Hertz Global Holdings, Inc. (HTZ) Q1 2019 Earnings Report, Transcript and Summary

Welcome to the Hertz Global Holdings First Quarter 2019 Earnings Call. [Operator Instructions]. I would like to remind you that today’s call is being recorded by the company. I would now like to turn the call over to your host, Leslie Hunziker. Please go ahead.

Good morning, everyone. By now, you should 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. Forward-looking statements are not guarantees of performance and by their nature, are subject to inherent uncertainty. Actual results may differ materially. Any forward-looking information related on this call speaks only as of this date and the company undertakes no obligation to update the information to reflect changed circumstances. Additional information concerning these statements is contained in our earnings press release and in the Risk Factors and Forward-Looking Statements section of our 2018 Form 10-K and our first quarter 2019 Form 10-Q when filed. Copies of these filings are or will be 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, which is posted on the 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., a publicly-traded company. Results for the Hertz Corporation are materially the same as the Hertz Global Holdings. On the call this morning, we have Kathy Marinello, our CEO; and Jamere Jackson, Hertz’s Chief Financial Officer. Now, I’ll turn the call over to Kathy.

Thank you, Leslie and good morning everyone. We’re pleased with our performance in the first quarter, where we continued to make progress and driving revenue and earnings growth. In the U.S., we generated a 7% increase in revenue in the first quarter on top of last year’s 5% improvement as our upgraded vehicle fleet improves service levels, strategic marketing actions; sophisticated demand forecasting and revenue management tools and entry into adjacent markets like TNC continue to pay dividends. Rate and volume trends also continue positive. Total U.S. RPD was up 2% and time and mileage pricing was 4% higher year-over-year. Volume rose 4% on a 6% improvement last year, and revenue per unit, a key measure of asset efficiency increased 2% in the U.S., the seventh consecutive quarterly year-over-year improvement. We are driving – we are delivering sustainable top-line growth. In the first quarter, these results were even more satisfying for us, because we had some macro challenges to overcome. And as you know, the first quarter is our seasonally low period for demand. After that, a negative effect from the Easter calendar shift into the second quarter and to a lesser degree, the impact from the severe winter weather in the Midwest. Yet despite these headwinds, we remain focused on our strengths and leveraged our resources to stay on track. In addition to the revenue growth in the U.S., we’re capitalizing on value creating fleet acquisition and disposal strategies, continuing to optimize asset life by growing with TNC and insurance replacement accounts, and opportunistically rotating fleet to capitalize on still strong market residuals. This enables us to control a significant portion of fleet costs and help to reduce U.S. monthly depreciation per unit by 15% in the first quarter. Globally, we delivered 3% higher volume in our rental car business on a 1% increase in total revenue per day, despite travel concerns across Europe relating to Brexit and the Paris protests. Worldwide, the higher revenue and a 12% reduction in monthly vehicle depreciation per unit in rental car, led to a $55 million improvement in adjusted corporate EBITDA in the first quarter. While we’ll continue to focus on revenue and fleet cost management, this year we’re also making a global commitment to driving productivity savings. Our goal is to bring greater discipline and control to our expense base without impacting the product quality, service levels or employee programs that drive growth. Employees around the world are doing their part and our own every dollar initiative. We’re creating a profit-focused culture that’s based on a shared awareness of what productive overhead is and the important role individual accountability plays in maximizing earnings. Employees across functions and in the field are taking an active part in analyzing processes from the perspective of the customer. By prioritizing value creating strengths, implementing supply chain best practices and measuring returns we’re looking to optimally scale our business. Jamere will share some of the more specific areas of opportunity. But I’m pleased with what we’ve achieved in the first quarter as we captured some of the low hanging fruit and put plans in place for addressing larger projects throughout the year. In addition to more effective cost management beginning to roll out our global technology platform is another major commitment for us in 2019. The technology transformation encompasses our digital assets, our customized CRM platforms, enhanced reservation rental and fleet capabilities, as well as the standardized group of back