Q3 2019 Earnings Call

Welcome to the Hertz Global Holdings third quarter 2019 earnings call. Currently all lines are in listen only mode. Following the presentation. We will conduct a question and answers Russia I would like to remind you that today's call is being recorded by the company I would now like turn the call over <unk>.

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. The 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 the performance 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 the state 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 then the risk factors and forward looking statements section like 2018 Form 10-K , and our third quarter 2019 Form 10-Q when filed copies of these filings are or will be available from the FCC and on the hurts 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 their profitability in performance is better demonstrating using these non-GAAP metrics.

Our call today focuses on Hertz Global Holdings Inc., a publicly traded company results and Hertz Corporation are materially the same as Hertz Global holdings.

On the call. This morning, with Kathy Mer Anello, our CEO engineer Jackson Hurts, its chief Financial Officer, I'll now turn the call over to Kathy.

Thank you lastly, and good morning, everyone in the third quarter, we delivered our ninth consecutive quarter of year over year, a top line improvement and our eighth consecutive quarter of earnings growth worldwide. Adjusted corporate EBITDA was 12% higher in the latest three month period. These strong results continue to reflect the op.

Operational efficiencies.

That's all execution of our strategies early returns on foundational and growth investments and the value 38000 employees around the world deliver to their commitment to understanding the needs of our customers and to creating differentiated experiences for them. So let me start there the investments we've made over the last three.

Here are some enabling efficient personalized service offering top rated vehicles and developing customer centric technologies that enhance the travel experience are paying off last month JD powers named her its number one all the wall and its 2019 North America rental car satisfaction survey I.

Personally thank everyone across the organization for their contribution to this accomplishment our employees are committed caring and take great pride and making the hurts experience number one for our customers. In addition to being awarded best overall Hertz also took the top spot in several key categories, including pick up process.

We time process cost in theater and the reservation process when it comes to reserving a vehicle purchase enhanced digital app.

Makes user experiences more personnel and provides customize the bulk content, a seamless checkout process and intuitive navigation the Atlas, helping to drive a 10% increase in her to digital direct bookings year to date.

Everyone that hurts dollar thrifty knows that putting the customer first is key to capturing demand and earning a higher price and the reason third quarter are you watch rental car business generated 6% more revenue on five course on higher volumes and a 1% increase in RPD on top of a very strong growth in the prior here.

When it comes to revenue growth by leveraging core strengths and looking at our business with an entrepreneurial mindset, where not only improving the customer experience, we're finding new ways to capture incremental growth an adjacent markets like T N C and last mile delivery, while also creating incremental value with innovation.

Like hurts us Fastlane biometrics technology are easy to use online car sales portal and Donlins driver point telematics platform.

There was a combination of donlin and hard to strength, we found increased advantages and opportunities for differentiation and expansion.

Donlins proprietary telematics and analytics platform, its maintenance network and its large fleet management capabilities dovetail nicely with the operating logistics distribution and service strength of our rental car business with donlin, we'd been connecting the T N C vehicles, and the delivery trucks and bands we rank globally.

To facilitate drive on maintenance alerts and encourage driver safety Donlin Strieber point analytics and dashboards also help our rental car operations better monitor vehicle usage and managed fleet utilization and maintenance requirements in real time, and we're only just getting started the potential for leveraging Donald.

In systems capabilities is significantly expanding well technology and improved processes are helping to create new revenue opportunities and make the customer experience faster and easier. It's also allowing our employees to operate more efficiently without jeopardizing service enhancements to our customer relationship management tools.

Our resolving issues and getting customers on their way faster. Our recently launch cloud based financial system has reduced manual activities offering direct access to data in greater flexibility, which impose reporting execution and forecasting accuracy and just last week, we cut over to our fleet management cloud solution.

And a small north American market. The first module of our integrated platform. This more agile and streamline system will allow for better lifecycle asset management on demand vehicle reporting and greater employee productivity.

Technology enabled products over the along with a companywide commitment to process excellence ensures we operate at the sustainably lower costs, while delivering the award winning supposed to work customers. When you don't want leaders across the organization are taking accountability for efficiencies and returns on incremental growth investment.

We're making steady progress year to date direct operating an S. DNA expenses as a percent of revenue improved 140 basis points and there's still quite a bit of opportunity vehicle depreciation expense was also lower year over year somewhat due to a strong market with vigil value from U.S., but also driven by or.

