Welcome to Hertz Global Holdings Fourth Quarter and Full Year 2019 Earnings 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 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 uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of this date and the company undertakes no obligation to update the information to reflect changed circumstances. Additional information concerning these statements is contained in our earnings press release and in the risk factors and forward-looking statements section of our 2019 Form 10-K when filed. A copy of this filing 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 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, 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. Three years ago we embarked on a critical journey to reestablish Hertz as a market leader create a portfolio of revenue opportunities transform our culture to one based on shared values and transition to mobile and cloud-based technologies all to deliver sustainable long-term earnings growth. It was a tall order and we had a lot of work to do. As you know we've invested in our fleet, our brands, our people, and our systems while making a unified commitment to productivity and customer service excellence. As we exited 2019, it was clear we have the right strategies in place and that they're working. In the fourth quarter, we delivered our tenth consecutive quarter of year-over-year topline improvement and our ninth consecutive quarter of earnings growth. Worldwide adjusted corporate EBITDA increased 11% in the latest three-month period and helped drive full year EBITDA 50% higher over 2018. We also reduced our leverage by more than three turns based on earnings growth and effective capital market strategies. Our success has been validated all along the way. Just last year we won the J.D. Power Award for Service Excellence; the Women's Choice Award for Most Recommended Car Rental Brand for Women; we're ranked number one by FlyerTalk for the eighth straight year for our best-in-class loyalty program and were named among the 2020 World's Most Ethical Companies for improving communities, building capable and empowered workforces and fostering corporate cultures focused on ethics and a strong sense of purpose. But that's not all. Our preferred fleet is cited as best-in-class by our customers. Our brand awareness is climbing as Hertz, Dollar, and Thrifty all delivered higher price and volume in the U.S. in 2019. Our digital direct channels are growing and our revenue management and customer relationship…

Thank you, Kathy and good morning, everyone. Overall we had a solid fourth quarter to finish out a strong 2019. In the quarter, we saw year-over-year improvement in revenue and double-digit improvement in adjusted corporate EBITDA. Once again we saw revenue strength across all of our brands in the U.S. and the investments in our TNC and delivery rental initiatives are producing solid returns. We continue to drive significant productivity across the business as direct operating expenses and SG&A grow slower than revenue, providing strong operating leverage and improved profitability as measured by our adjusted EBITDA results. The combination of our expanded product offerings, industry-leading customer service, brand-building marketing and intense focus on productivity position us well as we look to drive growth and margin expansion in 2020. First, let me provide an overview of our total company results. Slide 7 shows our consolidated results on a U.S. GAAP basis and our non-GAAP measures for the quarter. Total revenue of $2.3 billion was up 1% on a reported basis and up 2% on a constant currency basis, driven by another quarter of strong 6% growth in our U.S. RAC segment. Our underlying revenue results were much stronger, as our total company growth rates were dampened by a change in presentation for certain leases in 2019 and significantly higher capital lease revenue in Q4 2018, both of which impacted our Donlen comparables for the quarter. Excluding these items, total company revenue increased more than 5% on a constant currency basis. GAAP net loss for Hertz Global was $118 million for the quarter compared to a loss of $101 million in the fourth quarter of 2018 and net loss per diluted share was $0.83 compared to a loss per share of $1.05. On a non-GAAP basis, adjusted corporate EBITDA improved 11% to…

[Operator Instructions] And first, we'll go to the line of Brian Johnson with Barclays. Please go ahead.

Yes, two questions. So, some housekeeping on fleet cost and an update on just your IT transformation. On the fleet cost, so 11% in 4Q increase was kind of very different from what we saw in the overall residuals, as well as from your competitor. Could you -- I think the most important question is kind of what's the right level going forward? And is 4Q an aberration? Or is this a new dollar per unit, per month that we need to extrapolate going forward?

