Prepared remarks
Welcome to the Hertz Global Holdings Fourth Quarter and Full Year 2025 Earnings Call. I would like to remind you that this morning's call is being recorded by the company. I would now like to turn the call over to our host, Johann Rawlinson, Vice President of Investor Relations. Please go ahead.
Good morning, everyone, and thank you for joining us. By now, you should have our earnings press release and associated financial information and these can be accessed through the Investor Relations section of our website. I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not a guarantee of performance, and by their nature, are subject to inherent risks and uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of today's date, and the company undertakes no obligation to update that information to reflect changed circumstances. Additional information concerning these statements, including factors that could cause our actual results to differ, is contained in our earnings press release and in the Risk Factors and Forward-Looking Statement section in the filings we make with the Securities and Exchange Commission. Our filings are available on the SEC's website and the Investor Relations section of the Hertz website. Today, we'll use certain non-GAAP financial measures which are reconciled with GAAP numbers in our earnings press release available on our website. We believe that these non-GAAP measures provide additional useful information about our operations, allowing better evaluation of our profitability and performance. Unless otherwise noted, our discussion today focuses on our global business. On the call this morning, we have Gil West, our Chief Executive Officer, who will discuss strategy, operational highlights and our fleet. Our Chief Commercial Officer, Sandeep Dube, will share insights into our commercial strategy followed by Scott Haralson, our Chief Financial Officer, who will discuss our financial performance. I'll now turn the call over to Gil.
Thanks, Johann. Good morning, everyone, and thank you for joining us. I want to start by thanking the Hertz team; their focus, discipline, and resilience, especially those serving our customers in the field, was evident throughout the year, but particularly during the fourth quarter holiday travel season, which is historically one of our most operationally intensive periods. Together, they executed consistently against our goals and made real progress, building momentum for the year ahead. 2025 marked the first full year operating under the back-to-basic strategy. Guided by our North Star metrics, we brought greater discipline to fleet management, revenue optimization, rigorous cost control, and improving the customer experience. The work is far from finished, but the progress we made this year materially strengthened the foundation of our business for the long term. In 2025, we achieved a full year adjusted EBITDA improvement of more than $1 billion year-over-year. We drove sequential improvements in revenue, RPU, and RPD, and improved utilization by sweating our assets, driving DPU down in line with our North Star target. We brought DOE per transaction day down despite lower volumes. We also completed our fleet rotation and successfully secured our model year '26 buys at our target prices and volumes. That allowed us to begin selling model year '25 through our enhanced retail channels, continue our short hold strategy, introduce a more optimized mix of car classes, and achieve our lowest average fleet age in almost a decade. And we delivered a nearly 50% improvement in customer satisfaction. As we turn to the fourth quarter, typically challenging seasonal environment was amplified by a number of external headwinds that were primarily isolated to the quarter, including government shutdown, coupled with FAA cancellations, multiple technology vendor outages, and unfavorable residual value environment to elevated recall volumes. Taken together, these created outsized pressure of well over $100 million on our business and kept us from hitting some of our targets. But even within that environment, we made progress. In the fourth quarter, adjusted EBITDA improved $150 million year-over-year, but our strongest result this quarter was revenue. In fact, it was our strongest revenue result in nearly 2 years. If you remember, we entered 2025 with revenue down double digits year-over-year. And by the end of the fourth quarter, we were nearly flat revenue with a 3% smaller fleet, a significant accomplishment driven by our ability to sequentially improve RPU and RPD and sustained utilization and transaction days, all with a smaller fleet. We also saw a more stable industry pricing backdrop throughout the quarter, which is especially noteworthy given the very polarizing peak and off-peak dynamic that plays out during this period every year. This is evidence that both our commercial investments in pricing and demand generation are paying off and that the industry setup is more positive than in prior periods. While DPU, as I mentioned, was in line with our North Star target for the year, in the fourth quarter, it moved above our North Star target due to a revised Black Book residual value forecast and lower-than-expected wholesale prices from heavy OEM and rental car company deflating during the car market seasonal low period. While we monitor multiple market trend sources, we have historically indexed heavily on Black Book forecast, which tends to be more seasonally volatile. As of the end of the year, it was down nearly 5% year-over-year, resulting in a $60 million noncash charge to depreciation. By contrast, Manheim average rental vehicle prices in December were up 2.85% year-over-year. And as we look ahead, updated projections from our partners at Cox Automotive show that their Manheim used vehicle value index is expected to end the year roughly 2% higher than in December 2025. While our forecast is not predicated on such a positive outlook, our internal analysis is encouraging and we've seen early signs of recovery in Q1 in line with these Manheim values, which in January were up 2.4% year-over-year. On the cost side, we brought adjusted DOE