Hertz Global Holdings Inc (HTZ) 2017 Q3 法說會逐字稿

Welcome to Hertz Global Holdings Third Quarter 2017 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 certain 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 that information to reflect changed circumstances. Additional information concerning these statements is contained in our earnings press release, and in the Risk Factors and Forward-Looking Statements section of our 2016 Form 10-K and our third quarter 2017 Form 10-Q. Copies of these filings are available from the SEC and on the Hertz website.

Today, we'll 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, Inc. It's a 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 Chief Financial Officer.

Now I'll turn the call over to Kathy.

Thank you, Leslie, and good morning, everyone. I came to this company knowing that the only way to drive a successful turnaround is to bring back growth and so that's what we're focused on. We're elevating our products and service quality to best-in-class levels, enhancing our brands and digital marketing to raise our exposure and solidify our value proposition for our customers and upgrading our system capabilities to ensure we have the most advanced technology to enrich the customer experience and drive repeatable and reliable processes, all of which will provide us with a distinct competitive edge. Bringing back growth after an extended downward trajectory takes time, a consistent ongoing focus and investment. But we're doing the work and making tough decisions even in the face of earnings pressure to ensure our iconic brands are attracting robust profitable demand and to position us for long-term sustainable leadership, while leveraging our fleet management and distribution assets in this evolving industry.

The good news is that our third quarter results reflect early contributions from the work we've already done, providing evidence that we're on the right strategic path. For example, we've begun to see some operating improvement after getting the fleet capacity and car-class mix rebalanced in the first half of the year; rolling out our new Ultimate Choice program to 47 U.S. locations to date has resulted in NPS improvement and incremental corporate volume; enhancing our revenue management capabilities has allowed us for better rate segmentation and faster response time; building our global continuous improvement program, or GCI, is reenergizing the operations on efficiency and customer service; and adding new leadership to complement the strong talent that's already in place ensures we benefit from aggressive knowledge and expertise that's critical to informal decision-making and business innovation. To be clear, it's still early in our turnaround. So of course, there's more investment being made and more work to do to optimize the outcome.

Let me give you some idea of what I'm talking about. In the third quarter, U.S. revenue per unit increased by about 1% year-over-year, reversing a 4-quarter negative trend. That's a move in the right direction as our realigned vehicle capacity and enhanced revenue management tools supported a price increase of 2% year-over-year, and while we achieved profit growth, a reduction in days and utilization tempered the potential outcome. Any rental car company's biggest challenge is managing the balance between pricing, volume and utilization. Getting the right combination means optimal market share and earnings growth. But it's a delicate balancing act and there's going to be some trial and error involved before we can get it exactly right.

After making significant investments in our fleet in the second quarter, we raised the bar on service expectations for the third quarter peak season with a goal of eliminating customer wait times. Candidly, we probably were too quick to shut off reservations in an effort to achieve that goal, and as a result, less than profitable volume on the table. So in the fourth quarter, we're making adjustments to better balance the reservation mix to maintain price, while capturing more of the profitable rental base and we have to get the right balance between wait times and utilization. The completion of the rollout of the Ultimate Choice will help with this, but it's still a work in progress. We'll be measuring that progress by RPU improvement as we focus on increasing the spread against the depreciation per unit.

Our preliminary results for October show a 1% improvement in RPU, so the progress continues. In terms of U.S. monthly vehicle depreciation per unit, in the third quarter, we delivered a solid performance with depreciation of $306 per unit, up just 1% year-over-year and down 13% sequentially from the $353 per unit that we reported in the 2017 second quarter.

Depreciation expense benefited from our better pricing on Model Year 2017 like-for-like vehicles, which are now fully deployed across our fleet. A more stable used car market that included some transitory benefits from hurricane-driven demand also contributed to lower-than-expected depreciation expense, and continued strong rate and volume across our retail sales channel was advantageous. We operate the 10th largest used car business in the country. This asset delivers value through 79 retail assets that generate strong returns supported by highly profitable, ancillary products like financing and warranties.

In addition to that, we're maximizing the asset value of our vehicles through ride-hailing rentals. As we've discussed, ride hailing, a relatively new customer segment for us, is serviced through a dedicated fleet of second-life vehicles that average 25 days per transaction. The lower operating expense and lower depreciation contribute to solid profitability. As ride-hailing companies work to expand their driver base, this new category has the ability to more than offset any potential competition from ride hailing on the core rental side of the business. Clearly, we're going to continue to grow and expand our ride hailing and used car operations.

Of course, growth requires investment. As I indicated last quarter, we're making roughly $200 million in gross capital investments this year, primarily to upgrade technology and reimagine the rental car experience at more than 50 airport locations through Ultimate Choice. Our company's capital requirements for fixing and enhancing the operations through fleet, GCI staff, marketing and technology expenditures of about $280 million this year, of which we've already disbursed approximately $210 million third quarter year-to-date.

While our 2018 internal forecast is still under review, we have a lot of heavy lifting planned again next year, to launch our new marketing campaign, incrementally upgrade the Model Year '18 fleet quality, enhance field processes, training and recruiting and bring the new technologies through testing, field training and the go-live rollout. My expectation is that we'll make similar levels of earnings and cash flow investments next year as we work through the final turnaround initiatives.

I know from experience, and I've said this before, "you can't cut your way to growth" even when it's tempting in the face of earnings pressure. Strategically, we're staying the course, focusing on the significant few things that will drive the customer experience. Our recent progress supports that belief. The end goal is to grow sustainable broad-based customer preference for Hertz, Dollar and Thrifty. So we're keeping our heads down, collaborating well, thinking strategically and holding ourselves accountable and measuring every action so that we can adjust tactics quickly as needed. We've got a lot of work to do over the next 5 quarters to keep this company on an improved path towards market leadership, though we have a great foundation to leverage. Our management team has deep, diverse experience to lead the evolution of this business with best-in-class products, processes and services. We also have great assets in this company: a large corporate fleet management business; a long-established rental operation with global distribution, service, logistics and maintenance capabilities; and some of the best, most innovative partners across a variety of industries; and most important, 40,000 employees who care deeply about getting drivers where they need to be, seamlessly every day, 135 million times a year. That's how we'll win in the end regardless of whether it's self-drive customers today or autonomous customers tomorrow. This isn't just about executing the turnaround. We're building for the future.

With that, let me turn it over to Tom for a more detailed review of the quarter.

Thank you, Kathy. Good morning, everyone. Despite approximately $57 million of elevated investments and higher vehicle interest expense and an additional estimated $15 million negative revenue impact from the hurricanes in the third quarter, we generated $321 million of adjusted corporate EBITDA, trailing the prior year quarter by just $8 million. We're able to narrow the year-over-year earnings gap compared to prior 2 quarters of the year by improving U.S. RAC's total revenue per transaction day pricing from minus 3% and minus 2% in the first and second quarters, respectively, to a positive 2% in the third quarter. Increasing the U.S. RAC revenue per unit per month from minus 8% and minus 4% in the first and second quarters, respectively, to a positive 1% in the third quarter. Moderate growth in the U.S. RAC monthly unit vehicle cost from an increase of 15% and an increase of 27% in the first and second quarters, respectively, to a narrow 1% increase in the third quarter. And continuing to deliver stable operating performance in our international RAC and Donlen businesses.

