Hertz Global Holdings, Inc. (NYSE:HTZ) Q4 2018 Earnings Conference Call February 26, 2019 8:30 AM ET
Leslie Hunziker - SVP, IR & Corporate Communications
Kathryn Marinello - President, CEO & Director
Jamere Jackson - CFO & EVP
Conference Call Participants
Chris Woronka - Deutsche Bank
Brian Johnson - Barclays Bank
Michael Millman - Millman Research Associates
John Healy - Northcoast Research Partners
Derek Glynn - Consumer Edge Research
Hamzah Mazari - Macquarie Research
Adam Jonas - Morgan Stanley
David Tamberrino - Goldman Sachs Group
Komal Patel - Goldman Sachs Group
Welcome to the Hertz Global Holdings Fourth Quarter and Full Year 2018 Earnings Call. [Operator Instructions]. I'd like to remind you that today's call is being recorded by the company. I'd now like to turn the call over to your host, Leslie Hunziker. Please go ahead.
Good morning, everyone. By now, you should have our press release and associated financial information. We've also provided slides to accompany our conference call that can be accessed on our website. I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance and by their nature, are subject to inherent uncertainty. Actual results may differ materially. Any forward-looking information related on this call speaks only as of this date and the company undertakes no obligation to update the information to reflect changed circumstances. Additional information concerning these statements contained in our earnings press release and the risk factors and forward-looking statements section of our 2018 Form 10-K. Copies of this filing is available from the SEC and on the Hertz website.
Today, we'll use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release and related Form 8-K, which are posted on our website. We believe that our profitability and performance is better demonstrated using these current GAAP metrics. Our call today focuses on Hertz Global Holdings Inc, a publicly-traded company. Results for the Hertz Corporation are materially the same as Hertz Global Holdings.
On the call this morning we have Kathy Marinello, our CEO; and Jamere Jackson, Hertz's Financial Officer. Now I'll turn the call over to Kathy.
Thank you, Leslie, and good morning, everyone. I can't tell you how pleased I am with the progress and the performance of our turnaround in 2018. With a priority focus on growth, we hit the trifecta as we increased volume, price and utilization last year. Worldwide, we generated 8% higher revenue. And the combination of revenue growth in effectively managing our assets led to 3% higher revenue per unit, which is a key performance metric for us. We head into 2019 with significant momentum and even greater confidence in our strategies and capabilities as a result of our broad-based accomplishments over the last 12 months.
In 2018, our top priority was serving more customers more often, and we did. Aligning to customer preference, our product revenue quality is now one of the best in the industry. Last year, we expanded loyalty through service excellence with 59 Ultimate Choice locations, expediting the rental process and new field training programs enhancing the customer experience. With reenergized brand assets, new segmentation strategies, enhanced mobile ABS and CRM capabilities and innovation like our new Hertz fast lane, powered by clear biometrics, we showcase speed, convenience and a customer-first promise. And an AI-led demand forecasting and revenue management help ensure we have the right cards in the right place at the right time and most importantly, for the right price.
When it comes to fleet capacity, we remain disciplined to meet the growth in the highest earning customer segment.
Last year, we reduced unit depreciation expense in the U.S. in part due to a favorable residual market, but primarily because a result of a better fleet acquisition strategy, opportunistic fleet locations, our more popular used car vehicle mix, the expansion of car sales to our highest return retail channel and longer asset life in our growing ride-hailing and insurance replacement fleet. These actions led to a 16% reduction in U.S. monthly depreciation expense per unit in 2018.
Driving long-term sustainable value creation requires rigorous attention to people, processes and systems. When it comes to our people, in addition to rebuilding our leadership team to leverage diverse backgrounds, fresh perspectives and relevant experiences, we focus every day on personifying our culture and values throughout the organization. Culture and values provide a foundation upon which everything else is built. They will arguably become our most important competitive advantage. We are reinforcing our purpose and priorities and creating a sense of urgency for our people. We're driving accountability, simplifying goals for the greatest impact and earning trust through regular transparent employee communications.
What I've found most rewarding so far is the speed with which the organization has embraced these values. We have a huge amount of talent in our business and we're encouraging people to feel confident in their conviction and accelerate their decision-making to get stuff done. Our people are our brand. They represent Hertz in the back office and on the front line. We're focusing more than ever on listening to customers and acting faster to adapt to their changing priorities.
We get feedback from roughly 100,000 customers every month, and they're telling us that we're delivering a more consistent and better experience than we were a year ago.
As a result, all three brands are generating higher customer satisfaction scores in the U.S. By all measures, our strong performance in 2018 shows that our turnaround has momentum. Over the last two years, the investments to grow their business sustainably for the long term have been significant but necessary, and the early payoff in revenue and earnings improvement shows that our strategies are working.