per transaction day down 6% year-over-year. This moved us closer to our North Star target in the low 30s. Recall volumes peaked in mid-November and December, taking over 20,000 cars out of service, which is almost 3 times higher than the normal rate. This resulted in us having to carry more fleet than we had planned and limited our performance, which had ripple effects across the business, impacting our fleet utilization, particularly for our rideshare business. We have strategically managed through this by redeploying available fleet where it would have the most impact, especially since a vast majority of these recalls lack available fixes and restrict us from renting and selling vehicles. We are actively working with our OEM partners to find solutions to minimize fleet downtime. Recall volumes have moderated slightly throughout the first quarter but remain elevated. With this in mind, we're staying disciplined in our capacity planning to ensure our rentable fleet stays well utilized and inside of demand. It's clear Q4 presented real challenges, but the decisions we made throughout 2025 held up under pressure and reinforced that our strategy is the right one. Today, Hertz stands on a meaningfully stronger foundation than it did a year ago. A healthier fleet, improved unit economics, a more disciplined operating model, a better customer experience. And what I want to be clear about is this: the improvements we're seeing in the business are structural; they're permanent. The headwinds we faced and continue to navigate are transitory. That difference matters and is what gives me confidence in the trajectory ahead. That confidence is already being validated as 2026 is off to a good start. Q1 trends in both revenue and RPD are positive year-over-year, a particularly encouraging sign given that this is typically a seasonal trough period for the industry. This means we're entering the upcoming peak period from a position of strength. Looking ahead to the rest of the year, we remain focused on accelerating revenue, RPD, and RPU growth while staying disciplined on cost, putting the core rental business firmly on the path to profitability. While rent-a-car remains our core business today, this transformation is about becoming more than a single line of business. We're executing with discipline in the business that powers us now, but we're intentionally building the capabilities that will power what's next. We're laying the groundwork for a diversified value-creating platform that will unlock value beyond the core. The Hertz platform spans rent-a-car, service, fleet, and mobility. It's still early days, and while the areas of our platform sit at different maturity levels, each presents meaningful upside, both near- and long-term. In rent-a-car, we'll maintain steady momentum in our mature airport locations by driving pricing, utilization, demand generation, and asset management. We see real near-term upside from growth in our off-airport locations in areas like insurance replacement, local commercial agreements, and small business. We're also sharpening our focus to unlock additional value in our franchise footprint while piloting new offerings in service. We see a particularly strong runway in fleet through Hertz car sales, and in mobility, where the long-term opportunity has the potential to become as, if not more meaningful than our core rent-a-car business. We're transforming Hertz car sales into a truly omnichannel experience, meeting customers where they are online, in person through rent-to-buy, and delivery right to their door. The opportunity here is significant. We are a used car factory with a building customer base, and we're building the shopping experience to match, one that can ultimately rival the largest used car dealers in the country. We have a constant supply of pre-owned vehicles and sales volume that already puts us in the top 5 used car dealerships in the country. Our improved website has a wide variety of vehicles for sale and intuitive interface, enhanced imagery, and more detailed descriptions to help customers shop more confidently. We already have scale in shifting our primary sales channel to retail as a major unlock. We also have established key partnerships with Cox Automotive, Amazon, and Palantir that give us the capability to scale this business profitably. Hertz car sales' value proposition has never been more compelling as new cars are increasingly out of reach for many buyers with prices topping $50,000 on average. With our short hold strategy, we deliver the best bang for the buck as consumers can get a nearly new car for around half the cost. This is an important differentiator as we head into spring, typically a peak buying season, which will be bolstered this year by record-high tax returns. Now, regarding mobility, Hertz owns and manages fleets at scale with core strengths in fleet ownership, large-scale operations, world-class maintenance, and vehicle fleet financing. Along our physical infrastructure, operating capacity, and leadership experience, this business is evolving to meet the mobility needs of tomorrow, whether driver-led or autonomous. Our journey in mobility began in rideshare by renting cars to Uber and Lyft drivers. Today, we operate the largest rideshare rental fleet in the world, and it has become one of our highest growth potential businesses with double-digit revenue opportunities. In the background, we're developing and testing new approaches in this space with strategic partners. While it's difficult to quantify the full growth potential of our Mobility business at this stage, the opportunity undoubtedly is significant. For context, Uber's CEO has described autonomous vehicles as potentially a multitrillion-dollar market. We're building the capabilities now to ensure Hertz is positioned to play a significant role in that ecosystem. Today, our rental car business remains the largest consumer of our time and operational focus. But as we scale the broader platform across rent-a-car, service, fleet, and mobility, the mix will evolve. Rental will become one part of a more diversified value-creating enterprise. With that, I'll turn it over to Sandeep.