Now I'll get into some of the factors that contributed to these improving trends in the U.S., international segment and update you on our recent financing transactions, liquidity and cash flow performance.

Starting in the U.S. rental car segment. In the third quarter, total revenue declined 1% versus prior year. The results, however, reflect an improvement from the prior 2 quarters, where we posted revenue declines of 4% each quarter. As Kathy mentioned, our focus is to turn the top line performance around and produce growth. In this quarter, we clearly made progress. We are narrowing the gap and heading in the right direction.

Total revenue per transaction day, or total RPD, decreased 2% in the quarter, comprised of a 3% increase in airport pricing and a 2% increase in off-airport pricing. The overall increase was tempered by decline in ancillary revenue as a result of lower Dollar and Thrifty volumes, which have higher ancillary penetration. Net time and mileage rates, which excludes ancillary revenues, increased 5% reflecting our tire vehicle capacity, a 400 basis points increase in SUV and premium vehicles as a percent of our total fleet mix and improved revenue management capabilities, where our focus is on capturing quality demand rather than sheer volume. It should be noted that the increases in total RPD and time and mileage rates were also muted by the growth in the ride-hailing rentals. The growth in ride-hailing rentals negatively impacted pricing by approximately 1 percentage point versus the prior year.

Total transaction days declined 4% in the quarter as a result of hurricane-related cancellations, our titled vehicle level compared with a year ago, our focus on elevating customer service by ensuring fleet availability and our initiative to optimize revenue through an improved mix of reservations. This effort in part contributed to decline in Dollar Thrifty volume as we reduced the reservation flow from lower price segments.

Airport transaction days decreased 6%, reflecting a decline in Dollar Thrifty, our trend in overall fleet and some of the impact from the hurricanes. Off-airport days increased by 1% driven largely by the growth in our ride-sharing business. You'll recall that last year's off-airport volume benefited from unusually high insurance replacement business due to the airbag recall activity.

As Kathy mentioned, we are continuously iterating and working to obtain the right balance of rate and volume in driving revenue.

Moving to fleet. Our average U.S. vehicle units declined 2% versus prior year. When you exclude the growth in our dedicated ride-hailing fleet, the average car rental fleet declined 5%. Fleet utilization of 81% was below our internal objective and reflected a 130 basis point decline versus prior year. As mentioned, some of the decline in utilization was a result of our enhanced focus on protecting service at the airport during the peak holding -- during the peak by holding cars to ensure minimal to no wait times. We are already working to influence better fleet planning and management tools in our operations and complete the rollout of our Ultimate Choice program so that we can achieve both vehicle utilization and customer service improvements.

Average monthly vehicle depreciation expense of $306 per unit reflected a 1% increase versus the prior year. Over the significant sequential improvement from the first and second quarters, we reported 15% and 27% increases in monthly vehicle cost year-over-year, respectively.

As you'll recall, we substantially accelerated our fleet rotation in the first half of 2017 to rebalance our car-class mix and fleet capacity, heading into the third quarter. This resulted in shorter hold period and higher remarketing activities than we originally planned coming into the year, which drove higher vehicle unit cost for us in the first half of the year, in addition to the decline residuals that impacted the industry. In contrast, during the third quarter, we rotated fleet of plan, leveraging our seasoned remarketing channel to help manage vehicle costs. We sold 81% of our nonprogram vehicles through higher contribution Dealer Direct and retail sales channels compared with 72% the prior year quarter and 60% in the second quarter this year. Our total rent sales declined 37% sequentially from the second quarter and the residual environment improved notably.

According to Manheim rental risk index, rental car residuals turned positive for the first time this year in August, ahead of the hurricane impact, with June residuals representing a low at a minus 4.4% year-over-year. As residuals have stabilized, we now expect full year 2017 core residual value pressures to moderate to minus 2.8% from our original estimate of a minus 3.5% based in part on Black Book's revised estimates.

Finally, the growth in our ride hailing and off-airport businesses, where vehicle usage and pricing characteristics report a slightly longer risk vehicle holding period, resulted in approximately 2-month extension in the overall life of our Model Year 2017 vehicles. We report an adjustment during our third quarter depreciation rate review in September to reflect this extension, which had a marginally-favorable impact of $9 million on the vehicle depreciation in the second half of 2017.

Overall, U.S. RAC adjusted corporate EBITDA declined $33 million to $166 million in the third quarter, largely attributable to the higher cost of the investments we were making in the business and higher vehicle interest expense. I'd also note that the $13 million in net direct costs related to recent firm activities, such as vehicle damage and transportation expense, were reported below the line consistent with prior treatment of similar events, such as Hurricane Sandy. We intend to pursue insurance reimbursement for both the direct costs and business interruption claims for the approximately $15 million of lost revenues that largely flowed to bottom line and negatively impacted the adjusted corporate EBITDA results for the quarter.

Now let me turn to the international RAC segment. Total revenues increased nearly 7% to $728 million versus the prior year quarter. Excluding a $28 million favorable currency impact, international RAC revenue increased 2%. Transaction days grew 5% driven by continued strong leisure performance in Europe, including double-digit growth in our long-haul segment from U.S. and Asia-Pacific regions. Our commercial segment saw low single-digit growth in Europe. International pricing declined 2% on a constant currency basis versus prior year, largely due to the competitive environment in both Europe and Australia as well as stronger growth on our value brands. Net depreciation per unit increased 1% -- decreased, excuse me, 1% in part due to the higher proportion of program vehicles which did not experience the digital pressures and a lower cost mix of vehicles versus the prior year.

Vehicle utilization increased 90 basis points to 82% as a result of improved efficiencies in fleet management. In total, the international segment reported adjusted corporate EBITDA of $158 million, an increase of $7 million driven by increased revenue.

Now I'd like to provide an update on our financing activities, free cash flow and corporate liquidity. When we issued the second lien bonds in June, our objective was to ensure the company had the time and liquidity to make the necessary investments to improve its operating performance. As disclosed last week on November 2, we executed several transactions to build that objective. Some of the benefits of the transactions include: extending the commitment on all of our global base funded vehicle facilities, which total approximately $5.3 billion through March of 2020; redeeming our 2019 notes, which pushes out any significant corporate debt maturities until October of 2020; and amending our corporate revolving credit facility to allow us to raise liquidity in the debt capital markets, if required. Our immediate debt capacity is $542 million, which equates to an amount of commitment reduction and internal amortizations that have occurred out of the $2.4 billion credit facilities' basket, contained in our senior credit agreement and bond debentures. Additional incremental capacity could increase by $400 million if we elect to utilize a newly-executed stand-alone Letter of Credit facility. We believe that maintaining excess liquidity in a debt market is prudent capital structure management. I want to emphasize, however, that our current plans do not anticipate raising new corporate debt for any needs other than potential refinancing of near-term maturities. Our commitment to delever our balance sheet by improving operating performance remains intact. We chose to reduce commitments on our senior revolving credit facility versus paying down senior term loans because the revolver has a shorter tenure and a wider draw spread than the term loans. In addition, we believe reducing bank commitments assisted us in achieving the best comprehensive terms with our bank group.

