Hertz Global Holdings Inc (HTZ) 2016 Q4 法說會逐字稿

Welcome to the Hertz Global Holdings fourth-quarter and full-year 2016 earnings call.

(Operator Instructions)

I would like to remind you that today's call is being recorded by the Company. I would now like to turn the call over to our host, Leslie Hunziker. Please go ahead.

Good morning, everyone. By now you should all have our press release and associated financial information. We've also provided slides to accompany our conference call that can be accessed on our website.

I want to remind you that certain statements made on this call contain forward-looking information, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance, and by their nature are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of this date, and the Company undertakes no obligation to update the information to reflect changed circumstances.

Additional information concerning these statements is contained in our earnings press release issued last night, and in the risk factors and forward-looking statements section of our third-quarter 2016 Form 10-Q. Copies of this filing are available from the SEC and on the Hertz website.

Today we will use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release and related Form 8-K, which are posted on our website. We believe that our profitability and performance is better demonstrated using these non-GAAP metrics. Our call today focuses on Hertz Global Holdings, Incorporated, the publicly-traded Company. Results for the Hertz Corporation are materially the same as Hertz Global Holdings. On the call this morning, we have Kathy Marinello, Hertz's CEO, and Tom Kennedy, our CFO. Now, I'll turn the call over to Kathy.

Thank you, Leslie, and good morning, everyone. Before we begin, let me say that I'm privileged to have been chosen to lead Hertz. Not many are given the opportunity to come to a multinational Company with an iconic brand, and a rich history of industry leadership, to help shape its future. It's an honor.

Having done my due diligence, I'm aware that there are self-inflicted issues here, and I'm already working to address those, but there's nothing I see that we can't overcome, especially when you consider the foundational strength of the Company. Since joining Hertz just two months ago, I've had the opportunity to meet many of our employees both in the field and at headquarters, whom have I found to be positive, engaged and very proud to work for Hertz.

In my initial meetings with corporate customers, it was clear that the Hertz brand carries a lot of equity still today. And having been on the General Motors board for nine years since 2007, I know that Hertz's business partners respect and admire this Company. Great people, great brands, and great relationships across the supply chain, are an extremely valuable starting point from which to grow.

When I first arrived, validating my understanding of the key drivers of this business was most important. Now working to prioritize the initiatives that support those drivers is where I'm focused, and is critical. It's probably not a surprise that the domestic operations will get the lion's share of my attention in the near term.

The international business and down line have been successful in staying focused and competitive, while the US rental car operations has had to regroup. Stateside, we're going to be taking a back-to-basics approach to generate revenue growth. And while you're probably thinking you have heard this before, that's because it's a core strategy in any turnaround situation, and it's always easier said than done. But I believe with my automotive and operating experience and leadership skills, we can get it done here.

With that in mind, I have already streamlined my reporting structure to facilitate more direct interaction with managers, fast-track decision-making, and quickly adjust direction, if necessary. We now have a cross-functional team in place in the US, made up of fleet, operations, pricing, sales and marketing leaders, that will report directly to me

Bringing these functions together to effectively execute is paramount. It ensures we're all working on the same agreed-upon objectives, and that we hold ourselves and our teams accountable. We're focused principally on four areas for growth: Fleet, service, marketing and technology.

As I told our employees, our mission is to be the preferred global rental car company, driven by people who care, and who deliver the cars our customers want. If we can get service and product quality and availability right, revenue will quickly follow. And technology that increases capabilities, and is highly adaptable, supports that initiative.

Furthermore, getting fleet and service right and utilizing faster and more intuitive technology will boost efficiency and productivity, thereby lowering our costs. But we're going to have to invest to grow. I'm not prepared to quantify the level of investment we plan to make this year, because candidly, it's too early in my tenure to know with certainty. We have a plan in place, but along the way, we may need to bolster it to accomplish our goals faster.

Here's what we're working toward: Our overarching goal is to win preference through customer satisfaction. Let me start with fleet.

We've been spending time evaluating our fleet mix, both from a car class and a quality standpoint. In terms of car class, we expect to have the fleet better balanced between compacts, mid and large vehicles ahead of the third-quarter peak. At the same time, we're continuing to upgrade the fleet quality, using the uncommitted model year of 2017 capacity.

We're also going to enhance our focus on improving the efficiency of how we buy and sell cars. I believe I have built a competency in fleet over my career, starting at GE, where I've managed what was at the time the world's largest corporate fleet business as CEO of their leasing and financing divisions. And I learned an amazing amount about manufacturing and selling cars from the inside of a major auto maker, so I know there is upside in Hertz's ability to offer a better product to our customers, while also managing the bottom line better.

Another way we will drive satisfaction is by giving customers the fast flexible process they demand, to ensure they get the exact cars they want. To do that, we're rolling out our new Hertz Ultimate Choice platform across the country. Ultimate Choice redesigns the Hertz rental experience, by allowing customers to choose their preferred vehicle on site, with no wait.

This program supports not only customer satisfaction, but should also improve utilization, and lead to process improvements in fleet management. By midyear, we expect to have Ultimate Choice operational at the top 30 USA airports. And by year-end, the program will be available at all major airport locations nationally.

But having the right cars easily accessible is only part of our back to basics plan. We're making greater investments in recruiting and training our employees, and we're rolling out a new incentive program that rewards best-in-class service delivery that shows our customers we care.

The way you generate growth is by delivering on the brand promise. These are the things that influence customer preference. It's our immediate priority, because not only will it drive demand for Hertz, but it will result in repeat business that supports consistent and predictable financial performance.

In my 10 years at GE, I learned from some of the most brilliant operators how to run a service Company for real NPS improvement. A big part of that is getting out and meeting with your customers and employees, and learning in real-time what's working and what's not. Towards that end, I've already been on the road several times, and I plan to make it a regular practice.

Corporate and digital marketing will be another area of investment this year. We've been under-invested on this front for quite a while. Last year, the team worked hard on preparations for repositioning the Dollar and Thrifty brands, and improving our search engine positioning.

