Q2 2019 Earnings Call
Welcome to the Hertz Global Holdings second quarter 2019 earnings Conference call. Currently all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session.
I would like to remind you that today's call is being recorded by the company I would now like to turn the call over to your host Leslie Hunziker.
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 that information to reflect changed circumstances.
Additional information concerning these statements is contained in our earnings press release, and the risk factors and forward looking statement section of our 2018 Form 10-K , and our second quarter 2019 Form 10-Q when filed.
Copies of these filings are or will be available.
From the FCC 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 Cathy marinello, our CEO engineered Jackson Hurts as Chief Financial Officer, now I'll turn the call over to Kathy.
Thank you Ashley and good morning, everyone. It's been a busy couple of months since we last fall and good progress continues on all fronts.
We delivered improved U.S rental car volume pricing and utilization again, and the second quarter and addition to our market leading vehicle offering enhanced service and improved processes are driving NPS scores higher.
And value added service revenue is trending positive year over year across all major categories. After we put new sales training programs in place and made enhancements to key products.
Machine learning revenue management tools continued to help us find strategic pricing opportunities and marketing initiatives are raising the visibility in value all three of our major brands each of which generated price and volume growth and the latest period. This resulted in 3% higher us RPD and a 10% revenue improvement, which extends a quarterly string of high single digits low double digit growth.
Admittedly year over year us comps get tougher as we move forward, but our commitment to balance top line growth remains a priority.
Our international segment reported revenue in line with last year on a constant currency basis, and a 1% higher pricing to generate sustainable momentum in Europe . Our team is taking a page from the U.S turnaround and prioritizing a richer fleet mix current configuration to better reflect country specific customer preferences for quality and premium brands, while launching AI pricing and demand forecasting tools across the regions at the same time that we're delivering record second quarter revenues were also focused on cost optimization, we have a companywide productivity initiative underway. That's paid early dividends with the second quarter results exceeding our internal plan and giving us increased confidence in the opportunities we've identified to work smarter leverage our scale and streamline processes right. Now a portion of these savings are being used to offset technology investments, but next year. These efficiencies will make a more notable margin.
Contribution.
As it relates to depreciation expense as you saw the reduction was significant in the quarter, while residual values remain stronger than expected going into the year multiple factors are contributing to the favorability, including on vehicle acquisition strategy asset efficiency through transaction growth and extended life TNC fleets and the effective use of our highest return retail sales channel.
So far we haven't seen much softening in the used car market. However, we're being prudent with internal planning and decision, making through disciplined fleet management and cost controls are focused on fleet procurement dispositions through high earning channels and the opportunistic rotations are capabilities that drive better outcomes on depreciation through all of the cycle.
We'll also grounded and thoughtful on how we are managing our technology transformation and we've made significant progress through the first half of the year, we've already rolled out the advanced features and functions of our now cloud based CRM program launched our faster more flexible mobile App and just last week completed the launch of our new financial systems. This month, we started user acceptance testing of our car rental and reservation systems and our plan is to launch our integrated cloud based platform and a couple of markets in North America. This fall, we have exceptional leadership and World class partners to help ensure the success of the launch and cutover activities. The technology transformation will put us on a path to delivering faster growth and incremental productivity in the years to come and we are confident in our ability to fully execute our plan.
And as we strengthen our presence and leadership in our markets around the world improving our capital structure to support growth is also top of mind and the second quarter, we launched a rights offering to retire $700 million of corporate debt, which reduces interest expense and increases financial flexibility.
We completed the highly successful transaction last month and at the same time refinanced our 2021 bonds at a lower rate with a new seven year maturity. There was overwhelming demand to participate in both transactions and I think that reflects the consistent progress we've made in delivering quality topline growth the margin opportunities from productivity optimization and the revenue and earnings growth potential that the technology upgrade creates.
The combination of profit expansion and the recent accelerated debt repayment will deliver greater future value to our shareholders.
Before I turn it over to Jim There I'll, just reiterate that the second quarter was very strong by Hertz by any measure by aligning ourselves with our customers and through disciplined execution and investments in new revenue opportunities. We are strategically positioned for significant future growth.
The combination of our car rental competencies car sales infrastructure Donlins large fleet management expertise, our ride sharing initiative delivery services program and telematics in AI capabilities give us a pipeline for future revenue growth that transcends anything we've seen in the past we've got a great team of dedicated employees in place working hard and working smart everyday to elevate hurt us to the next level. It's an exciting time to be in rental car now let me walk you through more details on the second quarter to mayor.