During the quarter, we also executed 2 U.S. term ABS transactions. In August, as reported, we sold $145 million base amount of previously retained subordinated BB rated term ABS notes. This transaction was subsequently followed by an $800 million issuance of new term ABS notes, with proceeds used to pay down outstanding variable funding note borrowings.

Now turning to cash flow. Adjusted free cash flow for the 9 months ended September 30 was negative $418 million. This largely reflects our year-to-date net capital expenditures of $124 million and increase in cash used to fund peak fleet growth primarily in Europe of $200 million and year-to-date cash flow operations, excluding vehicle-related depreciation was a negative $120 -- $112 million.

During the third quarter, the improvement in U.S. vehicle cost trends and pricing along with the seasonal peak in volumes produced additional operating cash flow of $360 million as compared to the second quarter, largely offsetting the negative operating cash flow through the first 6 months of the year ended June 30.

The strong third quarter operating cash flows combined with the $94 million of net proceeds we received from the sale of our Brazil operations in Localiza more than offset the seasonal fleet needs and CapEx incurred in the quarter. Our liquidity position improved by $242 million in the quarter to $1.39 billion at the end of the quarter. The composition of liquidity also changed as we reduced borrowings in our senior revolver to $120 million at quarter-end. In October, we repaid $120 million and expect our liquidity position to further improve as fleet needs are seasonally reduced over the remainder of the year. From a financial covenant perspective, we ended the quarter at 2.58x on our first-lien leverage ratio calculation, relative to covenant threshold of 3.25x. With the decrease in first-lien debt resulting from the reduction in commitments under our revolving credit facility, we have created significant cushion against this test. Pro forma [prefunded] reduction, our leverage at the end of the third quarter would have been 1.55x. This translates to a pro forma trailing 12-month adjusted corporate EBITDA cushion of $194 million as of the end of the third quarter. We believe our current liquidity profile, covenant tax and covenant package provides us with enough financial flexibility to continue our efforts to improve our product offering, enhance our service levels, update our technologies and revitalize our brand marketing.

Before I turn the call over to the operator for questions, I want to provide some additional commentary on the pace of investment and impact of direct operating SG&A expenses along with some early perspectives on October. First, as it relates to investments impacting EBITDA, we expect to spend approximately $280 million in 2017, generally spread out equally throughout the quarters. This level of investment reflects an approximate $175 million increase versus the prior year. Further, while we had the benefit of annualization of cost savings and [issues] from 2016, these were largely captured in the first half of 2017. As such, in the second half of 2017 and into 2018, these investments will reflect a greater headwind in direct operating SG&A expenses.

As it relates to [pulmonary season] in October, total consolidated company revenue increased approximately 3% versus the prior year with an approximately 1.5 points of that growth increase related to foreign currency. For the U.S., total revenue grew approximately 1% and total revenue per unit also increased 1% in October.

As with any operational turnaround, the work being undertaken is complex and as Kathy noted, we will not always get everything right the first time. The goal is to continue doing more of what is working and stop and adjust quickly when things are not working. Early progress is encouraging, but we have significant work ahead of us before we can return to predictable and sustainable revenue growth and margin expansion. This is all work that is within our control, and we have stated there's nothing structurally that prevents us from posting competitive margins once the turnaround is complete and we can begin building momentum.

With that, I will turn the call over to the operator for questions. Operator?

(Operator Instructions) Our first question comes from the line of Chris Agnew, MKM Partners.

There's a lot of detail on the call. So if I -- you mentioned T&M around 5%, I'm assuming that's excluding ancillary items. And did you and can you share what leisure rates were in the third quarter? And then with respect to that T&M, are you seeing headwinds on ancillary items outside of the impact from the lower Dollar Thrifty volumes, which you called out and said were having a mix impact on ancillaries?

Chris, yes, as I said, I think it's important for us to kind of give a little more clarity on the rate because I think, fundamentally, a good indicator of the industry and company performance is the T&M rate. What is more directly in our control is the ancillary and the mix and improving the mix. So yes, the T&M rate excludes the ancillary performance, total RPD includes the ancillary performance. In the third quarter, we did have some by design and some by work we had to do. We did have lower volumes of Dollar and Thrifty business and as a result, that has a higher penetration of ancillary, as you know, because it's primary leisure-driven and as a result, it has more of a headwind on ancillary, and therefore, dampens the headline RACD price. So as we go forward, I think we've got a lot of initiatives to balance the right mix of trying to -- continue to improve the performance of the Dollar and Thrifty brands as we've talked about in the previous call. Those brands were very under-invested, as you can say, for almost a decade. They have brand managers are involved now in there, very talented person leading that brand. Our new Head of Marketing has got a lot of ideas on driving demand into those brands, for improving the service and quality of the products offering. What we expect is an improvement in that mix going over time, which will, by definition, improve the ancillary performance of the company. There's obviously some secular headwinds I think as you think about, things like GPS, but we also have other products we offer. Actually some early indications of uptick and positive response from customers that can offset some of those secular headwinds that you have such as GPS. So there's both a mix and a product issue. We've also worked within our centers, our field people to improve and does the tests there, how do we improve ancillary penetration. So a lot of good initiatives and a lot of good things going forward to improve both the mix as well as the overall performance of the ancillary in the business.

And actually, I asked a couple of parts in that. Are you willing to share leisure versus commercial rights in the quarter? And while I'm here, just my last question was, if we back out the impact on the depreciation-related changes that you had in the quarter, does that give us a better view on the underlying per unit fleet cost run rate as we're heading into the fourth quarter? I think if I backed out, was it $15 million, is it something like $315 to $320 per unit per month?

Yes. So the leisure rates were up stronger overall, obviously, because commercial, as you know, is contracted, so it's less flexibility to affect that near term. It's a competitive market commercially. But the leisure rates were up between 5% and 6% on a total RPD basis in the quarter, so that was pretty positive for us. So we were pleased with that, and again, keep in mind, we also have 1 percentage point headwind for the [T&C] mix on the overall RPD, but on the leisure standpoint, we're up between 5% and 6%. On the fleet cost aspect, again, if you think about our first half and second half of the year and full year fleet costs, and again, we aren't giving guidance, but I think as we think about it, heading into next year, we have indicated previously and we've not changed that, that we expect residuals to decline another 2 percentage points next year. That equates to about every point about $60 million of fleet depreciation headwind. We also are substantially complete with our Model Year '18 negotiations, which we've achieved pretty significant price reductions, which will help be an offset to that. And we're continuing to improve our alternative disposition channel and expand our ride-sharing business, which also has benefits to our fleet cost. So we expect that while everyone expects that potentially there are some kind of temporary impact on residuals related to hurricanes as I mentioned in my remarks, even a lot of pre-hurricanes saw an uptick. So there was stabilizing going on. We, nonetheless, are still expecting about a 2% decline next year, that's how we're [deeping] our cars today. We do our rate review in November. So we'll get an update from Black Book then and so I don't expect it to change, but I think the first half of the year is an anomaly because it was primarily driven by -- there was a lot of residual pressure. From an industry standpoint, we had our own specific -- Hertz specific issues that we talked about last quarter's call that were unique to us, that would not continue.