This year, we're continuing to connect significant energy towards completing our turnaround plan. We've been clear that this is growth-led turnaround, because that's where the greatest long-term value can be created. With revenue growing again on increasing rates and a great fleet in place, reflecting higher utilization and lower cost, productivity gains will be a priority in 2019. But we're not just looking to cut costs. That's easy, and it's a short-term solution. Our goal is to become a nimble, more focused and more efficient business at our foundation. We know that improving productivity allows for better and faster execution of our strategies and results in greater cash and income return and a better experience for our customers and employees.
Towards that end, we've been laser-focused on zero-based budgeting to prioritize spending against our strategic goals and we're driving efficiency, centralizing maintenance to lower service and repair costs and reduce out of service fleet time, optimizing procurement and working to achieve benchmark SG&A. Phasing through the productivity improvement initiatives will help offset the impact of higher technology spending as we begin to roll out the system transformation in North America later this year.
In 2020, we expect these savings to flow through with an incremental productivity coming from new systems-enabled capabilities and data analytics that will drive further organizational improvement. Jamere and our entire team are determined to continue to explore every avenue and office to make sure our businesses are working smarter and have the resources and collectability to maximize their potential in the years to come. When it comes to the transformation, our system's goals are to better serve our customers by leveraging real-time visibility into our fleet and operations and to more accurately predict future trends so that we can make smarter decisions faster. Our major platform transformation includes cloud-based implementation for CRM, mobile apps, reservation, rental, fleet management in our back-office system. As part of the upgrade, we're streamlining our infrastructure with fewer applications to simplify and improve the quality, usability and accessibility of our data.
While our already launched analytics engine for revenue management and demand forecasting continues to get smarter as they absorb actual outcomes, combining data from consumer rental trends and our connected fleets is the next step in our system's evolution. Consumer rental data will allow us to enhance our customer satisfaction, support sales and marketing goals during customer acquisitions, optimize marketing and channel benefit, further improve inventory planning and informed service and life design.
Connected fleet data, which we've been collecting and managing since the acquisition all of our Donlen Corporate leasing business in 2011, will allow us to lower cost and provide a better customer experience. Donlen has been generating vehicle data since 2010 through our proprietary driver point telematics and information platform. With roughly 1/3 of Donlen's customers connected today, growth is accelerating. In 2018, we increased the number of new connected accounts by 50% year-over-year. Driver points capabilities include monitoring route efficiency, driving behavior, fuel levels, GPS logistics and maintenance diagnostic help. And Donlen's next-generation advanced diagnostics device, launched in March of 2018, have the incremental ability to track higher pressure odometer levels in flow lines, all in a dynamic, analytical tool that allows its customers the ability to optimize cost and productivity savings.
The benefits to driver point accounts versus traditional lease accounts shows connected customers have 11% lower total fleet operating cost. While we're already piloting Donlen's connected capabilities in several rental customer segments, the real value quickly appreciates once their data capabilities are integrated into our new enterprise technology platform. At that point, expeditiously moving from pilot to a fully connected U.S. and global rental car fleet should be straightforward as we leverage Donlen's decade of in-market experience. We've established real momentum in creating long-term sustainable value with strong leadership teams in place, an employee base that is committed to a common purpose and growth platforms that resonate with customers and markets around the world. Our growth focus and productivity initiatives in 2019 will support continued margin expansion as we launch our technology transformation later this year.
With that, I'll turn it over to Jamere to give you a more detailed insight into the fourth quarter's performance.
Thank you, Kathy, and good morning, everyone. We had another great quarter and a strong finish to 2018. Our growth initiatives are delivering and we're building a faster growing, higher margin business. Our execution in the quarter resulted in strong year-over-year improvement in revenue, adjusted corporate EBITDA and many of our key operating metrics. The investments that we have made in our fleet, product offering, customer service and brand building marketing, along with disciplined pricing and fleet management, are driving growth and profitability.
As we move forward into 2019, we expect this momentum, along with an intense focus on productivity, to drive top line growth, margin expansion and earnings growth this year. 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 fourth quarter and the full year. Total revenue was $2.3 billion, up 10%, driven by another quarter of exceptionally strong growth in our U.S. RAC segments, along with moderate growth in our International RAC segment.
In addition, our Donlen business was up 39% through the higher capital lease sales in the fourth quarter. Net loss attributable to Hertz Global was $101 million and net loss per diluted share was $1.20 compared to net income per diluted share of $7.42 in the fourth quarter of 2017, which included a benefit of $679 million or $8.18 per share, resulting from U.S. tax reform.
On a non-GAAP basis, adjusted corporate EBITDA improved 133% to $49 million and our adjusted corporate EBITDA margin expanded to 2%, a 110 basis points increase from fourth quarter 2017. Our adjusted corporate EBITDA results were driven by higher revenues from increased volume and pricing as well as lower vehicle depreciation expense in our RAC business.