Yes. So on fleet costs, a couple of dynamics happened in the quarter. As we've said, we saw some recall activities across the fleet that impacted sort of the timing with which we would -- we normally de-fleet. And so, in the October and November time frame we did see a little bit of dip in residuals that sort of impacted our results. And the second dynamic, I'll remind you of, is that, we had pretty favorable depreciation on our model year 2018s. And as we work our way through disposing of those model year 2018s, some of the benefits that were associated with those model year 2018s you wouldn't expect to carry forward, as we move into the future. Overall, on depreciation, I would say that, we expect residuals to decline low single digits next year. That should inform how you think about depreciation in the fleet. But all the things that we've been doing to maximize our outcomes on depreciation, being disciplined on our fleet acquisitions, moving a significant chunk of our dispositions through the retail sales channel, the work that we've done on fleet management; all of those things are helping us to maximize our outcomes on depreciation. So we did have some mix issues in the quarter, but overall, the things that we've been working our way through to maximize the outcomes. Those things are still capabilities that we have inside the portfolio.

And additionally, the productivity initiatives that we have continued to bring down our DOE and SG&A as a percent of revenue, which, again, is one way to manage through any kind of increase in expenses. Brian, you had a second question?

Your line is now open.

Yes. Thank you. My follow-up question, Kathy, is around the IT transformation program. Can you update us on the pace of spend? I know some of it and which model will come in is excluded out of adjusted. But just kind of the overall spend, what's in the adjusted P&L? What is -- how that ramps down? I think the original plan was in 2020? And then, when do we see, to your point about DOE SG&A coming down a couple of hundred basis points, further impact either on expenses or in revenue generation program.

So we -- I would say, we've had a lot of success in certain areas like our financial systems upgrades, as well as our CRM systems upgrades and that has had an impact on both productivity as well as our top line. We're continuing to progress through the other facets of our transformation. And we do expect that the development spending is starting to ramp down. And we are starting to appreciate and recognize some of the benefits from an operating efficiency perspective. I'll let Jamere go into a little bit more detail on expectations of when that would actually ramp up.

Yes. So as Kathy mentioned, I mean, we're going to continue to invest in a disciplined way in 2020. And the way to shape the year is, given that the financial systems and CRM work are largely complete we expect the investment to be less. But by how much will depend on the rollout time and timing for the U.S. -- in the U.S. and international. Our productivity efforts are offsetting the OpEx impacts right now and that enabled us to grow DOE and SG&A at a slower pace than revenue. And then as I think about the investments specifically in technology, we've been very disciplined about the way that we've rolled out the tech plans. We've made sure that we have productivity to offset those impacts in our DOE and SG&A. And as we get a critical mass of the new systems up and running in reservation and rental systems and fleet management, the benefits of that productivity will roll through the numbers. We'll decommission some of the old systems and we expect our forward-looking DOE and SG&A to have some pretty significant improvements associated with it. But our pace is measured we're disciplined and we're using productivity to be the bill payer for the impacts that we see in OpEx.

Thank you. Next we'll go to the line of Hamzah Mazari with Jefferies. Please go ahead.

Hi. This is Mario Cortellacci filling in for Hamzah. Maybe I missed this earlier on the call, but did you size up the TNC fleet from what that currently is? And then maybe you can run some of the economics of the business. I think we get a lot of questions on the margins of that business and what that looks like longer term? And maybe you can also just give us an idea of how big that business can get over time?

So as things have gotten a little bit more competitive in this space and we look at all the different segments that we're managing I'm hesitant to continue to report actual numbers we have in the past. I guess, what I would say is we continue to grow that business. We continue to see solid returns on it as well. We have been involved in that business for about four years and we continue to grow with the partners that we've started off with. And we are leveraging a lot of the fleet management capabilities we have in our corporate fleet business as well as leveraging our rental car business to deliver connectivity, deliver great maintenance support. And we have found this to be one of the contributors to our growth. However at the same time, we won't over leverage that for -- from a future perspective but we think there will continue to be more than enough demand to go around and we're going to take advantage of that demand. It's a segment we like. But we will grow it in a metered way and we will continue to leverage our capabilities in that regard.