This year, we plan to transform our digital assets. This investment will dramatically improve our website and app experiences, allow us to transform interactions with our customers, and provide a platform from which to bring technological advancements to our customers across their rental experience in the coming years. Strategic marketing is clearly a key element to our revenue growth.

Finally, we're going to continue with our planned investments in technology. I recognize the importance of this initiative in driving every aspect of optimal performance. My experience running technology-enabled programs at Ceridian and early at First Data cultivated an appreciation for systems and the benefits they deliver.

From that lens, I can tell you that this is a really big project that we're undertaking at Hertz. I still need some time to better understand how we're prioritizing the initiatives to ensure that our customer-facing needs take precedence on their timeline. The bottom line is that the technology transformation remains an important strategic driver for us, and significant level of investment will be allocated over the next two years.

It's clear we have a lot of work ahead, a lot of hard work in front of us, but it's all within our control. We'll be increasing our focus on the four areas I outlined. Some initiatives will have a global reach, and some will be US-focused, as we work to get the domestic operation growing.

I point out that as my tenure increases beyond 60 days, there maybe other areas where greater attention is warranted. Until I have more experience with the day-to-day operations of the business, and we get some level of consistency in our performance, we are not in a position to provide financial guidance. It wouldn't be credible at this point.

My focus is not just about growth next month or three months from now, but it's about driving sustainable, incremental growth over a multi-year horizon. I'm looking at making investments today that will create long-term value in this Company.

That doesn't mean we have to wait three years to see progress. The strategic lead and service initiatives are certainly within our control, and therefore we can make a more immediate impact in those areas to drive customer preference for Hertz.

I know that 2016 was a tough year for this Company, with the fourth quarter being no exception. And while 2017 will continue to be a transition year, we expect progress on the fleet and service actions will ramp up steadily.

This is a resilient Company with great brands and great people, the value of which cannot be discounted. We've got a solid foundation to build on. For now, I will let Tom walk you through the details of the recent quarterly performance, and then I'm happy to take questions.

Thank you, Kathy, and good morning, everyone. Let me start with a snapshot of our full-year 2016 consolidated financial performance. Total currency-adjusted revenue declined 2% last year, primarily due to a 5% weaker pricing in worldwide rental car, partially offset by 2% stronger volumes.

Clearly, we struggled with US pricing most of the year, due to a variety of factors including unfavorable customer fleet mixes, and the adverse effect of lower fuel prices on ancillary revenue. However, we did see a year-over-year RPD improvement in the US in each sequential quarter. Global cost initiatives yielded $350 million of savings in 2016.

Unfortunately, this was not enough to offset the lower worldwide rental car revenue, and a 9% increase in worldwide rental car multi-depreciation per unit vehicle costs. The significantly higher cost of program vehicles and declining residual values, especially in the second half of the year, put pressure on vehicle costs. I will talk about some of the actions we are taking to address those unfavorable trends in just a minute.

For the full year, we generated $553 million of adjusted corporate EBITDA and $258 million of free cash flow. I would point out that in 2016, the Company reported $340 million of non-cash impairments on a pretax basis, compared to $70 million in 2015. This primarily resulted from fourth-quarter impairments of $172 million on goodwill related our European vehicle rental operations, and $120 million related to the Dollar Thrifty trade name.

Also, you may recall that there was some unique events in 2016 than impacted earnings. Including a large reserve for insurance costs, primarily related to adverse case development and claims experienced in the UK. In addition, we experienced unusually high levels of vehicle recall activity that affected volume and costs, and the terror attacks in Europe that stifled peak season inbound business, which is one of our highest RPD categories.

Of course, there can be unique events in any year. These are just some of the unexpected headwinds we experienced in 2016.

Despite the disappointing financial performance of 2016, we began investing in the business and made progress on several fronts. Last February, we piloted our first Hertz Ultimate Choice program in Austin, Texas, empowering customers to choose exact car they want, while offering flexibility and options. As Kathy mentioned, we began the broader rollout in October, and expect to have 30 airports operational by midyear.

We launched our technology transformation initiatives with the outsourcing of the legacy operating system earlier in the year, and the introduction of our first updated platform CRM at the end of the year. In addition, we deployed the first of two new revenue management modules in December, which will give us better segmentation of rates and a faster response time to market rate fluctuations. That lays the foundation for the deployment of the second module this quarter, which will give us more accurate demand forecasting with which to better plan fleet.

From a product standpoint, we began a process of enhancing our fleet mix in 2016, rebalancing the car class weighting of the fleet to allow us to be more competitive. We expect our compact mix to be more in line with historical levels in the second quarter. In terms of transactions, in June, we completed the spinoff of our former equipment rental business, which included a successful restructuring of our balance sheet and non-vehicle debt.

And in December, we entered into an agreement to sell our operations in Brazil to Localiza, South America's largest rental car Company. We expect the transaction will close sometime next quarter. The transaction includes a strategic partnership agreement involving co-branding in Brazil and key international gateways, customary tolls outside of Brazil, and exchange of technology and information.

From a balance perspective, we strengthened our maturity profile by extending the weighted average life for vehicle debt from 1.8 to 2.3 years, and our non-vehicle debt from 3.4 to 5 years. In fact, we have only $8 million of non-vehicle debt maturing this year, and $266 million in 2018.

Now let me provide some details on the fourth quarter's impact on the year. Total worldwide revenue was essentially flat year over year at $2 billion, adjusted for currency. Worldwide rental car revenues declined 1% compared to 2015 fourth quarter on a constant currency basis, driven by a 1% increase in volume, and a 2% decline in pricing. All our operations, which represents 8% of the total Company revenue, and primarily is made up of dominant leasing business, carried a 4% increase in revenue in the recent quarter.