Thanks, Gil, and good morning, everyone. I want to jump right into the headlines on revenue this morning. The fourth quarter, the industry's typical trough period with volatile seasonal demand, represented Hertz's strongest year-over-year revenue result since Q1 2024. After adjusting for Q4 2024's one-time loyalty gains, in Q4 2025, we drove year-over-year revenue growth, with the primary driver being RPD, which was nearly flat on a year-over-year basis. Most importantly, RPD for the airports in the Americas, our largest segment, was positive year-over-year for the quarter. We achieved this meaningful sequential improvement despite several headwinds, including a lower car class mix, the extended government shutdown, and elevated recalls. In Q4, we achieved a difficult feat by improving both year-over-year pricing and days sequentially, primarily driven by Hertz's commercial strategies. Our revenue metrics showed good sequential progression. Q4 2025 adjusted revenue was sequentially 4 points better, going from down 4% to about flat. RPD mirrored the same sequential improvement on a loyalty-adjusted basis as well. The driving factors of these improvements were the same as detailed in our Q3 earnings call. Let's dive deeper into the details a bit. First, driving a better customer experience. Our Net Promoter Score grew by nearly 50% year-over-year, and it is driving better organic demand for our brands. Second, generating greater durable demand from higher-margin channels. Direct website demand is showing strong growth. Our corporate business is gaining ground. We are now driving consistent growth in our off-airport business, and our mobility business is growing revenue double digits. Third, improving our pricing tactics and strategies. We are on a multi-phase approach to bring more sophistication in the way we drive demand, with a focus on driving positive RPD for comparable asset classes. Mid-quarter in Q4, we executed a totally new pricing metric, and we saw immediate results from that change in driving positive RPD. Our next situation is going into test mode in a few weeks. I expect phase improvements in the sophistication of our pricing approach. Fourth, better monetization of our higher RPU assets. This was achieved by improved asset deployment, having the right vehicle at the right location, ensuring that higher RPU assets are effectively monetized. Fifth, better value-added product sales. We drove better sales of our value-added products through improved operational performance and pricing sophistication. Lastly, local level profitability and optimization. We continue to manage our business at a more granular level of profitability. These commercial strategies and tactics primarily drove the positive momentum in Q4 2025. Most importantly, these foundational changes raised the baseline productivity of our revenue and RPD production, and we expect these gains to largely persist irrespective of the macroeconomic environment. And just a reminder, we are still in the early innings of a transformation of our commercial strategies, and we expect more foundational improvements in the coming quarters. If you step back even further, the takeaway here is the sequential improvement through 2025 as a result of our back-to-basic strategy. We started 2025 down double digits year-over-year on revenue and down mid-single digits year-over-year on RPD. This narrowed to near parity on both metrics by the end of the year, and they have both turned positive in the early part of 2026. We also delivered improvements in utilization across our total fleet in each of the quarters in 2025, including Q4, where we were able to offset the impact of a higher rate of recalls and delivered an improvement of 200 basis points year-over-year. Total fleet includes all vehicles irrespective of operating status, whether in service, out of service, or in our car sales inventory. Looking ahead, we are delivering clear results and building momentum for the year ahead. 2026 is off to a strong start, as the strength we saw at the end of December for the holidays carried forward into the new year. In January, we are seeing year-on-year positive revenue and unit revenue growth, mostly driven by a couple of percentage points increase in global RPD, reflecting pricing growth in both our Americas and our International segments. February is trending even more positively, and March looks to continue on that trajectory. As a result, we expect Q1 2026 revenue to be up mid-single digits year-over-year, with fleet growth of only low single digits. Q1 2026 is also supported by a more constructive industry environment compared to Q4 2025, with the industry demand environment looking better. For the rest of 2026, we will manage our growth in a disciplined manner. This means holding airport growth at or below TSA levels while pursuing off-airport and mobility opportunities. At the same time, we are focused on doing more for our customers. The improvements we have seen in our Net Promoter Score are a clear indicator that our work to create a more consistent, convenient, and caring customer experience is resonating. We are deeply grateful to the millions of customers who choose Hertz, and we have recently lowered the threshold for achieving 5-star status to reward them even more for their loyalty. At a time and status across the travel industry feels harder to earn than ever, we are offering a faster, more transparent part, providing more value with every booking and one more reason to continue choosing Hertz. So in summary, our commercial playbook is working, and the results are starting to prove it.