And in terms of the profitability as I've said oftentimes before on the call we're pleased with the profitability of our TNC business. It's a strong contributor to the growth and profitability of our U.S. RAC business. Our operating costs continue to improve and we're benefiting from the lower cost of cars. As you think about the P&L dynamics the maintenance costs are higher, but P value is accretive when you factor in the benefits of length of keep and lower vehicle costs. And the continued operational efficiencies that we're driving allow us to grow faster on both the top and the bottom line. And for example we're leveraging our Donlen fleet maintenance expertise in telematics technology, which help us drive lower costs. So we still believe there's growth available from ride-hailing based on the underlying demand in the marketplace that Kathy talked about and we're well-positioned relative to our competition in the space just based on our scale fleet management capabilities and our experience over the past few years. And as I think about things from a competitive standpoint you've started to see some of the smaller competitors start to wobble in the space and that bodes well for our businesses. We're having an opportunity to pick up some share.

Okay. And just one more and I'll turn it over. So I just want to know what you're more focused on in 2020? Is it more volume? Is it more pricing? A competitor of yours is focused more on this longer length of rental which is giving them higher volumes and they're willing to sacrifice some on price. And in your Q4 it kind of looks the opposite of that which is kind of a shift from what you guys saw earlier in the year. So just wanted to get an idea of what that competitive dynamic looks like going into next year? Is it more focused on volume or pricing and how you expect to manage that?

Well we -- I would say in walking around the halls we absolutely talk about both price and volume. But I do -- at this point one of the things this industry has struggled with over the years is getting price. And cars have become more expensive, people, salaries have become more expensive. And as an industry, I think one of the most important things we need to start focusing on is getting price for the value that we provide. We get people cars where they need them whenever they need them across the world. And that is a tough challenge. If you look at what our business is, it is signing tens of millions of contracts every year with tens of millions of consumers to create $10 billion worth of business. So to that regard, first and foremost it's getting price for the value and not to -- we won't sacrifice price to get the volume. I'll put it that way. But I think given what we've done from a branding perspective particularly in our value brands, we got both volume increases and price in all of our brands last year. And frankly we've really just started investing in the Dollar and the Thrifty brands and we see a very strong promise of growth and price in those brands as well. So we think we're going to win across both the volume and the price range. But if there is low single-digit increases in depreciation, we have to make sure we get price to cover those costs.

Yeah. And as we look at our 2020 plans, I mean we're pretty confident there's volume and price opportunities in the marketplace today. We're laser focused on driving price as you've seen in our results this year and you saw our results in the fourth quarter. And the reason that we're focused there obviously -- for the obvious reasons we get more margin calories when we get another buck of RPD relative to another day of transactions. But the work that we've done inside the company to make sure that we have the right fleet in the right place at the right time for our customers is yielding positive results for us. And we're doing both. We're winning by growing our volume and we're winning by growing our price and we're continuing to be focused on driving price as we move forward.

Thank you. And next we'll go to the line of Chris Woronka with Deutsche Bank. Please go ahead.

Hi, good morning everyone. I wanted to ask in terms of what you saw on the residual values in the fourth quarter, which sounds like maybe it was a little bit different than what you thought heading into the quarter, does that change any of your fleet plans for 2020 in terms of the make or model or mix or anything like that?