Strategically buying and the benefits of having one of the leading car sales operations nationally Jimmy I will give you more details on our recent performance.

Well, it's clear on foundational strength of disciplines Palito Robin on management operational excellence and brand marketing all effectively delivering consistent revenue and EBITDA growth, having that strong foundation in place now affords us the ability to innovate in response to new growth opportunities towards that and we're already.

Seeing strong year over year earnings contribution from ride hailing retail delivery and large corporate fleet management. Additionally, the investments we've been making in a connected technology platform will further elevate and support the vitro the business. There's a lot to be excited about with so many opportunities as always we'll be disciplined and.

Thoughtful in our approach to creating value with that I'll turn it over <unk>, Germany or.

Thank you Kathy and good morning, everyone. Overall, we had a solid third quarter marked by year over year improvement and revenue doubled visit improvement in adjusted corporate EBITDA and significant progress on our growth and productivity initiatives. We are building it faster growing business driven by improvements in our fleet expanded product offerings industry, leading customer service.

And brand building marketing.

The growth initiative more vehicle carrying costs and our laser focus on productivity are driving margin expansion and improve profitability.

The improved operating capability of the company position as well as we look forward to 2020.

First let me provide an overview of our total company results slide six shows our consolidated results on a U.S. GAAP basis.

non-GAAP measures for the third quarter total revenue of $2.8 billion is up 3% on a reported basis and up 4% on a constant currency basis versus third quarter 2018, driven by exceptionally strong 6% growth in our U.S. rack segment, partially offset by a four point drag due to foreign currency and our international rack segment.

Our revenue results Mark nine quarters of consecutive year over year. According to go for business.

GAAP net income for global was $169 million during the quarter compared $141 million in the third quarter of 2018, and net income per diluted share was $1.26 cents compared to a dollar and 47 cents.

The drag on net income per share is attributable to the equity rights offering which increased the weighted average number of diluted shares outstanding from 96 million in the prior year 434 million in the third quarter of 2019. We've included an appendix in the presentation Slide 15 that provides a reconciliation of our share counts <unk> third quarter.

2019 in 2018.

On a non-GAAP basis, adjusted corporate EBITDA grew 12% the $392 million in our adjusted corporate EBITDA margin expanded by 110 basis points.

The significant improvement in our results were driven by higher volume increased pricing lower vehicle depreciation expense in Iraq business and the impact of our productivity initiatives, which caused our direct operating expenses and that's DNA to remain flat while revenue grew 4% on a constant currency basis.

Adjusted net income for the quarter was $214 million or $1.60 cents per share compared to $180 million were $1.88 cents per share in the prior year quarter.

The drag on a drug to be POS is also attributable to the equity rights offering that I mentioned earlier.

I wanted to provide some color on the quarter, starting with our U.S. rock segment and I'll start with revenue.

Our newest rock doesn't have total revenues of $2 billion up 6% versus the prior year and third quarter record for the segment.

Yeah, Chris Rock segment saw strong volume growth well, the 5% increase in transaction days moderate pricing improvement with both time and miles rate and total RPD up 1%.

Revenue results were driven by strong demand in retail high margins value added services and mills were lyft drivers, which would call PNC rentals.

Do you see U.S. RAC revenue grew 5% driven by 20% increase in transaction days and a 2% increase in RPD.

In the quarter, we saw strong revenue growth in <unk> dollar anthropy and both on and off airport.

[noise] fee, which is one of our key growth initiatives were about 30% and contributed over a point of revenue growth for the segment.

We continue to see robust demand increased pricing and writing new locations in service offerings to capitalize on this important growth opportunities.

Your was rock adjusted EBITDA was $269 million of 29% improvement versus the prior year quarter.

Our results were driven by the strong top line growth like 5% decrease in monthly per unit vehicle depreciation and outstanding productivity.

Our teams continue to execute on our growth initiatives disciplined fleet management service Excellence brand building marketing and productivity, resulting in solid growth and profitability improvements and our newest black segment.

Well tone in the fleet.

Monkey vehicle depreciation expense of $247 per unit for the quarter decreased 5% as a result, and disciplines lead acquisitions residual values shrink and solid execution on our disposition strategy.

Utilization in the quarter was impacted by securing callable vans and trucks to support the fourth quarter holiday people package delivery and the growing industry demand for last mile delivery driver.

