Hertz Global Holdings Inc (HTZ) 2017 Q4 法說會逐字稿

And ladies and gentlemen, welcome to the Hertz Global Holdings Year-End 2017 Earnings Call. (Operator Instructions) I would like to remind you, today's call is being recorded by the company. And 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 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 2017 Form 10-K. Copies of this filing 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., 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 Chief Financial Officer.

Now I'll turn the call over to Kathy.

Thank you, Leslie, and good morning, everyone. Our top priority in 2017 was seeding an operational turnaround that would drive sustainable profitable revenue growth. Last year, we made great strides towards our goal of capturing more profitable demands and satisfying customer fleet preference, enhancing service quality, developing brand strategies to secure new and more frequent renters with differentiated value propositions and ensuring a significant competitive advantage through assistance innovation, speed and data flexibility. Our progress was evident beginning in the second half of 2017 with higher year-over-year U.S. rental pricing, utilization rates, revenue per unit and customer service scores as well as lower monthly depreciation per unit.

Our momentum is broad-based across the Hertz organization starting with our fleet. Procurement has created a favorable mix of SUVs and premium vehicles that reflect customer demand and a tight upsell. They successfully met their negotiating objectives on Model Year 2018 cars to offset industry residual value declines, and they've seamlessly managed a growing fleet of [second-light] vehicles to support the rapid expansion of a new customer opportunity for transportation network companies and their ride-hailing drivers.

Fleet operations is using new analytic tools to better forecast demand and coordinate fleet by location to improve utilization. These new tools and enhanced data will also help us with more precise capacity collection decisions and delivery timing. There was a lot of work done in 2017 to develop and fine-tune these systems, and we expect to progressively realize more of the utilization benefits in 2018. Fleet sales really showcased this expertise last year by successfully managing the largest fleet rotation in our company's history, while optimizing sales channels for the best residual values. We moved a record number of used cars to our 80 retail lots, the highest return remarketing channel where we average a net benefit of more than 1,000 per unit over auction.

In 2018, the car sales team is stepping up again, expanding our retail footprint, enhancing our B2B web platform, growing our presence in digital retailing and leveraging our partnership with Salesforce.com to better utilize CRM opportunities. Between our physical sites and enhanced online capabilities, we expect to shift our used car sales mix even further toward retail transactions in 2018. While the fleet team made significant strides last year, they worked hand-in-hand with our revenue management group to advance our pricing capabilities as we rationalize fleet capacity. A new dynamic contribution management system is helping sort, analyze and optimize rates. We've also introduced an additional proprietary pricing system that reacts more quickly to market rate variations. The early outcomes we're seeing are very encouraging.

On the operations side, our U.S. field teams continue their focus on promoting loyalty through service excellence. We exceeded our goal last year of 50 Ultimate Choice locations, which allow Hertz customers to choose their preferred vehicle on-site with no wait. Today, Ultimate Choice is available at 54 airports with plans to roll out additional sites in 2018. Our corporate share is stabilizing, corporate customers are telling us they like our Ultimate Choice option better, and they're beginning to reward us with more frequent visits. Along with Ultimate Choice last October, we launched our new site optimization initiative to consistently create the best rental experience for our customers. The goals of the program are to staff sites optimally, adhere to standard work processes, leverage best practices and establish a new management program focused on continuous improvement.

Through this program, we're measuring what matters, happy employees, happy customers, clean cars, the right cars in the right place at the right time. We're ensuring that our employees have the tools, training and opportunities they need to excel at Hertz. This is how we deliver service that exceeds our customers' expectations and builds loyalty for our brand. Our U.S. field representatives are absolutely committed to our mission and the success of our transformation. Their work is beginning to pay off. In 2017, we generated a significant improvement in U.S. customer satisfaction as measured by our Net Promoter Score. And in 2018, we've raised the bar on NPS objective.

Our sales force is finding that corporate customers appreciate the efforts we've made on their behalf. We are renting to more customers as we retain those most loyal to our brand, regain lost renters and convert the casual renter into a committed customer. We spent a lot of time last year getting to know all of our customers more deeply, their attitudes, their preference, their behaviors, in order to create more personalized experiences and customized promotions for them. We asked ourselves what we need to offer to make sure that valued customers choose Hertz again and again.

We've recently hired Jodi Allen as our new Chief Marketing Officer to lead this effort. And while it's early days, I can tell you that Jodi and her team are off to a great start. In 2018, it's the 100th anniversary of Hertz. We have exciting plans to celebrate our iconic brand. In the coming months, we'll be initiating marketing campaigns that encourage more customers to enjoy our upgraded fleet choices, new value-added services and a more flexible rewards program. Through upcoming digital enhancements and a new mobile-first strategy, we'll be offering more options to engage with Hertz, Dollar and Thrifty. As we do, we're optimistic this will contribute to the momentum of our business.

Now let me spend just a minute talking about value-added services, which we used to refer to as ancillary sales. We've changed the name to reflect our view that if we offer customers discretionary products and services with recognized value, we'll drive more volume while securing customer loyalty. Ancillary sales were drag on revenue last year, which masked our second half improvement in U.S.-based rental pricing. When we analyzed the situation, we found that certain products weren't as compelling to our customers on a need or value perspective as they could be. So we've redesigned existing products and are introducing new products that represent real value to our customers. Now, we're retraining staff on service-based selling techniques that showcase the value of our discretionary products and services and how they can meet individual customers' needs. And at Hertz locations, we're providing coaching on how to identify upsell opportunities as our Ultimate Choice expansion leads to more counter bypass. For this, we demonstrate Donlen's best practices where counter bypass has long been prevalent.