Our next question comes from the line of Samik Chatterjee, JPMorgan.

I just wanted to start off with, if you could share more details about the pricing trends during the quarter because there were certain one-off events during the quarter, like the hurricanes and the solar eclipse. So outside of these one-off events, what was pricing like relative to the average 2% that you saw during the quarter? And just a clarification, I think you mentioned October RPU was up 1%. Is that the same for RPD as well?

What we've seen is continued pressure on corporate rates. Obviously, businesses are looking for productivity gains and it's a very competitive space. We've seen a better match between increases in the cost of cars and the price people will pay for renting cars. I think we've also, with rolling out our revenue management system and getting more and more experience with it and having a more strategic targeted approach to the segments and how we price those segments, based on our different brands, we continue to see better pricing and picking better business and more profitable business. And we're focusing on growing the spread in between -- basically our RPU returns. So we saw for the first time, in quite a while, growth -- though slight -- progress in growth in that number.

Yes, I'd say, the trends generally as we've mentioned in our second quarter call, you may recall, we disclosed that we expected pricing to be up around 3% in July, that was somewhat consistent. We had about 3% increase in August and then December was less than 1 point. The October time and mileage rates are up 1 point and 2 points ex ride hailing, respectively. There's going to be some headwinds as it relates to ancillary as we talked about earlier, but the headline pricing helps the business. I think it's better represented by T&M because the ancillary is more in our direct control based on our mix and our initiative. But from an overall health of the industry and company, I think the 1% T&M being up in October and 2% ex [T&T] are good headline numbers of performance. Nonetheless, we've got to keep working on some ancillary to improve the overall RPD performance, but we always look, Kathy said in her remarks, and what we've always got to remember, is what we're really focused on is driving revenue per unit per month because that's a combination of optimizing your fleet, your days and your rates to get more revenue for every car from us and increasing that spread between the revenue you get from us and the cost from us. That's the driver of the profitability in business, and that's what we're really focused on those 2 key metrics and the inputs that go into RPU, you've got to get the right balance between the mix of days, the mix of rates and mix of the business.

We have continued opportunity in our utilization rates and our ability to get days and not give up on price. So it is very difficult and it takes a lot of analytical prowess and patience, but we believe we have opportunity to get more days and we also think, operationally, as we focus on better process out in the field and some of the technology enhancements we're doing in our cars to manage our fleet, as we get better at fleet management, which will pay off in the long run in any kind of market, whether it's ride hailing or autonomous. The pricing that we're doing around matching better, what we're paying for our cars and the price we get, being more selective of on what business we take, managing through the ancillary headwinds, there's a lot more opportunity out there around price and we're working it.

And just to clarify, I think I used an acronym, [TNC], just for folks on the phone. But that's kind of an internal acronym. That the ride-hailing business. So our dedicated rental to Uber or Lyft, which have longer length of rent, lower RPD, that is a big growth item for us year-over-year that has about 1 point negative impact year-over-year from a comp standpoint on RPD and T&M.

Got it, got it. And just a quick follow-up, you mentioned opportunities on fleet utilization. It declined this quarter in the U.S. and I think you mentioned there was some sort of prioritization given to wait times, et cetera, which is why it was down. But do you like when we think about what would get it to increase and start to improve, is it -- do you see that the fleet size has to be brought down further? Or do you see the demand already there where you can start to improve utilization rates maybe like next quarter onwards?

No, actually, our challenge is that we have cars out there, we have demand for those cars and we have to improve our ability to clean the cars, put them in position, get them stalled and get them rented. So it's really an operational issue. If anything, I think there's -- based on what the demand we're seeing for our rentals, there's actually pressure on or there'd be a temptation to add cars. But rather improving -- we're looking at improving how well we manage the process to get cars cleaned and into stalls versus just throwing a lot of fleet out there. So it is -- really isn't about having too much fleet. If anything, we're putting pressure on ourselves to have too-little fleets and be better at managing the fleet we have.

The market demand is there. We just got, as Kathy said, to get the right -- the cars positioned in the right place and capture our [clear] demand. An example would be, in the latest information on the top 100 U.S. airports, there's lot of color about concerns about the growth and health of the market or the industry. The top 100 U.S. airports grew in the month of July, which is the most recent month -- in August, excuse me, grew 4 percentage points. So the market grew 4 percentage points. So there's growth out there. We just got to continue to improve our products and service offerings to capture our share of that growth.

I think, ultimately, both in our European operations as well as in our corporate fleet management business, we have a lot of great core competencies around vehicle location, what's going on in the vehicle, like how much fuel, whether there's been a bump, et cetera. So the work we're doing around enhancing the technology in the car and letting that help us be better at positioning the car and getting the car in place knowing where the car is at all times, that capability will drive much better utilization, obviously, getting more value out of the cars we have. But also the large corporate fleet business that we have and what we built over probably 15 years around telematics and logistics is going to be invaluable as autonomous fleets start to come into an existence and grow. Somebody is going to have to help them manage those fleets.

Our next question comes from the line of James Albertine, Consumer Edge.

I wanted to ask, if I may, and I appreciate all the color on the call, the $280 million you alluded to for 2018, if we can kind of take a little bit of a longer-term view and if you could help us understand sort of within your spending aspirations, sort of what percentage of your planned spend is sort of a maintenance, sort of CapEx versus a growth CapEx or repositioning the brands for growth over time? And how should we think about that sort of trending over the more like the 3- to 5-year period?