These drivers were partially offset by investment spending to support our transformation initiatives and increased vehicle interest expense, primarily in U.S. operations. Adjusted net loss for the quarter improved 28% to $46 million and adjusted diluted loss per share improved to $0.55 from $0.77 in the prior year quarter. For the full year, total revenues for the company were $9.5 million, up 8%, led by strong performance in our U.S. RAC segment and solid growth in international. Adjusted corporate EBITDA for 2018 was $433 million, up 62%. That strong revenue growth and lower vehicle depreciation more than offset operating investment and vehicle debt interest.
Adjusted corporate EBITDA margins expanded by 150 basis points to 5%. Net loss attributable to Hertz Global was $225 million versus net income of $327 million in 2017, and net loss per share was $2.68 compared with net income per share of $3.94 in 2007. As a reminder, the 2017 results were driven by a $679 million benefit recorded in 2017 related to U.S. tax reform.
Now let me provide some additional color on the quarter, starting with our U.S. RAC segment, and let me start with revenue. Our U.S. RAC business had an outstanding year. Total U.S. RAC revenues were $1.6 billion, up 10% versus prior year and up 7% excluding fleet dedicated for ride hailing, or TNC. We saw strong volume growth with a 6% increase in Transaction Day and solid pricing with CNM rates up 6%. Total RPD was up 3% versus the prior year, and ex-TNC total RPD grew 4%. Our TNC business continues to be a growth driver for Hertz with revenue nearly doubling behind volume and positive pricing.
In 2018, we generated nearly $300 million in revenue from TNC and the business more than doubled versus 2017. In addition, we continue to drive growth across all brands, on- and off-airport and in both business and leisure. While the market is growing, our execution has delivered exceptional results behind disciplined fleet management, strong customer service and brand building marketing. We remain focused on sustaining top line growth in a disciplined way as we transform our business. U.S. RAC adjusted corporate EBITDA was $48 million, which more than quadrupled versus the prior year, driven by the strong top line results and a 15% decrease in per-unit vehicle depreciation. We're continuing to invest heavily in innovation in both operations and technology in those investments, such as the recent rollout of Clear, will enable new products and service offerings that will drive growth and future productivity.
Our U.S. RAC business had a tremendous year, with revenue growth up 8% and adjusted corporate EBITDA margins up 270 basis points. Importantly, the capabilities that we built in 2018 will help us deliver solid growth and profitability in 2019.
Now turning to fleet. We continue to manage our fleet capacity with rigor and discipline. Fleet capacity was up 6% and up 2% ex-TNC fleets. Vehicle utilization was 81%, up 10 basis points, as we continue to use sophisticated predictive analytics tools and data science to mask capacity to profitable demand. Leveraging the tools and talent and our revenue and fleet management organization has been a key driver of our success as we focus on driving price, utilization and lowering our fleet costs in the U.S. against the backdrop of strong market demand.
Moving to depreciation. Monthly vehicle depreciation expense was $256 per unit and it decreased 15% versus the prior year quarter. The decrease in unit vehicle depreciation expense was the result of disciplined fleet acquisitions, residual value strength and solid execution. We will continue to aggressively manage our vehicle acquisition cost and utilize our high return retail channel to drive better outcomes on depreciation. These actions, combined with a favorable residual value market, have been a significant contributor to our results in 2018.
Moving to our fleet sales initiatives. Our nonprogram vehicle dispositions were up 20% in the quarter. Our retail sales capability is a tremendous asset, which we believe is undervalued and has given us the competitive advantage. In 2018, our sales will continue to make up one of the top used car sales operations in the country on a stand-alone basis. As I've said previously, we have a world-class sales team, we're expanding to profitable new locations and our web-based platform is driving revenue growth and profitability.
We will continue to invest in these assets as they have tremendous synergies with our RAC operations, and creates enormous value for our company. Moving to our International RAC segment. Total revenues were flat at $487 million and up 4% on a constant-currency basis. RPD was flat and Transaction Days grew 4%, driven by growth in Europe, Asia Pacific and across all customer segments. Utilization was down 60 basis points, which contributed to a 1 point RPU decline. In 2019, we will expand our enhanced revenue and fleet management capabilities through our international organization and expect to reap similar benefits as we've seen in the U.S. The International RAC segment also reported adjusted corporate EBITDA of $8 million, a $3 million decrease versus the prior quarter, driven by higher interest cost.
Now I'll move to the balance sheet and cash flow. I would like to provide an update on our financing activities, our corporate liquidity and free cash flow. Our corporate leverage as measured by adjusted corporate EBITDA to net corporate debt declined 5 turns to 7.7x from 12.7x at year-end 2017.