office support systems. All of these assets are being integrated in a cloud-based platform that allows for greater speed access, visibility and data sharing and analytics. Let me give you an update on where we stand. Last month, we began rolling out the advanced features and functions of our now cloud-based CRM system. The cloud allows us to unify our customer service strategies to ensure that all of our sales reps around the world are accessing the same continuously updated digital information. It also enables us to automate certain key tasks like customer interaction tracking, giving us a greater ability to more deeply address individual customer circumstances and supporting focused marketing initiatives. This advanced suite of services will enhance our customer relationships and improve the customer experience while providing us greater insight into customer preferences and improving the efficiency of our organization overall. Also, in April, we released our redesigned Hertz app that gives customers a faster and more personalized rental experience. We’ve received great feedback from our customers so far. Additional improvements will be made throughout the 2019 powered by our technology transformation. With regard to the transformation between now and July will be working on system integration testing with the goal of starting field user acceptance testing in August. Once that’s completed, we have a four tier deployment strategy that kicks off this fall. The plan is to launch the integrated system in a couple of small markets in North America just after the peak season and then follow that with a larger, more complex region before year-end. We’ll then kick off the New Year with the full U.S. cutover in January with the EMEA system transition closely behind. Besides activating this integrated enterprise wide platform, we also have plans to replicate our U.S. AI-enabled revenue management and demand forecasting technologies, and international markets next month. Having leading edge capabilities for strategically pricing and positioning our assets overseas should allow us to more efficiently maximize revenue in utilization for worldwide margin expansion. We feel really good about the progress we continue to make. As I look forward on optimistic about what we can deliver incrementally in 2019. When it comes to the U.S. economy, it feels stable with no apparent signs of leisure or commercial travel softening. For Hertz, the comps get a little tougher, but that doesn’t change the goal of year-over-year improvement. We continue to be disciplined fleet managers. The auto makers continue to be disciplined producers and our focus on the trifecta of rate volume and utilization is unwavering. For the TNC business, we expect to grow significantly again, in 2019 with a fully connected ride-hailing fleet by year-end. Finally in the U.S., we’ve got an important debt refinancing on deck. As Jamere has told you, we’re risk averse in this area. It’s top-of-mind and we’re well positioned to execute. In Europe, there’s still some uncertainty as it relates to the potential economic impact from Brexit and the yellow jackets. And it’s tough to forecast the 2019 peak season based on 2018’s unusual trends considering the World Cup and the heat wave impacting UK travel and the shifts in vacation destinations to franchise countries like Turkey, Egypt and Tunisia. Therefore, we’re being more prudent in our international fleet planning, and if demand comes in better than expected, we’ll simply take the opportunity to yield leveraging the new AI tools we’re putting in place. Globally, we got a big ask of our teams regarding the productivity savings, but I’m confident that our employees will find efficiencies through better processes and smarter decision-making. After all, these are the people that stepped up, brought ideas and executed on our strategies for top-line growth. They’re the same dedicated employees that impressed me every day with plans for driving asset value and optimizing fleet costs. They understand that maximizing profit allows us to reinvest in careers and in the company, reward great performance and return value to our shareholders. When it comes to productivity improvement, we’re all hands in on this and we’re getting it done. The technology work is also on track. We’ve got great partners that are submitted to the success of this project as our IT team. Hard milestones are in place. Daily updates are happening and our technology delivery leads are all over this. It’s a big year for us. We have a lot of work to do and it goes without saying that execution will be critical, but it’s also an exciting time. We’ve got the right people, the best fleet, great partners, and of course, our iconic brands. We’re globalizing AI tools and have game-changing new technologies in the pipeline. We’re going to continue to capitalize on the momentum we’ve created and I look forward to updating you on our progress. With that, I’ll turn it over to Jamere to give you more detailed insight into the first quarter performance.

