Welcome to the Hertz Global Holdings Third Quarter 2018 Earnings Conference Call. Currently all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. I would like to remind you that today's call is being recorded by the company. I would now like to turn the call over to our host, Leslie Hunziker. Please go ahead.

Good morning, everyone. By now, you should all have our press release and associated financial information. We've also provided slides to accompany our conference call that can be accessed on our website. I want to remind you that certain statements made on this call contain forward looking information within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements are not guarantees of performance and by their nature are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of this date, and the company undertakes no obligation to update 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 and our third quarter 2018 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 by using these non-GAAP metrics. Our call today focuses on Hertz Global Holdings, Inc., a publicly traded company. Results for the Hertz Corporation are materially the same as Hertz Global Holdings. On the call this morning, we have Kathryn Marinello, our CEO; and Jamere Jackson, Hertz's new Chief Financial Officer. Now, I'll turn the call over to Kathy.

Thank you, Leslie, and good morning, everyone. In the third quarter, our company celebrated its 100th year anniversary. With an unmatched history and position of creating customer connections and innovative experiences, Hertz has been setting the standard in rental cars from the beginning. Today, we’re presented with more opportunities to raise the bar than ever before, leveraging those opportunities begins by changing the way we think and act in order to strengthen the fundamentals of our business and reignite growth. With the U.S. turnaround plan launched in early 2017, we introduced a more structured long-term approach for how Hertz operates at its foundation. It emphasizes managing business based on the highest rental and residual returns, planning fleet capacity at the local level using advanced demand forecasting tools, driving operational excellence through training and productivity methodology, returning excitement to our proposition and brands and leading through systems innovation. When we optimally execute on these strategies, we win customers support discipline in the marketplace, sharpen our processes and disrupt the status quo. Strong execution and discipline are key drivers of our turnaround progress, as evidenced by another quarter of year-over-year revenue and earnings growth. The 2018 third quarter was highlighted by a 10% increase in revenue in the U.S. rental car business. For the peak season, we closely aligned our fleet with the rising demand in our more profitable customer segments. The higher volume is being driven by the investments we’ve made in fleet quality, customer service, and marketing initiatives as well as robust travel trends. As a result of disciplined fleet growth and a favorable customer mix, we generated a 5% increase in time and mileage rate in the U.S. year-over-year, and a 30-basis-point improvement in utilization. Revenue per unit, a key measure of how we assess our performance was 3%…

Thank you, Kathy, and good morning, everyone. We have a great quarter. Our results reflect another quarter of year-over-year improvement in revenue, consolidated adjusted corporate EBITDA, and major of our key operating metrics. These results reflect our continued commitment to build a faster growing, higher margin business, driven by improvements in our fleet, product offering, customer service and brand building marketing. As we move forward, we expect the momentum from our growth initiatives, the investment in our technology and a laser-focus on productivity to drive margin expansion in earnings growth in 2019 and beyond. First, let me provide an overview of our total company results. Slide 6 shows our consolidated results on U.S GAAP basis and our non-GAAP measures. Total revenue was nearly $2.8 billion, up 7%, driven by exceptionally strong growth in our U.S. RAC segment, along with moderate growth in our International RAC segment. Net income attributable to Hertz Global was $141 million, and net income per diluted share was $1.68, up from $1.12 in the third quarter of 2017. Our net income per share result was driven by higher revenue due to both volume growth and increased pricing and lower depreciation. These drivers were partially offset by investment spending to support our transformation initiatives and increased vehicle interest expense, primarily in U.S operations. On a non-GAAP basis, adjusted corporate EBITDA improved 9% to $351 million, and our adjusted corporate EBITDA margin expense is 13%, a 30 basis points increase from first the third quarter of 2017. Adjusted net income improved 53% to $180 million, and adjusted diluted EPS increased to $2.14 per share from $1.42 per share in the prior year quarter. Let me provide some additional color on the quarter starting with our U.S. RAC segment, and let me start with revenue. The key takeaway of…

[Operator Instructions] Your first question comes from the line of Chris Woronka from Deutsche Bank. Please go ahead.

