progress means executing with discipline across all of these. And we’re encouraged by the momentum building across the business, by what we’re seeing in the opportunities ahead, and by the actions already in motion. With that, let’s open it up to questions.
Back to you, operator.
OPERATOR
We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one. Again, we ask that you pick up your handset when asking a question to allow for optimum sound quality. Please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question is from the line of Stephanie Moore with Jefferies.
Your line is open. Please go ahead.
Stephanie Moore, Analyst at Jefferies
Hi. Good morning. Thank you. So, you know, honestly, it looks like a good print and it sounds like you guys feel pretty confident about where the business is going. So, in your eyes, what do you view investors are missing here? Because it feels like the drop in market cap just over the past 45 days or so is disconnected from the story you guys are telling and the confidence you have and the direction of the business. So any insight there would be helpful.
Gil West, Chief Executive Officer
Yeah, thanks, Stephanie. This is Gil. I’ll chime in. I’m sure Scott will want to add. Well, I mean, great question, certainly keeping us up at night. Candidly, the valuation of the business today is tough to understand. You know, it’s hard not to be distracted by the stock price, and of course, we remain focused on the long game. But there really does appear to be a disconnect between how the equity markets view Hertz over the last quarter, and the way I think about it is at the end of the first quarter, we sat at roughly a billion and a half in market cap, which we felt at the time was undervalued.
And then during Q2, we refinanced the debt that fell off the revolver. And just prior to the earnings announcement today for the third quarter, we were only at about a third of that market cap that we were 90 days ago. So I would argue we’re in a much better position than we were 90 days ago. And there’s clear evidence of the momentum that we’ve been talking about. The core business is performing again. And then first on liquidity, we navigated the seasonal low point with liquidity and came out, as Scott mentioned, at roughly a billion dollars, which was consistent with what we guided.
And we expect to build liquidity throughout the year and to be free cash flow positive in 27. And as we talked about, we’re exploring franchising that not only can add liquidity, but also a path to delever the business. And then I think the EBITDA results as well for the quarter and year-over-year improvements despite some headwinds. And the commercial momentum revenue that Sandeep talked about, you know, really doing more with less. Revenue up 10% with a 1% smaller fleet.
So the strategies and the hard work the team’s been doing is paying off, and we expect more ahead. And then depreciation as well, right. Effectively hit our North Star target. And even though we accelerated the rotation of older vehicles, we’ve got a really healthy fleet. And that ought to bode well for DPU as we sell those through more lucrative channels. So I think the other upside we see is the platform. You know, Scott and I both talked about that, but, you know, that’s all upside, but it’s building momentum.
Oro is an example. And then the valuation of Oro by itself could be very material in the mix as well. So look, I think we’re focused on executing the strategies that we have. We know ultimately the stock price will take care of itself. So that’s really key for us to stay focused and keep moving.
Scott Haralson, EVP& CFO
Yeah. Hey, Stephanie, look, I think Gil outlined it well. I think the point is the fundamentals of the business are different than they were two years ago. How we’re talking about the business today is different. The traditional rental car portion of our business is strong. Foundational elements of RPD and DPU are in a good position, if not improving. So that platform, coupled with the strategic plan that we’ve outlined, I think the feeling in the building is really a lot different than what we’re seeing in the marketplace.
And that’s understandable. Look, I mean, I talked about in the prepared remarks, we recognize that our investors are focused on the capital structure and the upcoming debt maturities. And that’s okay. Our job is to continue to execute over and over again and all that stuff will play out over time.
Stephanie Moore, Analyst at Jefferies
Thank you. I appreciate the insight there. Just a follow-up for me. I mean, I agree. I do think investors are focused on the liquidity profile and the capital structure. So it sounds like you have a plan in place. Kind of a two-part question: Do you have to do some of these franchise deals from a liquidity standpoint, or is that just more so, you know, another option that you have? And then secondly, as you think about what keeps you up at night, Gil, as you think about just your liquidity profile, what could go wrong?
I mean, at this point it does sound like you’ve made a lot of actions on your own, within your own control. But if I’m an investor and I’m concerned about overall liquidity, is it mostly just a weaker, deteriorating macro? Help me alleviate maybe that downside scenario. That’s it for me.