Thank you Kevin and good morning, everyone. Overall, we had a great second quarter and our results exceeded our previous estimates the momentum from our growth initiatives disciplined fleet management residual values going in our laser focus on productivity drove significant improvements in revenue and adjusted corporate EBITDA for the quarter.
In addition, we have taken the necessary steps to de lever de risk the balance sheet, which will provide us with tremendous opportunities to grow the business and improve profitability of free cash flows.
Before I get into the details there is one housekeeping items in accordance with the topic to succeed the company as adjusted the share count used for both basic and diluted EPS for the second quarter 2019, and in 2018 to give a flexible rights offering that we launched in June .
But let me provide an overview of our total company results slide six slide six shows our consolidated results on a us GAAP basis, and our non-GAAP measures for the second quarter.
Total revenue of $2.5 billion was up 5% on a reported basis and up 7% on a constant currency basis versus second quarter 2018, driven by 10% growth in our U.S Rec segment, partially offset by a six point drag due to foreign currency in our international RAC segment.
And revenue results Mark three quarters of consecutive quarterly growth for our business net income for homes global was $38 million during the quarter compared to a loss of $63 million in the second quarter of 2018.
The net income per diluted share was 40 cents compared to a per share loss of 66 cents.
On a non-GAAP basis, adjusted corporate EBITDA improved 124% to $207 million and our adjusted corporate EBITDA margin expanded by 440 basis points.
Our results were driven by higher revenue from increased volume and pricing combined with lower vehicle depreciation expense in our rug business and the impact of our productivity initiatives.
Adjusted net income for the quarter was $71 million or 74 cents per share compared to an adjusted net loss of $16 million or 17 cents per share in the prior year quarter.
Now let me provide some additional color on the quarter, starting with our use rux segments and I'll start with revenue.
Our us direct business set a second quarter record with total revenues of $1.8 billion up 10% versus prior year.
Our TMC business grew 73% and contributed three percentage points of revenue growth for the segment driven by robust demand.
The years Rec segment saw strong volume and pricing growth with a 6% increase in transaction days, driven by TMC and retail leisure and time and mileage rate up 3%.
Total RPD was up 3% versus the prior year quarter and expediency total RPD grew 4% fueled by growth in both business and leisure both on and off airport.
In addition high margin revenue from value added services were positive contributor to top line growth in the quarter.
You are correct adjusted EBITDA was $156 million, a $138 million improvement versus the prior year quarter.
Our results were driven by the tremendous top line growth of 14% decrease in monthly per unit vehicle depreciation and solid 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 in our us Rec segment.
Now I will turn the fleet, we continue to manage our fleet capacity with rigor and discipline. We comparison was up 6% and up 3% expediency fleet due to utilization rose, 82% as we manage it tightly and drive segment profitability.
Moving the depreciation monthly vehicle depreciation expense of $247 per unit decreased 13% versus the prior year quarter. The decrease was the result of disciplined fleet acquisitions.
Residual value shrink and solid execution. In addition, we continue to increase unit sales through a higher returning retail channel to drive solid outcome and depreciation.
Moving to our fleet sales initiatives.
Our non program vehicles, the dispositions were up 5% in the quarter.
This positions through our retail channel grew 11% compared to the second quarter of 2018, while same store unit sales grew 4%.
We continue to expand our retail footprint to Hertz car sales and we are 84 stores at the end of the second quarter with more to come.
Retail car sales as a core capability and represents an important component of our future growth and profitability.
Moving to our international revenues total revenues were $560 million down, 5%, but were up 50 basis points on a constant currency basis as volume declines offset our approach.
Our PD grew just over 1% and transaction days were down just under 1%.
Our business in Asia Pacific continues to see solid volume growth for our European business saw some pricing improvements, partially offset by weaker volumes.
We have expanded our revenue and fleet management capabilities to our international segment, and we launched new growth and service initiatives, which we expect will deliver benefits for the segments similar to what we have seen in the us.
The International RAC segment reported adjusted EBITDA of $56 million down $23 million on a constant currency basis.
To primarily to a favorable expense item in the second quarter of 2018 that did not repeat in the second quarter of 2019.
Now I'll move to the balance sheet and cash flow and I'd like to provide an update on some of our financing activities and free cash flow.
As Kathy mentioned, we announced the stock rights offering which concluded in July .
This efficient equity offering raised $750 million with over 96% of the basic rights that only subscribe for and substantial over subscription requests.
The proceeds from this transaction combined with the issuance of $500 million of unsecured senior notes completed in August will allow us to redeem the $700 million 2020, corporate debt maturities and refinanced the $500 million 2021 maturities.