Despite our continued improvement in driving lower consolidated unit costs, a 16% increase in worldwide monthly rental car depreciation per vehicle more than offset the favorable efficiency and cost trends. In the US, revenue was flat versus same period last year, as roughly a 1% increase in transaction days was mostly offset by 1% decline in rate. While year-over-year pricing declined, the quarter-to-quarter trend continued to improve, reflecting 160 basis points of sequential improvement versus the third quarter of 2016's rate performance.

We generated volume growth in the quarter despite the closure of our Firefly brand early in the year, and while the continued softness in the corporate accounts is disappointing, we recognize that we will not win customer preference overnight. However, the planned investments in fleet, marketing, service, and continued rollout of Ultimate Choice locations should provide the catalyst we need to drive steady improvement in demand, and allow us more predictable forecasting.

On the fleet side, while we continue to take action to optimize vehicle capacity, in the fourth quarter, total utilization slipped to 78% from 79% a year earlier, driven by weaker than expected volumes in early November that resulted from an extended election impact, the on-boarding of some of the new full-size vehicles to rebalance the fleet mix, 15% more non-program vehicles queued up for sale compared with a year ago as we worked down the compact inventory, and an increase in days out of service due to OEM recall activity.

As you know, the recalled fleet and the vehicles taken off brand but not yet sold are still included in our capacity calculations, even though they cannot be rented. Rentable utilization was down 50 basis points versus the fourth quarter of 2015.

Monthly depreciation per unit increased 19% in the quarter. As you may recall, we forecasted an approximately $30 million adjustment in the fourth quarter for the quarterly third-party rate review in November. The actual adjustment was in line with expectations.

We also experienced somewhat lower hold periods on the vehicles actually sold through our retail channels, resulting in additional adjustment in the quarter. Finally, our compact mix declined approximately 2.5 points as a percent of the fleet, as compared to prior year. As a result, our full-year net vehicle cost of $300 per unit closed slightly higher than the high-end of original guidance range of $293 to $300 per unit.

We are working to offset the residual market weakness by improving the quality of our vehicle mix, negotiating lower purchase prices on like for like risk vehicles, and increasing ride handling rentals which provide through spec and used vehicles through extended hold periods. We're also increasing vehicle sales through our higher return retailer and dealer direct channels.

During the fourth quarter, we increased retail sales by 21% year over year. And through a year-long focus on productivity and expanding sales in online channels, retail sales per store increased 20% over last year's fourth quarter. In the dealer direct channel, our second-most profitable outlet, sales volumes were up 22% year-over-year, accounting for 37% of our total risk sales.

Overall, non-auction sales channels represented more than 71% of our non-program vehicle sales in the quarter, up 480 basis points compared with last year's similar period. In the US, as we close out 2016, we continue to experience challenges both internally with the revenue predictability, and externally in the residual market. However underlying progress continues as we rebalance the fleet mix, roll out Ultimate Choice, and invest in service and marketing to generate higher more consistent revenue trajectory. As Kathy pointed out, improving the fleet and service execution ultimately will drive performance and preference, and reduce costs, supporting long-term margin expansion.

Turning to the international segment, total revenue declined 4% when adjusted for currency. Transaction days increased just 1%, when we made the decision to exit from certain underperforming accounts in the UK. International pricing decreased 5% year-over-year, due to the faster pace of growth in our value brands as a percentage of our overall business, as well as competitive pricing across Europe.

We are pleased to see in the fourth quarter an improvement in our long-haul inbound business after the terror attacks earlier in the year. Volume was particularly strong during the holiday period. In spite of the overall revenue decline, the fourth quarter adjusted corporate EBITDA margin of 5% was flat versus prior year, as a result of the 9% reduction in direct operating SG&A expenses per transaction day.

Now I would like to provide an update on our balance sheet, liquidity and cash flow. We ended 2016 with non-vehicle debt $2 billion lower than 2015, and as previously mentioned, extended the weighted average life. This was achieved through the capital structure changes related to the spin-off of HERC and the opportunistic refinancings.

In 2016, we repaid and terminated $2.1 billion senior term facility, and refinanced $1.5 billion of senior notes with a lower-cost term loan and a lower coupon senior note. As result of these actions, we estimate that our non-vehicle cash expense will be reduced by about $60 million in 2017. Lower corporate EBITDA in 2016 resulted in elevated leverage levels.

As we worked to improve our operating performance, we amended the financial maintenance leverage covenant in our senior revolving credit facility in February 2017, to increase the cushion related to this covenant. Slide 17 illustrates how this ratio was calculated at year-end 2016.

Concurrent with the amendment, we also extended maturities of four revolving fleet financing facilities to January 2019. The extensions were for $3.2 billion US VFN commitments, EUR230 million of European RCF commitments, and GBP250 million for the UK leverage fleet facility, and CAD350 million Canadian facility commitments.

Our liquidity position continues provides to substantial support for our business needs. As of year end, we had $1.9 billion of liquidity, comprised of $1.1 billion of availability on our senior revolving credit facility, and $816 million of unrestricted cash. Similar to our limited non-vehicle debt maturities, our 2017 fleet debt maturities, after considering the 2017 amendments, are manageable at $192 million in US RAC and $453 million in expected Donlen term ABS amortizations.

Free cash flow for 2016 was $258 million, but due to the corporate EBITDA decline, the 2016 year-end net corporate leverage ratio is 5.6 times. We remain committed to bringing leverage down to the year-end leverage target of 3.5 times or below, and have no plans to repurchase shares or pay a dividend. We have modified the covenants in our senior RCF to be consistent with this intent.

Before I turn the call back to Kathy, let me give you some insight into the trends we're seeing in the first quarter. We entered the year with more vehicles in the US than optimal, as we opportunistically added more full-size and premium cars into the fleet in December, while at the same time, trying to accelerate sales of compact cars, even in the weaker residual market.

The residual market typically begins strengthening in late February and is more pronounced in March, and we intend to aggressively sell fleet to the degree the market warrants. So our fleet capacity is a timing issue until we get the mix rebalanced. An unfavorable US customer mix also continues to pressure RPD, which we expect will be down in the first quarter versus prior year.