Thank you Kathy, and good morning everyone. Overall, we had a great first quarter. Our continued focused on growth and productivity, helped us delivered top-line growth and margin expansion. Our solid execution in the quarter resulted in year-over-year improvement in both revenue and adjusted corporate EBITDA while we continue to invest and transform our business. Before I get into the details, there is one housekeeping item on January 1, we adopted ASU 2016-02 leases, also known as topic 842, which required us as a lessee in to record a net $1.5 billion of assets and corresponding liabilities on our balance sheet associated with leases. Adoption to the new standard did not have an impact on previously reported net income, earnings per share or adjusted corporate EBITDA. In addition, accounting under 842 in 2019 did not materially impact our revenue or adjusted corporate EBITDA in the first quarter of 2019. First, let me provide an overview of our total company results. Slide 6 shows our consolidated results on a U.S. GAAP basis and our non-GAAP measures for the first quarter. Total revenue of $2.1 billion was up 2% and up 4% on a constant currency basis versus first quarter 2018 marking the seventh consecutive quarter of growth for our business. The solid revenue results were driven by 7% growth in our U.S. RAC segment, partially offset by a seven point drag on revenue due to foreign currency in our International RAC segment. Net loss attributable to Hertz Global was $147 million and net loss per diluted share was $1.75, an improvement from a loss of $2.43 in the first quarter of 2018. On a non-GAAP basis, adjusted corporate EBITDA improved 93% to negative $4 million, and our adjusted corporate EBITDA margin expanded by 270 basis points. Our adjusted corporate EBITDA results were driven by higher revenue from increased volume and pricing, lower vehicle depreciation expense in our RAC business and the impact of our productivity initiatives. These were partially offset by investments spending to support our transformation initiatives and increased vehicle interest expense primarily in our U.S. RAC operations. Adjusted net loss for the quarter improved 37% to $83 million and adjusted diluted loss per share improved to $0.99 from a loss of a $1.58 in the prior year quarter. Let me provide some additional color on the quarter starting with our U.S. RAC segment, and I’ll start with revenue. Our U.S. RAC business had another outstanding quarter. Total U.S. RAC revenues were $1.5 billion up 7% versus prior year. Our TMC business grew 84% behind strong volume and pricing and contributed approximately three percentage points of revenue growth through our U.S. RAC business. Overall, for the U.S. RAC segment, we saw strong volume growth and pricing with a 4% increase in transaction days driven by TNC and T&M rate up 4%. Total RPD was up 2% versus prior year quarter and ex-TNC total RPD grew 3%. In addition, we continue to drive revenue growth both on and off airport and in both business and leisure. U.S. RAC adjusted corporate EBITDA was a positive $7 million, which was a $55 million improvement versus the prior-year quarter. Our results were driven by strong top-line growth, a 15% decrease in monthly per unit’s vehicle depreciation and solid productivity. We continued to deliver on our execution of disciplined fleet management, strong customer service and brand building marketing while we invest in technology to drive innovation and productivity. We’re also laser focused on driving productivity and we’ll see additional improvement in direct operating expenses and SG&A as we move through the year. As I said during our Q4 2018 earnings call, we’re continuing to invest in innovation in both operations and technology, our recent rollout of the new faster Hertz mobile app and further expansion of Hertz Fast Lane powered by CLEAR, our evidence of our progress on this front. The IT transformation efforts are on track and we’re building exciting new capabilities that will drive long-term growth and profitability. Now, turning to fleet. We continue to manage our fleet capacity with rigor and discipline. Fleet capacity was up 5% and up 1%, ex-TNC fleet. Vehicle utilization was 79% as we continue to go after profitable demand or managing a type fleet and lowering our fleet costs in the U.S. Moving to depreciation, monthly vehicle depreciation expenses of $256 per unit, decreased 15% versus the prior year quarter. The decrease in unit vehicle depreciation expense was the result of disciplined fleet acquisition, residual value of strength and solid execution. Our model year 2019 vehicle acquisition costs are averaging lower than our model year buy on a like-for-like basis from 2018. We also continue to increase unit sales through a high return retail channel to drive better outcomes on depreciation and the market continued to be strong throughout the first quarter of 2019. Moving to our fleet sales initiatives, our non-program vehicle dispositions were up 18% in the quarter. As I’ve said before, our retail sales capability is a tremendous asset for us and dispositions through that channel grew 11% versus prior year quarter while same-store unit sales grew 7%. We currently have 84 stores and during the quarter, we opened new hertz car sales locations in San Diego, Indianapolis, Fort Lauderdale and Cleveland, but plans to open more locations before the end of 2019. Moving to our international RAC segment. Total revenues were down 7% at $433 million, but were flat on a constant currency basis. RPD was down 2% and transaction days grew 2%. Our business in Asia Pacific saw solid volume growth in both the business and leisure customer segments. Although volume was up in Europe overall, we saw some softness due to the lingering political uncertainties in markets like the UK and France. We continue to focus on expanding our revenue and fleet management capabilities to our international organization. We expect to reap benefits similar to what we’ve seen in the U.S. when fully executed. The international RAC segment reported adjusted corporate EBITDA of negative $13 million [ph], which reflects the impact of foreign currency on our revenues and expenses. Before closing, I’d like to provide an update on our financing activities, corporate liquidity and free cash flow. We ended the quarter with no drawings under our corporate senior revolving credit facility with $1 billion in corporate liquidity and our first-lien maintenance covenant ratio of 1.2 times was well below the maximum of three times. In the near term, we are evaluating refinancing of our corporate debt maturing in October 2020 as we further derisk the balance sheet. Turning to cash, the timing of fleet rebates and ABS marks, which can cause volatility from quarter-to-quarter. It drove the use of free cash flow in the quarter. We expect these dynamics assumed out and normalized as we moved through the year. The fleet cash use was partially offset by a $110 million year-over-year improvement in our operating cash flow, excluding vehicle depreciation, which is a solid indication that our operational turnaround continues to gain traction. So, wrap up the first quarter of 2019 reflects continued momentum in our turnaround. Our U.S. RAC business delivered 7% growth driven by higher price and volume, and has solid momentum. The growth initiatives including the tremendous opportunity we see in TNC are delivery and we’re driving higher margins, our capabilities and fleet management, service excellence, brand building marketing and innovation are the catalyst for building a faster-growing business, and we are focused on driving operational efficiency and productivity to drive a higher margin business. We’re confident in our ability to drive long-term shareholder value. And I look forward to updating you on our progress in the coming quarters. And with that I’ll now turn it back over to the operator for questions.