More importantly, this enables us to accelerate the de levering of our balance sheet and provide us with increased flexibility to grow our business and improved free cash flow.
Turning to cash our cash usage in the quarter is driven by the seasonal fleet ramp up the new summer demand, however, the strength and residual values and the improvements in operating cash flow has improved our cash outlook for the year.
Two for digital values hold up over the back half of the year as anticipated and we expect to generate positive free cash flow in 2019.
So to wrap up the strong results in the second quarter and early momentum in our summer peak season position us for a solid 2019.
Despite tougher comparisons in the third and fourth quarter on revenue and vehicle depreciation we still expect to drive revenue growth and improvement in adjusted corporate EBITDA in the back half of the year.
Longer term our growth initiatives will continue to deliver solid topline results, while the focus on productivity and efficiency will contribute to our margin expansion objectives.
These dynamics, along with a stronger balance sheet give us confidence in our ability to drive long term shareholder value and with that I'll turn it back over to the operator for questions. Operator, Thank you, ladies and gentlemen, if youd like to ask a question. Please press Star then one on your Touchtone phone you will hear a tone, indicating you have been placed in Q you may movers. So from Q at any time by pressing the pound key if you are using a speakerphone. Please pick up the handset before pressing the numbers and to get through as many questions as possible today. Please limit yourself to one question and one follow up per turn once again, if you have a question. Please press star one at this time.
Your first question comes from the line of Chris Woronka from Deutsche Bank. Please go ahead.
Hey, good morning, everyone.
And congratulations to you on a on a really terrific quarter.
Wanted to wanted to ask is pretty clear that you are.
Youre gaining market share on the on the core business.
And.
Is it possible to kind of talk about what inning, you think that might be and if you go back to kind of win this turnaround started where you were and where you're going just the trajectory of.
It was market share gains and what you think is possible.
Well look I think there is still more room to gain share for Hertz add a.
At at a fairly steady pace not not anything really significant there is a lot of business to go around.
Yes, if you also look at the macroeconomic environment and the opportunities.
With ride sharing last mile delivery.
There is a ton opportunity there to provide vehicles and services to support those efforts the demand far outweighs.
The vehicles in that capacity out there and no one's better ad.
Managing financing and delivering fleets out into the marketplace wherever and whenever you need them than hearts and so I think we have a brands at a reputation in this space.
And we're building that every day, we have seen enormous growth in our ride sharing business and I think we have more potential off airport to gain share for those reasons. In addition to just probably more of our fair share as you're aware, we dropped our share over the last several years based on kind of taken IOC the price and frankly I think we're just winning our fair share back.
So I think there is plenty of growth for everybody right now and it's a matter of just now ramping up and in our taking what we do well and putting it out there and then a few one of the the Janice we haven't guessed we have is donlan.
And you know we were up our whole team was up in Chicago, a week ago looking at driver point and the capabilities they have.
To manage all sizes of fleets fleets of one or two write up fleets of tens of thousands.
And so with the work they've been doing on telematics and connected car. The work we've been doing what we have over in Europe that we have developed.
And then what we're doing and consistently putting place in technology.
Our ability to offer a wider variety of services and capabilities.
Is limitless at this point, so yes were laser focused and install intently focused on.
Getting our foundation solid so where we've gotten our balance sheet position and our leverage by the end of the year I think we'll be in a very good place there, but we're well on our way there in our by getting productivity and expense management in place. In addition to world class marketing and pricing capabilities and then you look at our utilization rate at 82% I mean, I could not be prouder of the efforts that the entire team has has put in and the results and then.
If you add into it I was out on the road on the West coast and in our watching people incredibly dedicated to delivering in our world class service to our customers cleaning cars and 110 degree temperatures with a smile on their faces incredible in all but if you add in a world class group of employees that we really value and I think make a difference in this space in our there's plenty of room to grow and there's plenty of room to get price for that growth.
Well, we're working it hard it's not in our there is no magic wand here, but I think the things we're doing are progressing in our slowly and surely and I think there's more to come.
Great I appreciate all that color Kathy and follow up question is.
You've always said that there were going to time when kind of the the incremental spending a lot of these initiatives would you kind of inflect, partially because of revenue growth and it really feels like this past quarter was a was a big step there I think the direct opex was only up a few percentage points.
Big margin expansion. If you think that that time is common you talked about some of the productivity initiatives, there's going to be a pay off next year. Do you think this was kind of the quarter, where were you inflected or is there something that would would make you go back in the other way.