Small package delivery represents another important growth initiative for the company, we've already partner with nearly 650 delivery service providers core servicing retailers used trailers and mark and consumers.

In addition, we grew our fleet capacity isn't sport, the girls and RPM business, excluding PMC and delivery vehicle fleet capacity was in line with the growth in core rental transaction days.

Moving to our fleet sales initiatives.

Overall, we told dispositions grew 9% for the quarter in same store sales grew 2%.

Our retail channel is an important growth initiative that has given us a competitive advantage on the cost of cars and the opportunity to grow we told car sales beyond dispositions of our rental fleets.

So we're continuing to invest in our world class sales team.

Adding new locations and adding capability to our web based platform to drive revenue growth and profitability.

[noise] growing to 18 stores in the U.S. in Canada with plans for additional openings by the end of the year.

The strength of the elsewhere.

Excellent quality the fleet and the investments in the customer experience will drive strong results worsen 2020 and beyond.

Well, we're door International works <unk> total revenues for the third quarter was $730 million down 4%, both on a constant currency basis.

Our business in Asia Pacific continues to see solid growth in pricing growth.

While our European business saw a permanent improvements partially offset by weaker volume.

The implementation of new revenue on fleet management capabilities in our international segment is under way and we're investing in growth and service initiative that will drive better result international.

They are acelrx reported adjusted EBITDA $115 million down 18% versus the prior year. Adjusted EBITDA results were driven primarily by higher vehicle related costs and flat revenue.

I'd like to provide an update on some of our financing activities and free cash flow on our last call. We mentioned that we completed a highly successful rights offering in July raising $750 million and in August we issued $500 million of unsecured senior notes.

The proceeds from those transactions, where you were doing $700 million of 2020, corporate debt maturities and refinanced $500 million of 2021 maturities to 2026.

As a result, we have no significant corporate debt maturities until June 2021.

Our corporate leverage as measured by adjusted corporate EBITDA and net corporate debt.

Outlined four times in the last 12 months to 5.1 time from 9.1 times.

Our improved financial results and stronger balance sheet should enable us to lower both our vehicle and corporate financing costs in the future.

On the liquidity front, we ended the quarter with no drawings under our corporate senior revolving credit facility with $860 million in corporate liquidity.

Now turning to cash flow, we expect continued improvement in overall cash flow through the remainder of the year as our fleet need seasonally decline.

We now expect full year 2019, adjusted free cash flow will be positive driven primarily by the improvement in operating cash flow and favorable ABS fair market value marks on our U.S. Lee consistent with a strong residual value market. This year.

So to wrap up I recently celebrated my one year anniversary as a beautiful it hurts and I could not be more excited about the opportunity to help create a faster growing higher margin business. While we still have work to do we've made tremendous progress in growing the top line and driving margin expansion through productivity improvement.

Growth initiatives are delivering and we're winning in the marketplace as evidenced by the recent JD power rent.

As we move forward and a 2021 of a keen focus on four key areas number one growing the top line with investments in our brand fleet products and service.

Driving margin expansion through productivity initiatives.

<unk> discipline fleet management to drive asset utilization.

And for innovation that will enable growth expansion into new markets and further improvements and cost and productivity.

We believe these are the right catalyst to drive improved shareholder returns and I look forward to updating you on a future progress and are in future quarters, well that I'll turn it back over to the operator for questions operator.

Ladies and gentlemen will now be getting the question answer session of today's conference. If you wish to ask your question. Please to press the star followed by the why don't you touched on this fall.

You'll hear a tone, indicating that you place yourself in Q1, all questions will be pulled in order to be our received you've made remove yourself at anytime by depressing the boundary on you've touched on fall and if using a speakerphone. Please pick up your handset before depressing the keys.

Our first question will come from the line of Chris Walker of Deutsche Bank. Please go ahead.

Hey, good morning, everyone in graduations, another very solid quarter.

What wanted to ask a little bit about the ramp up of the I guess last mile delivery service.

Yes, what kind of eating do you think that's in for for you guys as a company and you know could that expand beyond some of the local delivery kind of how much of an investment or are you willing to make in that.

Well, we see it as a a really significant opportunity and it dovetails nicely with the abilities, we have than our corporate fleet management, along with what we can do from a direct to consumer loan until perspective. So we have thousands of locations around the country, we ever really great suite.