I was curious as to whether at this point you have any thoughts about potentially giving out 2019 guidance? Not asking for numbers yet, but just directionally whether you think you might return to providing guidance when you -- possibly when we report fourth quarter results?

Chris, I'm not surprised if that's the first question. I think the best way for me to answer is we've been very focused on driving consistent and sustainable improvement in our operation. And I still think it's too early for me to predict how that will drive next year. What I think, I have said in the past is, after we get through a fairly rigorous transformation of our technology and the efforts that will drive, and come out the other side of it, which, as you know, is really elevated our expanding across our operations, our efficiency and our investment as well and the things we have to do to survive until we get through that, I think, in 2020, we'll be in a better position to be talking a little bit more about guidance. But I really hesitate to get direction into that, I don’t feel I have a great deal of confidence, and given the efforts we have to get through next year. So long answer to a short question.

Yes, the only thing I will add is that while we won't provide 2019 guidance, what we will get from us is we will continue to be transparent about the progress that we're making on the transformation initiative investments that we're making to strengthen the business, and we won't be today certain about forward-looking comments. But as we complete the journey, we'll be able to incredible to provide more forward-looking comments about our financial performance.

Okay. Fair enough. And just a quick follow-up if I can. Do you think kind of -- as you sit here today, do you see more momentum going forward on the commercial side in terms of picking up more accounts or pricing? Or do you think the leisure side of it is still going to remain the stronger going forward?

I think what we found is as we've improved our fleet, our service and the value we are delivering now into the corporate space, that adds a great impact on our ability to have our fair share in that side as well as it gets project for the value we're creating. So when you put out a great fleet and great service and great reliability and consistency for the business traveler, it has the positive impact both on or ability to hold price to grow our share of that business as well as to attract more from the REIT -- in the retail space. So I think we continue to work harder at that and we're seeing the benefits from it.

Your next question comes from the line of David Tamberrino from Goldman Sachs. Please go ahead.

I had a couple of questions hopefully you will be able to answer them. First, on your T&M metric, did you provide a breakdown of pricing for leisure in commercial?

We don’t break that out.

Okay.

But, I would say we've had pretty good consistent results in both of those areas. So we are seeing improvement in growth in both commercial and our retail space. If we have very targeted demand forecasting, which is proving to drive some of the opportunities we're seeing in the third quarter and haven't seen, and have been getting consistent. So we have a very systemic analytic approach to this and it's bearing out. And we continue to report that. I mean that's one of the duties of machine learning and artificial intelligence, as you use it more they get better and smarter and that what we're seeing.

Understood. And it’s improving, but it's commercial still a drag year-over-year?

I would say what we're seeing is a threatening of the pressure on price. And I think that has to do with when you create the value, you can get the price. And then we're also seeing an improvement in our share and winds we're getting. And as you know, most of these accounts are shared and we’re growing our share of these accounts because we’re consistently delivering a great fleet and great service. And people are using our service more frequently and coming back more frequently. We’re retaining -- we're really doing a better job at retaining business.

Got it. And my second question is on direct operating expenses. I think it stepped up about 100 bps year-over-year. I know you're in some elevated spending. But you could have better utilization so that should have been a positive offset. Trying to get a sense of how much and what you're really spending on now? And when do you really seeing, I don't know, I’m not looking for guidance, but just trying to understand how much more of a drag that should be because of -- the pricing, obviously, is coming in better, but not necessarily seeing that from the operation side fully dropping down?