Laura I think what we have to do is be really diligent and being world class in our operations and clearly the real secret sauce. There is technology and so the work. We're doing has taken time, but we're doing it right now we're fixing all of the backbone systems, not just coming up with some add on stuff that works nice, but what's more important is that our core enterprise systems work flawlessly.
Have the technology and our employees hands that they need to deliver the right service to the customers as well as seemingly and seamlessly enable us with our connected car capabilities and so this is something that will make a huge difference. So if we're honest there will continue to be some technology investment down the road, probably well through 2020.
That work still has to get done in and brought to completion, but as I mentioned, we are in user acceptance testing on the really lions share of it.
But I think we are very intent on.
We have a good cycle now with the cost of cars being down and I think I think you know you're going to see a different residual market given the macroeconomic conditions around the cost the cars. The population is growing in the space that demands a lower cost used car.
The Oems are much more rational around in l., how they're producing and what they're producing the bankruptcy did a beautiful thing for them took that allow them to get out capacity and refinanced their balance sheets.
But I think looking at Sars at $17 million.
On an all time high was 20, but that $17 million is driven by population growth and a consistent population growth in United States in our Idhone. However, given all of that we're managing our business to be profitable and succeed and continue investments through a down cycle on residual values right. So I'm not assuming that we're going to be sitting at 250.
Now for the next 10 years, we're building an operations and a capability that can whether its through 350 or whatever residual values come out at.
So ill.
Long answer to you now a short question, but.
I think we have more work to do on productivity and process and a lot of that is around our technology.
But we have to manage and everybody here knows we're managing our business to a much higher residual right.
And so I think that will that that discipline will drive overall, our higher margin over time.
Yes, the only thing I'll add is that we said coming in the year that we were focused on becoming both a faster growing.
And a higher margin business and to do so we've been focused on growing our our direct operating expenses and our SDN at a slower rate than revenue growth, which we achieved in the second quarter revenue grew over 5%.
7% on a constant currency basis, and our deal we announced DNA grew just under 2%. So there are opportunities as Kathy mentioned, we get leaner and drive efficiencies really across every line item in the female and we're going after them in a disciplined and sustainable way and you're starting to see the benefits of those things flow through or are you now.
I'd add what I really love about our results is that you know I think we really put strong results on the table for the quarter, but we were also heavily investing in the technology and the brand and the marketing and the people in the company all along the way so to be able to deliver that and invest back in the value creation of future opportunities is really how we have.
Our employee base, our leadership is motivated by look if we waste the single dollar that's one dollar unless we can invest in the future and future opportunities. So the motivation in all is very positive. Even if you look at I think the greatest motivation we've had for the general employee base out in the operations is we have a world class fleet out there significantly higher quality than it was two years ago at $100 less than it was at the peak per unit.
Per vehicle per month, and I think that's that's how you got to run the business.
Your next question comes from the line of Brian Johnson from Barclays. Please go ahead.
Brian Johnson your line is open.
Thank you just took it off me Kathy two questions one for your GMR around Opex for the second around a broader strategy.
Around opex.
It improved as a percent of sales.
Would you describe that to June 10th the cost reduction initiatives, you're growing just better expense management, while the revenue grow or as you mentioned earlier some of that technology enables cost saves.
It's both so.
The most efficient way for us to grow our earnings in the business is through topline I think that's true for most businesses.
But as I mentioned before we are laser focused on driving productivity and efficiency across our company. So we have literally hundreds of productivity initiatives and every area of our business every function has a productivity goals.
Every area of operations as a productivity growth goal and we're driving that with rigor and discipline and I think those capabilities combined with a growing business, where we're getting operating leverage is works.
Contributing to the acceleration in EBITDA that you see in this isn't sort of a one hit wonder the discipline that we put in place around productivity.
These are sustained thing so its not a cut in chase program, it's making sustained structural improvements in our business and putting that discipline and.
In the business and going forward.
The technology is really early innings and so we've seen the benefits that we're going to see from technology, whether it's through the backend financial systems, where the improvement in our reservation rental systems or fleet management systems or a customer service systems. Those are all things that are yet in front of us and we think that will add an incremental opportunity for us to grow our margins. So again, we're focused on building a faster growing higher margin business, you do that with disciplined growth on the topline getting both volume and price.
And then you do it with really managing your direct operating expenses and the rest DNA.
And we're we're running that play with intensity inside the company.
Okay second question.
It's kind of got two parts, but the same topic, so as announced that you're up a car is acquiring the small company Fox.
Rental car.
So kind of two questions one on.
Before we comment on the merger itself, which probably won't say much about but just as we go to exit.