Gil West, Chief Executive Officer
No, I appreciate it. So I’ll start, and I think, Scott, you can talk more about the liquidity and the franchising piece. Yeah, look, I mean, we’re, as I said earlier in the prepared remarks, we’ve been facing a lot of headwinds for different reasons. Some are some macros that I mentioned. Others are just working through issues historically. Not to relitigate some of the fleet discussions, but we had to rotate the fleet for a variety of reasons. That was hard to do, especially the liquidity head.
But we’ve come out the other side. I think we’ve been facing headwinds and attacking them head on. We know things can continue to change and happen, but I think given our starting point and the headwinds that we have faced and the things that could go wrong and did, we managed through that and then came out in a much better place. So we’ve got what I would say the momentum, the team, candidly, and the more durable strategies, especially in fleet and revenue, that can sustain us.
So we’re eyes wide open and we’ll manage all the variables as we see them materialize.
Scott Haralson, EVP& CFO
Yeah. Hey, Stephanie, real quick on liquidity and maybe a little on franchise. Look, I think over the last two years, much of our discussion has centered around capital structure and really centered on liquidity, ensuring that we had the right resources needed to support the business, and rightfully so. But today the conversation is increasingly different because the underlying economics of the business are materially stronger than they were two years ago.
So as a result of all that, our focus is expanding beyond financing the business to thinking about capital allocation and long-term value. So we believe our current liquidity provides us with a lot of flexibility to execute our operational and strategic plans while continuing to evaluate the opportunities to further strengthen the balance sheet. So as we think about liquidity, we think we’re in a good spot to fund the business. The idea of franchise is, we think that is a tremendous idea regardless of our capital structure.
It’s the right move for the business at this time, particularly with the strategic options around Oro and our fleet. These are capital allocation decisions, not capital structure decisions. So we think it’s the right move for Hertz today.
Stephanie Moore, Analyst at Jefferies
Thank you, guys. Really appreciate it.
OPERATOR
The next question is from the line of Chris Woronka with Deutsche Bank. Your line is now open. Please go ahead.
Chris Woronka, Analyst at Deutsche Bank
Hey, good morning, guys. Thanks for taking the questions and for all the details. So I was hoping we could maybe unpack the residual issue a little bit, and you guys covered a lot of ground for Q2, so maybe we can just focus more on the forward-looking relative to what you thought maybe three or six months ago. Is this more an issue of the market temporarily moved against you for a specific kind of model or something? Or is this really about channel mix not being quite what you thought or hoped? And if it’s the latter, if it’s channel mix, how confident are you, and what are some of the steps you’re taking to get the mix more favorable going forward?
And then I’ll have a follow-up. Thanks.
Gil West, Chief Executive Officer
Yeah, sure, Chris, thanks. Good to hear from you. Good question. What I would say on residuals, and I tried to cover it in the prepared remarks, but I think we saw some things that were unique to the quarter that affected us. The broader outlook—and keep in mind the backdrop of the dynamics—right, we saw record tax refunds. We saw that and forecasted that the market would go up. It did. It ran up strong in the first quarter, right, and, you know, February, March, up 7, 9% in the rental car index.
So I think what we saw in the second quarter again is those kind of elevated levels on a year-over-year basis started to normalize in the 1 to 2% year-over-year range. So you saw a monthly kind of falloff. And I think that was part of it—might have been the pull forward for tax refund. Keep in mind, this is principally the wholesale market. And then the other dynamic there was volume, right. I think what we saw was a lot of volume. You know, we played a part in that.
The rest of the industry did. There were a lot of lease returns coming back as well. So that supply-demand imbalance, I think, just—price is the lever there, and especially on the wholesale side. So we saw all that play out. You know, I think ideally in a perfect world we would use more lucrative channels that aren’t exposed to that. But, you know, the challenge that ultimately we’re trying to solve is, one, to build additional capacity in those more lucrative markets.
But, you know, periodically we have volume to move and we need the capacity to do that. So the channel mix side is a problem we’ve been focused on. We’re obviously driving towards higher-yielding channels. There are a variety of strategies to do that. We’re in our direct retail, both physical and digital, area. We’ve focused on partnerships as another area. But just know we continue to iterate and figure out how do we move from, you know, call it 70 to 80-plus percent wholesale volume into flipping that equation to more lucrative channels.
So it’s a big area of our focus and has the opportunity to create a lot of value for us.