We're continuing to focus on delevering the business as our operating results improve. On the liquidity front, we ended the quarter with no drawings under our corporate senior revolving credit facility with $1.6 billion in corporate liquidity and our first-lien covenant ratio of 1.4x was well inside of the required 3x. In February, we executed a series of vehicle financing to cover our U.S. RAC maturities and forecasted seasonal fleet needs in 2019. The transactions included a $700 million 3-year term ABS issuance and an extension of $3.4 billion of revolving ABS commitments for March 2020 to March 2021.
In addition, we had a commitment under the U.S. revolving ABS facility and a new seasonal facility to round out coverage for our peak season. We also remain focused on managing the maturity profile of the non-vehicle debt with no significant maturities until October 2020, which we plan to proactively address in the coming months. Turning to cash, adjusted free cash flow was positive $99 million, a $435 million improvement from 2017, driven primarily by the improvement in operating cash flow excluding vehicle depreciation. Prior to European vehicle debt advance rates and favorable ABS fair market value marks on our U.S. fleet, consistent with a strong residual value market issue.
To wrap up. 2018 marked an important milestone in our turnaround. We've invested in capabilities that will help us create a faster growing, higher-margin business. With wealth initiatives that will deliver, we're winning with our customers, we have tremendous momentum entering 2019. Many of the challenges of the past few years are behind us, including the remediation of our control environment. Our focus in 2019 is to maintain this momentum with disciplined fleet management, service excellence, innovation and brand building marketing while executing on the technology transformation that will be a key enabler for growth and profitability beyond 2019. We will drive operational efficiency and productivity. We have a laser-focus on execution and all these actions will be the catalyst to drive long term shareholder value. I look forward to updating you on our progress in future quarters.
And with that, I'll now turn it back over to the operator for questions. Operator?
[Operator Instructions]. Our first question is going to come from the line of Chris Woronka from Deutsche Bank.
I wanted to ask if I could, where -- in terms of the TNC business, how significant could that become? I mean, you mentioned $300 million in revenue, more than double versus '17. Is there a certain level that could get capped at or that you're targeting for this year or next year?
I think it has been a significant contributor to our growth. The great news is all of the aspects of it are coming in better than planned. So it is profitable and it is accretive. We plan on growing it, again, probably 30% to 40% over this year's numbers. We ended at about 42,000 vehicles. But we like the business, but we will grow it responsibly and we'll maximize with the efforts that we have, the cars that we come -- that are coming off of our program because they're aging out. The cars we're able to put into the TNC fleet are at 40,000 miles and they're of value to these drivers and frankly, we've been getting great feedback from them that it allows people to ease into the expenses and the business of ridesharing. And so we continue to grow it. It's growing profitably and it will continue to be a contributor to the overall wealth of our business. But we're going to do it sensibly. And so far, it's been going pretty well.
Okay. Great. Just a follow-up on the fleet costs. Yes, it's -- you made really remarkable progress there. I guess the question is, kind of, is the cadence that we've seen sustainable or are there things -- maybe a few thoughts on residual market in 2019? And anything that might change the cadence of the downward trend in fleet costs?
Well, I guess -- it's hard for me to say what's on most product you've seen delivering the growth or the ability to buy and sell cars at an industry-best level. And so those -- my background used to be, a long time ago, CFO and Controller, and I'm always looking at the P&L. And those are the 2 biggest lines in our business and we've made enormous progress with both of those lines and we've done it, getting both revenue and volume, which has been a tough achievement but we're pretty proud of it and it is -- we've been doing it in a sustainable way. On the fleet cost, the key there is getting the fundamentals right. And so we've gotten the fundamentals right. We have a great team that's doing a great job at buying cars, the right cars at a lower price that our customers are thrilled about driving. And then on the other side of that, they want to buy those cars when we put them into the retail sales slots. And we have a great team, a great leader.
And the retail sales business, I think we're #8 at this point in the sales of used cars. And that business is going really well. I think we're opening up another 10 retail outlets over the next year. So we've gotten the fundamentals really strong in buying and selling cars and then managing them in between at great utilization level. So now the next challenge, and I think I mentioned it earlier, we got a -- we can do better on utilization by 1 point or 2 maybe, on getting our out-of-service in line. But outside of that, if there is any kind of change in residual values, number one, we have a great fundamental capability in buying and selling cars. And we're pretty good at selling cars quickly at profitable levels and if we need to fleet up, we know where to buy cars, too. So the best way to get through any kind of residual downturn is your ability to just have best-in-class practices on how you buy and sell the cars. Right now, we're building in about a 2% decline in residual values. And so far, the year is starting off fairly well.