Finally, we're improving our digital capabilities, which will allow us to merchandise better through our website at the point of reservation, as we confirm the reservation and, again, as we acknowledge the reservation on the day of pickup. As our technology initiative expands, marketing opportunities will multiply. Our future depends on getting the fundamentals right and that means modernizing not just the digital effectiveness but how we interact with our customers and go-to-market. We're also transforming inventory management, reservation and rental capabilities and elevating the use of data so that we can work smarter and more efficiently.

Our IT group has spent the last 2 years designing and developing enhanced platforms that take complexity out of our systems and automate processes, while improving the rental experience for our customers and driving business results. In 2018, we'll be testing, training staff and deploying 3 of our key systems, the reservations, digital and enhanced customer management platforms. I would caution you here that until all the systems are up and running, the significant human resources and expense that is required in this effort will continue to weigh on earnings. Tom will provide more detail on the investment plan. But as we look beyond 2018, this technology transformation will be foundational for Hertz and will provide a distinct advantage to capitalizing on future growth opportunities.

While we've got much more to accomplish on this journey, and, admittedly, 2018 will require more heavy lifting, Hertz's management team is experienced and aligned around a set of key enterprise priorities, allowing us to focus and drive accountability. We had amazing talent when I got here last year, and we supplemented that talent with a lot of great new leaders, including in our HR and marketing areas. And this morning, we announced the appointment of Paul Stone as our new Chief Retail Operations Officer for North America. Paul is a retail veteran, having run Walmart and Sam's Club operations for 28 years, leading more than 30,000 sales employees there. We're lucky to be able to leverage Paul's experience and expertise at this critical moment in Hertz and the industry's evolution. There's more potential in the marketplace and in our plan, and we're leveraging our considerable size and scale to our market. And while our tactics will always be evolving, the second half of 2018's (sic) [2017's] progressive improvement demonstrates that we're focused on the right work.

So far, I'm pleased with our progress, but we all understand that there's still a lot of work ahead of us in 2018. However, once we get into 2019, we should be moving much more quickly towards industry competitive margins. Now Tom will walk through more details about our financial performance in the fourth quarter and how we're thinking about 2018.

Thank you, Kathy, and good morning, everyone. Our financial performance in the second half of 2017 improved significantly from what we reported in the first half of the year. The favorable growth trends in the U.S. RAC total revenues, unit revenues, time and mileage pricing, vehicle utilization and vehicle depreciation provide us with a positive momentum heading into 2018. Some of the factors that contributed to this intrayear improvement are as follows. The first half reflected the inefficiencies associated with reducing U.S. fleet capacity, resulting in lower pricing utilization. The substantial number of vehicles we sold in the first half of 2017's residual value weakness along with investments to upgrade car-class mix also contributed to the significantly higher fleet cost in the first half of 2017 relative to second half of the year. However, in the second half of the year, with a tighter fleet, improved vehicle selection, more locations offered in our Ultimate Choice service offering, we began executing our strategy to align our fleet capacity to the most profitable segments of demand. These improvements were supported by more intuitive price and demand forecasting tools, all of which drove higher revenue -- higher -- revenue higher and fleet cost lower.

From a financial perspective, a few key metrics really illustrate the relative difference in the first and second 6 months of 2017. We have included a slide in our posted materials comparing the significant improvement in operating performance in the second half of the year as compared to the first half. But to summarize, we produced consolidated unit revenue growth, higher U.S. RAC vehicle utilization, lower U.S. RAC vehicle depreciation costs relative to the first half of 2017, significantly improved U.S. RAC [foretime] mileage rate, which is not a reflection of our performance, but I believe an indicator of the overall industry health, all resulting in a significant improvement in the trend in adjusted corporate EBITDA earnings.

As Kathy mentioned, the sequential progress we are seeing in our results informs us that we are focused on the right levers and continue to generate improving operating performance in 2018.

Now let me walk through the fourth quarter results, our balance sheet liquidity position and then provide some insight on how we're thinking about 2018.

First, turning to U.S. railcar segment. With an overarching goal of delivering profitable sustainable growth, the key measure we use to monitor our progress is absolute and per unit revenue performance. U.S. RAC total revenues increased 1% versus the prior year quarter and also improved sequentially from the third quarter of 2017. Further, revenue per unit or RPU improved 2% versus the prior year and is the result of the 3% increase in transaction days and improved vehicle utilization. Fourth quarter 2017 RPU also increased sequentially from the third quarter, we posted a 1% improvement in the third quarter over the prior year quarter. Total RPD decreased 1% in the quarter, but increased 3% when you exclude ancillary revenues and the impact of growth in ride-hailing rentals. The core pricing improvement reflects strong leisure pricing and tight fleeting. Ancillary revenue, or as we're rebranding it, value-added service revenue was a headwind of approximately 300 basis points in our total RPD performance as compared to the prior year quarter.

Kathy has already discussed some of the opportunities to drive value-added sales, and in January, we're already seeing some of the initial signs of success in our initiatives. Total transaction days in the U.S. increased 3% in the quarter as a result of growth in our ride-hailing and off airport businesses.

Moving on to fleet. In the fourth quarter, overall fleet profile, capacity management, ownership costs and utilization showed a marked improvement versus prior year. Total U.S. RAC average number of vehicles declined 1% versus the prior year despite a nearly 17,000 unit increase in our dedicated fleet for ride-hailing drivers versus the prior year quarter. At year-end, we had approximately 22,000 ride-hailing vehicles, reflecting a higher mileage, low-ownership cost fleet, specifically for use by these customers.

Our core rental fleet, which excludes the dedicated ride-hailing vehicles, declined 4% in the fourth quarter compared to the year ago. Total vehicle utilization of 81% was a 250 basis point improvement versus prior year as we continue to maintain discipline in our overall fleet levels and are improving aligning fleet with demand at a location level with the analytical tools Kathy described. Average monthly vehicle depreciation expense of $300 per unit reflected a 6% decline versus prior year and was largely in line with the third quarter result of $306 per unit. The second half of 2017 vehicle depreciation benefited from stabilized residual values heading into August and then some incremental demand for replacement used vehicles after late August and September hurricane destruction. The lower depreciation is also in part due to higher composition of Model Year 2017 and 2018 vehicles in the total fleet, which have lower like-for-like purchase prices compared with Model Year 2016 vehicles. At December 31, Model Year 2017 and 2018 vehicles comprise 72% of our fleet.