Thanks, Sandeep, and good morning, everyone, and thanks for joining us. As you heard from Gil and Sandeep, the fourth quarter had a number of items that cloud the results. But once you get past the transitory impacts in the quarter, you can see some interesting foundational elements. The revenue trends are improving. Our fleet is rotated and model year 2026 buys have been secured at prices and volumes we expected. In spite of a richer fleet mix in 2026, which will provide a tailwind to RPD, we still expect to keep DPU for the year below $300 per unit. NPS took a big leap forward in 2025, and that's primed to continue in 2026. Our digital customer experience, operational consistency, and customer-focused initiatives are being recognized by our customers. We have found a good balance between utilization and NPS scores, but have our eyes set on improving both at the same time. The moves we made last year to create a rental car fleet with an average age of less than 10 months, which is the youngest it's been in almost a decade, and to drive record-setting utilization are now strategic tailwinds. The cost and efficiency actions paid dividends and will get even better in 2026. Throughout 2025, we pulled off a difficult task. We lowered unit cost while also reducing units. That's difficult to do in a heavy fixed cost and operationally complex business like ours. We have real opportunities for growth in 2026. The focus of that growth will be at our off-airport locations and in our mobility business. Our expansion of the platform outside of traditional rental cars is progressing nicely. Our digital car sales business has made some important technological advancements on both the back-end website and the merchandising capabilities, as well as the digital transformation of the car sales process. While early, we think 2026 digital expansion could produce a meaningful progression in the percentage of our car sales that will be transacted through retail channels. On mobility, while we are the industry leader in rental rideshare, we are growing and developing the business to meet evolving needs. We also have been actively building in the background a substantial set of capabilities that we will be leveraging to position Hertz to be a significant player in the aggregation of the supply of mobility in the future, whether that is driver-led or autonomous. This will ultimately be the future of Hertz, but we are balancing the current optimization of the mature part of our business while building the platform for the future. Even though the absolute financial results are not where we want them to be yet, the actions we have taken over the past year or so are showing real sustainable results, and the opportunity in front of us is exciting. So with that preamble, I do want to quickly walk through some details in the quarter, where we are with liquidity and cover a bit of our 2026 outlook. Starting with the quarter. For Q4, we reported revenue of $2.0 billion, which came in ahead of consensus expectations with RPD broadly in line and down approximately 1% year-over-year. Importantly, excluding the prior year loyalty adjustment, revenue growth was up year-over-year with RPD nearly flat. Adjusted EBITDA for the quarter was a negative approximately $200 million. While this is a $150 million year-over-year improvement, it was still about $100 million off of our target. This was entirely in our vehicle carrying cost. We incurred about $20 million of additional costs resulting from the additional fleet to compensate for the elevated recalls. We also had a $20 million loss on the sale of assets due to the large number of cars available in the marketplace that weighed on residuals in the quarter. We also took a noncash depreciation expense of approximately $60 million due to the late in the quarter residual value adjustment by Black Book. While we do believe the adjustment on the forward view of residuals to be a bit conservative, we did take the entire impact to the P&L. We view these items as mostly isolated to the fourth quarter, albeit recalls will likely remain elevated throughout the first quarter. We expect the residual value market to improve as we head into the peak car sale cycle starting in Q1 into Q2. The government shutdown duration and timing also weighed on results. We were able to recoup most of the days lost in the period, but it did come in more off-peak days production since the shutdown came in what was becoming an improving October with positive demand and pricing momentum. While difficult to quantify, and while the revenue for the quarter was still positive, we estimate the government shutdown cost us an additional $10 million to $20 million of adjusted EBITDA in the quarter. In total, the underlying business performed better than the reported adjusted EBITDA would suggest as we performed well on the items within our control. Transaction days were almost flat year-over-year as we kept the higher fleet to mitigate the recall issues and recoup some of the days lost due to the transitory events. Utilization remains solid. Even with the additional fleet, the global fleet was 3% lower than the prior year. Adjusted DOE per day was another positive story. It improved 6% year-over-year, coming in at $36.39 as our cost initiatives are taking hold. It did, however, reflect higher collision severity and repair costs and ongoing elevated insurance costs. We still have more to do, but have done good work on addressing operating expenses in our big three categories: labor, facilities, and vehicle maintenance and repair. With further work to be done in growth in transaction days in 2026, we do expect lower unit costs this year. Core SG&A remained flat, with total year-over-year variances primarily stemming from the timing of expenses in 2024, with 2025 being a more normalized expense level. Turning to depreciation and DPU. For 2025, we produced a full year net DPU of $300 per month. While this is right at our North Star metric, we were certainly not happy that we had to take a late charge to depreciation due to the move from Black Book. We were expecting to be below $300 per unit. However, if residual values end up where we think they will in 2026, this will prove to be timing of the expense and will benefit us with less depreciation this year. The fourth quarter ended at $330 per unit, down 21% year-over-year, but nonetheless, higher than we expected. Now let's talk liquidity. We ended the quarter with approximately $1.5 billion of total liquidity, including revolver capacity. This reflects the impact of the partial redemption of $300 million of the 2026 notes in Q4, leaving $200 million outstanding. The Wells Fargo make-whole liability, which had been reserved for some time, was primarily concluded with the $346 million payment made in late January. This reduced our available liquidity to just under $1.2 billion. This number was about $100 million lower than expected due to the timing of vehicle dispositions that were delayed and the early acceptance of vehicles in Q4 due to the larger number of recalls and the impact of the government shutdown. Other than the cost to carry the additional vehicles