Thank you very much. [Operator Instructions] Our first question will come from Chris Woronka with Deutsche Bank. Please go ahead.

Hey, good morning everyone. Another impressive quarter on the TNC rentals, maybe just a little color on how big you think that that program can ultimately get?

The way we’re approaching the program is to use it more as a way to generate better returns on the assets. So, if you look at this from where the real opportunity is it’s the length and the time we have the asset, put it into a very effective retail sales growth and attract actually more buyers into that retail outlet as well as make more money over on the asset when we sell it. Additionally though, as we built this out, with prudence over the last year or two, we have strong back office support capabilities. We have a great relationship with both Uber and Lyft that make this a good deal both for the drivers and ourselves, and we have very solid returns on it, even given increased maintenance. And if you think in light of the key the price we’re getting, and the support we get from the providers. Overall, it’s been a very effective program. From a growth perspective, we want to manage it prudently, where we use the flow – the natural flow of vehicles out of our fleet as they age out into this fleet, where possible, because we have 84 sales units out there. We are able to buy some cars into this fleet and provide some further value, but we’re going to be prudent on the growth.

Okay. Very good. Thanks, Kathy.

Thank you. Our next question in queue will come from David Tamberrino with Goldman Sachs. Please go ahead.

Great. Thanks for taking our questions here. First one for Jamere, the first quarter looks like you had a lot of fleet growth and a little bit of a cash outflow as a result of that. How are you expecting that to track throughout the remainder of the year and do you still believe the company is going to be in a negative free cash flow position for 2019?

Yes. So, let me make just a comment on the quarter, the timing or rebates and incentives on fleet buys as well as ABS marks, which can drive volatility from quarter to quarter, really drove the usage in the first quarter. We expect this to smooth out and normalize as we move throughout the year. And as I said before, we’re pleased with the operational cash flow that we saw of over $100 million. What I’ll say about fleet growth as you listen to the U.S. RAC results, where our capacity was up 5%, but it was up 1% ex the TNC fleet. So, the growth that’s being driven there is primarily from TNC and you heard Kathy’s comments there. It is a growth driver for us. We’ve been disciplined about managing the fleet and that discipline that we see in managing the fleet is actually helping us to drive yield. As I think about our expectations for free cash flow for the year, there are puts and takes. We didn’t want to set the right expectations. On the positive front, our operating cash performance is improving. We did say that we’re anticipating a drag from interest rates and we have a heavy year of investing in our tech initiatives. That sort of mutes the performance that we’re seeing there. But the swing factor will be residual values. If the market is strong, we’ll need less corporate cash to finance our fleet needs and we could get the positive on free cash flow. And if the market gets more than anticipated, then obviously, we’d have to use more corporate cash. So, we came into the year based on our expectations around residual values planning for negative, but there are clearly some puts and takes that could swing us the positive.

Okay. That’s very helpful. And then Kathy, from an operating standpoint, kind of interesting, your fleet size for TNC and how you just responded to how you’re thinking about that going forward? But can the ride-hailing partners grow their capacity and drivers without you or you – are they now somewhat captive to you for growth?