Airports move more and more.
Calm and rental car facilities I happened to be our rent to one of your colleagues at O'hare.
The other week said Hello.
Europe Bye bye.
Liner the system that it's a beautiful site now anyway is there Larry.
Hi, now I know I said Leslie a note, saying next time give me a call.
But my question is as you look at a facility like that I'm always struck by how the kind of what I used to think as the off airport minor brands are right. There on the same sledding I think Fox is literally between dollar thrifty and hertz or six.
With the major brands. So before you comment on Fox Europe occur what are you seeing in terms of market share trends in those facilities to wind up leading more I saw actually a lengthy line thats good news or bad news of dollar Thrifty that day.
So do you see any kind of market share premium brand erosion. When you do that when you airports mood advances type facility and then second what do you think about your rubber car Fox combinations.
Well actually was on what we've done with dollar thrifty as we've invested back in those brands.
It's actually elevated the Hertz brand.
So the Hertz brand is not looking for the Fox clientele.
You know the Hertz brand is more focused on.
Our speed of service and reliability, whereas when we get into the value brands you know dollar interest fee.
Compete down with those brands and I would say dollar more competes with.
The budget brands interesting more with somebody who is looking for a bargain, which as who is going to go to Fox and sell our fleet our service in our reflect that and what we have seen actually as our dollar thrifty brands have gotten stronger.
Our hearts price continues to grow and the elevated so we have you know with the artificial intelligence and machine learning, we've gotten through that capability over the last year and a half since we've had it in place.
We continue as you saw we got 3% price in the second quarter and I think it's not an easy environment with the cost the cost going down to do that and the competition.
Now as far as acquisitions, and you know Europe car during the Fox acquisition.
You know as I talked about earlier, we think we have competencies to grow our share within the rental space with the three brands. We have and we think we had lost some traction a few years ago and now we're getting it back and we think we can grow those brands and the capacity they have on without having to do acquisitions accompanied by Fox.
When we look at growth as I mentioned before I think our off airport locations. You now have a lot of opportunity to expand and grow as well as a ride sharing and last mile delivery and other services and capabilities. So I think there's more profit.
If I step back Theres when there is great demand and you have a great capacity to meet that demand Thats, where you maximize profits.
We don't see our future competing down at kind of rule ankle biter lend the low end of the business, we see it providing value services and leveraging the brands, we have and the investments we have made in technology in those brands.
Your next question comes from the line of John Healy from Northcoast Research. Please go ahead.
Thank you.
Was hoping to talk a little bit more about the TMC business in the <unk> and the sitting right there.
Can you give us a little bit color on what's driving the the step up there.
You know where you ultimately think this business can get to over the next year or two in terms of size and any early indications on how the profitability of this business might compare to the normal airport rental business.
So the best way to explain it as I had a conversation with one of the CLL as of of one of the ride sharing companies and that they explained in the Chicago Metropolitan area. The demand that is their full rights.
In order to meet that demand you would have to sign up all of the licensed drivers in the metropolitan area to really consistently.
Meets the demands of the ride that consumers want.
So, it's probably a bit of an exaggeration, but frankly, there's just an enormous demand for drivers.
And the greatest challenge obviously in that space is you have a car.
And cars are expensive.
And so you know when you find a solution like leveraging the depreciation curve of our cars.
And not selling them into the you know.
The rents used car space at a time, where they're really not that they are best pay from a residual value perspective.
Instead, putting them out to these drivers and being able to do it at double digit margins.
Now it's been it's been.
Great win for the ride sharing companies for the drivers and ourselves and whenever you find a need and demand and a solution where everybody wins.
You know the profitability and the growth is you know, we frankly were going to grow this business sensibly and rationally.
We're not going over expands we're going to leverage the distribution that we was network we have our ability to buy these assets and sell them and continue to grow up what a fair I mean, the growth has been huge obviously.
And you know our projections, we as you know our projections continues to be well north of 50, 60, 70% a year as far as what we're able to add.
We will come close to half a billion dollars by the end of the year.
The other thing we're doing now as well.
These fleets we have connected them. So we are able to now and have been building services and capabilities from those learnings.
And then were leveraging our donlen business to manage with driver points.
The platform that we have for logistics and fleet management to really learn and go well beyond.
Just putting a renting is hard to a driver.
So I think expanding the services.
Signing on the Dsps to delivery service providers that back up some of these larger companies to do last mile deliveries and then expanding it into a real platform as a service offerings that is where we're headed so the growth. We've got the question before was you know we're going to buy land providers.