in the quarter, the timing of the vehicles in and out of the fleet is not expected to have any meaningful positive or negative impact on our expected liquidity at the end of the second quarter. Also, our ABS programs remain healthy, with ABS vehicle fair values comfortably above net book values and market access is solid. We recently entered into financing transactions that we expect will result in an increase in our liquidity by approximately $200 million at an attractive cost of capital. We also have several other liquidity enhancement opportunities that we'll be evaluating in the coming months, that could total more than $500 million. In addition, we also have approximately $400 million of first lien capacity to refinance the expiring revolving credit facility commitments in June of this year. With the disciplined growth that we have planned for 2026, we have access to the liquidity capacity to make that happen. We expect to reach the low point of liquidity at the end of Q2 at something likely below $1 billion, as we invest in the fleet in the first half of the year and then expect to end the year well north of $1 billion as free cash flow generation improves after Q1 and from the return of capital that happens in the fleet rotation cycle in the back half of the year. To be clear, this assumes we action some of the liquidity enhancements we have available to us. Finally, let's turn to guidance for the year. For Q1, we expect transaction days and fleet to increase low single digits year-over-year. Total fleet utilization will likely be flat in Q1 year-over-year due to the impact from the heavy winter storms and continued elevated fleet recalls, which should decline throughout the quarter. On the revenue front, as Gil and Sandeep noted, January saw positive year-over-year RPD and revenue growth, with February trending even better and March bookings to date showing a similar trend. However, Q1 is still an off-peak quarter for us, and the recall levels are still going to impact our results. Given this, our Q1 expected margin range is in the negative high single-digit to low double-digit range, which is a year-over-year improvement of approximately 600 to 800 basis points, assuming DPU at around $300 per unit. For the full year, we previously communicated an outlook of a 3% to 6% adjusted EBITDA margin range. While the revenue trends were positive and the internal expectations for DPU are in line with prior expectations, it is early in the year, and we would like to see more game film before we revise the guidance upward. That's why we are maintaining the guidance for the year in the 3% to 6% margin range. We continue to target $1 billion of adjusted EBITDA in 2027.
With that, I'll turn it back to Gil for closing remarks.
Thank you, Scott. 2025 was a year of back to basics, focused on rebuilding the core and transforming Hertz for the long term. We first tackled our fleet, the biggest problem to solve, along with cost and revenue, all while elevating our customer experience. Through our fleet strategy and rotation, we operated as an asset management company, and the team turned our fleet, which was once a massive headwind, into a competitive advantage positioning us well for 2026 and beyond. We delivered year-over-year improvements in unit cost even with a smaller fleet, and we see a long runway of cost and productivity initiatives that cut across all aspects of our business. This, along with operating leverage from growth, should help propel us forward. Unit revenue growth has been a key area of focus. The team's work around customer service, demand generation in the right segments, revenue management strategies, and initiatives are paying off, and we have the talent, tools, and technology to continue this momentum and return Hertz to solid profitability this year and achieve over $1 billion in adjusted EBITDA in 2027. But our transformation does not stop there. We're both pragmatic and ambitious, focused on what's in front of us while also planning for the future. We're making progress in developing our platform to unlock value beyond our core business, leveraging the same operational discipline, rigorous cost control, and revenue optimization that defined this turnaround. With that, let's open it up for questions. Back to you, operator.
Questions and answers
Our first question comes from Chris Woronka with Deutsche Bank.
I guess, Gil, to start off, one of your competitors recently took about a $500 million write-down related to EVs. And obviously, Hertz went through a process a couple of years back that I think is complete or largely complete. Can you maybe give us a refresh on where you guys are in EVs and if your strategy has changed or evolved at all recently?
Yes. Chris, thanks for the question. Yes, I think a lot of headlines across all the automotive industry on EVs, of course, of late. And I think we're probably a little further down the road than most, and we do have a bit of a different strategy now. I'd just start with some context. We're the largest fleet supplier to rideshare in the world, as I mentioned. It's really important to get that fleet right because rideshare has different fleet needs compared to our traditional rack business, and EVs remain central to rideshare and remain a long-lived asset in that fleet. So we're just probably more experienced than anyone as an EV fleet operator at scale. We've been building a lot of operational muscle around EVs over the years, and that includes the technical expertise as well as operating infrastructure. So kind of as part of our transformation, as you well know, we've gone through and rightsized our EV fleet based on what the natural demand is for EVs. So essentially, we've redeployed that fleet in the right channels, with the majority of that fleet moving towards rideshare business. And that puts EVs into real high-intensive operating environments, helping us accelerate our learning curve. So specifically with our Tesla fleet, just to give you an example, we're in the process of doing an interior refresh on that fleet. It's really given where we've encountered on the interiors over the last several years. So this is a low-cost investment per vehicle for us, and then the vehicle condition comes out looking nearly new and extends the useful life of that asset, having considerable economic benefits for us on that fleet. So we got a world-class maintenance and tech ops team. They've done this all their life really on older generation aircraft, applying a similar approach where we refurbish the interiors and do it at a low cost. So it's what's happening with our Tesla fleet. Ultimately then, I think with that fleet, the limiting life factor will be battery life at this point, kind of given the current battery replacement cost. But even that could change in the future. But we got to remain agile with our EV fleet. It's really set us up well, though, in our rideshare position. And then it's probably worth noting that that experience we've been building with EVs really sets us up well in the future for AVs, because I think every future autonomous vehicle will likely be an EV. So all that will bode well for us in the future.