I wouldn’t say captive, but I do think we provide a really strong flow of cars into their driver network and we find the drivers are highly satisfied. We’re finding NPS scores similar to our retail business. It’s a great way for people to get into the business without making a financial commitment of thousands of dollars a month for a leased car or even the outlay of a used car. And I think we are one of multiple outlets for driving – driving more increased volume and revenue to their business. I don’t know that they’re captive, but I would say I think they appreciate our partnership. They’ve been working really well with them. We’ve been actually working with them on this, rolling it out almost three years ago and as you know, time has evolved, we’ve built a better, stronger partnership and it’s obviously, more effective given the growth we have. So for us, it’s a win. For them, it’s a win. I think on constraints, obviously, there’s a lot of drivers out there that they hope to attract to deal with the volume. I know they have more demand and they can provide drivers, but we’re helping them work on that.

Got it. Understood. In the last one, I’m sorry if you addressed this in the opening comments, but how are the near-term trends in April so far? And how do you see the peak season booking shaping up?

Well, if you look at March and April, we are very pleased with what our volume is, what our pricing is, and the promise that holds for the summer peak season, which is obviously our most important time of the year. A lot of the things we’ve done better fleets, great marketing, we’ve leveraged the Avengers: Endgame, which has been really powerful for us. And just the marketing, the revenue management capabilities, the marketing capabilities, we really are seeing a great impact from all of the efforts out there and it’s been sustained. I think if we look at it quarter-after-quarter, we see the same flow, steady growth and price and volume, and we saw a very strong April. And if you put that together with March, it has a really great indication for the summer for us.

Internally, spring break and Easter tend to be bellwethers for the summer peak and as Kathy said, spring break and Easter were strong and in line with our expectations and generally point to a healthy peak season. I think the other thing is that the macro data also suggest that the consumer’s relatively healthy heading into the summer and some of the early reads from our airline partners also suggest the previous summer. So, all of this should bode well for our business.

And I think to add to it, we have a really strong leadership team in place. We’ve got a great leader in operations that came out of Walmart that’s really rocking it out there with our employees. All the capabilities we’ve built over the past two years and operating, getting the cars in front of the customers, our NPS is really strong and continues to strengthen. We’re at the top of the game from a J.D. Power perspective and that makes a difference. So between the brand, our leadership team and all this, how they’re working together, all these things are coming into place nicely and sustain quarter-after-quarter, month-after-month.

Understood. Thank you very much for answering our questions.

Thank you. Our next question will come from Derek Glynn with Consumer Edge Research. Please go ahead.

Good morning. Thanks for taking the questions. What impact did the TNC business have on U.S. pricing in the quarter? How much of a benefit or drag was that to core time and mileage pricing?

Yes. So, our TNC business, just from a mix standpoint, it’s about a one-point drag on the U.S. business. But what I’ll say is that we’re making really solid progress on pricing in T&M. So, if you just look at that business discretely in TNC, we got about a mid single-digit increase in RPD on our TNC business. It’s a reflection of the work that we put in to really understand what our partners want and our partners need. The demand has been good and we’ve been providing a great fleet to that part of the business, so – and then if you take a look at the profitability of that business, the fact that the RPD is a little bit lower, we actually more than makeup for the drag that you see in RPD, because of a lower-cost business model associated with it. The length of keep associated with that business is a really big helper – help for us as well as the fact that these are older cars that have a lower cost of car associated with them. So, we’re pleased with our results there and it’s been a growth driver for our business, but it’s also been a very profitable piece of business for us as well.

Got it. That’s very helpful. And then with respect to the vehicle dispositions to the retail channel, what impact are you seeing, if any from any finance and insurance products you’re attaching to those sales?

So, the F&I sales have been strong. Our team is world class there. We have great discipline around making sure that we drive F&I. So, we treat this like you would treat a normal retail used car business. So, the teams have targets around those things and we drive those revenues as hard as we’re driving the actual disposition of the car. So, I’m pleased with the results there and we’ve got a world-class team with world-class capabilities. And going forward, we’ll look to continue to drive strong results in that area as well.

Yes. If you look at the size and the distribution that we have in that business, we have 84 retail lot it’s growing. We also though have now – we are well into the top 10 of used car dealers and we’re operating that way. And I do think that this asset is really core to sustaining long-term profitable margin. In a downturn, we’ve reaped the benefits of this network and the capabilities we’ve dealt as well in buying cars, we were better by 15% in this hot market, which is pretty phenomenal. And then if things turn the other way, obviously, we’re going to use that same set of assets to power through it, hopefully, as good as anybody can and manage – manage the downturns as well as we’re taking advantage of these peaks that we’re seeing right now with residual values.