Finally, our higher-yielding alternative remarketing channels represented 73% of vehicle sales in the fourth quarter versus 71% in the fourth quarter last year. Our fleet mix continues to improve, reflecting customers' preferences to large and premium vehicles. With the onboarding of Model Year 2018 fleet, our shift to better reflect the car-class balance we're trying to achieve is essentially now complete. In addition to investments in our fleet last year, we made significant but necessary investments in operations, IT, sales and marketing. We have previously indicated that the turnaround investments impacting EBITDA in 2017 would be approximately $280 million for the full year and spread equally in each quarter. We ended the year slightly below that level at approximately $260 million.

U.S. RAC direct vehicle and operating expenses, or DOE, were elevated in the fourth quarter as a result of the increased investments in IT and in staffing to improve the service quality and capabilities in our operations. Fourth quarter DOE was 62.7% of U.S. RAC revenue, a 110 basis point increase versus prior year. SG&A expense was 7.1% of revenue, a 70 basis point increase versus last year. On a full year basis, U.S. RAC [fuel and ancillary] expense as a percent of full U.S. RAC revenue was 130 basis points higher in 2017 compared with 2016 as a result of our investments. We expect to spend approximately $300 million in investments that will impact adjusted corporate EBITDA in 2018, or roughly a $40 million increase versus 2017, predominantly in the IT and sales and marketing expense areas. As a result, consolidated DOE and SG&A expenses as a percent of revenue will remain elevated in 2018. Despite the elevated investments and a $14 million increase in vehicle interest expense in the fourth quarter, the higher revenues and reduced vehicle depreciation expenses resulted in a $2 million increase in U.S. RAC adjusted corporate EBITDA versus the prior year fourth quarter.

Now let me turn to the International RAC segment. International RAC total revenues increased 10% to $487 million over the prior year quarter. Excluding $29 million of favorable currency impact, international RAC revenues increased nearly 4%, with transaction days growth of 1% driven by continuation of strong leisure business throughout the year, particularly in our long haul segment, offset by the divestiture of our Brazil rental car leasing operations in August. Excluding the Brazil divestiture, international transaction days would have increased 6% in the quarter. International pricing increased 3% on a constant currency basis, primarily driven by sales of our lower RPD Brazil operation and improved leisure pricing in Australia and New Zealand going into their summer and holiday peak season. Excluding Brazil, RPD for the international segment increased 1%.

Net vehicle depreciation per unit increased 9% over the prior year quarter or 7%, excluding Brazil. The higher expenses were driven by decline in residual value, particularly diesel engine vehicles in Europe and incremental vehicle costs in Canada. International vehicle utilization improved 40 basis points in the fourth quarter to 73% as a result of continued improvement in fleet management. Overall, the International segment reported adjusted corporate EBITDA of $11 million, a decline of $12 million, largely driven by fleet-related costs including residual value impacts.

Now I'd like to provide an update on our financing activities, free cash flow and corporate liquidity. As mentioned in our last quarter's call on November 2, we extended the commitments on all of our global [base] funded vehicle facilities totaling approximately $5.3 billion through March of 2020. We also redeemed our 2019 notes, which pushes out any significant corporate debt maturities until October 2020, giving us liquidity runway to focus on investing in our core operating performance we started to experience in the second half of 2017. We ended the fourth quarter with nothing drawn on our corporate senior revolving credit facility, over $1.6 billion in corporate liquidity and our first lien covenant ratio of 1.9x, well inside the required 3.0x. In January, we executed a $1 billion 5-year term ABS transaction in U.S. RAC. This issuance covered the $929 million in term ABS maturities we have this year and further extended our vehicle debt maturity profile. We are now focused on refinancing our 4.375% euro Fleet Notes and Donlen term ABS notes.

Turning to cash flow. Free cash flow for the 12 months ended December 31, with the use of cash, was $336 million. This largely reflected our operating performance as measured by cash from operations, excluding vehicle-related depreciation, which was a negative $328 million. Additionally, our level of operating expense and capital investment in the business during 2017 was elevated. Partially offsetting the elevated cash investments were improvements in the use of cash deployed in our RAC fleet growth of $144 million. We continue to believe our liquidity profile and covenant package provide us with the financial flexibility to continue to improve our product offerings, enhance our service levels, update our technologies and revitalize our brand marketing, all of which are essential to improving our operating cash flow performance.

Now let me share with you how we're thinking about 2018. Consistent with prior year, we will not be providing financial guidance while we undertake the significant technology work for the U.S. operations and manage the other investment priorities. However, we expect the favorable momentum achieved in the second half of the year from U.S. revenue growth, improved utilization rate and lower depreciation to continue into 2018. Specifically, we expect continued improvement in total unit -- in unit U.S. RAC revenue performance, disciplined U.S. RAC fleet capacity driving an improvement in full year vehicle utilization, decreased U.S. RAC full year unit vehicle depreciation costs, [despite less than] 2% decline in residual values in calendar 2018 as a result of favorable pricing in our Model 2018 and 2017 vehicles and continued leverage of our higher yielding alternative disposition channels, increased cash interest expense primarily a result of driving interest rates on our U.S. RAC vehicle interest expense. We anticipate the combination of increased floating rate and additional issuance of term ABS paper will increase the average cost of U.S. RAC vehicle by about 50 basis points over 2017. This translates into an approximate $35 million to $40 million increase due to rate increases. Excluding FX, international RAC vehicle [interest] expense will increase modestly due to a small increase in spread level and by the rate achieved on refinancing our 4.375% Euro vehicle notes I mentioned earlier. On Donlen floating rate, it is essentially hedged. We can pass straight increases through our fleet leases. The volume impact on interest expense will depend on the relative size of our fleet year-over-year. Relatively unchanged corporate debt interest expense at 85% of our corporate debt is fixed, and we expect lower drawn senior revolving credit facility balances in 2018. We expect elevated EBITDA impacting investments, I mentioned earlier, spending an additional $40 million versus 2017. Continued stable performance in our international RAC and Donlen leasing businesses and improved consolidated adjusted corporate EBITDA in 2018 relative to 2017 despite higher EBITDA impacting investments, I discussed earlier, and the increased vehicle interest expense.