So Gil, if a lot of commentary here on the mobility business, your prepared remarks I think said mobility has the potential to more than surpass rent-a-car. So could you dig into a little bit more here on the future potential of the mobility business for Hertz? What does that look like? What is the plan for the next year, 1, 3, 5 years, if you could? Just want a little bit more detail on how you're thinking about that.
Thanks, Chris. As we discussed on the call, the potential here is significant, and we're positioning Hertz for the future of mobility. I believe we'll play a key role in this, especially with our strong partnerships in the rideshare sector. When considering the next phase of mobility, it's really about the transition from rideshare to autonomous vehicles. We have been testing some innovative models with a strategic partner and are beginning to scale those efforts. We will provide more information on this in the future. I see Hertz as a natural contender in the mobility and autonomous vehicle space as it develops. Our mobility business is led by an incredible team, and I'm very optimistic about what the future holds. To summarize my view on how the industry is evolving, there's a massive total addressable market here. It's not a winner-take-all situation; rather, it's substantial. Hertz is one of the few companies with all the necessary components to become a major player in autonomous vehicles. Our core business revolves around owning and operating large vehicle fleets, which is essential for AVs and future mobility models. We possess an iconic brand, a global presence, operational excellence, advanced maintenance capabilities, and strong fleet management skills. Additionally, we have experience managing electric vehicles. Overall, I believe we have the right elements to succeed in this area, and we are committed to it. However, it's also important for me to emphasize that we are focused on ensuring our core business is performing well and heading in the right direction without being distracted by other matters. We can and are managing multiple priorities, with mobility being a significant aspect of our future.
I wanted to go back to the question of DPU. And I know your North Star metric is the $300. But perhaps you could just walk us through again the path to how you can sustainably be at that $300, given some of the vehicle inflation that we've seen. What offsets do you have? Because just mathematically, if you're holding a car for 18 months and the price is going up, that DPU is going to just increase above $300. So what offsets do you have to get it to that $300? And what's the confidence on that?
Thank you for the question. I'll begin, and Scott can add if needed. We are confident that our comprehensive fleet strategy will be effective in any market, allowing us to maintain the sub-300 DPU this year and into the future. While we acknowledge some seasonal trends and volatility, we have refreshed our fleet with model year '25 and '26 vehicles to support our depreciation goals. The used car market is also favorable as we move forward. Additionally, we've shifted towards heavier retail car sales and shorter holding periods, which should act as positive factors for us going ahead. Ultimately, success depends on effectively managing our purchasing, holding, and selling at the right make-model trim level to optimize retention value throughout the duration. It's essential to focus not just on the initial purchase cost but also on the retention value based on the net purchase price and the eventual selling price. This retention value over time is crucial, and managing it effectively positions us to achieve our DPU targets.
Yes. Dan, it's Scott too. I'll just add an important sort of mathematical component here. Obviously, we buy a ton of vehicles at sort of large volumes that are significantly below MSRP. And at that sort of discount level, I mean, ideally, you turn around and sell the vehicle the next day, obviously, to monetize that discount. But obviously, we can't do that, and we rent the car for a period of time. But to Gil's point, the idea of a short hold has significant mathematical components, albeit operationally complex because you do need a large inflow of vehicles, and you need to have the piping to be able to exit vehicles at that volume. So the combination of all those things create the ability to optimize DPU that we think will be below $300. And we have the capabilities to drive it a good bit further once all of the components sort of start humming. So I think mathematically, you could easily get to that point. Historically, the rental car business has been well below $300, so I don't think we're charting new territory here, respectively. But I think there are a lot of components that we've definitely gotten good at, and we'll continue to do that. But I think mathematically, it's important to sort of think of it around those factors.
Great. And if I could just ask a follow-up on the liquidity standpoint. So I appreciate the commentary on Q2 being the trough and some other liquidity actions. But just given you're still going to be a ways away from being free cash flow positive, maybe you could just comment on the free cash flow dynamics. But in the absence of that, what other capital raise options do you have to keep the liquidity in line until you hit free cash flow positive?