Chris Woronka, Analyst at Deutsche Bank
Okay, thanks, Gil, appreciate that. And then on the franchising, just to kind of follow up there. And I don’t want to put the cart before the horse. I know it’s still very early days of what you might do there, but at a very high level, do you envision that you would have some kind of requirements or standards for franchisees on the liquidity side so that they would remain in good health? Is that something you think you would consider if you go forward on this and, just in general, how much regulation do you want to put out there for franchisees?
Scott Haralson, EVP& CFO
Hey, Chris, this is Scott. I’ll start. Look, I think it’s probably a little early in the process to talk a lot of specifics around this, but I think a couple things. One is this isn’t new for us. We’ve been doing this for a long time. We just haven’t fed that business the way it should. And we think it’s an interesting option for us to expand that percentage. Today we’re north of 25% for branded revenue as franchise. We think that number could be directionally higher.
We’re not going to today tell you where we think it could end up because we’re not sure yet. But we do think it’s a very interesting channel. We have very high-quality franchisees today and we’ll continue to look for high-quality franchisees that can operate this complex business. But we’re excited about where it goes, especially from a capital perspective. I think it’s a much more efficient use of our capital and creates a consistent level of EBITDA, and we’ll give you more as we go down the path on this.
But we’re excited where this can go.
Chris Woronka, Analyst at Deutsche Bank
Okay, thanks, guys.
Scott Haralson, EVP& CFO
Appreciate it.
OPERATOR
The next question is from Rajat Gupta of JP Morgan. Your line is now open. Please go ahead.
Josh Patwa, Analyst at J.P. Morgan
Hi, good morning, this is Josh Patwa on for Raj Gupta. Thanks for taking our questions. I just wanted to start one on the retail disposition mix and if we could get an update where that is and how should we think about the runway to expand it from here? Is there a natural ceiling or a clear path toward that higher aspiration? It would also be helpful to understand how the partnerships you’ve built over the past couple of years with Amazon, eBay, Cox, how are those factoring into your retail disposition channels?
Thanks. And I have a quick follow-up.
Gil West, Chief Executive Officer
Yeah, sure. Some of this may be repetitive, but again, I think it’s obvious why we want to try to lean heavier into the higher-margin channels. And we think of it as any process. It’s how do we increase throughput in those and that yield. And so we’ve taken a multi-pronged approach. As we’ve talked about, our do-it-yourself model, direct and physical approach, or digital and direct retail approach. We’ve also got partnerships now with a number of the larger used car dealerships.
And I think the point I would make there is, as we look at this with those partnerships, it’s how do we move from more a transactional type relationship to a more strategic relationship, right? Because ultimately that approach can create a lot more mutual value between us, which then we can each share in. Right now it’s been more transactional, if you will. And there’s value to create certainly on the price, certainly on the back-end and conditioning costs, also kind of our, what I would call, work-in-process of our cars sitting there waiting to sell.
We would like to be able to operate those and leverage the working capital with that. So I think there are a number of opportunities to create a lot of value between us. Scale matters in that environment. And then we partnered with other retailers, Amazon, eBay and others, and Cox as well, to leverage our own direct retail car sales. And progress is being made. I don’t want to indicate otherwise, but as I said earlier, as we think about kind of flipping the volume model from wholesale to the more lucrative channels, from, call it, I don’t know, 70% to 80% wholesale now depending on seasonality in the month and the volume, to moving more of, we want to see 70% to 80% moving through the more lucrative channels. So that’s been the approach.
Josh Patwa, Analyst at J.P. Morgan
That’s very helpful. Thank you. Just as a quick follow-up on ORO, I was curious, what’s the magnitude and nature of the investment going into the San Francisco autonomous ramp and how fungible should we think about the infrastructure? Is it built to flex across a range of autonomous players as the ecosystem shakes out, or is it purposeful to this one specific partner? Thank you.
Carlo
Yeah, no, thanks. Great question. As I mentioned earlier, we’re really excited about where ORO’s heading, the capabilities, and kind of our rightful place in AVs. What I would say about the infrastructure, and this is really the benefit of Hertz as a background, is we have a lot of infrastructure footprint. We’re operating on it. We can pivot and adapt into AVs with that. From an investment standpoint, a lot of that’s already there. The biggest item to make sure we have the capability, of course, is EV charging networks in that distributed footprint.