No, we're probably going to focus in on this space, where we've had success we have a great brand and there is.
More than enough business to go around for anybody and everybody in the space.
And just in terms of profitability I mean, we're pleased with the profitability of the TMT business. It's a strong contributor to both growth and profitability of our newest rack business and in the second quarter, our vehicles were up 68%.
Pricing was better our operating costs are improving and we are obviously benefiting from a lower cost to cars and when we look at the business in totality its actually EBITDA accretive when you factor in the benefits of length of keep in the lower vehicle costs offsetting somewhat higher maintenance costs on an older fleet. So we're pretty we're pleased with the profitability there and as Kathy said the demand has been robust and we expect this business to business to grow double digits really for as far as I can see just based on the demand in the marketplace and we have started discussions are in the process of launching.
These services with our partners over in Europe , as well so with the global footprint, we have there's enormous opportunity.
We already have.
Work down in Brazil, with our partner locally is us.
But we've just started to expand and grow this business.
Okay, and then just a follow up I feel like you guys have mentioned.
Last mile delivery, five or six times in this call and I feel like Thats, a little bit different than in the past and denied.
I just immediately think of those Hulu Amazon van driver around my neighborhood driving things off so I'm trying to think about that type of opportunity are companies like Amazon are those potential partners for the Donlen business.
And maybe what an offering in the last mile space would look like Thats brought to the market bankers.
We already have Hans literally hundreds of contracts with CSP.
On for it to support Amazon deliveries, so our donlen business.
Has literally been signing dozens of contracts every month with these companies to provide our fleet management services, which include maintenance and and our driver point platform.
The support Amazon deliveries.
And then in our off airport locations, we are loading up vans and cars in our off airport locations in order to make sure that we're well positioned.
To support last mile delivery needs and again, we can't get an advance to meet those needs. We're running north of 90% on all of the deliveries out and off airport locations of these types of vans.
But in addition to leveraging our distribution network directly out to in our drivers who are seeking employment in that regard we have a great offering has been certified and.
We're supporting both Amazon trucks that you see driving around in the sense that the dsps that are signed up with Amazon.
To find drivers and trucks.
We are supporting with our fleet management services out of Donlin, and obviously leveraging.
Our distribution of our rental car business to do that.
Your next question comes from the line of Michael Millman from Millman Research. Please go ahead.
Okay. Thank you.
You talked about.
The percentage.
Changes of gross revenues keep my Naveen.
Hey man Osisko to OTI Asia.
Deals you have with AAA and such.
Were assessed and where it's going.
Secondly.
Could you talk about.
Comprehensive business.
Which I think you noted in your press release was strong.
Sure Hi segment pricing so.
Questions about what's happening with pricing.
We we are seeing a firming up and corporate pricing.
And that's a favorable trend.
We do see.
As far as are the partners that you just talked about.
We highly value you know we have a world class best in class group of partners, we have United and Marriott from a travel perspective number one and new space.
We have a great partner and AAA clearly a highly valuable partnership there.
Our state farm partnership is solid and growing.
We saw in the replacement space fairly stable volumes and price.
A little bit.
It was fairly flat the first path, but we saw.
We saw.
Volumes picking up in July there were hailstorms et cetera, So we seen transaction growth in the replacement business on.
I think when you look at those target we pick the right partners and we work very successfully with those partners to maximize the value and the price.
And the growth that they those brands and those partnerships strive for us.
Yeah, and I would say no to the first part of your question on.
Where we're seeing the volume growth I mean, we're seeing volume as I said in business and leisure.
And one of the things that we've been really focused on as we as we drive prices finding yield opportunities within individual segments. So while we've seen growth across all the segments and the performance that we've had in retail and our ability to get.
Price and retail has been outstanding through the first half of the year and so as we're looking at our business across the segments, we're finding opportunities to drive price within those individual markets and that's important.
I think as Kathy mentioned.
Corporate has always been a really.
Competitive segment in the marketplace.
And the investments that we've made in the fleet investments that we've made in our service capabilities are enabling us to get price there and that's really really important for us.
The drugs.
Pricing opportunities within our business and I think Michael to that point look there is a lot of talk around ride sharing in last mile delivery and all that goodness, but we have a massive distribution network.
That has been supported over the years by Great partners like United like Marriott the corporate business.
What we're doing with state farm and replacement and so you know the heart of this business, we're not going to take our eyes off of that what the heart and soul of this businesses, which is corporate travel leisure travel.
The off airport needs and we see.
Now a rational growth from last mile deliveries and ride sharing it is not going to dominate our business we.