Yes, let me address a few points, Dan. I anticipate that we will make significant progress in generating free cash flow in '26. After Q1, if you examine the margin profile, we will be fairly neutral in terms of cash flow for the year following Q1. We need to position the business in '27 to become cash flow positive, allowing us to meet all our working capital requirements. We've mentioned several initiatives in the pipeline, including a $200 million project designed to create an alternative letter of credit facility, which will help us minimize the funds drawn from the revolving credit facility. We have numerous initiatives beyond the standard first lien offering, which we also possess, that focus on increasing capacity within our asset-backed securities structure. Additionally, we have real estate assets, including properties we no longer require. As a century-old company, we have surplus assets that we aim to monetize to optimize our facility footprint. There are also operational locations where we intend to continue and may consider sale-leaseback transactions at favorable capital costs. This represents a more efficient capital allocation than retaining real estate throughout the network. We are pursuing various strategic initiatives to expand our franchise base, including venturing into new regions where we currently do not have a presence and exploring corporate-owned locations that offer appealing franchise opportunities and potential upfront capital infusion. Therefore, we have a multitude of options providing us with flexibility, including approximately $400 million in first lien capacity, much of which results from the expiration of some of the revolving credit facility capacity we can refinance this year.
Gil, I wanted to go to a comment that you kind of weaved into the prepared remarks a few times; you used the word off-airport. And you seem to use it in separation with the word mobility. So would just love to get your view on the word off-airport, what you guys are doing there. If it is separate from the mobility business, and is it related to maybe a desire to get back into the insurance business that the company was in a while ago.
Yes, thanks for the question, John. To clarify, when we refer to off-airport, we're talking about our rental car business, not mobility. It's a distinct part of our rental operations. We consider both on-airport and what we call Hertz local edition, which includes off-airport volume. Regarding growth in this area, we do see profitable growth and are disciplined in our approach. As we worked on rotating our fleet, we needed to reduce its size to speed up the rotation, managing our capital and vehicle availability while addressing depreciation. We maintained our airport capacity fairly stable during this time, while shrinking our off-airport HLE locations and, to some extent, our mobility business. Looking ahead to 2026, we see an opportunity to return to our previous levels of off-airport growth, with demand present across various segments. It's essential to note that mobility is a separate initiative, growing at a much faster pace than off-airport through our partnerships, and we believe it has significant potential for the future.
John, this is Scott. Just a quick comment. I think we view those businesses differently, too, by the way. The airport has different demand profiles, obviously driven by airlines and TSA demand, while our off-airport business has a different cycle to it, obviously related to insurance replacement and even some leisure demand and commercial components that operate on a different cyclical component. So as we think about growth profiles, profitability profiles, we do view those a bit differently, which is why when we talk about growth, we segment it out into the airport, off-airport, rideshare components, just because they behave differently.
Great. And then just one question on cap structure and balance sheet. You guys have said that, I believe, 300 to 600 basis points of EBITDA margin this year. If you're at the high end of that range, does that get you towards kind of cash flow breakeven for the year? And just longer term, any thoughts about the approach to deleveraging here? I mean, even on the '27 goal of $1 billion in EBITDA, even if we earmark a lot of that improvement to debt repayment, we're still an awfully levered company. So just wanted to get your thoughts about how we bring down leverage. And I know you talked about sale leaseback and some of those things. But I would just love to get your view on ideal cap structure and hypothetically, like maybe when we could be below certain leverage levels?
Yes. John, it's a good question. Obviously, the business has to get to the point where it can cover its debt servicing and working capital needs. I mean, you could probably do the math within our balance sheet, but the sort of free cash flow breakeven number sits in that sort of 6% to 7%. So yes, at the high end of that, we're going to be pretty close to sort of free cash flow breakeven for the year. And I've said this before; obviously, the business has to get to the point where it's producing free cash flow to start thinking about using those funds to delever. There are other components that will take place in the future as well as we refinance. We may have the capability within our stock price to use equity at some point in the future that we've talked about. We're definitely price-sensitive to that because we are so optimistic about where the business goes. And the other components of that, that we think through are how the platform and the initiatives will play out in forming the ability to delever. We think the components of mobility and fleet car sales will both drive operating profits to the business as well as an infusion of equity capital that may also participate in all the holistic views of capitalizing those components necessary to grow those businesses but also helping the cap structure at the same time. So there's a lot of moving pieces, and this is going to happen over time. But the first step is getting the business on solid profitable footing.
With regard to the Hertz car sales strategy, what are you expecting in terms of the percentage of vehicles disposed of via various channels in 2026 relative to 2025? And maybe looking beyond this, what is assumed already in your North Star target for per unit depreciation of under $300 per month or $1 billion of EBITDA in '27 versus what level of disposition performance would be incremental to those targets?