So the only thing I'll add is that you saw from our results, the monthly debt per unit was down 16% for 2019, as Kathy said. We do expect to see some declines in residuals at the low single-digit range in 2019, and this decision was [Technical Difficulty] what we're seeing from external forecast. But the reality is that the absolute number is more nuanced. It depends on a variety of factors. The market position, our execution on acquisition, our execution on rebuild distribution, our vehicle mix by car class, what we have in terms of volume, exposure, model year. So it's tough to put a normalized depreciation number, at any given point in time there are a number of things that impacted them. What we can tell you is that our execution, no matter what the market statistics are, will be solid and those are the kinds of capabilities that as Kathy mentioned, our execution for acquiring cars, making sure that we have the right mix, making sure that we have the right number of cars and then moving those cars through our highest return channel. Those will be the determining factors for where we actually end up, and I feel very good about the capability that we've instilled at the organization.
And probably, as you know, what the OEMs do clearly impacts residual value. And so far, we're not seeing any unusual behavior to spark any real concern. So I think, all in all, the environment is holding up pretty well.
Our next question then will come from the line of Brian Johnson from Barclays Capital.
Two questions. First, following up on that and when we get the K, we'll get the numbers, but can you disaggregate in the 4Q and then maybe for the year, the gain on sale portion of the domestic residual performance?
So if I look at our depreciation results and you look at the results that we had year-over-year, about -- I would say about 2/3 of that was actually driven from our performance. A combination of what we're doing on acquiring the cars and what we're doing in terms of moving cars through the retail channels. We can follow up with you on the exact numbers associated with them. In fact, it should get you in the right zip code.
Okay. Second question. I know you're not giving detailed guidance, but just as Kathy was talking, trying to get in -- could you give us any direction between the increased technology spend versus cost takeouts on the OpEx side and SG&A side -- including SG&A, so we can kind of think about the cost side of the business in '19?
Yes. So here's what I'll say, is our investments in 2019 are primarily related to the tech transformation. In 2019, we expect to grow our DOE and SG&A at a significantly slower rate than revenue growth. We expect to drive incremental productivity and operations in SG&A and quite frankly, this will serve as bill payers, if you will, to the investments we're making. And this will help us expand margins despite the incremental investment. So as a result, you should see adjusted corporate EBITDA and margin improvement in 2019. And then incremental improvement in 2020, as Kathy mentioned, as we complete the tech transformation.
Our next question will come from the line of Mike Millman from Millman Research.
A follow-up on the last question. When you compare with Avis, you were about at half of the margin -- EBITDA margin they did. Kind of, it'll be helpful if you could let us know of that half, how much is cost -- additional cost and how much is not catch up? And when, indeed, do you expect to catch up, if you will, if not exceed the -- I guess, in the same vein, once you get into the technology world, does it continue to expand and maybe in terms of the cost and benefits, you never quite catch up. So relatedly, what can we look for -- or what is your target EBITDA margin and when do you expect to reach that?
Okay. So I guess, as I've said before, if we look at the fundamentals in our business, given the strength of our brand, the Hertz brand, given the assets we have and our used -- our 8 largest used car sales business as well as our corporate leasing business in Donlen, it's clear that there is no reason, structurally, that we wouldn't be best-in-class EBITDA and EBITDA margin. And right now, weighing on our ability to get there are our interest expense because of our lower than industry average EBITDA, right, which obviously impacts our leverage, as well as the catch up that we're doing around investing back into this business. So we could have taken a path that ultimately would not have panned out, which would have dramatically cut costs without any kind of strategic focus to it and pump up our EBITDA, which was sometimes done in the past. Instead, we're taking the right course, which is investing in the assets of the company where they haven't been invested in and in particular, in our infrastructure and our technology as well as we -- reenergizing our brands. And spending that we've done, we probably are spending less, but more productive when it comes to the growth-related initiatives around our brand and our marketing.
So we're very effective there. Where we've really been driving the bulk of the investment is getting the actual operating structure of our company back into shape. And the technology where it needs to be longer term. And some of that technology is 30-, 40-year-old, we're a 100-year-old company. So it has been in dire need of repair. I think the good news is for the last several quarters, we've been consistently improving our rates and price that we're getting on cars. Consistently reducing the cost of cars. And then we're consistently expanding margins from when I first came in and started turning around the business from the downturn it had been in. So if we look forward, the best predictor is, is this sustainable and are we continuing to make progress? And we do continue to make consistent progress in all the metrics we need to and now, as we brought back the two largest lines to where they need to be, clearly, we need to attack our infrastructure costs and our operating costs. And we've got a great team here that when they have to do something, they get it done and they've consistently performed in those areas. So we consciously did focus on the growth and on the cars and now we are very decisively focusing in our productivity and any kind of cost and waste that we have out there and using that to pay the bills and start expanding our margins further in 2019. And Jamere, you can -- if you want to get a little bit more into what the longer term looks like, go ahead.