Part of the thing the 207 million and EBITDA, you know and record revenue growth.
He has been somewhat you know that's been somewhat a part of it but clearly our ability to get price in grow.
Overall is all about our core businesses and not about ride hailing and last mile delivery, that's purely a leveraging an adjacency.
That there is a lot of demand and need and we can help meet it.
But could you put some numbers.
On.
What what you are seeing caustic pricing.
Some numbers on how much of.
The revenue.
Hi, Keith.
How much goes to.
Third parties and others that you just talked about we obviously thats pretty competitive competitively sensitive information, but what I can tell you directionally is that.
We we have based on the improvements that we made in service.
Based on the improvements that we've made in terms of the fleet. We as Kathy said, we have a beautiful fleet out there those are the things that enable you to win business and the one price.
And Thats, where Bob Stewart on our sales team focused and as our brand gets stronger we have more people coming direct to our web sites and our apps.
Your next question comes from the line of Derek Glynn from consumer Edge Research. Please go ahead.
Yes. Good morning, Thanks for taking my questions just had a follow up on some previous comments on M&A in the space. There has been a history of consolidation in the U.S. rental market over the years, but each of the big three still has multiple brands under his umbrella do you think there's too many brands in the marketplace and as you look across the competitive landscape do you feel there is a distinct value proposition to the consumer for each of those brands.
I do we do have very distinct value propositions for each of those brands and as I mentioned, all three of those brands to grow revenue and price. So, there's clearly upside and opportunity and are maintaining and growing three brands and in fact being able to differentiate.
As you know elevated the Hertz brand from a value proposition and price and I do think you know as we drive more specific services and target in our markets with very specific value propositions for all three of those brands.
We will see more price.
Potentially in more volume as we get better at that.
Yes from our perspective, you know the competitive landscape has been cleaned up and expanded multiple times over the years I think our perspective as Kathy said is.
It's about focusing on the customer segments, and making sure that you have the brand and the product and the service, which sort of meets the needs of the marketplace and so we're more focused on that and driving value through that equation as opposed to figuring out whether or not there are for consolidation or roll up opportunities in that industry.
Got it and then following the rights in the notes offering can you just expand how you're thinking about expand upon how you're thinking about capital allocation and where does reducing leverage even further rank in the order of your priorities.
It is and has been from the day I joined the company, a top priority, creating cash and getting leverage and to the three in our zone is where I am Hell bent and I you know I do think I've been pretty clear and guiding that.
By 2020.
We should see our company in a much better place.
And the productivity improvements I think have.
I'm pleased to say you know the the distance that we put on productivity very quickly.
The team has done an amazing job, we have we have a great group of financial professionals here working with a great group of leaders and engaged employees and.
You know getting our cost down at the same time growing our company and then being able to pay down the debt that we did with the rights offering.
Really puts us in a very sweet place there have to be spot on where our leverage needs to be.
And from this point forward I mean, obviously the rights offering gave us the opportunity to accelerate the deleveraging activities.
And the operating capabilities that we built inside the business will enable us to naturally delever.
We're really comfortable running the business in the sweet spot for Kathee talked about.
And we will be on a pretty good trajectory as we enter into an exit 2020 as well as we get.
The debt down and our EBITDA up where it needs to be you know the passion around that is also around the cost of debt I mean.
Having high leverage and.
The risk assessment around that is very costly to this company and.
As we take that out obviously from a capital perspective, we can return more to the shareholders weekend may have more to invest back into the company as well.
And I think getting our leverage down has been a key contributor to ensuring that we create future value as well as manage through any cycle that.
Now that that hits us.
Your next question comes from the line of Ryan Brinkman from Jpmorgan. Please go ahead.
Hey, Thanks for taking my question. This is Roger just on for Ryan.
Just a question on the exit rate into two and then into Threeq you raised guidance.
Yes twice over the last month and a half.
Can you help us understand.
What really got that much better you know towards the end of June was there any particular.
Metric you could point, you would have us international arena with us with the pricing or the transaction you have anything you can point to that God would do any better or exceed your expectations and then how did that flow through into July .
Just want to clarify does a lot.
I think with the rights offering we did have to give a range for guidance.
And it was before obviously June had close.
And.
We the guidance that we gave originally.
We had to have surety that we weren't going to mess. So it was somewhat conservative you know on purpose.
As we closed June and.
From a price of volume and a depreciation perspective and cost actually our costs really came in better than we had expected.
Depreciation will help.
And as a result of that and we Didnt see a you know.
We didnt have a price issue.