We expect a significant improvement in free cash flow relative to 2017. However, given the continued elevated investment spending, we may still be cash flow negative in 2018 depending on the trajectory of our operating performance improvement.

Finally, looking ahead, I want to address the impact of the new revenue recognition standard on our operating performance, the new tax legislation on our cash tax and effective tax rate. We adopted the new revenue recognition standard on January 1, 2018. Mostly this impacts our accounting for loyalty points in that it requires to defer revenue based on the retail value of the free rental until the points are redeemed, whereas we historically recognized an expense for these points at the time they were earned, based on the clause to provide a free rental. We estimate that the accounting change will negatively impact total RPD by approximately 20 to 30 basis points in 2018, after the application of a [breakage factor.]

As it relates to U.S. tax reform, we reported an estimated net benefit of $679 million in the fourth quarter, resulting from the remeasured valuation of our net deferred tax liability. We do not anticipate a liability from a one-time charge on accumulated foreign earnings as the company's 4 subsidiaries have an accumulated net deficit. These estimates are recorded in our SEC Guide SAB118 and will be finalized later in 2018. Due to lower corporate tax rate in the U.S., the company's effective tax rate is estimated to be between 23% and 26% each year. While the new tax law will eliminate the Like-Kind Exchange for personal property effective January 1, 2018, they allow for the 100% expenses on vehicle purchases through 2022. From 2023 to 2026, owners' depreciation steps down 20% per year. Due to our existing NOLs of approximately $4 billion combined with our deduction available on our 100% depreciation, we do not expect to incur significant cash taxes in at least the next 3 to 5 years.

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

(Operator Instructions) And your first question today comes from the line of Chris Woronka with Deutsche Bank.

I wanted to ask on the fleet that's dedicated to ride hailing. Two things on that. One is, do you expect more growth -- a lot more growth there in '18? And also are you buying used cars for that? Or is that just kind of trickling down from the cars that otherwise would have been sold from your core fleet?

What -- great question. Two great questions in that, I guess. We do anticipate further growth in that space. We spent 2017 understanding how to approach this business profitably, which we have -- we have a process behind that, that deals with, basically, how do we maximize the value of the assets, meaning pull out cars that are in pretty decent shape with 40,000 miles or more, put them into this fleet, run them to about 70,000, maximize the value you get out of that asset at a point where depreciation curve is going to be much more attractive on the return to that asset. And then when we sell that asset, we're getting premium dollar. Dealers love and our retail sales guys love 70,000-mile cars. I mean, it's a sweet spot in used car sales. So we achieved a win on extending the value of that asset that we bought from a depreciation expense perspective. We're somewhat backfilling some relative loss over the years to ride-hailing with this revenue that we're getting from these renters. We're doing it profitably, and it's a growing segment. So we really like the segment overall.

Okay, great. Just a follow-up on that. Some of the incremental investments you're making, appreciate the quantification of it. And the question is kind of, as we look out to '19, I won't ask for a number, but directionally, it sounds as if the spending will -- the incremental spending will drift off and is that -- can we add up the incremental spending of '17 and '18 and assume that '19 is directionally that much lower? Or is there something else to think about?

In 2019, we have a couple of last legs of the technology conversions. The bulk of the heavy lifting is in 2018, and as a result of that, we do have increased investment spending associated with it. But I would say 2 things that we think about for 2019, from a marketing perspective and from a service perspective, being betwixt and between an old system and a new system really does hamstring us on many fronts, on servicing our customers, on our marketing efforts, et cetera. So there is somewhat of a double whammy in 2018 on our ability to grow the top line as well as even moving around cars to some extent. So as we have 3 of our major systems converted over and our mobile apps converted over in 2018, in 2019, I would think from an -- we're planning on getting productivity phase, but even more importantly, incremental revenue growth because now we're working on a new system that is much easier to use for our employees, much easier to [market growth,] takes advantage of mobile first and really puts us in a whole new position. Now so the way we think about it, and I guess everyone should think about it, is not just the headwind that we get on the investment expanding and expense, but management resources, people resources as well as all the tools you need to market and drive growth in the business is somewhat impinged by all of these conversions this year. I will say though, I've been pretty deeply involved both with the senior leaders at the major vendors we're working with as well as the team, my managed major conversions in my past life, and we really have a solid buttoned-down process and basically approach, and we have the full attention of the CEOs of these companies in getting this done successfully. So I'm cautiously optimistic that we'll have successful implementations, and I'm very optimistic that once we have some tailwind behind us on the tools that we use to grow our business and service our business, we're going to be in a whole different place in 2019.

Yes, and just to add to Kathy's point. Financially, obviously, the investment always precedes the benefit. So obviously, we're in the period of time, at least we were in '17, where we were largely invested and not a lot of benefit seen. As we got to the second half of the year, we saw our trajectory of our performance curve improve, and that's a function of some of the investments we're making are certain to have an impact and that will continue. Now we're going to have an elevated level of investments in '18 and as we've said, DOE and SG&A will be relatively elevated, probably pretty consistent with 2017, but nonetheless, we're going to start to see the benefits and those will accelerate in 2019.