I'll start by addressing your point, Ryan. We're not expecting that Hertz car sales will significantly contribute to the $1 billion of EBITDA in 2027 or any substantial amount this year. The focus for growth revolves around two key aspects of Hertz car sales. We aim to increase the percentage of car sales going through retail channels. Historically, we've moved volume through rental car seasonal periods and wholesale channels to align with those cycles. We're now shifting our strategy to push most of that volume through retail channels, reducing our sales time. Currently, about a third of our cars are being sold through retail channels, including both Hertz car sales and our direct sales with established retail partners. Our goal is to grow that to around 80%. We have a clear path for this and are making strong efforts to achieve it. Additionally, we have a physical presence and have been investing in our digital and e-commerce capabilities, creating a solid model that allows us to connect with customers where they prefer, rather than relying solely on physical or digital channels. This combination is crucial. We have a growing customer base who are actively test-driving our cars. We're also offering rent-to-buy options and have partnered with Cox to enhance our website, which I encourage you to check out as it's impressive. The feedback from customers who buy our cars is outstanding, with Net Promoter Scores exceeding 90%, which is a remarkable achievement. The customer experience is favorable, supported by our trusted brand, and we're focusing on generating top-of-funnel demand through our significant partnerships. Our challenges lie in generating qualified leads and improving conversion rates, which our team is dedicated to resolving. Boosting our net margin per sale is critical—it’s not just about volume, but about increasing the net from each sale, which could lead to substantial impacts by selling hundreds of thousands of cars. We're also concentrating on reducing reconditioning costs and capturing finance and insurance revenue on sales that we've not capitalized on previously. This strategy, combined with more digital sales, is reducing overall selling expenses, and we’re seeing margins improve on a per-car basis. The goal is to increase volume, and while it’s not an easy process, we have the capacity and scale to succeed by adjusting how we sell. This presents a significant opportunity for us.
Okay. And then lastly, with regards to the more sophisticated approach to pricing that you referenced in your prepared remarks that is leading to higher revenue per unit, and you expect to contribute more; are you utilizing or refining a new or existing software system? Or what would you say are the drivers of the progress so far and the catalyst for further improvement?
Just to clarify, are you talking about the car sales or our rental business, rental car business?
Now the rental, the pricing that's baked into the RPD.
Yes, this is Sandeep here. Thanks for the question there on pricing sophistication. So see, we are relooking broad scale how we price demand overall, right? And it's a combination of improved systems. And we've talked about this in prior earnings calls around our work around there. And that's a longer term, and we are well on that journey. On top of that, you have to always relook how you structure your pricing and the approach that you use within the systems, right? And that's the piece that I referred to when I talked about Q4, where we've infused the revenue management team with some new talent. There's some really good thinking that's going on there. And we've applied different queries into how we actually price for demand, and that's leading to a different outcome there. So I think it's a combination of systems and different thinking. By the way, this is still in the early innings of how we kind of go about this. This is a journey, and I expect continuous improvement on this front.
Our next question comes from the line of Chris Woronka with Deutsche Bank.
The second question relates to our goal of achieving $1 billion in EBITDA next year. We understand the North Star targets conceptually, but I'm curious about the fleet size that might be necessary to reach those targets. More importantly, could you give us an overview of how you see the revenue breakdown? For instance, is this related to corporate market share, leisure market share, or perhaps rideshare where we face less direct competition? A high-level categorization of these factors would be very helpful.
Okay. Well, I'll start, and I would encourage Scott and Sandeep to dive in. Thanks, Chris. Yes, first of all, I think in terms of the $1 billion EBITDA in '27, I mean, a little bit of context, at least from my view, I mean these aren't uncharted waters, right? We've been there in the past. Others in the industry are there now and achieve that level of performance. So it's clearly achievable. I think the North Star financial targets that we've given on DPU, RPU, and DOE, along with some modest growth, get us there conceptually, and we can talk about any of those assumptions. And then, of course, the approach we've taken on back to basics laid a foundation to get there. The trajectory of all those metrics is heading that way; they turn and are heading in that direction. I think the biggest economic lever, as you know, is the fleet, which we've addressed, and that's the economic engine. And we're tracking really with all the North Star metrics directionally where we want to go. We'll never be satisfied with the timing, and we'll keep pushing hard. That is the one variable that's always a little difficult to gauge given the nature of the significant transformation we've been doing. But there's a strong sense of urgency at the team. Everybody is full throttle; the needles are moving. So we've talked about depth some, maybe the revenue piece, you want to touch on.
On the revenue aspect, I believe our growth will be very disciplined. Specifically, in our airport operations, we plan to ensure that our growth aligns with or is below TSA levels. We will continue to refine our segment mix to increase our margins from the airports. As for our off-airport business, there is room for more growth, and we will keep developing that area. There is also an opportunity within the off-airport segment to improve margins through segment mix strategies. Finally, regarding mobility, we expect continued growth in that area, and we are progressing well. However, maintaining discipline in our growth strategies and fleet management is crucial.
Yes. I think just real quick before we wrap up the call here, Chris, is that I think mathematically, all 3 levels of the North Star get you well above $1 billion. I think the point here is that there's a number of ways to get there; they all don't have to hit to hit $1 billion. Plus you've got the fourth dimension of scale, which plays into here. And then we really haven't even talked about the platform component that adds on to it. So Gil talked about timing, but I think the takeaway is there are multiple ways to get there.
There are no further questions at this time. This concludes the Hertz Global Holdings Fourth Quarter and Full Year 2025 Earnings Conference Call. Thank you for your participation.