Yes, so as Kathy mentioned, our first order of business was, quite frankly was to invest in returning this company to top line growth, and that's what you've seen us do. Since we split, we've had a very disciplined approach to how we manage the fleet, we're focused on having the right size and right mix of cars in the right locations and quite frankly, that's been the backbone of our strategy. This is what's helped us enables price utilization and we're just getting a better return on the apple that we're investing and the great fleet that we have. So all of these investments that we're making in technology, in service quality, in brand-building market all underpin the strategy. And the capabilities, these are capabilities that you fundamentally must have as you move forward. That being said, it is the next leg of the stool for us is to drive productivity, and we're running productivity play with intensity across operations and SG&A. We have opportunity in virtually every line item of the P&L and we're attacking that. So we have pretty detailed plan to do that. In 2019, you'll see those productivity efforts help offset the investments that we're making, primarily in the tech transformation. But then these are also the things that are building us -- building the right fundamentals for us as we emerge from that segment transformation in 2020, that has not only a faster growing business, but a higher margin business. And no structural impediments for us to not be at industry-leading growth rate and margins and that's the focus inside the company. So I'm excited about the capabilities that we've built. We've built them the right way, we've built them with rigor, we've built them with discipline and now, we have an opportunity to go drive productivity in a way that is going to help us move the needle from a margin standpoint and get the EBITDA margin calories back into the business.
So I appreciate that. I guess to drill down into what analysts always want to know is some sort of timing as -- and level of EBITDA that you can reach under reasonably good market conditions?
I think the best predictor of the future is the cash right now and we did improve our EBITDA by 65% with headwinds of interest expense and investment, obviously investment spending. And we have definite plans in 2019, maybe not 65%, but I will say significant EBITDA improvement in '19 and carrying that forward into '20 when the bulk of our technology, double redundant costs and the efforts to get new technology in and the old technology out, we should continue that kind of double-digit EBITDA growth into 2020. And at that point, there's no reason to think that we're not at very industry-competitive EBITDA levels. It should also help get our cost of debt down and clearly at that point, our leverage should be down in the 4 range versus where we're going to go out this year. So we have very focused plans on bringing this company back up to industry competitive profitability. And we're making significant progress year after year over the last two years and we intend to continue that progress in 2019.
And I think from a 2019 standpoint, I mean there's growth available in the marketplace. We intend to get our fair share of that growth and do that in a very profitable way. And on top of that, as I mentioned, we're going to drive productivity. So the comment that I made about our DOE and SG&A growing at a significantly lower rate than our revenue growth, that we're going to have margin improvement in 2019, and you're going to expect [indiscernible] for 2020. So I'm confident in capabilities that we've had. Again, we've done it fundamentally the right way and adding productivity is the next leg of the stool, if you will, will create the kind of company that I mentioned in my comments, which is we're growing faster. We've done a great job of returning the top line. And we're going to have a higher margin business. We have a laser focus on that inside the company.
And I -- where I'd end is, if you ask any operating CEO, "What are the 2 things that keep them awake at night and are most important?" And they may change up the order, but it's generally these 2 things: Having great leaders in place; and then secondarily, getting growth. And honestly, the easiest thing any CEO has to do is cut costs. That's in our control. So I think the tougher battle over the last 2 years has been getting the right leadership in place and bringing growth back to the company and growth at a higher rate, which we've done, I think in a significant way. And now, given the strength of this leadership team, I have all the confidence in the world that they can get the costs out and do it in a way that doesn't put a chill factor on our growth.
So at one time, there was talk in the industry of 13% to 15% EBITDA margins, is that in your future?
Well, I think it'll depend on a number of things, as you well know. It will depend on a number of macro factors, how fast the industry has grown and whether or not there's trucks available that's out there. It will obviously depend on what happens with the cost of the vehicles, the depreciation [indiscernible] and a big chunk of that will depend on our execution. I think what I will say is that again, there are no structural impediments for us to not be at industry leading sort of margins, if you will. And we're building the fundamentals of the business that strengthens our business no matter where we are in the cycle. So all of this discipline that we've put in around managing that fleet, doing the right thing from a revenue management standpoint and now, driving productivity, underpinned by a technology stack that is going to be enable us for both growth and productivity, gives me a lot of confidence that on a like-for-like basis, we have the ability to be a faster growing, higher-margin business and be an industry benchmark. And that's our focus inside the company.
Okay. Sorry to try to keep pushing to get a number, but that's what we do.
I totally get it.
Our next question then will come from the line of John Healy from Northcoast Research.