And the calendar effect of Easter moving from March to April, and one less day in the current quarter after benefiting from late year-end 2016 puts additional pressure on revenue and pricing. As such, we expect first-quarter US revenue to be lower year over year. The weaker revenue and higher fleet costs in Q1 2017 will result in lower adjusted corporate EBITDA versus prior year in the first quarter.

Of course, we are working aggressively to reverse this trend through the initiatives launched in the second half of 2015 and planned investments that will continue in 2017. We will have an improved fleet mix by the second quarter. As Kathy mentioned, we expect to have 30 Ultimate Choice airport locations up and running by mid-year. New field training should support progressively better service levels, and we expect that capacity will be adjusted heading into the third-quarter peak.

At the end of last year, we created a fleet plan that allows us to grow marginally this year, recognizing that we are still lagging the industry from a demand perspective. As Kathy stated, we're going to hold off providing financial guidance while we work on resolving the execution issues and prioritizing investments that will ultimately drive the US operations recovery. Putting in place a collaborative cross-functional management team to lead the turnaround in the US, with a back to basics focus, investment priorities, and increased accountability is right path forward for Hertz.

While it's going to take some time, our employees are committed to ensuring Hertz returns to its position as a preferred brand in the industry. With that, we will open it up to questions. Operator?

(Operator Instructions)

Chris Agnew, MKM Partners.

First question. Is the large difference between your US RPD in the, for most of 2016, and let's say, industry pricing, and that gap substantially closed in the fourth quarter. Can you run us through some of the different elements that drove the elimination of that gap? I know there's different mix headwinds, including fuel, which -- did that become a tailwind rather than a headwind in the fourth quarter? Thank you.

Yes, I think the gap, as you noticed from the public comp has been narrowing. We have been seeing improvements in our fleet mix, as I mentioned. We're about 2.5 points less in compacts in 4Q versus 4Q 2015. That's an impact.

We have obviously been investing in our own systems, we didn't really get the new module phase one done until the end of the year, but as we have mentioned throughout the year, that the knowledge base and the experience at the team has been improving. We have been doing system modifications on the latency of our response time of our systems, and obviously, we've been focused on improving the quality of the revenue and trying to drive appropriate pricing, relative to the demand in the market.

So we aren't obviously where we need to be from a pricing performance standpoint. I think ultimately, the investments that Kathy is prioritizing going through the drive preference ultimately will lead to improved pricing for our Company, but we are not pleased with the results, but we're pleased that we continue to make progress sequentially each quarter and we still have a lot of work to do to continue to improve that performance.

Thank you. My follow-up. Your Ultimate Choice. Can you share what you observed in Austin from your trial? What the impact was on corporate share of travel, or your ability to yield in that market? Thanks.

What we were testing for was customer reaction to the Ultimate Choice product. Having -- empowering the customer to select, to have them select the car they want, and have the flexibility of the car in the aisle, and having the flexibility of how they want interact with us, either going to counter or going directly and selecting their car, is really a preference item. It does approve utilization.

We saw positive customer feedback from NPS. We saw improved utilization on the cash, which we expected. We obviously, I think it's going to take time to convert the share we lost on certain accounts, so we're going to have to get it more rolled out in more locations, so one location does not make a difference. So that's why we're aggressively expanding it to through the course of this year, and then aggressively start expanding in October.

So we'll have 30 by midyear, and all major airport locations by year end. I think once we get enough presence of the product nationally and marketing it, I think our customers will start to word-of-mouth is already starting to get around, but we'll obviously start to promote it and drive it further. So it is a preferred way for our customers to interact with us, and it does provide operational benefits from our operating team, and will ultimately drive cost savings of service delivery as well.

I'd also add that one of the side benefits we are finding out is, it's helping us as we are trying to continue to upgrade our mix and the quality of our cars, as the customers go and pick themselves, we're also finding the cars that they like the best, and the cars that are remaining, we realize maybe don't get any more of those. So I think it's also helping us upgrade our fleet with the type of cars that our customers demand and prefer.

Excellent. Thank you.

Chris Woronka, Deutsche Bank.

I understand you are still in the process of upgrading the fleet, but can you make any comment maybe about the overall size that you might end with, compared to 2016 in the US? And then also, I think 94% risk in the fourth quarter. Is there any plans to meaningfully change that?

I mean as we look at the fleet, we're not giving forward guidance on capacity. We obviously want the fleet relative to what we think our expected demand is. The market grows generally GDP, our objective is the fleet somewhat less than that. But in the near term, we are going to be accelerating the inbound of cars that our customers prefer.

And if there's a near term utilization impact, we will take the utilization impact for the benefit of getting the right cars in our customers' hands. So that's how we're looking at it near-term, but on the longer-term, our objective is obviously we think the market will continue to grow GDP, and our expectation is the fleet somewhat consistent with that, particularly as we get our demand more predictable and more consistent. From a mix standpoint, I'm sorry, what was the second part of your question, Chris?

The risk percentage. As we talked about, on prior calls, the pricing, obviously the pricing of the program units by the OEMs has been very difficult to justify a large program acquisition in 2015. The percentage increases have been pretty substantial, and I think we have talked about on previous calls, you'd have to assume a double-digit percent decline in residuals, to be indifferent between taking a risk and a program car.

We obviously will be opportunistic in trying to drive more program vehicles, but we also have to be objective in the economics, and whether it makes sense from a trade-off standpoint to take programs. So the program availability has been constrained, as we said on prior calls on the model year 2017 buy, and the economics were high. So we'll see how the next model year purchase cycle changes. Maybe it will change, and obviously we will work with the OEMs, and to the degree we can get more program content at a somewhat more reasonable cost, that the indifference factors in such a large residual decline for us to be indifferent, we'll obviously be opportunistic in getting more program vehicles.