I think going back, we are focusing on RPU. And one of the things that's pretty evident in this industry is it really is -- the math exercise here is about getting more revenue from the top line and managing the cost of your fleet. And in between, even though there's significant expense on our distribution, I mean, we have upwards of 40,000 people, thousands of locations and lots to go along with that, but the reality is, it's really about those 2 numbers that we have to stay focused on. What is clearly impacting the top line number is how well we are at delivering a great experience with our consumers and how good we are and making sure we're everywhere where they're looking to rent the car, when they need to rent a car. And when we look at that, we really in this company, have had a real lack of marketing focus and expertise. We hadn't kept up to speed with media -- social media channels. A classic example of that is Carolyn Everson who is a fabulous marketer and heads up marketing at Facebook. We spent around $10,000, $15,000 on Facebook marketing. So here, we had a board member for the last few years on our board and we weren't leveraging her expertise in that amazing channel. So now we brought in a very seasoned, successful, experienced leader from P&G, Jodi Allen, to manage a great group of talented people that have made -- have been making an impact on how we manage our digital marketing, social media. We actually did not have brand managers in this company, which is just stunning, given Hertz is one of the most well-known brands, defines the category and has been here 100 years, so we made this fantastic asset that we didn't even have a brand manager against. So we now have brand managers for the programs. We have a deep experience leadership team. We've hired staff. We've been developing our brand message and you haven't seen that impact on the numbers yet. So as we go out into the years to come, we should start seeing the good news from more efficiently managing the great partners we have. We have the best partners out there, where people go to rent a car: United, Marriott Hotels, Delta, we have AAA, State Farm, Southwest and so many -- I can't remember them all, but these are all the places you want to be when somebody is ready to rent a car. So if you really look at that part of the equation, I would say we're unsurpassed on our partnerships. Now go down into the cost of our cars and how we manage that asset. We, as I mentioned earlier -- we're the 10th largest retail car sales outlet out there. So we're getting maximum price when we sell those cars. But at the same time, how good are we at buying them? We're doing a great job on getting the right price that matches the residual values. I have 15 years of experience in car sales between managing 1 million plus car fleet at GE's corporate business and 10 years on the GM Board, I know what they -- what it costs to make cars, I know what products are in demand. We added buying cars that people want with the right type of enhancement in those cars so that when we go to sell them, we get a better price. So we're really, really pleased with how we've reduced our cost of depreciation. Then if you add in there, bending the curve with once a car hits 40,000 miles, putting it out into the ride-hailing area where we have a profitable venture there with the different major ride-hailing businesses. We're also maximizing that asset value from a depreciation curve perspective. So there is enormous opportunity in the future to see goodness out of that in '19 and '20. But over the next several quarters, as we mentioned, we still have -- the biggest bullet to deal with is the technology enhancements that we're doing and that will take a toll on the business operations and what we can focus on. So rolling out and implementing our technology investments will continue to hit us on our income and then a -- as we manage and get the value out of the brands and our marketing expertise, that's going to take time. So we're already seeing progress on our price. We're already seeing progress on our NPS improvements, and we're clearly seeing progress on our depreciation rate. Long answer for a short question, but, obviously, we're pretty pumped up about what we're doing and the progress we're making.

Our next question comes from the line of David Tamberrino of Goldman Sachs.

Hopefully, you can clarify something. I think you mentioned that October time and mileage was up 1%, maybe 2% excluding the ride-hailing business. Can you translate that to how revenue per day is tracking so far in 4Q '17 October time period?

So RPD is a little -- ex ride-hailing, it's a little under -- it's a little -- it's about 20% down in October and October having somewhat of a stress because of the long length of rents and the hurricane-related rental and the service rental. So we, again -- we see that not too -- not alarming, but, nonetheless, it's the flex we have because of T&M being up 2%. And the overall RACD would be down a little less than 1%. It's basically all the ancillary ones. So we've got work to do that's more in our direct control to close that gap in ancillary.

Got it. And is that just because you're seeing some of the dissipation in hurricane recovery demand? And maybe there's a little bit excess fleet out there that should be kind of solved as we get into the holiday travel season, so you'd expect it to sequentially improve throughout the fourth quarter?

Well, again, I would say that our T&M rate, ex ride-hailing so it's more comparable, being up 2% is pretty good for the month of October, which, historically, as you know, is a more of a corporate month. Therefore, corporate doesn't have as much ability to affect the rate near term because there's a longer negotiated contract. So we view that as a pretty healthy performance for the month of October, being up 2% on T&M. The issue is for our direct control, how do we improve the mix in Dollar Thrifty business and create the right mix between Hertz and Dollar Thrifty, and how do we close the gap in some of the ancillary performance we've had in this past year. We've been very keenly focused on service and not as much on getting paid upgrades, but more on free upgrades, not as much on insurance product, but we're going to be working on it moving forward. So again, I want to emphasis, I think the healthy center is represented by the T&M rate and that's been up 2% in a corporate month, which is traditionally a corporate month, which is, I think, a pretty good performance. But nonetheless, you are in a quarter which you have these -- a lot of peaks and valleys within the quarter with the Thanksgiving holiday, the Christmas holiday and New Year holiday, so you're going to have some peaks and valleys throughout the quarter on price.

Totally understood. Very helpful. Also, earlier you mentioned on the fleet buy, pretty much complete for 2018. I'm curious how much of a brand change to your fleet you're going to see year-over-year. I think the Detroit Three have pulled back pretty noticeably on selling into the daily rental channel this year. As you head into Model Year '18, is there going to be a massive shift in different brands that I'm going to see in the aisle for Hertz? Or is it more muted impact?

Well, as you might guess, I do have a little bit of a bias towards one of those Big Three. However, I did not let that get in the way of buying the most profitable in-demand cars. What I'll say is we did have a shift in mix. We do have more of our mix going to General Motors cars where we got a very, very competitive bid year-over-year; one of the best out of all the manufacturers. We still have a very large relationship with Nissan and Chrysler. And what I would say is we probably got a better piece of the share out of what they are actually putting out into the rental fleets. And being on the board of General Motors for almost 10 years and being in the corporate fleet business before that and understanding the rental business, I was a proponent on not using the rental fleets as an outlet for increased inventories and not to flood the market with stripped-down cars that really degraded the residual prices. And I think all of the Big Three Detroit OEMs have gotten much more disciplined about the quality of the cars that they put out into the rental fleets and the quantity. And as a result of that, I do think that's having a positive impact on the residual value. So that discipline has been pretty -- I know specifically for the -- who we're dealing with, they've been very disciplined around that. And they've also been managing around putting better trim and what's going in the car at a more reasonable price to us, because, as you probably know, you really can't get the value when you go to sell the car on these enhancements, but they tend to have very nice margins on them. So we manage to, in our overall buy, get prices that reflect where the residual values have gone and get cars that are a much better quality. We're also taking the approach of being the nemesis of the OEMs and being brutal on holding them hostage when they're really up a creek on building inventories. We're good partners. So we look to help them introduce vehicles, market their vehicles. And we try to buy cars that are better trimmed out, so we're not impacting negatively the residual values. And then finally, I'd say when we go into selling those cars, we try to be smart about how we sell them. So we have a great Direct to Dealer network as well as, again, I mentioned, I think a great asset and our retail cost sales. So I think we're doing our fair share to keep residual values up on the type of cars we buy and then finally, we put a lot of effort into buying the cars that our customers want to drive. And so we match up, we get feedback from the cars that are in our lots. If they don't like them, we stop buying them, and we buy more of the cars they do like. So we've greatly increased the amount of SUVs that we have. I think we're up 23% now, and we're buying them early. So I think as we're smarter about the cars we buy, what's in them and our mix, you'll continue to see a better outcome in residual values.

In addition to GM and Nissan and Chrysler, those 2 big partners are Kia and Toyota, lastly those continue to be big partners this year as well. And additional point, people might want to be asking, our mix of buys is going to improve slightly on program. So we're about 22% per annum with the mix of buys in Model Year 2017. We're about 25% for Model Year '18. So it has been a little bit of an uptick in the program availability and they're actually attractive economics in the Model Year '18 buy. So that's another change from year-over-year.

Our next question comes from the line of Chris Woronka with Deutsche Bank.

Was hoping to maybe get an update on some prepaid trends and also distribution in terms of where you are on book direct versus OTAs and maybe transparent, opaque, just general trends would be helpful.