Yes, and what I would add is, look, you have to deal with what you're handed. And what I love about the team and the people here is when we realized there's a lot of systems things we're not going to have to make our jobs easier, people focused on, well, what are all the things we can improve and drive more productivity on the use of our fleet? Drive more pricing, drive better service? What are the things that we control that we can work on now, get ahead of the game so that when these tools come into place, we have a much more accelerated advancement of the abilities now that we're creating going forward. And so everybody, I think, is in the right place where this is hard work we're doing. We're going to get it done. We're going to get it done right, but in the meantime, we are not standing still.

And we do have a question from the line of Hamzah Mazari with Macquarie.

This is actually Mario Cortellacci filling in for Hamzah. Maybe you guys can dig a little into the ancillary pricing, I know pricing is down 1%, but actually ancillary and ridesharing is up 3%. I just wanted to see, I guess, what was the drag on pricing and how ride-hailing fits into that -- that formula?

So generally, as you saw, our total RPD reported is down 1%. We estimate that, excluding ride-hailing and ancillary, it'd been up 3% (inaudible) mileage, excluding ride-hailing. Ride-hailing has had between 3/4 and 1 point, roughly, impact on RPD year-over-year based on the growth. So ride hailing, you could say, is about 1 point and ancillary is about 3 points of the 4-point delta between the plus 5 to minus 1.

Got you, okay. And I guess just a quick follow-up. Could you also frame for us your market share in business travel and whether you're seeing any movement in corporate travel due to tax reform?

Yes. From a corporate standpoint is, I think Kathy has mentioned and we've said, we've seen growth in our corporate business in the fourth quarter. I think the investments we're making on the fleet, the Ultimate Choice product and the service in the field is starting to win back some of the share of wallet and some of the shared accounts we have had. The corporate feedback has been very positive, the free upgrades, we're competitive now with the other 2 major corporate offerings in the marketplace. We still have a lot of work to do there, but we view we're on the right trajectory on corporate. As it relates to tax reform and its impact, I think our view is, generally, how does that affect the economy and the economy affect employment and employment affects business and leisure travel. So we believe that obviously that's been generally well received by corporations. It's obviously going to be, I think -- we think, a tailwind for corporate performance and as a result, will likely lead to greater corporate travel and therefore greater corporate rental opportunities for the industry.

And we do have a question from the line of Michael Millman from Millman research.

Regarding your technology spending, is the $300 million you're talking about for this year all incremental? And so maybe you can talk about what your ongoing technology spending is likely to be? Secondly, can you talk about or give us some estimate of where you think your fleet comparison year-over-year will be by midyear? And can you talk about what you're seeing in pricing currently and going forward this year?

Michael, as it relates to technology and the overall brand -- or let me just reiterate and maybe Leslie and I will post a slide in addition to this -- what we already posted to give it perfect clarity. We expect to spend $300 million in EBITDA impacting OpEx and SG&A investments, that's a $40 million increase. So the increase year-over-year is $40 million. Technology itself is around a $60 million increase year-over-year of that. So there's some things that tail off, but net-net, overall, the company will be up around $40 million in investment spending. And technology, as Kathy indicated, this is a big year for technology. So it is up on an absolute basis year-over-year as an increase. Our overall technology spending in OpEx and SG&A from a GAAP perspective is around $400 million, and that has been pretty consistent since I've been here since 2013. We do expect that to come down from an OpEx standpoint fairly materially when you get to beyond 2019 from a run rate standpoint -- from an operating standpoint, but we do have an elevated level of investment right now that is actually keeping it up. So we've actually -- actually, because of some of the actions we took to outsource our legacy systems, such as to IBM, we actually have run rate savings of around $70 million, $80 million on a base core running of the historical legacy system, but nonetheless, because we have elevated OpEx on IT, our $400 million was fairly consistent over the last 4 years, but that is going to come down after we get past this technology period. As it relates to fleet capacity, I think, as I said in my remarks, we're going to be very disciplined in how we manage our fleet. I've always said and Kathy and I agree that it's easier to flex up to the demand than try to flex down if you overestimate your demand curve. And therefore, as we've said, we'll be cautious on how we fleet relative to our expected demand, and we'll be working to drive utilization particularly in the first half of the year. As you know, we do have somewhat of an easier comp in the first half but we actually have, candidly, better execution as demonstrated by our fourth quarter being up 250 basis points in the U.S. So you'll see us being cautious in the fleet and, candidly, trying to forecast our fleet a little bit below our demand and therefore flexing up if we see demand recovering even at a faster rate. As it relates to pricing, we're not giving any forward-look on pricing, but we are seeing the continuation of our experience in the fourth quarter continuing, where we're having strong T&M industry, I think, and company performance, which is, I think, a good indication of the health of the industry and the tightness the industry is operating with its fleets. Nonetheless, we have work to do on ancillary. And as Kathy mentioned and I mentioned in my remarks, we're starting to see some of the improvements already in January and we'll see that accelerating in the later part of the year as we move to the more digital platform -- be able to move ancillary to a digital place. And as we continue to work with our field [operating] to rebalance and recalibrate how we're promoting the value-added products as we now are rebranding them to our customers and retooling them to make them more contemporary to our customers.

And then I would add that part of this is dependent on the OEMs continuing to have discipline and how much production they create and how much excess production, if they run into that, gets dumped into the rental fleets. And we've seen continued discipline by the OEMs on how much they'll sell into the rental fleets and I think that will continue to keep fleets tighter than they were in 2017.

Just going back to technology, and I think you for all that. The numbers suggest that beyond 2019, technology spending will be $100 million. Or have I gotten that incorrect?

