Stephen Scherr: Well, I think — listen, it’s important to understand depreciation is not kind of a fixed element, meaning it’s influenced by a number of decisions and factors that we make all with an eye toward the ROA or the margin of the overall business. And so I’ll just make a couple of comments. First of all, while we’re attentive to what customers want, as and to the extent that rate is not being differentiated as between a brand-new car versus a good condition, low mileage used car, we’re going to run with lower cap costs, lower-cost cars, okay? And we look at the totality of what the cost of that vehicle is in terms of making those decisions. So I think that we’re in a place where, as we think about financial performance, whether it’s EBITDA down through cash flow, depreciation is but one element, and we have quite a number of levers to control in the context of it based on what we buy, the length of keep for the vehicle Obviously, as we engage in growth around P&C and Dollar Thrifty, those are going to be two kind of business repositories where older cars are going to go therefore, playing to sort of higher margin and lower depreciation.
All of those are factors that influence depreciation. But again, depreciation is but one piece of an overall puzzle and it itself is an output of some very clear decisions we make around the return profile, looking at cap cost, maintenance expense and overall economic return for the car itself.
Kenny Cheung: Just to give more color, Ian, on depreciation. So if you look at Q4, right, as I mentioned, net DPU was $244. If you bifurcate between gross and gains on sale, gross was roughly $346 million, and then the gains on sale per vehicle was $102 that’s how you get to the, call it, the $2.44. As you look outwards, right, I’ve talked about we expect in the range of $300 to $320 for the rest of the year, right? So growth appreciation for the most part, faced similar, right? Let’s call it $350 for rounding standpoint. The gains on sale, right, we had $100 in Q4, high-low math, let’s say that’s $50 now. So that $350 minus $50 gets you to $300 for the rest of the year. And that’s how we think about it.
Stephen Scherr: Yes. The one thing I would say, though, is that we’ve taken a rather conservative approach to sort of what we believe price decline will be over the course of the year. And I think we said in our remarks that we’re more conservative than where the indices or the market is forecasting. And so that obviously plays into the view we have on the forward and we will adjust. So we’re taking expense down. I think in the last five weeks, we’ve seen a correction to use car prices to our benefit, not to our detriment. And therefore, gain on sale may improve over the course of the year to the extent that we see that sort of continue on. And to the extent that the worst of used car decline is behind us. But I think we’re taking a prudent and conservative approach to this and have a number of levers to sort of offset where depreciation will be, no less what depreciation will be as we play forward.
Kenny Cheung: Yes, the way the years of the good start have you awake our on cars selling prices gone up every week.
Ian Zaffino: And then may can you just touch upon on the corporate side. Maybe also international inbound. How is that progressing assortment February? Where February looks like? You know I have been negotiating some of the contract some of the corporate side. How’s that going? And what should we expect on that front.
Stephen Scherr: Sure. So let me take them in that order. First of all, the inbound business, which is a very profitable business for us, okay, has been up quite considerably. In fact, the momentum we’re seeing carrying into this first quarter, if you just look at the month of January, international inbound was up 56% year-over-year. So comparing January as against January. And that business continues to sort of play very strong. In fact, it played strong even through year-end when, in fact, foreign exchange would have suggested otherwise. So it just suggests to you the strength of demand of travel by non-U.S. customers who are coming to the United States. So very strong, and the momentum is carrying forward into January kind of as an early indicator on where we are on the year.
In terms of the corporate business, I would say that January equally sort of told you of the continuation in demand. Demand was up 28% over January, again, with corporate demand coming back now closer to where we saw it. Importantly, I would tell you that if you look at contract renewals, and I made a comment to this in the prepared remarks, we’re seeing near 100% contract renewal on our corporates importantly, they’re getting renegotiated at higher prices. Obviously, corporates are focused on EVs as an alternative to put their employees in to satisfy their own ESG commitment, but the corporate business is feeling quite good, very strong. I’d also make one other comment to you, which is not just simply about corporate nor about inbound, but about the totality of travel, which is this last Sunday, if you look at TSA figures, they processed on Sunday about 1.7 million travelers across the United States.