Yes, Chris. Our prepaid is around 10%. It's increasing. Obviously, there's a higher demand for that product under the Dollar Thrifty brand. So as we continue to improve that performance, that'll help that business. Those businesses, we expect them to continue to grow. So it's an important aspect. And to your question, the other question was about OTAs and opaque. What was the other piece of that question, excuse me?

Yes, just kind of how the book direct -- where you stand on book direct versus OTA mix and whether you're decreasing the amount of opaque that's out there.

That's about half-half. Obviously, what we're focused on, we're working to redo our brand websites in our mobile platform. So we believe the tools we've had for the customers have been somewhat behind what is a modern expected means to book directly with us. So we're going to be rolling that out early next year. I think we'll have a mobile platform for mobile Hertz and the Dollar Thrifty brands. And those I think are going to be critical tools for us to really improve our ratio of the direct versus indirect distribution, which, as you know, is something that's important for us to get the direct relationship with the customer, but also have the residual benefit of lowering your distribution cost. So that's an important investment that we're in the middle of working on and that we expect to roll out early next year, which I think will help continue to improve that ratio to more direct and less indirect.

Okay, great. And then just a follow-up for you, Tom, on the fleet, on the buys for '18. Is the timing -- since you guys did a really big refresh kind of in the first half of this year, is the timing of that going to look any different? And I guess the other directional question is on overall fleet size. Are you still kind of trending down year-over-year?

So the timing really isn't affected by our rotation last year -- or last -- earlier this year. That was more of just improving the mix of full-size higher-premium cars and getting those in sooner. The mix of car days from Model Year 2017 delivery, one aspect that improved the third quarter performance, is we went from about 47% of our supply in the second quarter with Model Year '17 to nearly 60% of our supply in the third quarter and as you might recall, we said in previous call, we achieved about a 2% cap reduction in Model Year '17 cars like-for-like. That was another benefit that drove a better appreciation and performance in the third quarter. So normally, we're now taking '18, there's no change in the -- kind of the historical pace for that and so those are coming in now, and those will make up between 40% to 50% of the car days next year. So we're working on the final plan. But those actually have a cap cost reduction in excess of what we achieved in Model Year '17.

And the last part of that is, well, the -- I think the fleet size next year will be comparable to the fleet size this year. We may see an increase in older cars for the ride-hailing space, but, again, we're working hard towards fleeting up as -- versus having -- hoping that the volume comes. I think it was a little overexaggerated -- our impact last year. I think everybody had a little bit too much fleet. But in general, as we get better rate utilization, we also are hoping to get better at the days that we drive and have more of a demand for fleet, but right now, I think we're getting better and smarter at matching when we need the cars and where we need the cars. We've invested pretty heavily in analytic tools and recently, we brought together the demand part of the company with the fleet buy part of the company to make sure there's a smooth communication around demand and that it's quick and as accurate as possible. So we have a really good visibility to the demand that we see coming and the relationship with where we need to get the cars and how quickly. And then finally, we do have a really strong dealer network and dealer support. So if we see good demand, and we need to fleet up, we have a lot of dealers that we could go to quickly and at a good price, fleet up on some pretty decent buys, both program as well as risk.

Yes, I mean, it's safe to say, too, that our first half of the year utilization this year with our fleet rotation was somewhat of a headwind, and we, obviously, think we have opportunity while we perform the third quarter. So where do we think we're going to be next year, our fleet levels are likely to be a little behind the demand levels because we expect some utilization improvement on a year-over-year basis, both because of the headwind we had in the first half year plus the tools we're rolling out including Ultimate Choice, we could have some benefits in utilization next year. So whatever demand, and we're still working through that in our business planning, we think we can achieve next year with fleet a little behind that and expect some utilization improvement to supply that.

Our next question is from the line of John Healy, Northcoast Research.

Kathy, I was hoping you can talk a little bit more about the evolving world of ride-hailing and how you're positioned there. Is there a way you can think about -- tell us kind of more about the number of markets you're in and the size of the fleet. And then maybe from an internal perspective, when you look at that business, say 2 years to 3 years from now, how big you see it potentially? How you see it potentially contributing to the earnings? Because I think you made a comment that you see the partnerships as more of a, on a net basis, upside rather than destructive to the business in terms of demand destruction on just the corporate or leisure side. I was hoping you could just talk to that a bit more.

Well, keeping my CFO happy, I'm going to stay away from giving guidance on this, but what I will say is we've spent the last 12 months understanding this space and understanding how to price it, how to manage insurance around it, the technical connections between the ride-hailing businesses, the marketing, et cetera, whether you can put these rentals into your normal or Hertz level edition locations or whether we need to dedicate locations. We've also partnered with Pep Boys as another way to reach these renters as a way to improve our speed to distribution. Pep Boys also is a big help around maintenance and providing maintenance quickly for these drivers. They also can use Pep Boys for those who own their own cars, for those maintenance needs. So that's been a great partnership. But we see it being a really nice space as long as you understand the dynamics and manage to those dynamics. So we've been rolling out, literally, over the last year, dozens of locations, mostly dedicated to this customer. We have in some of the more, I would say, suburban areas where the demand is not quite as extreme, leveraged our local edition locations. But for the most part, we've been working with these partners to roll things out in such a way that we can handle the demand as well as not have a hit to our operating costs. So we've had some good learnings. As I mentioned, it is profitable for us, and I see it being a consistent growth area for us over the next several years. I think there's been and there continues to be a lot of energy around how the rental business is dead and ride-hailing is going to kill it. And the reality is -- and I think we've mentioned this multiple times, it's less than 10% of our volume, more like 5% or 7% that is in this shorter-term, shorter-distance space. Most of our volume comes from longer, cheap and a lot more mileage. And the best example I use is, we got a lot of slack around the solar eclipse that we weren't providing cars and that we were calling and canceling. So we had to move thousands of cars very quickly, so that we didn't have to cancel reservations. And what we learned is you can't take a ride-hailing car to go see a solar -- perfect solar eclipse an hour outside of St. Louis or an hour outside of Portland. So we want to make -- as verse is -- as the saying goes, "hold your friends close and your enemies closer." We don't see ride-hailing as an enemy. We want to work with them, meet those needs and take advantage of getting more out of an asset that, I think, we turned too quickly in this business. So we see it as a long-term growth play at a consistent double-digit level, and we will continue to open up locations in sites across the country to meet the needs of our partners.

Agreed. And there's just one follow-up question. You talked about the rental car market still being a growth market. When you guys look at maybe data that you receive from the largest airports, if you look at the overall revenues in the industry, maybe on a year-to-date basis, are you seeing revenues or rental days improve for the industry? Or are they flattish? Or are they declining, do you think?

Yes, only 6 airports, John, of the top 100 actually break out rate and volume. So you really can't get an industry volume versus rate separation on that. So it's really revenue share. So the metric I focus on is the health -- as an indicator of the health in this group and whether there's any kind of risk relative to that is how the overall revenue has grown in the top 100 airports. And as I said earlier, August is the most recent month, we have all the [investor] data in and it was up 4%.