Got it. Thanks for all the commentary.

Thank you. The next question in queue will come from Michael Millman with Millman Research Associates. Please go ahead.

Thank you. Just following up on the last, what is your expectation for depreciation – unit depreciation in the U.S. for the year? Secondly, could you break out; I guess what I’d call a catch-up technology from continuing technology in terms of its cost and what impact will have that – will that have on operations as well? I guess what I’m looking for is what should be a normalized EBITDA once the catch-up is complete and what’s the timing on that catch-up?

Yes. So on depreciation, we came into a year expecting to see some of the clients and residuals in the low single-digit range in 2019. I think this was consistent with external forecast. The reality is that the absolute number is a little bit more nuanced than that as it depends on a variety of factors, market conditions, our execution on retail dispositions et cetera. We’ll say that through the first three or four months in the year, residual values have been strong. We’ve had favorable depreciation rates and our execution has been strong. So, we haven’t changed our forecast for the year. But I will say that, through the first quarter or so, we do have some favorability as it relates to that. And then on the technology spend, the thing I’ll point you to is a couple of things. First, in terms of the impact on our adjusted corporate EBITDA, we said this year that we would have some impact associated with the technology spend. It’s probably going to be in the range of $30 million to $50 million. But we’re also generating productivity to offset that impact. And then outside of adjusted corporate EBITDA, we said we have somewhere between $80 million and $100 million below the line and those are the things that are going to actually roll off. So, the way that we’re approaching the technology spend this year is that we’re going to essentially self-fund that with productivity improvements. And then as that technology spend starts to roll off the back half of next year, you’ll start to see those productivity improvements flow through the P&L, and actually improve our adjusted corporate EBTDA numbers next year.

So everything else being equal, what should your EBITDA be?

Well, I mean, it will depend on a lot of things. Most notably what we expect to see in terms of top-line growth. If you’re looking at sort of our business from a long-term standpoint, what we’ve said is we’re positioning ourselves to be a faster-growing higher margin business. We expect to grow our top-line, in line with the market and get our fair share of the market growth and we’re going to drive productivity at the same time. So, there is no reason structurally why we can’t be a faster-growing higher margin business. That’s what we’re focused on and all of our efforts internally are given us a lot of confidence that we’ll be able to do that as we exit the technology transformation at the back half of 2020.

considering we have a large corporate fleet management company, considering we have a top 10 used car retail outlet business, considering we have a profitable growing ride hailing partnership, put this together with a solid iconic brands, and then just I’ll find the best employees in the world, there is no reason why we can’t be competitive and/or in this relieving [ph]and profitability margin.

Would you care to put a number on that?

No, we don’t. You guys can try to give me – to give guidance, but I think that’s as far as I’m going to get to it.

That’s our job.

Yes.

She gave guidance; I’d be kicking her under the table.

That’s right.

Thank you.

Thank you. [Operator Instructions] Next question is from Yilma Abebe with JPMorgan. Please go ahead.

Okay. Thank you. Two questions from me. Firstly, you talked about sort of ride sharing and what you’re doing on that side of the business, but perhaps, can you comment on the competitive side of the business? What are you seeing in terms of competition with ride-sharing providers for your core business?

We see, when you say, are you saying ride – I think I’m not quite sure I have the questions right if you could try it again.

Yes. So what are you seeing in terms of the competitive landscape in terms of your competition from ride-sharing as your core business?

Okay. So you mean, is it, how much of it eating into our core business…

Exactly.

I would say, back in the past, years ago, when it first started coming out, it probably hit mid-to-high single-digit erosion of our business. And it was generally speaking very short-term rentals, which frankly aren’t that great for us, between turning around, cleaning them, fueling them, the longer length that keep, the better. To that end we probably saw an erosion of about that much. If you look at the size of our fleet now and how that’s growing, I think we’ve more than replaced it and made up for it with profitable business by leveraging the opportunity saying, okay, these guys need cars. We’re not in the best place on residual values when a car is a year or two old and only 40,000, 30,000 miles, let’s put it into the ride-hailing business. Let’s manage it in such a way that it’s profitable, which we have. And let’s leverage the curve on residual values as well as the demands and we – with those partners we’ve created a win-win situation which we have manage pretty significant growth over the last two years very effectively and profitably.