Management company, and we signed hundreds of contracts with the Amazon DSP.

Oh providers and bad you know frankly.

We can't get enough balance you know we've cleaned it up to one thing under the third quarter for this business I'm you know we continually good great demand only gets good margins from it.

And we just think it's a natural adjunct to what we've been going in our PNC space as well as corporate fleet management, leveraging you know great assets into rental car space.

Okay very good and then.

Beyond the retail strategy, obviously, it's paid a lot of dividends for you so far kind of along the same winds you know how.

How do you kind of maybe internally underwrite the growth there and how how how much of that do you want how much of that.

You want the total business to become I guess trying to think about it in the context of sizeable role fleet and you mentioned doing things beyond just reseller.

Core rental cars.

I think the if you look at you know how mobility is changing and and I I think mobility is a little overused, but you know the demand on vehicles, particularly for last mile delivery and the distribution assets that we have the retail car sales assets that we have the corporate free business that we have.

And you know thousands of locations that you know within I think about 90% or the time within 15 minutes can reach a console or there's enormous upside for us to move into outside of the traditional I'm you know air be at the airports growth. So I think you know we've got a lot of leverage still.

And our hurts localization and Weve being you know we began to expand you know what we do out of those location. So I think you know that could be a business double its carbon side, you know with expanding more around delivery and more affordable you know opportunities with TMC drivers. So.

Thank you know we look at you if you look at the growth we've already experiencing the TMC space, which was you know really incredibly rapid.

Because I think we've got a great product you know we gave we've got great process around good and it did deliver good margins were saying the same kind opportunities and you know the last mile delivery space. So I think we've just started and it's very you know very early innings in both of those spaces. So yeah I'd like to see.

More diversity, and we're moving towards that and making investments towards that from a large corporate fleet business.

I ride hailing business, our last mile delivery. In addition to our traditional consumer rental car business and specifically as it relates to retail car sales I mean, we've been very vocal about the fact that we are a.

Top 10 used car dealer if you were looking at it on a standalone basis, we built tremendous capability inside the organization, we have a world class sailed speed, we're investing in our web based capabilities and if you look at the growth that we've had and locations in same store sales growth no. We do think there's opportunity for us to grow.

Well beyond just the dispositions of our rental fleet.

And into something that as we look at our strategic plan over the next few years or so that will be exploring in more detail.

Oh, well, we've got early innings, there and you know we've developed great online capabilities and payment capabilities. So there's a lot of opportunity in that space along.

No I think 88 locations. We've clearly you know done a decent job of expanding quickly just based on our own volume was but there's a lot more cars out there so.

Brian Johnson from Barclays. Please go ahead.

Thank you I want to drill down into some of the cost wise.

Let's start with us DNA in particular.

You know if I look at the two segments. It was basically flat year over year. Despite rising revenues corporate came down as well I forget how much of that is.

Adjusted out so can you kind of.

You talked about some of the cost controls yet investing in service can you give us a feel for two directory. That's due now over the next couple of years.

You know given your initiatives as well as within that how much of the <unk> spend that's still in the adjusted numbers and that we're all buffers.

Yeah, so from an S. DNA standpoint, it's part of our overall productivity initiatives, we are running the productivity play inside the company with real intensity.

So I'll, let this quarter if you look at.

CNS unite combine it's literally flat year over year, where our revenue was growing 4% on a constant currency basis.

As we've said before on previous calls, we see opportunities really across the organization.

Everything from the way that were staffed in certain functions to opportunities and procurement to opportunities in working with third party vendors and we're making tremendous progress. There you know as we look at our plans over the next.

Two to three years or so what I'll say to you as our commitment is to grow deal, we and asked DNA, adding slower rate than the top line and that should give us nice operating leverage as we as we move forward as it relates to the technology investments. We've made a really good progress as Kathy alluded to on the call. This morning, we still have some investments to make on our on our.

Integrated platform, but what you will see going forward is that the the things that we're working on from a productivity standpoint will essentially be the bill parents, where the investments that we make I'm not so much healthier place for us to be as a company. So we feel good about what are we are it is you know unloved another leg to the stool that we've added.

The drive our results and you're seeing it as we get operating leverage this quarter and in future quarters <unk> I think one of the benefits of the technology upgrade to then you know we have been looking at the process before we put it on a new technology and as a result, our operations leaders have really done a great job thought.