No, we haven't provided what the run rate of our technology spending has been, at some point in the future, we will. But what I've said is, historically, we've been running about $400 million. We actually have saved, in our legacy [business], around $80 million a year, while our investments have kept the overall level spending at the same level around $400 million. We will see a step down as we get into 2019 and 2020 and beyond, but we haven't provided a specific number. It will be greater than $100 million, but it will be significantly below the $400 million level we've been running at.

(Operator Instructions) And we do have a question from the line of Justine Fisher from Goldman Sachs.

So I wanted to drill into D&A because I think it's interesting that cars D&A guidance for 2018 was better than people expected -- have expected in years. It was much better for the fourth quarter. And I'm wondering whether the alternative distribution channels and the better car buy can really help divorce your D&A performance from what people might expect from market residuals? And so given that you guys have a lot more control over some of the factors going into D&A, i.e. selling off the retail lots, et cetera, can you give us a little bit more color as to where D&A will trend? I mean, should we expect it to stay in the low $300 million for U.S. rental car this year?

Yes. So Justine, we haven't given specific guidance, but I think to your point, as Kathy mentioned in her opening remarks, she did indicate that our negotiation and working with our partners has resulted in what we believe to be a pricing level that will offset the 2% decline in residual we've assumed. Now, if the residual market is worse than that, we'd have some exposure and, as we've said previously, about every 1 point is about $60 million. But it's not usually material, but it, nonetheless, [factors into] sensitivity. But we believe that, based on both our negotiated pricing on model '18s and our alternative distribution channel, which is -- we're at 80 lots and we're going to continue to expand the growth in that area and including online on our retail. We believe between those 2 factors we're able to offset the residual exposure the company has.

We should have -- we should be very, and are very competitive in this area because of the depth and breadth of our retail car sales. I would also say because of our car buying capabilities as well. We use a lot of different channels to provide fleet. We look at, in some cases, very attractive low mileage, relatively new cars. We have a fair amount of dealer relationships to leverage. We have very good relationships with the OEMs where we work with them on how we can help them with ups and downs in production and how they can help us. So when it makes sense, we're trying to do -- supplement, particularly, our peak seasons with some attractive program car deals where, when we get into the valleys of utilization, that's the time they're returning them, but they're at a smart time for the OEMs in the used car sales markets as well, but we think, given a lot of the analytic capabilities we've developed and continue to develop on matching our demand, forecasting with much more insightful placement of these cars and the ability to move them around and fleet up, that we should continue to manage, at very competitive levels, depreciation cost. And our residual values, now, are something, unfortunately, we can somewhat project but we don't totally control. But I would say, to the positive, what really impacts that area is the discipline that the OEMs have on what they're going to sell into the rental fleets and they have as much to gain by not selling so many cars at inappropriate times as we do. So I think you have a much more rational OEM base and a much more rational fleeting by the rental car companies at this point, which should help us to keep residual values higher as versus a lot of ups and downs. But, as you all know, the auto industry is pretty cyclical.

Right. And my follow-up is on the 2020 bonds. I know it feels a little bit early to be asking about it, but I've actually gotten some questions from investors on this, about when you guys might think about refinancing those. And on the one hand, it would seem that if a lot of the business transition will be over by 2019 and Hertz composed better numbers, maybe you'd wait until then because you can refinance on the back of better numbers. But then investors are looking at where rates are supposed to go over the next couple of years, looking at how long this stronger economic cycle will last and saying maybe Hertz should address now. So Tom, could you talk to us a little bit about how you're thinking about those bonds, please?

Yes, so for everybody's sake, the 2020 bonds are due in October of 2020. It's a $700 million item. Right now, it would be a call premium about 101, it steps down to 100 in October of this year. I think what we're looking at -- we'll monitor the market and our own trajectory of performance, and we'll be opportunistic. So if the market is there and our company's performance supports hitting the market, then we'll consider taking those off sooner. So I think sooner than the October 2018 date is probably unlikely, given the call premium, but after October, or beginning October of this year, I think that's certainly an option we're actually monitoring pretty closely.

And we do have a question from the line of Adam Jonas with Morgan Stanley.

Just a couple questions. First, on the ride-hailing fleet. The 22,000 vehicles. Can you tell us what the RPD is on that?

Yes. I mean, when we -- I think we've disclosed is what the weekly rate is. The weekly rate is somewhere in the 210 to 215 range. And so the cars are 40,000 plus mileage vehicles, so the ownership costs significantly less. So it's a lower RPD number, but it's a long length of rent. Utilization is -- on these vehicles is fairly high in the mid-80s. So it is a nice interesting piece of business for us. It is a different type of business. It has different characteristics from a customer standpoint and damage and mileage and things like that. So we have quite a bit of experience, we're learning early in '17 to help us -- inform us to how we go forward with it in the latter half of '17 and into '18, so I think we've got a lot of insight into what works economically in this. So that's why we think it's an interesting component of the business, and again, as we've said previously, it allows us to take cars that we normally would have gone to remarketing channels [with] after use for daily rental and put them into this second life use.

Yes, okay. I want to ask about that as well. 22,000, though, I mean, that's a big number, that's 5% of your U.S. fleet. Is that something, without being too specific, can we see that up 50% this year? Can we see that 30%? Can we see that double? I'm just kind of -- we know it's going to be up, presumably, but just kind of -- can you give us a round number of what you're thinking about for 2018 that 22,000, where that could go?

We really -- Adam, we haven't really -- we have a planned expectation. We haven't talked about it publically, obviously. We expect growth in that, but it's going to be a function of the growth in demand, and we'll be able to supply it. So we're going to monitor the demand for that. And if the demand is there, we'll continue to grow it. So we have expectations it will grow, but it could be a very -- a wide range depending on the market demand.

And we have a question from the line of John Healy with Northcoast Research.