So I think, first of all, I always, it is a math gain. If you look at it, you get a lot more our growth and you get out of cutting expenses, and doing it arbitrarily. So, and joining the company, clearly there was an under investment across pretty much all areas of the company. And so I've been very focused on reinvesting in the areas that will drive growth. And the great news is we've done the hard work, the team has really put together great plan and it's working. We’re getting price and we’re getting growth. And we’re doing it with a very disciplined fleet approach. At the same time, I also realized that there is a lot of opportunity for productivity. But that’s really in our control. It's a lot harder to get growth, I think, as anybody who's been in this job knows. The hardest thing -- you ask any CEO what are the two things that keep them awake, it's leadership and talent and growth. And so as we've, I think, continued to progress on improving our RPU and getting growth, we know we have to focus on expenses. And I think two areas where we see immediate impact where we can drive down costs is in logistics and transportation and then maintenance expense. So, we have an effort around centralizing maintenance and that has an impact on our out-of-service as well. So I think we can get another 1% on our utilization if we can improve our out-of-service by having both a better turnaround on maintenance but also a lower cost. So that's one of the areas that we have elevated expenses and it drove the 100 bps increase. The other area is logistics and transport. And one of the things that's impacting both maintenance and transportation and logistics is the rising cost of people. Low unemployment rates, increasing hourly wages. It's tough to find people to do maintenance and then when you do find them, we're getting charged more for it. And then, on the other side of it, same thing with transporters and moving around our cars. But with Jamere joining and a focus around sourcing and working with Paul Stone, we have a couple leaders here that have a tradition of productivity and expense management. And remember that Paul Stone comes from Wal-Mart and retail operations there. So we have the right leadership and the right skills around that and they're laser-focused on it. But we're going to be smart about it. We're not going to make arbitrary cost cuts that dampen the great service and the marketing efforts that have clearly won price in our space and won more customers. So we're going to be smart about it.

Yes. The only thing I'll add to that is we said that our EBITDA would be impacted by the investment spend in 2018 related to the transformation activities that Kathy talked about and we're on track. A portion of this investment was around a richer fleet, around some of the marketing activities, and, of course, the technology and operations initiatives. But to be really clear, there is a productivity opportunity here that we're going after as part of our growth and marketing expansion efforts. The productivity and efficiency will be a big focus area for us going forward. As I wrapped up my comments a little bit earlier, we're going to continue to sustain the momentum that we have in the top-line growth. But this opportunity around productivity and efficiency will be a business builder for us as well and, in some respects, will be a little bit of a bill payer for some of the things that we want to do to improve our operations overall. So, we're excited about the opportunity. It is a team sport. We're doing it across the organization. We've organized ourselves around a number of projects. There's lots of granularity around it. We have full management commitment associated with it and I'm looking forward to talking more about that as we move forward.

Our next question comes from the line of John Healy from Northcoast Research. Please go ahead.

I wanted to ask a little bit about fleet costs. The U.S. number of $261.00 this quarter was very impressive. And just wanted to try to get more color on what we should be expecting on that line going forward. And I realize there's a lot of moving parts but I was just hoping maybe you could provide us some framework how to think about fleet costs for next year. Maybe especially considering the growing TNC business and how that changes the life of hold of a vehicle.

I think from a fleet costs perspective, we mentioned earlier, I do think the fleet is at a very disciplined level in general. The questions around with tariffs and oil prices and interest rates, et cetera, what will be the pressure on that? Where we focus is -- how are we at the very best at asset management in this space. And we have a team that's just working on all cylinders, as I said earlier, at being the very best at acquiring the cars that people want to drive. And the good news is they generally want to buy it, too, at the other end of it. And then we're very focused on getting price and growth for that fleet in between. And then we're expanding our retail car sales group and we're selling less in auctions and more out of these outlets. And we're also, though, adding in -- and what's helped us and continues to improve our depreciation expense line -- is opportunistic sales. So, we're using deep analytics to look at when is the ultimate time to sell this car based on mileage and where to sell it and pulling those cars out of the fleet and opportunistically selling around them. And then being able to flex up through our dealer connections and our relationships with the OEMs to backfill where we sell opportunistically has really, in the end, made, I think, a pretty impressive improvement in consistency around our ability to manage depreciation expense. And so the best way to handle any ups or downs in this area is be the very best at managing these assets and you'll win. And the good news is, I think, from an experience and understanding perspective, I have a pretty good relationship in the OEM market. I spent ten years on the board of one of those companies. And I understand how to work with them in such a way that we don't hurt residual values. And the fleet that we're buying and how we equip that fleet and when we sell it, I think, we all win. If we help the OEMs with residual values, it helps us as well. So I think all of those things come together with our continuing ability to manage fleet costs in the environment we're coming into.