Guys, I -- we just saw, I think, Delta just guided on what they saw in volumes. I think there is a natural 4% to 5% growth in this industry. What sometimes tempers that is corporate travel, as companies have pressure on their expenses and they -- one of the areas they quickly look to is don't get on a plane and go anywhere; do conference calls. And also -- but I think what we've seen over time is a consistent mid- to low single-digit growth. And Hertz just needs to get more of its fair share in that space.

Our next question is from the line of Anj Singh, Securities.

I appreciate the color you folks provided on the investment spend and the outlook for that into '18. I was wondering if you have a sense of how long you may need to be investing aggressively like this to get the parity or ideally ahead of your competitors from a capability and offering perspective? Asked another way, do you think your investments over the last few years and what you're calling out going forward, are they going to position you to get the parity? Or will there still be an element of playing catch-up?

I think, as we mentioned, still very significant capital and cash impact to [allow] 2018, probably somewhat significant at the very beginning of '19. But then I think we will start to see the upside of improved consumer demand and reach to our consumers of our product and services as well as a tapering off on the intent level of investment. And then I also think with better service and better reach, we should see the pipeline increase, and we should also see a reduction in our overall servicing and infrastructure costs. So somewhat -- and I would say moderate at the beginning -- pretty significantly moderate at the beginning of '19 and even more so towards the end of '19.

Okay, got it. That's helpful. And then wanted to follow up on your alternate disposition channels. It's an impressive number of fleet being disposed through that -- through those channels. Is the goal to get this percentage even higher? Is this percentage of fleet disposals through those channels is something you believe you can sustain? Just trying to get a sense of what you're targeting internally and how to think about sort of the steady-state version of your disposals through alternative channels.

Well, I think you will have to always sell some cars at auction just due to damage or the issues with the cars from a salvage perspective. But for the most part, we want to continue to move more to Dealer Direct as an option and more out of Dealer Direct into our retail lots. So as we get better on that and we are -- we're doing better on the technology. We're making some improvements on the website and the ability to take out loans and do the financing for the consumer, but there's a lot of goodness in our retail car sales business. So again, it's the 10th largest business out there. So there's a lot of value there that I think people aren't necessarily identifying in this -- in our business.

Yes. As we look forward, for example, to that point, we're identifying, for example, the retail businesses, this intrinsic value that, within the company, how do we give it more life and continue to invest in it? And as we grow that channel, so we've grown it 10,000 units likely this year in sales, how do you grow -- and not only through brick-and-mortar, but how do you grow it online? So we'll be investing into the tools and the system in order to move some of that sales activity from the traditional brick-and-mortar onto an online platform and then allow customers to have that choice that probably want to interact and buy products with Hertz, whether it be online or in person. So I think there's an enormous underlying value there that not only contributes today to our fleet depreciation cost and managing that, but just from evaluation of the business that's really untapped and that has not yet really been fully leveraged and revealed to the marketplace.

Our next question comes from the line of Hamzah Mazari, Macquarie.

This is Mario filling in for Hamzah. Could you give us a sense of -- or update us on how you think about secular risks for the rental car business and how you get comfortable with them?

The -- I think it's just what we talked about. Being really smart at the cars you buy, not -- and then being really good at selling the cars. So I think the biggest secular risk is probably residual values. And we have seen just an all-time low, I think, in residual values, which clearly has impacted our margins and everybody's in this industry. So we -- it is a cyclical industry, and you can never get comfortable that a good trend is going to stay. So constantly managing our channels and smart buys is, I think, the most significant secular challenge we have to deal with. Then if you have some big shots in the system, like we did with 9/11 in travel, that's, obviously, an impact. Hurricanes, we win and lose in hurricanes and then given we have State Farm, which is a fantastic partner of ours, we do have a place in the replacement business. However, those are really the things that we have to think about and manage for.

And further, I think to expand on that, there's a lot of concern, and we, obviously, monitor it from a metric standpoint and kind of the noise in the marketplace about the rental part of the industry and its health. And we talked a lot about it today. I think if you go back and recap the opening remarks, I think that the core tenets of what a car rental company has is the fleet financing, fleet management, the logistics, the fleet remarketing assets and the distribution and the network in order to manage large fleets. And there are lots of -- as mobility evolves, there is a need for that service and that activity, which I think we're uniquely positioned to provide in the marketplace. So all this concern about the health of the rental car industry, clearly, in the near term -- there's clearly been some impact on the used cases, for example, for those of you who live in New York, obviously take Uber a lot. But I would say that the fact is, as Kathy said, it's 1% to 10% of use case and there's new uses and new growth markets that we're building on. Our partners, for example, in the ride-sharing business is to build the business in other areas.

And autonomous, the OEMs, Uber, Apple, Google, nobody manages large fleets other than the rental car companies, not dealers, nobody. And if you look at what Hertz and the rental car companies have, we are getting better every day at managing large fleets of cars. And we have the distribution network, we have the people. There's a great article, Robots Can't Clean Up Vomit, and that's the truth. And if you look at the fact that we are the only car rental company that has a large corporate fleet company, that has been managing large corporate fleets for well over 15 years, we are uniquely positioned, both in the ride-hailing as well as in the autonomous world.

Okay, perfect. And one more and then I'll turn it over. The international business has been competitive for some time. Has that gotten worse in terms of pricing recently? Or what do you think going forward?

I think there has been pricing pressure. You have a much larger percentage of very small price play rental car companies in this space. We have franchised in the smaller markets that business, so we don't have the overhead and some of the capital investment issues that you might have in that kind of a space. So we continue to again take leverage some of the great revenue management tools and what we're doing over here and transfer them into Europe as we get smarter. So we try to leverage each other around how do we get price and then we try to manage the ups and downs with franchising in fairly small markets. So we just signed a pretty significant deal over -- for the Nordic countries as well to that end. So we're trying to mitigate that with how we approach Europe strategically.

And then we have great partnerships as well, not only the franchise partners, like the Nordic franchise and in Ireland, Portugal, but as you know, with our Localiza announcement in August and the close of that transaction, a great partner, #1 market leader in Brazil. China Auto Rental in China, great partner. Really untapped opportunities for us to work with these 2 groups. In certain countries in the world, it's better to partner with a local operator who's the market leader, than try to be corporate and run it yourselves. So in our opinion, those are another 2 great examples of how we are very well positioned in very large growth markets, which are going to be very positive inbound, the U.S. opportunities for us to leverage.

We spent time down in Brazil when we launched and celebrated the Localiza relationship. It is a huge market and has huge inbound traffic for us. And they are just a great, smart partner. We think we will learn some things from them and vice versa, and we're really excited about that relationship.

Our next question is from Michael Millman, Millman Research.

I wanted to follow up a little bit on Dollar and Thrifty, and -- I guess would -- considering where they are now, would you consider -- or are you considering selling one or both of them? And what do you think the market value might be? And if you don't do this, what do you think the cost and time is going to be to return these to acceptable profit?

It's about shelf space. So if you look at the distribution channels and how people rent cars, we do believe we have undermanaged and underutilized those brands. We do believe having shelf space in both of those brands is critical. We think there's enormous value and upside to maximize how we make sure we take advantage of that shelf space, and we have a great leader out of P&G who clearly knows how to manage shelf space and get the most out of it. And we're very excited about the prospect.