Great. Thanks. And just as a follow-up, maybe a comment or two about your off-airport strategy this year, in terms of some of the larger single commercial accounts that might be coming up?

I think our off-airport strategy is continuing to, I think we have made great progress in 2016. We did some organization realignment, we have a very senior experienced person who manages the off-airport. We've seen improvement in volume and in rate off airport. We don't have any plans to rationalize or change our off airport network.

We have some important renewals coming up, and I think we have great relationships. We've done great partnerships with some of those other parties, and those renewals we expect to come out favorably. So we have no plans to change our off airport strategy, other than continuing to improve, which we're going to do both off and on airport, both our product quality and service.

Okay. Very good. Thanks, Tom.

Brian Sponheimer, Gabelli.

Congratulations, Kathy. Just at 30,000 feet, when you took the job, and you think about your flexibility and leverage that you have, you have made a lot of money at larger airports, and less at some of the smaller locations. How should we think about you looking at the portfolio from an owned location versus franchise point of view? I guess I'll start there.

Again, I'm still evaluating, given it's under 60 days, so you'll have to forgive me for not having a solid opinion on it, but actually for the next two days, we have our franchise operators in, and our Board, and I'll be spending two days with them, understanding their business better. My initial reaction is the current -- I really wouldn't change the current strategy. I wouldn't go aggressive on franchising were operations, nor would I move away from where add at this point.

So as a strategy there's times it's appropriate, but for right now, I still have to meet with these guys over the next two days and get a better sense of where we're going with it.

Okay. Very fair. Just o n the balance sheet, I appreciate the time that you and Tom took to walk us through where you are right now, but what's your comfort level as far as leverage, and would a rights offering potentially alleviate any concerns that you may have?

We obviously feel comfortable with the balance sheet where our liquidity is. We're obviously at an elevated leverage level, given the decline in earnings in 2016. We have an objective that we have not wavered from, which is to be at 3.5 times or less at a year-end metric level, on a net corporate EBITDA, leverage to corporate EBITDA level. So we're going to continue to work towards that goal.

We don't have any intention or plans, or we believe needs to do any other offerings from a liquidity standpoint, given our liquidity position. And despite I think what will be a very aggressive investment profile in 2017, we still believe that our liquidity is appropriate during the course of the year, to support our investment needs. So there is no plans or intent, or a need from our vantage point, to do any additional rights offerings or anything to shore up the balance sheet. We do acknowledge that we're at elevated leverage levels, and we're going to be working to bring that down.

But you have levers. Thank you very much, and best of luck.

Dan Levy, Barclays.

Kathy, in your prepared remarks, you talked to going back to basics on different areas, fleet, servicing, et cetera. I know it's still very early days in your tenure, but can you just give us maybe what you would view as a mark to market? Do you see any low-hanging fruits that stand out as quite clear in terms of work to be yet done? Are staffing levels okay throughout the organization?

Again, it's under 60 days. So I have spent a lot of time on the areas that I think we could make a very quick impact, and that's specifically around service and fleet, as well as technology. Technology probably a little longer runway on that, but also looking at our customers from a -- our corporate customers as well as our other channels. Focusing in on doing better segmentation and applying some of the revenue management systems we have brought in to bear that we worked on last year in being implemented.

As far as staffing levels, the way we are going to work through and grow is not through a cost cutting strategy. My approach is basically the right process without errors is generally and always the lowest-cost process. So first is taking a broad brush and cutting staffing and expenses by percentages, where we're going to go at it by improving our process, eliminating errors, getting the right fleet, bringing customers back, and that will drive out a lot of cost in and of itself.

We always have to look at all the different roles, and as our customers' needs change and how we go about business change, we're going to have to adapt to it. And as we add in process and new things, we're going to have to take out some things. But that's going to be a continuous process, and not a one hit wonder.

Got it. Just a quick question. Back in 2015, and this is a question for Tom or Kathy, you issued a whole set of financial targets, and actually looks like even in 2016 you ended up hitting your cost out target of $350 million. I assume that the targets that have since been -- that were put out there in 2015 are no longer outstanding, but I was just wondering if you could confirm whether or not that the case?

I think with anytime you have a transition and a new CEO coming in on board, there's going to be a reevaluation of the trajectory of the margin expansion and the prioritization of the investments, and the duration of time it takes to get this Company going the right direction. So I think it's safe to assume that the targets we initially established are not appropriate at this point in time, but that does nonetheless mean that as Kathy has time to work through, and our team work through our trajectory of our revenue performance, investments we're making, there is consistency of the investments in technology and products and service, that we believe will drive the ultimate margin expansion. But as far as the targets are assumed, Kathy needs time to go through and reevaluate the timing and trajectory of those at an appropriate time, she will update the market as to what those will be.

Okay. Thank you very much.

Anj Singh, Credit Suisse.

First one for Kathy. Could you speak into a little bit more detail on where you are with the investments that you're talking about? Is it safe to say -- I know that Tom spoke to aggressive investments for next year, so would it be safe to say that in fleet service and technology, these investments are being accelerated beyond what the prior leadership had earmarked? And if so, I'd appreciate any details on perhaps where you're seeing the biggest need versus prior allocations?

In looking at how we're going to grow this Company and get back to driving the preference that we've had a heritage on to our brands, it is about investing in service and customer back, as well as in the training and tools that our employees need. And things like mobility and digitization.

So in those areas, I would say I probably am bringing new focus. And as I bring in new focus into the business, more around investing back into the things we need to do to deliver great service, including the fleet mix, there's going to be other things that probably are in the plan that we're not going to do. I'm a great believer, and you have to focus on the significant few things that are going to have a big impact.

And in that regard, I'm limited more by people resources that I am financial resources. There so much any organization can get done at any given time, and I think making sure that we're all aligned towards the initiatives that I've discussed is going to be really critical, and that's really going to be my job, ensuring that what we do lines up to delivering against those initiatives, and get it done this year. And so that, I think we can assume that there's certain things that maybe were in the plan from prior leadership, that won't be in there going forward.