No I would say that we're focused on driving the right fundamentals as it relates through the cycles as it relates to residual values. We did see some softness in October and the early part of November. But quite frankly, November from a residual value standpoint had a little bit of a snapback and we're seeing pretty good results in January and February, so no change in terms of our strategy moving forward. Our strategy around fleet acquisition starts by where the consumer demand is. So we're putting cars in the fleet that consumers want to drive. We think about the long-term impact from a residual value standpoint and how we're going to perform when we dispose of those cars. And we also have an eye towards what cars make sense for us to then layer into our TNC fleet. And we've been very disciplined as it relates to making sure that we operate with those fundamentals in mind really through the cycles. And as you saw results over the course of the year we're down year-over-year and we're pretty pleased with the capabilities that we have inside the company. And as you well know you, go through pockets or windows where residual values may move on you in a very short period of time. But if you maintain the fundamentals around discipline and fleet acquisition and discipline in how we manage the fleet we'll be fine. And specifically as you look forward, we've seen some movement in SUVs for example and particularly some of the SUVs that were in the model year 2018 time frame. Our results were impacted by that in the fourth quarter. But as we look long-term, we feel pretty good about the portfolio that we have and we feel good about our execution in the marketplace.

Yeah. And the best thing that we can do is to control, how we buy cars and how we dispose of them and pricing in between. And we're constantly improving all aspects of that challenge. And we have, I think world-class acquisition strategies here. We're pretty good at opportunistic selling. We're constantly looking at the makeup of fleet and adjusting it based on where we see residual values, as well as consumer demand. And then we've been expanding our retail car sales business and improving those capabilities. So overall, I think we have world-class acquisition and disposition capabilities in managing the fleet and continued focus on price if there's any changes is the best way to really manage through any kind of increase or decrease around residual values.

Okay. That's very helpful. And then just kind of a follow-up question on the package delivery, is there any way to maybe calibrate the size of the opportunity that you all are looking at versus TNC when you first started looking at that? And then kind of secondarily, as we think about how the profitability steps up is there -- is it more of a step function? Or is this going to be just kind of a constant source of steady growth for you?

I think we have just really started expanding into delivery. And I think we -- the approach, we took with TNC has worked very effectively. So we're looking at how do we leverage our large corporate fleet business in Donlen and our capabilities to best service customers like Walmart. So we're focusing in on some really big players who are the best in the industry and looking at how can -- we help them meet the demands of last-mile delivery and provide that type of capability and improvement for their consumers and create a win for them, a win for us and a win for their customers. So we are focused on it. We think we'll have a very similar success that we've had with TNC with last-mile delivery. Clearly, it's just a monster opportunity. And it's a huge problem for many retailers and we look to be providing solutions in that area. The brands, we have a great brand that stands for mobility and is recognizable and you may have already seen Hertz fans out there delivering goods and services in this space. And we continue to -- we will continue to expand it.

Thank you. And next we will go to the line of Adam Jonas with Morgan Stanley. Please go ahead.

Hi everybody. Hi, Kathy. So you have about 700,000 or 800,000 vehicles in your global fleet. I think -- in the markets you participate roughly 1 out of 1000 vehicles on the road are Hertz vehicle and on our calculations about 1 out of 300 miles is a Hertz rental car mile. So you're in a really unique position to kind of make a big change, make a big progress impacts on reducing carbon footprints. I'd be curious and I know this doesn't come up yet in conference calls, but I think you might agree given all the focus from investors in ESG, this is going to keep coming up. So how do you think -- what's your strategy for Hertz to reduce their CO2 footprint of the vehicles in your fleet? I haven't seen a sustainability report since -- the – or this corporate responsibility report since 2017. Correct me, if I'm wrong maybe you have one coming out. But you mentioned a few thousand hybrids, I think it's established at nobody has EVs in the fleet of any significant volume. So be curious for just anything you could kind of help enlighten the audience here as ESG is becoming a real existential issue for all companies, not just rental car companies. And you certainly have an opportunity to do something great about it?