Yes. I mean it’s a growth driver for us. You’ve seen it in our results the last few quarters or so. And what I would say from a competitive standpoint is, we really haven’t seen any change in sort of the core rental car use case trends where the average rental transaction is five days and roughly 500 miles. And right here when customers are typically hiring for a significantly shorter trips as alternatives to taxis or subways in urban environment. And so our core business has held up very well and we’ve turned the ride-hailing business if you will into a growth driver for us by dedicating a portion of our fleet to the market and we’re pretty pleased with the outlook going forward.

What’s been actually a nice opportunity for us to bring together our rental business with our corporate fleet management business. And keep in mind, I spent five years at GE managing the largest corporate fleet business in the world. That was also global. We’ve been able now to leverage that business that we have in Chicago, which is a sizable business profitable business, and manages large corporate fleets and managing these large corporate fleets in essence with Uber and Lyft. So we’re taking connected capabilities and maintenance capabilities that we have developed over the years for very sophisticated corporate fleets and starting to apply them into these rental fleets for ourselves as well. So, we think, some of the learnings we’re getting from that will be able to apply out in the future. If you do get into autonomy, any of these things nobody has more competency I believe than we do and managing a large fleet in general. So where there’s a lot of goodness and these partnerships that we’re seeing overall.

Thank you. That’s a good color. Did you have a sense whether how ride-sharing this point in time is affecting overall pricing in your business or maybe overall in the industry at this point?

No, I mean if anything, they’ve had to try it ratchet it up a little bit so their drivers can make money. So going out there is very low cost, but in order to continue to attract and retain drivers, they’ve added in tipping. They’ve the surge pricing. So if anything, what some of our companies has found is sometimes, there are deals with us in the rental space are more productive and effective from a cost perspective then taking very – I would say expensive surge related type of rides. So I think, the pricing is if anything sticking up as versus sticking down.

Great. Thank you very much. Two more quick ones, and I’ll pass it on. I guess, firstly, I wasn’t sure I got the response on the free cash flow in a question. For the year, I mean, assuming residual values used car prices remain stable for the balance of the year, is free cash flow expects to be a positive for 2019?

Well, as I said before, I mean it will be, the swing item when came into the year expecting to have some drags from interest rates, we expected to have a little bit of a drag from the investments that we’re making. And the swing factor has always been what happens with residual values. If residual values remain strong, then we actually could swing the positive, if not, then we’ll use a little bit more corporate cash flow. So, and you saw these dynamics last year where we came in the year expecting sort of negative free cash flow and as residuals firmed up. We actually swung to positive by the end of the year. So there are puts and takes. We wanted to set the right expectations and as we moved through the year and see what happens with residual values and impacts on marks and our ABS facilities, that’ll determine where we shake out from a cash flow standpoint. And I think the thing that we’re really, really focused on and I’m very pleased with is that operationally we’re making tremendous progress, and that operational benefit is actually helping us from a free cash flow standpoint.

Yes. I think given – we continue to get better operationally from a cost perspective, we continue to get better from a pricing perspective, when going into this year with much better – much lower depreciation expense. We are cautiously optimistic that we should expect similar more cash or better cash results this year with them. We saw last year and given the economics that we’re turning in right now. And given how the peak and the – the Easter season turned out and how strong April was. Again, we’re cautiously optimistic about the results of the year.

Thank you. The last question I had, you talked about financing the 2020 maturities. But do you have a 2021 bond that matures just a few months later, the [indiscernible]. How are you thinking about that bond?

Well, certainly be opportunistic about it. In the near-term we’re focused on the 2020 stack. If we were in the market and the pricing was right, and we had an opportunity to upsize and de-risk, the more we will certainly take a look at the 2021 stack as well. But again, you know those dynamics when you get into the market and again, we’re focused on delevering and derisking the balance sheet. So we’ll do what’s best for the company as it relates to refinancing.

Thanks very much. That’s all I had.

Thank you. And our next question in queue that will come from Trent Porter with Guggenheim Securities. Please go ahead.

Hi, thank you. Just – I think you’ve talked about this before, but I was hoping the systems that you plan to roll out to a couple of markets after peak season, I think these are the – as I recall, these are some big ones. So, I was wondering if you can reiterate just what those systems are and qualitatively what the full rollout will do for you operationally and competitively, just to kind of the broad strokes of what you’ll be able to do, accomplish once they’re out that you can’t do as effectively today?