You know building great Unoprostone end to the new technology and I think you know if you look at what we've been able to accomplish you know despite you know waiting for some of these improvements the comment you know winning the JD Power Award is it's a significant evidence of we're getting the process right. You know regardless of you know the tech.

Allergy investments so I think it you know as we just launched the fleet.

Got you all of our integrated platform, there already seeing great opportunities and fleet management maintenance and and you know just how to get the card quicker serving the customers that they comment. So we're pretty excited about you know the the future productivity as we you know every time, we get a new module and most of that has been help.

Less than our our top line I'm now, we're starting to see technology coming in that'll help us in our productivity.

And follow up on the weak cost side, if auction values, which is of course the measure we see publicly work to be flat or down 1% where would your fleet costs go you know I guess underneath that is we'll see the Q how much gain on sales were there and then how much of started just mild equation.

The used car getting it gets you need offset figure channel strategy.

Yeah. So as you know, it's a little that's a little nuanced when you look at sort of what happens with AWS auction values, sometimes that does not necessarily reflect what we're actually experiencing in our fleet you know the good news with what we've done with our disposition strategy is we've actually move the lions share of our disposition strategy through either directly.

Dealer or as I mentioned earlier to rebuild car sales and that actually gives us significant advantages versus what you see and then auctions.

What I'll say to you is that the the initiatives that we've put in place around building a better fleet all take into account not only the demand that we see in the rental car business, but it also takes into account what would you expect to see in residual values and how we expect the disposition cars either through the tendency fleet.

Through auction or through direct to dealer or through retail and so all those things will be the drivers for what we ultimately see in terms of the.

Financial results on our business. So the strategy that we haven't places is geared towards managing the entire lifecycle of the car and we do that with the notion of maximizing residual values really wherever we are in the cycle.

Michael Millman Millman research. Please go ahead.

Thank you.

Oh.

If you Didnt talk about pricing if it's the other day talk about how.

Pricing seemed to at the end of October take a jump up.

Fourth quarter looks very strong and then you also mentioned that the first time and.

11 quarters, there was a price increase internationally.

Wondering if you were saying those and to what extent.

He was saying.

So it was thanks.

We were pretty pleased with our results in the U.S. from a pricing standpoint, as I said in my prepared comments that you know excluding TNC, we actually saw price up 2%.

Which was pretty strong given the environment that we're in I'd also say that you know as I look at the early results coming back from our October results here, a pricing looks fairly strong during the month month of October I think fleets are are tightening as we typically see in the fourth quarter.

For the year, and we expect to see some pretty good yielding opportunities out there and then in terms of the international market you know what we what we also saw as we saw pricing in both Europe and Asia Pac I'm very proud because actually seeing volume growth and pricing, which is there's a big contributor to our results. The volumes scenario in Europe has been a little bit softer.

Given some of the my market dynamics in the macro dynamics there, but overall, we are seeing in some improvement in a in the international markets and pricing what we've said inside the company is that you know driving prices are number one priority. It's the most efficient way for us to build both the topline in the margin at the same time.

We've invested in very sophisticated revenue management capabilities, we've talked about the investments that we made an AI and machine learning and predictive analytics those things are paying huge dividends for us in the U.S. and we're starting to implement those capabilities outside the U.S. as well and we liked the things that we've done with the fleet.

And those things are helping us to drive drive price a inside the business.

Well when do you think.

You will be operating center on an ongoing basis.

Most of the major.

Hi improvements.

Already incorporated.

[noise] next 12 months or is it.

Continue sort of however.

The way of ongoing operations.

I think you know its evidence of a winning the JD Power award for the best service in the rental car space.

Bad we exceeded.

I would say you know that there's some industry positive and that we had a 2% XT and see price growth on top of a volume I think given we've had eight consecutive quarters of EBITDA grew up with an expansion in nine of topline growth we're doing it the right way, we're delivering productivity and improve.

Oh, Dod deal only an S. DNA as a percent 11, though our fleet Expensed is down to I would say you know industry best averages and we continue you know to have all the foundations in place to drive that so you know I think every company is constantly you know it it's not a destination you cost.

Certainly our expanding your margins improving your process innovating to create new opportunities you know I think one other things we've been able to do is consistently put in foundational capabilities that drive growth EBITDA growth the right way through a top topline growth with controlled Vic.