Or volume issue, so things came through better than we expected on the sell price and volume held our expectations productivity residual value through better and as a result, we came in at 2.7 and we had two before we came in at that say, we were going to be somewhat better as we knew we were going to be.
We had the guide in that direction.
You know as far as you know the third and fourth quarters, we have tough tough comp.
But the capabilities that we put in place.
We've been really.
Diligent on managing our fleet.
You know buy in our volume and our price associated with that fleet to maximize value to the company and the capabilities. We have put in place with our revenue revenue management and our fleet management systems along with discipline.
Weve progress the business.
But again the comps are going to be tough in the second half but.
We believe we will continue to progress as we have in the past.
So we're working the same systems that have delivered and we assume they will continue to deliver in the second half, but we do have tougher comps.
Got it and just just to expand on the on the tougher comps gone then.
You have 2% twice a year in the U.S. them.
We moved the Gom getting tougher good that.
We continue to see some growth in the second half or are those that meant to indicate that it could be flattish or I mean, just.
Can you give a little bit more into this bracket that a little bit as to what kind of pricing, you're seeing especially based on what you've seen in July so far.
So.
I'll just remind you mean.
The back half of last year, our direct revenues grew 9% and 10% through a combination of both volume and price in both volume and price were strong in the back half of the year. So as we look in to look at the year over year comps those are the things that we're referring to.
To earn quite so overtime.
To the extent that we continue to execute on the strategy.
Those are the things that enable you to get price through the cycles. There are always quarters were going on competitive dynamics to be different market dynamics can be different but the strategy has not changed.
And we are really focused on driving both volume growth and pricing growth in our business.
Your next question comes from the line of David Tamberrino from Goldman Sachs. Please go ahead.
Yes, great.
I wanted to follow up on Jimmy your comments about possibly getting to positive free cash flow. This year I think thats really know much more positive than you were earlier in the year, where where's your thinking there was going to be negative.
What assumptions do when you are what do we need to see from residual values in the back half in order for you to achieve that.
We came into the year, saying that we were expecting residual values to decline.
Sort of low single digits, we obviously havent seen that in in the first half of the year. So if we sort of continue along that trajectory that were that were on.
That was the big swing factor in deciding where they are and determining whether or not we get to positive free cash flow I think from an operating standpoint, our operating cash flows are improving our execution in the in the marketplace is very strong residuals have been the swing factor and based on what we're seeing.
If these kind of trends continue and we'll get to positive free cash flow for the end of the year.
Okay and just within that.
Have you seen any change in the cadence of used vehicle values throughout the first half of the year for yourself or is it somewhat tracked along with the public indices that we're able to track.
Well, we've been tracking sort of in line with the with the public indices. There are pockets and there are times, where we outperform and we've seen a little bit of that.
In the first half of the year, but generally speaking those those numbers that you see from sort of the public indices are directionally in the in the right direction, obviously, our own individual experience vary from time to time just based on.
The the nuances associated with our business the mix of the fleet.
The markets that were in the demand in those marketplaces, sometimes gives us an opportunity to outperform but.
Generally speaking Directionally, we have been in line with what you're seeing it Okay. And then your competitor yesterday I made some comments about what they're seeing on on peak season shaping up so far understanding the conversation about tougher comps are you seeing fleets being tight into you know July and now the early August period, you're getting a little bit looser and just what are you guys seeing from a market perspective being that the number two player in the U.S.
Generally speaking the fleets are about right.
No I wouldn't necessarily say that they're super they're overly tired or lose I would say generally speaking the fleet you're about right, but what's most important is that.
When you're operating in this industry and there's discipline around.
Fleet capacity and pricing then generally speaking that's a that's a that's a good dynamic for our business and through the first half of the year we saw.
You know in industry that that had fleets capacity and about the right place and you've seen us be able to get pricing in those those environments and again you will.
We'll have you know.
Pockets of underperformance in certain markets from time to time, but I think generally speaking the fleet sizes are about right. Yes, if you look at our fleet.
We have gotten more volume and more price.
Then we've added in freight on and I think that kind of discipline.
And now and show that pull down have overcapacity, and so I can't control what everybody else does but you know right now buying you know having a disciplined fleet for ourselves we are seeing in our 3% you know increase in price, we're saying you know more than that in volume and you know the methodology is the pricing and the utilization efforts. You know are playing out with a $270 million EBITDA physical you know for the quarter and so we will continue to do what we've been doing because it seems to work.
And at this time there are no further questions.
Thank you.
Ladies gentlemen that does conclude your conference for today. Thank you for your participation and for using ATM T. Executive teleconference. You may now disconnect.