I wanted to ask a follow-up question on the ride-hailing side of the business. Can you give us some thoughts on where you think your market share may be when you look at the Ubers and the Lyfts of the world? Do you think you're kind of punching above your weight in terms of percentage or partnerships with those players right now? Or is it too early to tell?

I'm not quite sure. Let me see if I get the question right. Do we -- are you talking about our share versus what Uber and Lyft have or our share of rental car companies and other partners with Uber and Lyft?

I apologize, your share with Uber and Lyft, compared to your rival competitors in the traditional rental car business.

I guess I'm not really aware of any other -- there are a few other programs that are getting involved in testing this space. I will say, I think the rental car industry has an advantage where we have, obviously, chains of maintenance and damage providers in this area. We have the locations. We have the experience in managing the fleet. We have readily available, well-maintained 30,000 to 40,000-mile cars. We have a great retail network to very profitably sell those cars. So we have a very low depreciation-per-month cost on these cars and a very nice long length of keep and very high utilization. So from that extent, I think we're in a unique position to leverage capabilities we already have and make the most of it and maximize those assets for the company. So we really haven't seen anybody really successfully leverage their book of business and their assets in the same fashion. But I'm sure there'll be more entrants, and so we plan to keep very focused on getting our capabilities around this and continuing to leverage what we have to be the best in this space for these partners.

Great, that's helpful. And then one kind of big picture question. You guys probably closed this year close to $300 million in EBITDA. I think your comments about an industry return level, to me, that implies somewhere around $1 billion of EBITDA. So there's a gap, let's call it, of $700 million. And when I'm trying to put pencil to paper, you've got the $300 million of investment you've called out. So there's this $400 million kind of delta, and I'm trying to understand where that comes from for you guys? Is it -- over the next couple years, is it a situation where you simply just need to grow the revenues of the company to get back to kind of an industry level of EBITDA? But I'm just hoping you could provide us some perspective of where you think that gap between current state of the company, your investments and an industry level of return, where it truly comes from.

Okay, let me address that. So first of all, last year, if you think of it, the level of depreciation expense has never really -- we never seen a higher level of per unit per month depreciation expense to the tune of $50, $60 higher than where we're running today. At other times in this industry, we've seen depreciation rates down around $260, $270. All right, so right now, we're running just a little bit north of $300. So obviously, that's one of the levers, managing the level of depreciation. We also saw last year, probably, we've never seen lower pricing in this industry, as well, when depreciation rates were about as high as they ever could be. So I think to say that it's simple, the math on this one, is underestimating the complexity of delivering what the equation is and very simply, it's getting more price, more days and maximizing the utilization on our fleet. And when I joined the company, the tools, the processes around those things were not -- were being built and put into place, and the cost of cars was at an all-time high. And now, we're also double dipping on our IT expense and double dipping on what people have to do to manage through all of the development, management, training, et cetera and the distraction of massive technology conversion. Keep in mind, we are converting every single system that this company uses and that decision was made back in 2015 and '16. And now, we're working through and executing and maximizing the value we're going to get out of that. So it was basically a perfect storm around any kind of negative expense and negative pricing that could hit this industry. Or, uniquely to us, I would say, based on the technology issues we were facing into as was well as a loss of focus around the brand and marketing around those brands. So as we put in place a great marketing team, brand management, we do have the strongest iconic brand in this industry. I will stand firm on, 100 years of brand strength. We're bringing back in marketing and pricing tools that will make a difference. And I will say in the last couple of months, we're excited about the fact that we're getting, not just price, but we're also getting days and we're getting it not at the expense of utilization. And so we're not giving up price to get utilization, all right? And we're not giving up price to get days. And as we are much smarter on managing the fleet and the car buys and we see more rational residual values because there are not a ton of cars being dumped into the auction market and we have -- and then I'll finally say, and I don't think anybody has a better capability around now buying and selling cars and putting them where they belong. So those are all things just being put into place while we're definitely -- we have both hands tied behind our back from a technology perspective. So I think that's where we come back to, we will see higher RPU, and we will see better retention and growth around the days and our customers. And that's how I see us getting back to industry-competitive EBITDA. If you look at all the structural underpinnings of this company, there is no reason why we can't be competitive and everything we're doing right now puts us back on that track.

And we do have a question from the line of James Albertine from Consumer Edge Research.

I dialed in a little bit late. If you addressed it in the prepared remarks, I must have missed it, but I wanted to touch on fleet costs and residual outlook for your -- really primarily European businesses. It seemed a little bit higher versus trend in prior quarters, I wanted to touch on that and maybe get some broad sort of view on the outlook for 2018.

Yes. So Europe was -- particularly, Europe was up. International was up 9% in fleet cost, unit cost in the fourth quarter, 7%, excluding Brazil. Keep in mind, we sold the Brazil operation in the later part of last year. So when you want to get a comparable number, exclude Brazil. We did have somewhat of an impact related to diesel. Diesel made up about 60% of our fleet in Europe. It's going to be down to 30% next year so there is a fairly significant reduction in our diesels going into next year, so that's a good item. Again, Europe was a much higher level of program versus the U.S. So it's running in the 50% to 55% range of program cars versus risk cars with less residual value exposure, but we expect some increase in fleet costs next year. We haven't provided guidance, that you probably heard at the end of our remarks, on any of the metrics per se, but nonetheless, we do expect some increase in fleet costs, but we did say we expect international to continue to be stable from an earnings standpoint, so that would imply those other factors that we see in the business that would offset that.

And we do have a question from the line of Dan Levy from Barclays.

I wanted to ask, just first of all, I know you've given some broader guidance and I know no guidance for '17 or '18, given these are transitional years, but at what point can we expect communication of, I guess, more firm near and midterm financial targets? Is this an Investor Day that's out in the future, wait a year? Or is that just it will not occur?