Scientists at the same time, we've been investing in upgrading and our technology. So we can manage and take advantage of things like connected car. Some telematics, we've expanded into new opportunities like T N C and last mile delivery.

So I I think we've got all of all of the gears hitting an all high speed full speed ahead, but again, we're disciplined and that's why we've been able to drive consistent EBITDA our growth over a quarter.

Adam Jonas Morgan Stanley . Please go ahead.

Oh, Thanks, everybody on just one question one follow up the first is can you confirm.

You don't how many electric vehicles I mean pure batteries are in the U.S. fleet right now.

Oh candidly, we don't have died on hand, you back number but it is not sitting up again and that there as to where she was was that.

You know the ones, we have customers don't want to drive because their concern you know where do they plug them into charge on you know generally speaking people are going to a place. They don't have a car, they're not familiar with and so they're not really comfortable you know looking at electric vehicles. However to your question we're very.

And trusted around when we get into last mile delivery from an economic Sunday, you know and environmental perspective.

We are in discussions was you know one of the OEM is on electric vehicles and you know how we can get more electric vans for our DSP drivers. So I think that's an area, where we expect to grow the fleet.

It's just really tough consumers are afraid to rent electric cars in places you know, they're not familiar with that makes a lot of sounds kv. Thanks for that and just one follow up [laughter], what can you tell us about the credit.

Quality or just anything regarding the credit worthiness or.

Financial Wherewithal of the typical can see driver because some some investors are out there. Thank Ken.

If you if you're in already on the gig economy, and you don't have your own right [laughter] it might skew more distressed and I'm just wondering what you can tell us about that thanks.

You know I I think it's actually a better solution to some other things these people might be getting into making a big investment and a car and then finding out that there you know they don't have the chops or you know, they're not know where they are they're not able to generate the robin I think as you know.

It's a really tough pod for these drivers, but you got to put in a lot hours. There is an expense around the car I think we're probably solution, where you know it took way way to answer around and plus if you look at you know the low cost as a car the maintenance that we provide.

You know I think all in where a much where a much more cost effective solutions for drivers and then going out on their own in dealing with their wrong. You know car purchase car sales in car maintenance. So I think if anything we help that environment and we improved the likelihood of success of these drivers I mean, when I you know.

Occasionally if I'm in I know by asking questions and they write away no hurt the love what we're doing and I think it's a it's a really big helps you know to get people started in this industry.

Ryan Brinkman J.P. Morgan. Please go ahead.

Great. Thanks for taking my question can you help us to maybe just think about how much of the benefits to lower per unit fleet costs. In 2019 is on the one hand, a function of you know lower perspective rates of depreciation that should be sustainable should residuals play out as you now expect or I don't know maybe stems from your disposition strategy.

Which can continue to help more versus how much I may be stems on the other hand from a you know like a onetime benefit to Ah Ah the gain on sale from unexpectedly higher auction prices a that wouldn't be expected to continue even if the used car prices do continue at this level.

You know as we've talked about as it relates to a depreciation overall its really nuances I mean, obviously all of the things that we're doing inside the company as it relates to discipline fleet management, making sure that we have the right number of cards, making sure that we buy.

Cars that not only our consumers want to rent, but with an eye towards what are the residual values in the back end the disposition strategy that we have moving you know vehicles through alternative channels. Those are all things that are really really important making sure that we get the best outcome on depreciation.

And obviously, the strengthen and residual values in the marketplace sort of sort of help that so any cycle in any environment you need to have that base level of capabilities to make sure that you maximize your outcomes on on depreciation. So while we are helped obviously by a strong residual value market.

No, we're executing really well in terms of procurement disposition and making sure that we buy though the rightfully that that has demand when it comes out of the rental market is important. So again I think the most important thing that we've done is we've we've done our acquisition of the fleet with an eye towards the lifecycle.

The vehicle and some vehicle, we're buying we have an eye towards putting them into the 10 feet fleet, which helps has been the depreciation curve and in the latter month and all of those things working together help us drive the best possible outcomes on vehicle depreciation and then our dreams are actually do well and we have an amazing girl good people I'm.

Vehicle acquisitions, and every year, we actually get like for light vehicles at a lower cost even though we have seen residual values up based on how we buy.

We tend to get a a price decrease every year and the vehicles are better quality with you know more of the things that consumers wanting their cars. When they are one thing a car as well as when they're buying.