And I just wanted to ask one clarification question. I thought you guys made a comment about cash flow for the year. Are you expecting to be free cash flow positive for 2018 or did I misunderstand that?

No, we are expecting to be positive for 2018. It's a combination of the solid operating slate that we have as a result of the turnaround but it's also the ADS marks primarily impacting that. That allows us to use less of the cash flow. That actually puts cash flow positive for the year.

Coming into this company, one of the things that I knew had to happen, and we have been focused on it here, is managing the cost of our assets. And so we are real focused on EBITDA and decreasing our leverage and providing cash on a consistent basis. And, clearly, this is one of the most important lines and areas to make that happen. And we will continue to be very disciplined in how we grow the fleet and very disciplined in how we manage it.

Your next question comes from the line of Michael Millman from Millman Research. Please go ahead.

Could you tell us what your year-over-year fleet comparison was as of October 31? Also, I may have missed it but you've typically told us what percentage is rented to ride-hailing companies. And if you separated the ride-hailing company piece of the fleet, could you give us an idea of what your fleet average price or cost would be since it's considerably lower than Avis and would assume that your businesses are somewhat comparable? Thank you.

So, what I would say is the depreciation expense on our TNC fleet, because it's relatively small, it's just a little over 30,000 cars in the fleet, and very minimal -- a couple of bucks an asset. And we maintain those cars pretty well. There is a cost to that and there are expenses around damage, etc. But it really has very little impact on the number. That number and how low it is -- is achieved because we have -- we'll go out this year with 85 retail car sales outlets. And it's how we buy and acquire those cars and manage that cost down. And our ability to sell most of those cars outside the auctions, and in the middle of it, drive opportunistic sales. We are getting that $261.00 because we're really effective at buying and selling cars and that has to be a core competency within this industry. And we're very much focused on maintaining that core competency through any kind of cycle.

And your fleet level at the end of October?

We don't give guidance on that. But we continued to have a very disciplined fleet and we continued to get results that illustrate that and support that, where we're seeing, again, our ability in October to get both price and volume increases at the same time on our fleet levels.

And just on the commercial, you indicated that you're seeing some improvement. Does that mean that your actual T&M is up for commercial year-over-year or is it just not declining as fast as it had?

It is absolutely not declining as fast as it has. It's basically leveling off. We're getting very little decline in price and we're working hard, as we renegotiate a contract, to actually look for price increases based on the value and the service that we're providing out to these customers. And I think, as importantly or more importantly, we're growing our share of customers in the commercial fleet space. And we're finding new contracts.

Your next question comes from the line of James Albertine from Consumer Edge. Please go ahead.

Hi, this is Derek Glynn on for Jamie. Thanks for taking my question. As it relates to the marketing campaigns for your brands, what kind of return are you seeing from those so far and is there anything you could share related to increases in traffic or conversion as a result of those campaigns?

What we're consistently seeing is -- what we love is more customers coming directly to our .coms. And the quality of the customer has improved as well and that shows up in our T&M pricing and both our growth and our price. So, the great news we're seeing is our marketing efforts -- social media, e-commerce, etc. -- our branding efforts, and our partnerships, we continue to expand and grow and get more value from our marketing efforts. But we're particularly pleased with the ability to attract more directly to our .coms.