Kathy, congratulations on not only stabilizing the trends in EBITDA, but beginning to turn it the other way. So it's been a long road and you guys deserve a lot of credit for that. Wanted to ask a big picture question about the top line. I think there's this perception out there that the rental car business is not really growing. Your results fight back on that. And I was just hoping to understand two things on the revenue line. If you look at 2018, what do you believe the industry rental revenue grew in the U.S. in the airport business? I know there's a lot of airport concession data that you're reporting and I'm sure you guys see a lot of that. So I'd be curious to know what you thought the market grew. And then secondly, to get to a normalized level of EBITDA for you, what sort of revenue growth or revenue level do you think the company needs to be at the produce those types of returns?
I guess what we focused on is drive to progress, right. So every year, being better than the year before and seeking that high single digit, what would be fabulous, obviously, is low double digit growth. So I think any CEO would be happy with those kind of rates. I think embedded in the industry right now is probably about 3 -- mid-single digit economic growth. We are -- there's different airports that grow at different rates. So I think we've been very focused on where is the greatest demand and where are people willing to pay to price and we have great analytic tools and we're learning every day and getting better at it and that's part of the reason why we saw rate improvements at the same time we saw a significant growth, particularly in the U.S.
So I do think there are -- one interesting story that I share with people when they ask me about where's the rental car industry going, there's two things I'd point them to. The first is the eclipse, when I first came, we got blown out of the water and hit all the news stations because we couldn't provide people cars. So people need cars in all different places and ridesharing can't solve all the solutions as well as when they need where their car is and they need a car and they want to get around, we're a car. And even from a corporate perspective, as companies started moving towards Uber and Lyft, they found that that was dramatically more expensive than renting a car. So there's still so many reasons, whether you're leasing a car and you want to rent a car to avoid the miles, whether you're somebody into college and you need a great big SUV. There continues to be multiple reasons why people rent cars and new reasons all the time. So that goes in our favor, just the general population in mid single growth. Then you add to it, from an autonomy perspective, we are a unique company in that we have a corporate fleet business along with a rental business and we have the unique ability to be best-in-class at managing a large fleet.
So as autonomy comes into play, we really have a great opportunity there to win in a big way, and I don't know that we're actually getting the value for that. But we are growing our fleet business, from a corporate perspective, and we see more coming in some of the partners that are approaching us around building for the world of autonomy. And then if you add into it, I don't think we're getting the value for our used car business, we're the eighth largest used car business out there. We're online. We have great -- we have industry-leading capabilities around that. And it's backed by a great brand. So overall, we see great assets plus future growth in ways that we're not necessarily seeing today. Within the economy though, we're seeing a pretty stable mid-single-digit economy supporting our business.
Yes. So what I'll say is, I mean to be really clear, the market is growing and there's growth available in the marketplace from both a price and a volume standpoint. Historically, we've looked at data by complainant, we've look at GDP growth. But quite frankly, when we're managing our business on a day-to-day basis, it's a very data-rich environment. We're not just looking at the macro data on the plane that you can see, but also market level demand signals that help us plan capacity and placement of cars. So like I said before, we'll continue to build our capability with both systems and people. We have talented data scientists and revenue management forecasting and these are all things that are helping us drive growth. So to be really clear, we do see growth available in the marketplace and the capabilities that we're building are allowing us to capture that both from a volume standpoint, but also from a pricing standpoint. And again, that's largely based on the capabilities that we've built inside our company.
Our next question then will come from the line of Derek Glynn from Consumer Edge Research.
How would you characterize industry fleet conditions and the competitive environment today in the U.S.? And do you find your competitors acting rationally or has there been any change in behavior the last couple quarters?
I think the fleets are tight. In general, we don't see any over fleeting. I think candidly, what's helping keep the fleets tight is residual values are great. So people are selling cars. So you got to make hay while the sun's shining and I think we're seeing a fair amount of car sales as well. And I think overall, that does tend to help us around keeping price up. It is a world of supply and demand. As we get moving forward, I also think the improved tools on demand forecasting are really helping all of us be smarter about how many cards we really need, and I think everybody is pretty rational on that. And as a result, we're seeing price overall continuing to steadily improve. And we know that it has to, with labor costs and minimum wage is going up and the cost of cars in general going up, we have to see -- we have to have a rational industry and we have to maintain decent margins for the shareholders. And the only way to do that is make sure the fleets are tight and get price for those cars.
Yes, I mean we're encouraged by the discipline that we're seeing. I had an opportunity this past quarter to spend some time with our fleet management and our revenue management teams. And I'm really impressed by the capabilities that we have internally and the tools that we're using. It's such a data-rich environment. The teams are using artificial intelligence, they're using machine learning. Fred is adding data scientists to his team every day to help us get a lot smarter about doing this. And because we all have an opportunity to see the demand signals that are in the marketplace, we know on a market-by-market basis, with some certainty, the number of cars we need to have by location and it's helping us to plan capacity and keep capacity tight, and importantly helping us to drive pricing and utilization. I think that's reflected in our results. So those are the kind of capabilities that you need to maintain the healthy dynamics that we have in the marketplace and I'm encouraged by what we see from the competitive environment as well.