Understood. That's helpful, and then one for Tom. Tom, could you speak into more detail as to where you are in the rebalancing process of your car class reweighting and investments in higher trim levels? I think for the class weighting, you talked about being done by Q2 ahead of the Q3 peak, but a little bit more detail on the higher trim levels. Is that happening concurrently with your car class rebalancing, and how long do you expect this may be a factor in your fleet costs?

Is it one or two quarters before your fleet cost increases begin to converge with market averages? Or do you expect it to weigh on fleet costs for longer than that? Thank you.

We started a process, as you may recall in the call, that we acknowledged in the mid year after we got some market intelligence, that we were over weighing compacts relative to our upgrade needs and customer expectations, and our model year 2017 buy was reflective of that objective, to rebalance. In the fourth quarter alone, our compact mix is down over 2.5 points of percentage of the fleet from the prior year, so we had made already progress through the fourth quarter, and we continue we continued to make the progress during the first quarter as a lot of the model year 2017 deliveries are occurring in the first four months of the year, and we are rotating out of the compacts.

And as I indicated, we ended up fleet at the year end a little higher than we expected, because we opportunistically bought some more premium full-size vehicles to enhance the premium quality that we want to have in certain of our customer segments. So Anj, I would say that our expectations is that while we're negotiating fleet costs reductions on a like-for-like basis on the risk fleet for model year 2017 versus 2016, which is our benefit in calendar 2017, we are, and we have said we will opportunistically change the mix of compact to full-size, as well as on some cases marginally on trim and on premium cars.

The trim aspects is probably later, maybe even model year 2018, because a lot of the model year 2017 has been acquired or committed. There is some uncommitted components to it, so we will probably have an opportunity there, but we expect compacts to be down, for example in the 17%, 18% range in the second quarter versus 20% it was in 2016, as an example.

There will be some increase in fleet costs, will be experienced in the first half of the year. There might be some moderate increases on trim, and it will have to determine -- the key driver here isn't necessary the investment of the fleet, which I think is on a large line item like $1.6 billion, a marginal investment to drive preference, but it's what's going to happen for the market in our residuals, and what happens with the OEM model year 2018 buy, which will be the second half of the year.

So from a market perspective, I think that's what monitoring pretty closely, is what happens in the residuals and the overall impact of the industry, and how that could affect fleet costs. Because I think one needs to be more careful following an investment that we're making, that we believe will have a return in and of itself. Which is opportunistic investment, which we think drives a financial return.

That super helpful. Thanks, Tom.

Michael Millman, Millman Research.

Over the last couple of years, generally, Hertz has been blamed for not going along with price increases. A lot of that, I think, and sounds like you think, relates to all the things you talked about, regarding back to basics. But I was wondering if beyond that, there was a concern about share. Certainly, we know currently that the Company is losing geography in airports, and I'm not sure how important that may be, but nonetheless, can you talk about what you think about price increases relative to share, and where you stand on looking at share? I have some others, as well.

I think if I refer back to what we've discussed, the best way to increase share and growth is to deliver the cars our customers want when they want it, where they want it, don't make them wait for it. And have employees out there that show they care and deliver that service. So as we clearly want to grow, and growth generally drives share improvement, and I think going forward, the improvements we're making on our fleet, the rollout of choice, the investments we're making in servicing our employees as well as in our technology, will continue to improve growth, and hopefully will continue to show some share improvement.

We have seen some strengthening in our share at this point, but, again, that is a long road to hoe, as they say in the Midwest, there's more work to get done. And we do think will see steady improvement throughout the year, as we do improve our service, and the cars that we deliver to our customers.

I was trying to be more specific. Often, share is a result of pricing, so really the question is, how aggressive are you going to be on pricing, and will you tend to go along with the industry pricing to a much greater extent than at least you're given credit for?

I'm not a great believer in talking about price, for a multitude of reasons. But we intend on winning share and growing because of the great employees we have, that we deliver the right cars, and because of our great brands. And I think, as we focus on the things we control, that don't have anything to do with price, we are going to achieve the share growth that I think a great Company and a great brand like Hertz will continue to command.

On a different topic, what were your plans for Donlen? The leasing business, as you know, much more -- much better than we do, has generally been a very good business and Donlen just lays there and never gets discussed. Maybe you can discuss your plan?

I can talk about Donlen. In fact, the gentleman who runs Donlen worked for me in my five years running the GE fleet business, running our Australian business. I ran the world -- at one point, it was the world's largest fleet management Company, so there's a special place in my heart for that business.

Basically, my experience and the work I did there ended up getting me on the General Motors Board, as well. And the nine years of great insights and experience in the automotive industry, I've got from that has just been invaluable. So I do have, what I'll say right now is the US operations is where I really need to get focused on, but it doesn't mean that I don't have a special place in my heart for Donlen and that business, and I think with a lot of the opportunities out there, that involve ride sharing and autonomous driving, being able to manage a large fleet set of vehicles is going to be a great asset to have in this Company.

And I also think there is probably certain things that I'm aware of, that I had developed when I was back in the fleet business around telematics and car location that I think we could carry over into our business, that would make a good deal of difference in how we manage our cars, and how we know where our cars are. So I think I would hold that thought. There will be more to come around Donlen.

James Albertine, Consumer Edge.

This is Derek Glynn on for Jamie Albertine. Just curious what initiatives you have in mind to further improve the alternative sales channel mix? What are the opportunities there, and any targets we can look to for 2017?

I will turn to channels. As you saw in the fourth quarter, we were up significantly on a volume sales standpoint, both in the retail and dealer direct. We think our opportunity to continue to drive more throughput through our retail channels or retail outlets we have, we can opportunistically add additional retail outlets. We don't think we have a saturation point as far as locations, but we're looking at that as a potential opportunity as well as improving the throughput of the existing locations we have.