One of the things I've been very impressed with is just the marketing team's use of all the sophisticated tools that you would expect for a consumer brand that does as much marketing that's done in this space. And so our teams' lasers are focused on ROI of all the marketing activities. They're doing all the sophisticated analyses using things like multi-touch attribution. And those things help you eliminate waste from this in time and drive incremental renters to the franchise and be able to attract those in a way where we can see what the return on that investment is. So, I'm very pleased with those efforts and we're winning. You can see it in the marketplace. You can see it in our numbers. And we're going to continue to track and measure that in a very rigorous way going forward.

Yes. And I think the great news is those marketing efforts are being supported by energized, committed, dedicated employees across the world. And so when the customers show up, we deliver on the brand promises that we're making in these marketing efforts. And the real strength of this company and our brands is our people. And from across the leadership team in all our different regions, down to the people cleaning the cars and delivering the cars, everybody's heart is in their job and it makes a big impact. If we did all this marketing and when people showed up, we didn't have the fleet and the service that we set them up to expect, we wouldn't be seeing the growth that we're seeing in our business right now.

And then I also had a follow-up just related to the used environment and fleet costs. Program vehicles are still a relatively small share. I think it's 12% of the total in the U.S. Given the strength we're seeing in used, are OEMs more willing to sell program vehicles? Is there any expectation that that program vehicle mix could possibly increase in the future if the used environment remains strong? Thank you.

I don't think so. We've seen -- what I will say is we've seen some nice program deals come through but it's been pretty small volumes and fairly random. So I don't see any future consistent growth in program. I think the mix as we stand is pretty much going to be the way it is out into the future as well.

Your next question comes from the line of Hamzah Mazari from Macquarie Capital. Please go ahead.

Kathryn, the first question is just around what inning do you think we are in the turnaround at this company? And then when does investment spend normalize? Is that 2020? 2021? Any thoughts there? Thank you.

Well, I think I've shared before that I think, in 2020, we should return to a level of -- a more competitive level and benchmark level of profitability. And you heard Jamere talk about productivity and expense efforts. I think, in 2020, we're going to have to make sure that we constantly don't waste any money on higher level expenses than is necessary and that we use continuously improved productivity efforts to fuel future investments. But I think, given where we're at in the turnaround from an innings perspective -- I'm going to hesitate. I'm not that big of a baseball fan to figure out how to analyze that one. But, again, I think, in 2020, we should start to see more normalized operations. But, again, I've been through a fair amount of enterprise-level technology change-out. So I know what it takes. I know that you have to be very disciplined through these and you have to plan for -- hope for the best and plan for the worst. And I think the great news that we've done is we have really solid partners that are committed at their Chair and CEO levels to our efforts and we have a really solid leadership team that's working on all of the process and requirements and working hand-in-hand with our technology group and our partners. And we're very focused on those efforts. So, I expect when we work through that in the fourth quarter of next year, on the other side of this in 2020, we should come out of it in a very strong position. And then I think, as you heard, from a cash perspective, we are very focused on returning cash to the business and that effort is already starting. And so the more we get improvements in RPU and sustained improvements in our depreciation costs, the more cash we create and the more goodness that -- we'll have a tailwind in 2020 based on the efforts. There's a lot of work we're doing right now that have nothing to do with the technology transformation that will really come even more to bear when we have all the right tools. Right now, we're kind of working with one or two hands tied behind our backs.

And my follow-up question is just around how you see the business model evolving in an autonomous car world. Do you need to sign more technology deals or does that not matter? Thank you.