What’s interesting is that if you look at the 4 prior Sundays, they were all consistent in at about 1.2 million. Now one week doesn’t make a trend, but steady at 1.2 and then a jump to 1.7, and you just listened to what you hear from the airlines and hotels let alone what we’re telling you about our own business. And it seems that travel has been pacing well. One last point on corporate, I would raise with you, and that is if you look at the pattern of corporate demand, it too is changing for the better for us, meaning, over the course of 2022, we saw an increase by about 20% for about 1.5 days to the duration of a corporate rental. That means that people are keeping that car longer. The way in which that’s manifesting itself as a person is on a business trip, they may extend by a day and then extend by two more days to keep a weekend in sort of the combination of both leisure and business that as days, by definition, to the rental, and that’s been quite beneficial to us in terms of overall activity.
Kenny Cheung: Just one point to add. International inbounds, when they come back and Stephen pointed out, they’ll be buying VAS and they’re very profitable to our business. But right now, despite even, what I would say, softness on international inbound, versus ’19, we are seeing VAS of double digit, right? So structurally, our improved VAS program is definitely working. And in corporate, even though we are seeing very, very strong renewals on — with the economics. The rates on the corporate are lower than RAC, but it is RPU-accretive because they come in midweek and helps with utilization.
Operator: Our next question comes from the line of John Healy with Northcoast Research.
John Healy: Stephen, why don’t you just to touch a little bit about free cash flow. I was hoping you could give us some guardrails to maybe think about that in 2023. Obviously, I know you’re not giving formal guidance on it, but would just love to think about kind of non-fleet CapEx, just corporate CapEx. Anything related to cash maybe going into the funding facilities. It sounds like you have ample equity already in there. But just maybe some guardrails to think about that for this year.
Stephen Scherr: Sure. Listen, I just — I think to give you a context, obviously, the magnitude of gain on sale that we saw at very elevated prices in the early part of 2022, is unlikely to repeat itself. And so the task in front of us is to replace, right, lost EBITDA and, therefore, lost free cash flow that was attributable to gain on sale, order of magnitude with fundamental performance in the business. And I think what you’re hearing from us is we believe we will see better on volume, better on rate we’ll see that sort of play out throughout the year. We’re seeing continued growth, as we’ve just spoken about across all channels. We’re going to start to execute on the growth elements of the business to generate EBITDA and free cash flow, whether that’s in margin-accretive activity around the rideshare business or what we do around Dollar Thrifty as we get back to the back half of the year, all of that will be a benefit and considerable offset to what we see decline in terms of gain.
Now it’s hard to read and extrapolate off of the first, call it, five weeks of the year. But in the first five weeks, you heard Kenny say we’ve seen a reversal of the direction that residual prices were taking. And therefore, that carries the potential upside to preserve gain on sale, certainly not at the levels that we saw last year but as an offset to perhaps what we thought we might realize over ’23 as we were ending ’22. So again, that’s going to play to sort of overall sort of free cash flow dynamics that are there. I would say there’s nothing that we see to siphon free cash flow into the ABS facility. Of course, that could always change, but what you’re hearing from us is based on very conservative assumptions about forward price movement in cars, which were not — which we don’t think will necessarily see.
But nonetheless, for modeling purposes, we feel we’re well positioned in the ABS facility with no need to sort of fund it as it were across the whole of 2023 itself. So that will not be a siphon. I think as it relates to fleet, we’re going to be very, very attentive to the kind of rules and the boundaries that we’ve set for ourselves. The extent to which we spend cash on fleet will be totally a function of ROA that is fleeting inside the forward demand curve and effectively and efficiently deploying capital against fleet will be the way in which we will do it. And as I said before, we’re going to look for the lowest cost investment to meet the customer need, which is looking hard at cap cost, maintenance, depreciation out of service, all of that is going to feed into an ROA model so that we’re not going to simply look to deplete free cash flow simply because we have a hunch about where we want a fleet.
We’re going to be fleeting smart. Much of that is going to happen in the first half of the year, as Kenny said, as we build the sort of a market demand level in Q2 and Q3, and then it will come back down in Q4. And that’s kind of the dynamics that you’ll see us sort of play with, in the context of free cash flow management.