As you know, we’ve got a lot of EV experience, and we have charging networks across the system. So it’s another infrastructure investment that we’ve made in prior years that helps play out with ORO as well. And I think, as I said earlier, if you think about the infrastructure that we have, the ability to operate fleets at scale, own and finance vehicles — trying to replicate all that would take a whole lot of time and a lot of money. So that’s the going-in foundation with ORO that we have.
And we’re excited about the right role we will play in AVs. We see it as kind of that operating layer. The way I look at this, candidly, is the analogy is what data centers are to AI, the operating layer that we play a role in is to AVs. So I think it’s required, and we’ve got a big running start on it.
Josh Patwa, Analyst at J.P. Morgan
That’s great, Carlo. Thank you. And good luck.
OPERATOR
The next question is from Dan Levy from Barclays. Your line is now open.
Dan Levy, Analyst at Barclays
Great. Good morning. Thank you for taking the questions. Wanted to start first with a question on the DOE, and I think you referenced this before that the challenge with the DOE is that as you are tight on your fleet, you’re not getting the scale that you need to drive that DOE per day down to that low-30s North Star metric. So can you just give us a sense of the path to drive it lower if the intention is to keep the fleet levels tight?
Scott Haralson, EVP& CFO
Yeah. Hey, Dan, this is Scott, and also apologize to everyone, too. We’re going to be close on time here given the extended remarks, and some of the answers were a bit extended as well. But yeah, to DOE. Look, I mean I think scale is one of the components we’ve talked about, not the only one, obviously. We think that a lot of the initiatives that we have in place are moving in the right direction. We talked about core operating expenses down 2% year over year on basically flat days.
That’s an important baseline to start from. I mean, obviously we have headwinds thinking about RPD-related costs and leasebacks, financing costs. But the core business is getting more efficient every year, and we haven’t even hit all the levers that we think are available. So there is room to run on unit cost efficiency. Now mathematically, scale is important. No doubt that it is important. So it’s a combination of all those things. But one thing I do want to add, too: we talk about North Stars and the ability to get to a billion or beyond.
Cost is not our only lever here — it’s important to state that’s the case. We do think there is room to run on DOE per day and unit cost, but it’s one of multiple levers including RPD, RPU, DPU — all of those things are going to be contributors. So there is room to run, but it’s not the only lever that we have.
Dan Levy, Analyst at Barclays
Okay, great, thank you. As a follow-up, wanted to ask about the liquidity dynamics and maybe you can talk about what changed in the liquidity guidance. You previously said ending the year with in excess of a billion and a half. Now you’re saying 1 to 1.4. But as you’re looking at these maturities on the debt side in ’28 and ’29 — $2.5 billion a year — what is the confidence that those maturities can be addressed? Because I’m assuming you’re already thinking about the different options for those right now.
Scott Haralson, EVP& CFO
Yeah. Hey, Dan. Just to clarify on the liquidity, previous guide was about 1.5, and I outlined in the prepared remarks that we removed ATM proceeds from that forecast. So that’s naturally going to bring it down. But we did say that we’re going to have the ATM in place and it remains available, and it’s a viable option, but it’s not in the forecast, really given where stock prices are. But look, we think we have the right amount of liquidity to fund the strategic plans and a little bit of modest growth into ’27.
So we feel good where that is. On the debt maturities, look, we know we have a number of debt maturities starting in the front half of 2028 and it’s an important topic to investors. But we’re not going to give specific views on the process today or even think about probabilities and confidence levels and all these things. I think, as you’ve heard in our prepared remarks and have seen over the last two years, the underlying business is strong and the economics are improving.
Plus we have a good strategic plan that we’re executing to and talked about ORO and franchising and fleet management, retail car sales, service initiatives, all those things. So liquidity is good. We intend to pay these 2026 debt maturities in cash. And maybe most importantly, though, to reiterate: our views on free cash flow production for the remainder of this year and next year means that we’re expecting that we’re no longer going to be funding operating losses with debt or other outside capital.
So it’s an important distinction from where we have been historically. And we also have a number of levers to pull to generate growth capital, and a number of those levers line up with our strategic initiatives around franchising and ORO. So we feel good about where we are and where the business is headed, and we’ll deal with the maturities in due course.
Dan Levy, Analyst at Barclays
Great. Thank you.
OPERATOR
There are no further questions at this time. This concludes today’s call. Thank you for attending. You may now disconnect.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
Recent Comments