Well in Europe, this is an area that Europe is much you know more advance than we are in the U.S.. The challenge we have in the U.S. is the infrastructure to support charging of vehicles. And until the government steps up in that area particularly when it comes to consumers renting cars, we struggle with people taking electric vehicles for fear of where will they charge it. When they're traveling to a place that they don't have familiarity with versus their own homes where they could plug it in or the local areas that they live in. So right now, if we look at where we think the greatest growth is going to be an advancement, it's going to be in Europe. And so we are working with some of the cities; for example, Paris to potentially provide in our location charging stations, we will be buying and meeting all of the fleet standards that the European countries are demanding. We're looking at, at least 1,000 electric vehicles in our fleet over in Europe to start. And so our approach is to work in those municipalities and areas, where the government and the infrastructure will support it, but we need to see the airport stepping up in that regard consumer preference that they will actually rent these cars that when we put them into the fleet and then from an OEM perspective, they've eliminated the incentives. Will they start putting back in these incentives so people will actually buy these cars? We do have partnerships with the OEMs and we have been in discussions with them particularly in the delivery area. How can we work with them to provide electric vehicles for delivery and be charging locations for these vehicles along with any kind of maintenance. Now the good news in electric vehicles they have lower maintenance requirements. So that's an upside. So we – from an electrification perspective it is part of our strategic plan. We have a focus on it. We will grow and develop first and foremost in Europe where the governments and the infrastructure are supportive. And then work with OEMs and the government here to make some progress as well. But the good news is as we turn our cars every 18 months and so as the infrastructure advances here, hopefully, we'll be able to put more electric cars in the fleet and maybe consumers will start wanting to rent them.

That's great color. Thanks, Kathy.

Thanks, Adam.

Thank you. And next we'll go to the line of Michael Millman with Millman Research & Associates. Please go ahead.

Thank you. A few. One as AIM has – when they reported said that, "it's the best market for U.S. pricing market they've seen in 30 years and that seems to be continuing." So I wanted to get your take on that. Secondly, you mentioned price – pricings have been moving up. Does that include large corporate as well in terms of pricing?

Well, and I guess I'm going to turn it over to Jamere. But I think if you read most of the industry reports last year we were consistently leading price up. And as I stated earlier, we provide value to consumers and that value has increased in expense both in labor as well as in the cost of cars. And we are going to continue to lead the charge in driving pricing. And that is our priority. We won't – we're not having to sacrifice volume, we grew every single quarter in volume last year in the U.S. So we continue to manage both to get volume, but we will put price always over volume in that regard. But Jamere, if you want to take it?

Yeah. So a couple of things from a pricing standpoint. December was a pretty strong month for us as well. And the whole quarter really if you look at our U.S. business, our U.S. business was up 4% in RPD. That's indicative of the kind of pricing environment that we saw. And as I said earlier, we're off to a strong start in the first quarter. As I look at sort of business, if you will, we are being rewarded for the investments that we've made in our fleet, in our brands, in our products, in our services. And we're seeing volume growth and pricing growth, in business. And so, the work that we've done to improve our fleet, the fact that we won J.D. Power number 1 from a customer service standpoint, those are all things that when Bob Stuart and the sales team have an opportunity to go in and to either win or renew a contract, those are things that give us a competitive advantage in the marketplace. And so, we like our performance there. As you know corporate is, very, very competitive, probably one of the most competitive segments if you will, of the marketplace. But we've improved our operating performance, improved our service capabilities. We've put numbers on the scoreboard, in terms of J.D. Power number 1. And those are the things that are helping us drive price and volume in that environment.

Okay. And in terms of your sort of catch-up over the last several years, can you kind of quantify how much is additional -- what additional costs, last year? And what additional costs you expect this year from the catch-up?

Yeah. So, I would say overall, we've invested in our business, in a disciplined way. And you've seen us invest in our technology. You've seen us invest in our service capabilities. You've heard us talk about the things that we needed to do to sort of point the business, in the right direction. But what you saw in 2019 is that, we were able to grow direct operating expenses and SG&A, at a slower rate than revenue. And that is our focus going forward to help us drive margin expansion. So, it is a journey that will continue. As I mentioned on the call, we're running the productivity play, with intensity inside the company. And every area of our business, whether it's in the direct operating expenses or it's SG&A have a productivity target, that we need to deliver upon. And this is going to help us create both, a faster-growing and higher-margin business going forward.

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