Well, we’re 100 – we turned 100 years last year, and our system, across-the-board are probably about 30 years old. So we’re facing in to all the challenges, well-established companies phase into nowadays. And before I joined the company, the prior board had made a significant commitment and investment based on management advice to really deal with us once and for all and deal with it very holistically. So when I came into the business, there was a massive amount of efforts and spending around this and basically every aspect of our system. The one advantage we have is, we don’t have the burden of a billing system with most companies do, which tends to be the toughest task out there. And now we take Visa or Mastercard or credit card payments only. But the reality is our back office systems, how we pay, companies like Expedia, et cetera, how we deal with our customers, our employees out there was antiquated, ready to break. So it really isn’t the best set of systems for employees to use right now to run the business and provide service to our customers. So overall, over the last four years, we’ve literally spent hundreds of millions of dollars on our financial systems. So we are down to one instance of Oracle. We’re about to complete that. We’ve changed out all of our CRM capabilities and now, we had sales force and senior leadership the other day, and they said, we are leading edge on how we’re using their capabilities from a CRM perspective. We’ve updated and brought in, really brilliant guy from MIT to work with a brilliant group of people, using AI to drive our demand forecasting and pricing capabilities, which now will be expanded across the world for the summer season and have had a really tremendous effect on our ability to accurately place lead and price lead to maximize, see the seven quarters of RPD growth we’ve gotten. And then finally, looking at into the future. If you think about, autonomous vehicles and managing large fleets, if you don’t have a really solid reservation, rental and fleet management capability, it’s really going to be hard to manage a million or two car fleet around the world, which, frankly is probably how it has to end up. Nobody out there does that directly to consumers. You have some large corporate fleet businesses, but they basically hand a car to somebody and that person drives off two years and takes care of it. Uber drivers take care of those fleets. So the biggest part of the effort and probably the most impactful we’ll be putting in a new enterprise wide, totally cohesive and, ability to manage in and out all the telematics capabilities involved with a connected fleet, a reservation rental and fleet management system backed up by a treasury management system to manage those assets that are very expensive and complicated to finance. So, I mean, that was a long a response. But basically now, we have this, leading edge, not catch up, but basically bringing it all into the cloud, driven and encompassing data and data analytics as well. That frankly, we will have globally by the end of 2020. And I will say, my confidence builds every day based on the great results we’re getting from our partners and the efforts we’re seeing right now, things are falling into place very nicely on a very tough, long, complicated technology efforts. But we’re getting there.

Okay. Thank you. That was a long answer. But perfect answer. Thank you very much. And a couple of two, just two more quick ones. The first one, you’re – you’ve made a heck of a lot of progress in your core pricing. And I’m wondering the – your segmentation strategy, could you update us on how far along you are there? Are you an early innings and there’s a lot of room left to push on that lever in order further enhancer or leverage the pricing momentum? And then the second question is, I was wondering if you could update us to the extent that you know how far you’ve been able to swing the pendulum in terms of recapturing corporate share?

Yes. So from a pricing standpoint, I’m very pleased with the work that we’ve done inside of revenue management and fleet management to really be disciplined about where – where we put fleet and having the right cars in the right locations at the right times. We’ve done a tremendous job of using capabilities like AI and machine learning and predictive analytics to help us in that regard. We have a world class revenue management leader and which built a world class team. And the capabilities that we built around segmenting our revenue and driving new are just fantastic. One of the bright spots at least in mind first eight or nine months in the company. What I’ll say about corporate share is that the corporate environment is as competitive as it’s ever been. We are winning, I would say, more than our fair share as it relates to corporate. And we’re making solid progress there as it relates to the corporate business. We’ve been very disciplined about pricing. And the investments that we’ve made and having a nicer fleet and improving our service capabilities are the big drivers to us really building our corporate business. And everywhere I go and where Kathy goes, we share feedback from business partners all over the country who say, the changes that we’ve made and having a really nice fleet and the service capabilities really set us apart, and that’s been the big driver for us. And so we’ve been able to take those investments that we’ve made and turn those into a business building proposition as it relates to driving business and corporate. Still very competitive, but we’re pleased with the progress that we’ve made.

And what’s powerful is that better fleet and world-class fleet, is that a significantly lower cost, and it was well over a year-ago as well as, I would say it’s industry leading. If you look at how we’re leveraging, multiple strategies to get the cost of cars down we’re getting it down, but we’re putting out the best fleet ever. And that’s making a huge difference, it’s winning a lot of business.

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