Okay. Thanks. That's helpful. Color then just lastly, a I'm curious too if you have any thoughts on the impact to the industry from a in Europe . You know the transition next year to a more stringent grams of C. O two per kilometer standard some of that some observers expect us to increase the prices of new vehicles in Europe are restricted.

The types that can be sold just curious if you thought that that is something that might have potentially an impact.

The other regulatory environment is getting tougher there and you know we we are starting to feel the impact that some of that in some of our vehicle cost today I think the industry will be discipline in terms of you know, how we think about procuring vehicle and the price that we need to get moving forward to be able to make a the business be profit.

Well, but there's no question that it is a a tougher regulatory environment, there and you know the entire industries face wouldn't and I think we're.

All focused on you know dealing with it in a in a very disciplined way moving forward.

Yeah. It seems like there could be some potential offsets of new vehicles cost more that could provide upward pressure on used vehicles you weren't on a percent on on the total revenue I'm just curious if there's a if it's primarily a headwind or there could potentially be tailwinds also are makes vehicles more affordable people need to rent them instead of own et cetera, I'm not sure.

Well clearly be puts and takes and you know some of the dynamics that you alluded to you know certainly point out that there may be some opportunities. We'll just have to see these things take time to sort of work their way through the system and you know you have to understand what consumer behavior is actually going to be but what I can tell you is that you know.

The market tends to be pretty resilient and consumers in the industry sort to adapt to the regulatory environment and you see things sort of normalize as you move forward in time, but in the short term lots of things that are happening from a regulatory standpoint that that we'd have to consider as we move forward and our business.

We have a question from the line to Yuma VP of more of JP Morgan. Please go ahead.

Thank you a couple of questions for me I guess, you know enough firstly, you might see looks and intermediates and near term year, what so what's your leverage targets and I guess as you move forward was to their rights leverage level fulfil for that business, especially in the context us substantial some macro in a slowdown or would you.

Expects to go into some sort of a recessionary environments with much lower and lower leverage to now right now and what's appropriate ratings category.

That's sort of a scenario.

So first question. The second question is related to you that sort of the free cash flow to sustain free cash earnings power. So that's a of the business in New York 2019 expectations. How much assumed one time expenses are embedded in there that's our expects to drop off and 2020 beyond.

Yeah. So on the first question as it relates to the leverage you know, we're comfortable running the business and ER and the three times area that gives us tremendous financial firepower to grow the business in a in a disciplined way and also make you know really smart investment decisions Oh going forward. So yeah, we're comfortable running the business and.

And that in that area you know the second thing that I will say as it relates to you know free cash flow is our free cash flow as a fully loaded number that does include the investments will start to see some of those investments that we're making particularly in some of the technology things sort of roll off and the free cash flow, earning power of the business.

So actually starts to accelerate as we move through 2020, what however, what I what I'll say to you is that the most important thing in the most efficient way for us to grow our earnings.

And our cash flow is to do exactly what things that we've been doing which is rolled the topline in a disciplined way manages our our operating expenses in our S generic to grow slower than revenue.

And to drive productivity improvements really across the business and those will be the you know the big drivers that drive you know as our free cash flow capabilities going forward. So I like the capabilities that we build from a company we are strengthening the balance sheet with some of the actions that we've taken this year.

Those things are going to help us lower our borrowing costs bolt on cars and corporate debt in the future and a those things will give us the ability to drive meaningful free cash flow improvement as we as we move forward.

Thank you and I guess, maybe a quick couple of quick follow up into 2019 expectations.

Able to share number in terms of one time expenses, that's our embedded in that that expectation.

So we haven't broken out sort of what the what the one timers are in the and the expectation. So what I'll say is that we have.

You know a scenario, where we'll get the free cash flow positive. This year you know we've talked about you know the investments that we're making in technology, some of which are actually being offset by the productivity improvements.

And then as we move into next year the opportunity for us the lower the amount of things that we're doing from a development standpoint on technology.

And drive additional productivity will give us a and much more positive free cash flow scenario, one important point.

And ladies and gentlemen panel there are no further questions in queue at this time.

Thank you for joining the call today and have a great day.

[noise] gentlemen, it does include our conference call for today on behalf of today's panel would like to thank you for your participation in todays Hertz Global Holdings teleconference call. Thanks for your service have worn somebody you may now disconnect.

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