Well, I think, first of all, we do have partnerships out there now. And I don't call it mobility, I call it connectivity. So, the focus we have and the partners we're working with really revolve around connected cars. And the technology, if you look at our Donlen office, and I managed the largest global fleet business for five years when I was at GE, the corporate fleet business has been dealing with connected car capabilities and all of the fleet management expertise you get out of that for 15-20 years. And we have a great company in Donlen that's very experienced in connected cars and has a significant connected car fleet already. We also have, both in the U.S. and in Europe, connected cars and touchless rentals. And what I'm focused on in that regard is being the very best at managing a fleet. And if we are the very best and have unsurpassed capabilities on that level, how many companies out there are the best at managing a million cars around the world? So, we are looking at everything we do in our fleet management technology and capabilities. If we could do that for somebody else who comes in and says, "Hey, can you manage my million cars?" We can manage a million cars. And right now, we're managing a million cars and we're very focused on improving all the capabilities you would need to manage a million cars for somebody else. If we can do it for ourselves, we clearly can do it for somebody else. And we already do manage large corporate fleets. And so between the analytic capabilities that we already have developed on deployment of fleet and demand forecasting, our ability across the country and world to deliver cars to consumers and keep those cars cleaned and keep them places, and then if you add into it the enterprise system that we're putting in place is built into RAC with touchless rentals and telematics and connected cars. So, the best way to win in the autonomous world and to win with partners is to have the skills and capabilities that they need to be successful in managing an autonomous fleet, as well as our ability to manage an autonomous fleet. And so that's where we're focused.

Your next question comes from the line of Chris Wang from Barclays. Please go ahead.

I just have two quick ones. First, I appreciate your comments on the positive free cash flow for the year. I think your last quarter was also particularly helpful with the pricing trend in July that you guys gave out. I know you typically don't give guidance but maybe you can talk about the pricing trends sequentially in the quarter and maybe into the month of October. Any directional color would be helpful there.

Well, we certainly don't give a forward-looking statement on that. I will say, though, that October is off to a very good start and we have good momentum going into the final quarter of the year. Our teams are executing well. We're being really disciplined about the fleet and the fleet management capabilities. We're meeting almost daily with our fleet management teams and our revenue management team so that we have the right sized fleet, the cars in the right place, the right mix of cars. So, I feel pretty confident about our ability to execute in this environment and, like I said, October is off to a really good start.

Yes. The good news is October is off to a good start. The challenge is the holidays. They are always a wild card. Right? So, we've got Thanksgiving and Christmas. They always fall on different days. And with December, it looks like we might get an extra week of corporate travel and some of the holiday will follow for Christmas and that holiday season into January. And then Thanksgiving is always a wild card. But, right now, we have the ability to manage our fleet appropriately and, so far, things are going well.

And now I want to focus on the balance sheet a little bit. Obviously, the priority here are the front-end maturities. How are you thinking about the timeline of the refinancing here? I mean, what are some of the considerations that you are thinking about internally? I mean, outlook is pretty good. I mean, the industry setup is pretty favorable. Does it give you confidence to wait a bit longer? And on the other hand, I guess from what we saw, the market volatility has picked up in October and I think it becomes a little bit more of a fluid situation in terms of the access to the market and the execution. So, how do you think about balancing the two?

So, we are obviously focusing on de-risking. The good news is that we have a tailwind with our performance. The better operating performance that we have gives us an opportunity to go into the marketplace opportunistically and de-risk and get better terms and better rates than we have in the past. So, our capital markets execution will depend on a couple of things. One is clearly we're looking at the marketplace and finding what's the right window to go do that. And, two, we continue to focus on our individual performance and putting together a story that suggests that we're a much better credit quality than the last time that we went to the marketplace. So, we have a world-class team that has the capability to do this and I'm pretty confident that we'll be able to address the stack in a way that gives us a better outcome than the last time we were in the marketplace with financing initiatives.

So, do you still have a preference for unsecured paper? And is your preference still to do the '20s and '21s together?

I mean, I don't want to complicate our capital structure at this point. However, I will say I'm very focused on making sure that we get the best possible financial outcome for the company. And so if that means we have to introduce a little bit more complexity, we will do that. But my focus is to not unnecessarily complicate the capital structure even more. And, again, as we improve our financial performance and show traction as it relates to the turnaround, we'll have a lot more flexibility in that regard.

And at this time, there are no further questions.

Thank you and have a great day.

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