Our dealer direct, I think we have, we can more actively manage the dealer direct channel with more personnel, and a more standardized process. How we engage with the dealer, and how we partner with them. So I think there's an opportunity as it relates to improving both the volume, as well as the margin on the dealer direct channel.

So we believe that our remarketing channel in our dealer direct and retail do provide us some insight, not only in the current trends on the residual market and on our retail sales, but also give us I think somewhat of an advantage on net proceeds we receive, including ancillary sales on those products through those, and particularly on the retail channel as it relates to wholesale.

I'll add in there that I've already met with a very large dealer network around what of the types of opportunities that we could work together, that would benefit both our businesses, as well as I bought more cars from dealers than anybody else in the United States at one point. So I have a fairly deep dealer experience and network of connections, and I do think this is a somewhat -- we have made progress there, but I think there's a lot more goodness to be had in working more strategies with our dealers.

Just as a follow-up. To the extent you can, in terms of pricing trends in the fourth quarter, were there any regions, any callouts within the US, where pricing was particularly resilient or underperformed your expectations?

I think it's consistent with what one might expect. We have experienced a milder winter. I think that has an impact on demand to some destinations such as Florida, which was weaker, and there has been more competitive pricing in the Florida market for example. So I think that's an example where one would say, the weather patterns can change every year, and unfortunately this year from a demand standpoint, that has had an impact on demand and why there has been more pressure on pricing in that market.

Okay. Thank you very much.

John Healy, Northcoast Research.

I was hoping you give us a little bit more color on the fleet cost potential for 2017. When I heard your comments earlier investing into richer mix of fleet, whether it's more larger size vehicles or SUVs or minivans, what have you, just absent the trim level discussion that happened earlier. But how much of an actual increase in the fleet cost does that present itself to for 2017? And is there a way you can help us think about what the right base is for the fleet cost of the Company today, before we get into residual value assumptions for 2017 or 2018, cap cost increases?

Again, you'll have to forgive me for being here less than 60 days, but I've been pretty deeply involved with managing the fleet mix to where we need to get it to. At this point, if you're asking if there is a big bang out there that you should be thinking about, that's not what we're seeing right now, but I think Tom talked about the more concerns if the market slows for the OEMs, what will happen to fleet prices, as tens of thousands of vehicles come off of lease, what will happen to what we're selling our cars for. So I think we're watching all of those things very closely, but I have reviewed how we go about buying and selling cars, and there's been a lot of goodness created over the last several months at being more effective in all of those areas. And I hope my experience working with large OEM over the last nine years will help me understand -- I won't get any price breaks, that's for sure, but hopefully it will help me understand what they're looking to do, and bring to the table what we're looking to do, and how they sell cars to us, to be more effective in our buying.

We have not changed our overall assumption of the 3% decline in residuals to date, for the residual decline for 2017. So John, as Kathy mentioned, that's a larger factor. We are opportunistically investing in the fleet, as we have said, both from a mix in starts and premium full size. But I think the major driver is what happens with the market, and how that might change, particularly as we go into the seasonal peak here. And near term, as I said, we aren't going to be aggressively selling cars, as well as bringing in new cars to rebalance the fleet here before the summer peak, which may have some near-term implications on utilization, and near-term implications on shortening some hold periods and having a higher fleet cost in the near-term.

But the overall market I think is the one we all need to monitor very closely, and that 3% decline residual, if that changes, we need to monitor that. And I think everybody knows the Manheim information was down 4 percentage point in November and December and down 3.8 in January, so it's going to be important to monitor what happens on that index really in February, and then March and April prospectively.

One follow-up question on the technology initiative. Since Dollar Thrifty closed in 2013, I want to say, you have been talking about a lot of different technology initiatives, and different things that needed to happen. As you look at the maybe lack of success you've had with technology at the Company level, do you feel like maybe you should be outsourcing a lot of this technology, or do you expect the spend to be spent to be internally driven going forward?

I'll speak to it, just what I've learned to date. There was an outsourcing of our legacy system, so that we could focus on developing and implementing systems that will really transform our customer experience.

So clearly yes, we will continue to look at using partners. We are already using both Infor, Salesforce and IBM. So we clearly are comfortable with outsourcing to the experts.

Again, I would say that the last year has been spent on what it should be spent on, which is developing requirements. Any successful technology project should be spending the lion's share of its time in developing the requirements, and then 20% of the time doing the coding, and then hopefully you're only in testing for about 10% of the time. I think the right order of work has been done, where there's been an enormous amount of time, energy and thought into what the process is that's going to go on to these systems. We're not just want to lift and shift stuff. We are going to do the right thing as we make a fairly significant investment in our future.

Hamzah Mazari, Macquarie Capital.

The first question just for Tom. Tom, do you see any impact from lower to value changes given what happens to residuals, or what's been happening in terms of your asset-backed? And any impact to the P&L as you look forward from that, or has that not really happened?

Sorry, the question didn't quite come in clearly. You asked about asset-backed securities?

The question is, given the used car market and drop in residuals that you're seeing, are you seeing any impact to lower to value changes in your asset backed debt, or vehicle debt yet?

As you know, we're marking to market all the time on the asset-backed securities, as far as the value of the fleet in the ABS and then enhancing the liquidity requirements for the ABS. So that something in a declining residual market you are seeing a mark to market pretty consistently, month to month, and that's month to month.

And then we are obviously improving or enhancing liquidity, to ensure that the net disposal equals the ultimate book value, that you're depreciating those cars at for ABS purposes. Where monitoring that, and that has had an impact overall from a financing perspective. That's not inconsistent with what one would expect in this market.

Great. Just a follow-up question. You talked a lot about technology initiatives around the fleet management and revenue management system, with some of the new modules coming into place. I'm just curious.

How much of a learning curve or lag is there, before you see benefits from some of these modules? Specifically, you guys had a headquarter move two years ago. You had to rehire revenue management staff. Are they ready for this transition? And then any benefits, or what is the lag before you see any benefits from some of these IT initiatives, specifically around the fleet and revenue management? Thank you.