Yes. So Dan, I think, given, as you said, it is a transitional year, there's quite a bit of heightened investment. We're trying to be as colorful as we can in our remarks to give investors and all of you some guideposts from which -- how we think about the business and the trajectory of the business. I think as Kathy said before, as we get in more into the business and now we're getting, I think, we get to a point where more consistency of our performance that would provide us greater confidence, providing the guide or a specific guide, that we'd get into that. I think we'll continue to revisit the trajectory of that and the predictability. And we believe that we made a lot of progress in the second half of last year on the predictability of our business model internally, based on our internal projections and how we ended the year and our revenue trajectory and how we ended the year, but nonetheless, we're going to continue to monitor that and we'll update it as the year progresses.

I guess, I would add, what I found in running companies is that the first year of running a company, you get smarter. It's after the second year, you really do understand and have a much better understanding and are going to be much more accurate in your predictions around the direction of the company. I guess I'm going to be humble to say I've gotten a lot smarter over the last 12 months, but I know there's a lot more to learn and I'm continuing to learn and understand the uniqueness of our company as well as -- the good news is I have pretty deep experience of over 15 years of managing millions of cars and working for a large -- on the board of a large OEM. But there's a lot of uniqueness around these days with a lot of different inflection points and given the technology changes we're putting in place, I'm going to feel a lot more smart around what kind of guidance I can provide more towards the end of this year. But right now, I think it would be foolish for me to think I'm smart enough about everything going on in this company to provide accurate guidance for people. I'm more than willing to answer questions and give a sense of where we are heading, but to predict, at this point, would be unwise. But I think we've given a pretty good indication of where we think it's going and I will stand behind, again, to say, structurally, there's absolutely no reason why we can't that be at industry competitive margins here, particularly some of the great assets that we have between our brand, between our retail sales capabilities, those are just 2 things to point to. And then if, on the other side of our technology changes, I think we will have the most competitive, forward-looking technology capabilities both from a basic operating system but also from an information and data management capability from a data analytics and artificial intelligence. So everything we're doing really should put us in a very, very competitive position and so there's no reason why we can't be at the same margins that are industry leaders are at.

Okay. And I just wanted to follow-up, actually, on one of the prior questions, the idea of the sort of bridge of the $300 million you're at today of EBITDA -- $300 million EBITDA today up to 900 -- $800 million, $900 million, $1 billion, what have you. And 2 of the items that I think you talked to, price and fleet costs, I guess the pushback that some might provide is that, for instance, on price, you would need something in the order of magnitude of 3 to 4 points of price a year, which is something largely unprecedented, and obviously, there's the risk that, that could be competed away. And on fleet cost, the 260 that you mentioned, which is more of a historical level. That 260 was printed at a time when you were more heavily levered to smaller cars that came with a lower per unit depreciation and a time of much higher residuals. So what would be the response to that pushback as to why you could get that 3 to 4 points of price a year, annually, it won't be competed away. And that the fleet costs could revert back down to that 250, 260 level, even though residuals are just much lower today.

So I mean, I think, those are fair pushbacks. So how I'd responded to that objectively is to say the following: First, price isn't just headline price. Price is the mix of business you achieve and how you position your brand. So candidly, as we've said previously, the Dollar-Thrifty brands have been under invested, have not been positioned appropriately in the marketplace. And as a result, candidly, you're not getting, relative to the historical brand positioning, not getting the price they can achieve just from a segmentation standpoint. So price isn't just headline price, it's segmentation to go to market. It's also how the company has performed relative to other segments in the business that have higher price and we believe we have option there. And again, yes, unprecedented, we're not expecting 3% to 4% headline price, but we obviously think there is not only -- there's headline price opportunity in the industry, but there's a segmentation opportunity for us as well. As it relates to fleet cost, yes, the industry does go through cycles and it can get a range anywhere from 280 to 320 in fleet cost range. That isn't necessarily where we're going to be, but what Kathy referred to, as you recall, and in the first half of the year, we were at $350 per unit per car. So that $50 differential, just in the first half of the year, equates to over $150 million of profit in the first half of the year so you have 300 already and 420 in 2017, pro forma for that impact. Clearly, with all the systems and technology put in, as Michael Millman was asking, we are going to have a step down in technology cost. The technology OpEx is going to go down. Now we haven't provided guidance, but if our run rate is $400 million, say we can get down to $100 million, it's $100 million to that bridge. Third or fourthly, we have a lot of technology and systems and processes going into our operation side of the business, including the Ultimate Choice, including a new digital and reservation rental system that we believe will obviously, over time, reduce the labor [content] and allow greater customer bypass and greater customer self-select. So in our view, [SG&A] as a percentage of revenue runs around 66% to 67% of sales, every 1 point U.S. RAC is over $60 million in savings. So we're going to see that come down over time. No, we're not going to -- we're not having a large cost agenda here, but we do believe that there is cost opportunities that we can take out of the business over time as a result of our technology and not impair the service delivery that we're going to deliver. And finally, our ancillary has to be a headwind. We do believe the restructuring of those products, making them more contemporary, putting them in an additional platform that allows us to, then, offer them to customers throughout the booking path. And then obviously, having the customer information, using that to leverage that information and make it more tailored individually to every customer does result in higher ancillary opportunity for us. That ultimately results in higher profits -- higher rate and higher profit. So we believe there is a clear bridge to get there and, candidly, as Kathy has repeated and I've repeated, there isn't anything structurally that would say that there's no reason we can't be at least competitive with our public comp on a margin standpoint. So taking all those factors in consideration, I can understand your initial pushback, but that would be my response from a number of different factors, how you bridge that growth, obviously (inaudible).

In summary, more price, more days, less car cost, less technology cost, and I think it adds up pretty quickly.

And with that, there are no further questions in queue at this time. Please continue.

Thank you for your time this morning, and we look forward to speaking with you again next quarter. Thank you.

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference service. You may now disconnect.