And how long do you think it's going to take before you get them to acceptable values, acceptable returns?

Actually, it's not all bad news. We've been probably more impacted by the ancillary issues for those products than we have necessarily around getting our fair share. But we actually have already seen from breaking those brands out and starting to focus on them this year, some improvement, and we think we'll get a lot more good news out of them next year. And I actually am very optimistic that we will see them return to growth by the end of next year.

Okay. And to follow something you also said about your partners. Can you talk a little bit about what percentage of your sales, rentals come from those partners?

Yes, Mike. I mean, it's [safe] -- every partner has a different percentage, so we don't -- for sensitive reasons, we don't really break that out. But all of those partners that Kathy cited have been very important and critical to the company, very good partners. And we have other partners we didn't call out, too. The other airlines, such as American, Air France that we're -- we're making primary, secondary with this. So all the partners are very important. And if you contribute to the business, I think in the past, the company has not necessarily optimized the relationship. With Kathy and Jodi coming onboard, I think we're really excited about how we really kind of activate some of these partners more directly and drive more business from the partnership. So it's an opportunity as we see it.

We have a great corporate sales team and corporate sales leader who've done a great job at signing those contracts, building those relationships. We need to make a greater investment. I think we've been good partners, but I think we can be even better partners.

Our next question is from the line of Adam Jonas, Morgan Stanley.

Two brief questions as I get off the call. First, how much of your business is subject to long-term contracts in the U.S.?

That would be, primarily, the commercial business, Adam. And those -- when you say, long term, there are -- some commercials are 1-, 2-, 3-year contracts, commercial depending on fees, can be anywhere from 30% to 40% of the business.

I guess overall, I mean including even business outside of commercial, such as long-term contracts. Is there a global number that you'd define as greater than a year?

Yes, I think it's probably in the 40% range, probably roughly.

Okay. And then just my second question is on kind of your car vehicle age. You've made some efforts to, say, control the fleet growth. Our understanding is that, that's been mainly because you're buying less, but you might also be selling a little bit less or maybe more from buying less, rather than selling more, if you know what I mean. I guess the question is kind of looking at your size of fleet and to keep an age around 15 to 18 months or 25 -- to keep the mileage at a good level, not too crazy, you may have to sell -- a business of your size might sell 25,000 or 30,000 units per month in the U.S. Are you doing that? And maybe kind of -- is that kind of right, that maybe you're hanging on to some fleet or maybe seeing your average age going up? I'm just kind of curious.

We're not going to age the fleet. We know that, that's a stupid move. Some cars, we are keeping older model cars out for the ride-hailing business, but actually, I think we're running around 10 months, 11 months for our overall fleet, and we will not go to lengthening to keep. In some cases, if we see enormous demand that we have to meet for unique reasons, like Hurricane Harvey, we'll keep cars a little bit longer and move 14,000 cars down to Texas, in order to get all the demand met. People who have no car are probably okay with a little older car for the short term. So we do have -- what helps us a little bit again on managing the curve of these assets is the business that we have with State Farm. The industry average for those vehicles, so one of the competitors who dominates in the replacement business has really set what the age limits are and they tend to be in the 30,000, 40,000-mile range.

Yes. Just to put -- get a [notice] back. Our fleets roughly average between 320,000, 330,000 units in the U.S. for half a year and that's pretty consistent year in, year out. So the way we managed a little bit of the fleet this year was just take less adds, but the average fleet age is still pretty -- is pretty constant and as Kathy said, we -- as well as we aged the 2017s a little bit, that was only because we actually were selling cars a lot more junior to get the fleet down in the first half of the year, so we have the opportunity plus some of the demand in the insurance replacement, and more importantly, the ride-hailing business is growing so much that it allows us to have a little bit longer hold period. But with the riding-hailing business, it gives us that flexibility to move cars into ride-hailing and continue to refresh the airport business and keep a nice fresh fleet there, a competitive fleet at the airport.

Our last question is from the line of Dan Levy, Barclays.

I wanted to just start out with one on the quarter. In the past, you provided a year-over-year bridge on the per unit fleet cost. Could you provide something -- I didn't see that in the deck. Could you provide something similar for 3Q? Just the broad strokes of the year-over-year. I know it was roughly flat, but what was the...

Yes, Dan, that's why we originally didn't provide it because there wasn't such the growth that we saw with the 15% and 20% increase in cost that we thought it was important to illustrate and provide that transparency on what was driving growth. With only 1% growth, we didn't think it was really important on a year-over-year basis, but the big buckets would be the headwind is the year-over-year decline in digital, that's the headwind. We'll have cap cost reductions on Model Year '17, which is a tailwind and it was now representing 60% of our car days in the third quarter versus 48% in the second quarter, that was a benefit. Our retail distribution and Dealer Direct distribution channels going up 10 basis -- 10 percentage points roughly year-over-year; that's a tailwind, a benefit on a year-over-year basis. The slight aging of the 2017s is only a $9 million impact for the whole second half of the year. So it's a pretty de minimis overall impact; wouldn't even look at that. But those are the big buckets. I think it's the penetration of the retail and wholesale. It's a good guy. It's -- Model Year '17 is a good guy. The bad guys is residual and some investment and fleet mix, obviously, as we've talked about, which has been pretty consistent year-over-year.

Richer mix, better price for a richer mix.

Okay. Got it. And then just a longer-term type follow-up. Kathy and Tom, you are now almost a year into, let's call it, a new regime. So I'm guessing there's should be some incremental perspective on this. And if we look at pricing over the last, say, 3 years to 4 years, there's been roughly a 10-point decline. That's corresponding to what's your margin compression. I know you're not in position to provide guidance today, and I think folks are wondering when they can get deeper guidance. But beyond that, based on the trajectory of your plans, how much of this 10 points do you think can be recovered? What's the low-hanging fruit? What's the longer-term piece? And how much of this do you think is contingent on industry conditions?

We stay pretty focused on how to be smart on the demand that we go out against us -- if you look at the Hertz brand, it is a brand that stands for excellence, premium. Really our employees are incredibly proud of the brand and our people are our brands and they do a great job around making sure that, that excellence and the service is out there. So I think it's more around smart segmentation of who our customers are, what their demand is, matching, buying and selling cars as smart as you can sell them, managing them in between. And then from a marketing, price and distribution, really maximizing what we get for those cars. So I try not to focus on what the overall industry is doing and more around how do I max the value we deliver with our costs. How do I drive the best service, which is generally the most efficient and accurate service by great people. And then how does that bring a greater NPS and more customers to me, which is the smartest way for me to get price. So I think as we continue to leverage our great brands, Dollar, Thrifty and Hertz, segment better, go to market better, leverage our great partnerships better, deliver better service, the payoff will come. In all my years of running businesses, it's always the best approach.

And at this time, there are no other questions in queue.

Well, thank you. It's been a -- you've had a lot of patience hanging on the call for these questions, and thank you for your time and attention today. Have a great day.

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