We are working on the requirements around the fleet management system, so that's something that's going to be coming into play the end of this year, early 2018. On the revenue management system and what we're doing there, it will take time. We are running a -- my guess is about three months, but we're moving slowly. We're testing different markets.

What we're trying to do is watch and learn, not spend two years on developing a system, launching it, and then finding out it may not be doing quite what we want. So rather, chalking up what we do with this module chunk, launching it, testing it, revising it, and then rolling it out. Those things, I think you said it appropriately, are going to take time to have an impact. But generally speaking, if you do the work, the results come, and the team here is doing the work.

Thanks so much.

Justine Fisher, Goldman Sachs.

My first question was on residuals, again. I'm wondering if you could help us think about the seasonality, or other factors that might affect the trajectory of your depreciation per unit per vehicle in the US this year? And the reason I ask is that if we look at the 3.21% from the fourth quarter, and we say all right, residuals are going to go down 3%, and let's say that Hertz can offset by selling through alternative channels and taking some of the other steps that the Company said it might be able to take to offset the market decline in residuals, so we drag that 3.21% out flat for the year. That obviously has a serious implication on year-over-year EBITDA. So can you talk to us about seasonality or other things that might allow that depreciation per unit per vehicle to come down in 1Q, 2Q, 3Q or 4Q versus the 4Q 2016 base that you set?

Happy to, Justine. I wouldn't consider 3.21% as the starting point from which to build off of your 2017 outlook, because in the fourth quarter, you have to catch up, for example the $30 million adjustment we had is also a catch-up, accelerated depreciation to catch up, for cars we're ultimately going to sell in the first quarter and second quarter that may have been depreciated lower. So it's not necessarily a place, a base to build off of.

Some of the puts and takes, as you think about it. If you even started with our 3.01% average for the year, clearly there was favorability, we're beating our plan in the first half of the year, and we are behind our plan the second half of the year. So on average, not a poor place to begin, from which to build your assumptions off of.

You have a 3% decline in residuals which is a negative, we have investment in both mix and premium and trim, which is a negative. We have a cap cost reduction on the car days for 2017 model year, which represents about 40% of our car day capacity in 2017 calendar year, which is about a 2% to 3% cap cost reduction on like for like cars. That's a favorable offsetting item.

And that we're going to continue to expand our retail channel sales mix, which has a differential favorable impact versus wholesale, which is a favorable offset. So I wouldn't start with 3.21% and build from there. You have other public comps which provide guidance as another triangulation factor, from which one can start from, and try to see where things could go. But clearly, we expect to have fleet costs up in 2017 on a unit basis versus 2016, not to the same level that we had in 2016 versus 2015 assuming a 3% decline in residuals.

Okay. That was very helpful. Thanks. The second question is just on refinancing. For the ABS maturities that you highlighted in your presentation, I'm assuming that you'd be able to just refinance those over the normal course of business?

And then on the 2018 bond deal, I know that it's only a $250 million deal, but I was wondering if the Company has any initial thoughts about how you might go and refinance that to unsecured markets that's going to offer you a high single-digit coupon. Would you consider something like a second lien or a revolver draw? How do you think about your other options for that bond deal?

From the near term perspective on ABS, yes, we expect to, as those ABS deploys amortize, to issue new debt at a normal course, and to replaces that capacity, in the course of this year. And as far as longer-term on the debt that's due next year, we haven't made any determinations as to what our plans are to do. Either to pay it down and/or refinance it.

We'll obviously be opportunistic relative to the market conditions, the cash flow business and our leverage, and we'll take all those into consideration and will see how the course of the year develops, and we will be opportunistic as to what the right course to address that. But again, it's an area in our view, a very small amount, and manageable amount of debt that's due in 2018.

Do you have second lien capacity to refinance?

We do have capacity. We could refinance that, but again, I think will look at potentially doing a pay down of that as opposed to refinancing it. Again, depending upon the liquidity profile that we have, and the cash flow of the business, which we expect to continue to improve as we are investing in the business and the top line starts to improve. We'll see how that goes, but I think we'll have to see how the year progresses, and we will be opportunistic as what our position is.

Sean Wondrack, Deutsche Bank.

Peeling away at one remark I heard a couple times on the call, and please clarify it if I'm incorrect. Did you say 3.5 times of net leverage as a target by year-end 2017?

What we said is we have not wavered from our ultimate objective to be 3.5 times or less net corporate leverage level at a year-end target level, not year-end 2017, but at the year-end metrics. So it's going to take time to get there. We don't anticipate to be there, clearly by the end of 2017. But we are not wavering from our long-term objective to be at a year-end leverage level target of 3.5 times or less over time. That's measured by at a year-end metric level.

Okay. Thank you, that's very helpful. Would you say that you will expect leverage to decline on a year-over-year basis from these levels?

That would imply providing some forward guidance, and right now, we're not in a position to provide that forward guidance. Again, over time, our objective is continue to reduce leverage. We do believe we're at elevated levels today obviously, and our objective is over time to reduce that leverage, and our credit agreement, which obviously call for that, so it's consistent with our credit agreement to continue to drive down the leverage level, to get to our ultimate long-term target of being at 3.5 times or less at a year-end metric level.

Fair enough. As you look at the spring season, how has the spring season is shaping up here in the US, in terms of maybe generically, in terms of volume and pricing, if you don't want to be too specific?

As I said in my prepared remarks, we expect pricing to be down year over year in the first quarter. You do have the effect, potentially a contributing factor to that effect of the Easter holiday moving from end of March to end of April, third week of April factor, that has an effect. But overall, we expect pricing to be down and profitability to be lower in the first quarter versus prior year in the first quarter. It's too soon to tell how the Easter holiday is building, because it's a very small percentage of the bookings on the books right now for the month of April, and we'll have to just monitor how that's progressing, how the market progresses closer to that period of time.

Thank you for my questions.

Thank you all for joining us today and have a great day.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.