Okay. Appreciate that color. And then secondly, as it relates to the sales type leases driving the revenue growth in Donlen during the quarter, is that revenue benefit something we should expect to carry forward or should we think of that mix impact is being onetime or limited to the fourth quarter for some reason?
We've always had some capital leases as part of the mix. We had a little bit more than normal in the fourth quarter. So I wouldn't call that a normalized view. The one thing that did happen this year, as you will know, is the leasing rules changed, where basically operating leases are now ending up on the balance sheet. So you could see some customers making some different decisions in terms of how we're managing their lease profile, the swap between operating leases and capital leases. The reality is, is that many customers had operating leases, they kept those off the balance sheet. They're now all going on the balance sheet even when they make some trade-offs in terms of the decision between capital and operating. We'll keep an eye on it. We're still managing the business sort of the same way. There's no change in sort of the EBITDA profile, if you will, and we'll be very transparent but if we see any spikes on having more capital leases where it's all up front, we'll share that data.
We have a question from the line of Hamzah Mazari from Macquarie Capital.
My question is around the tech transformation. So we talked about that ending in, I guess 2020. 2021 seems like a normalized investment spend year for you. Maybe if you could touch on the execution risk, if that's remaining as you complete the tech transformation? I guess you have duplicate systems running. Any sort of color around execution risk?
I think we all, in this company, understand that we're going to have all hands on deck to make sure this goes well. The reality is, is before I joined the company, this was in play and it's been the entire time I've been here. And so we've spent a lot of time making sure we're on the right track. We have very committed partners behind us with their best resources backing the effort. And we -- our intent is to make this happen as smoothly as possible, obviously. Now the reality is I've been through enough of these and been on both sides of these types of transformations that things will go wrong, and we are anticipating that and we are prepared for it. And I think the efforts that we have in place and how we're doing it will mitigate some of the risks along those lines. So we do have a phased-in approach in North America, starting nationally in a couple of months and going throughout the year with a 2020 anticipated full rollout. So I think we have a lot of seasoned professionals here. We brought in a fantastic CIO from this industry who's got deep experience in managing these types of challenges. He's built a team around that. We're all hands on deck throughout the business and supporting the efforts and we're going to get it done.
Great. And then just on the comment around residuals being down 2% for this year, are you assuming OEMs do not get aggressive on incentives? Are you assuming just status quo of what the OEMs are doing? Or are you assuming sort of a step up in incentives given U.S. auto inventory levels are pretty high?
Well, for the most part, we already have a big bulk of the buy already in for 2019. So there -- any kind of impact of that happening is somewhat minimal on the size of our fleet and the fleet we're buying and the cost. I think -- as you know, I spent 10 years on one of the OEM floors I've been -- before that, I spent 5 years buying more cars than anybody else in the United States. And what I've seen is a dramatic change in how rational the OEMs are across the industry, and I watch all the time, every month, who they're selling to, how much they selling, what residual -- what incentives they're doing and frankly, I continue to see across-the-board fairly rational behavior. And so they figured out, to keep price up and to manage their margins, they have to manage production, they have to manage incentives and they've got to be smart about it. And I see them getting smarter every year. So again, our best defense is a great offense and we have great capabilities in place just in case there is, for our '20 buy, any kind of irrational behavior.
We have a question from the line of Adam Jonas from Morgan Stanley.
Just a brief question here. What is Enterprise doing in the TNC rental business arena that you can comment on?
I honestly do not know. And we stay very focused on handling what we're doing. I admire Enterprise as a company, but right now, the only real sizable actions that we're seeing is the -- in the rental company space is ourselves.
Okay. I mean, but you would be aware -- I ask that because I imagine that just given the growth and the obvious synergies of the business and the interplay of car rental as a mega fleet manager in that business, that you would -- if they were large and active, you would see them. So it's more that you'd -- I'm interpreting your answer as they're just not -- they're not a big presence right now. Is that fair?
I'm just being candid, I really don't know.
Okay, okay. And I guess as a follow-up, could you tell -- you mentioned that the vehicles that enter the TNC fleet have roughly 40,000 miles on them and this provides a great opportunity for you to extend the useful life. Was curious, and I know you've only been running this program for couple years, if that, but how long are these vehicles in the TNC fleet on average, and then kind of what mileage do they have when they exit? And can you give us some -- the relationship with 767 Auto Leasing, Carl's -- the leasing company, VIE. How much of the 38,000 units are owned by 767 and kind of where does that go?
Well, I'm not going to comment on the 767 business, but I will comment, we've been in the TNC business since 2016 and we're getting better and smarter around that and expanding the business, as you know, growing it. We generally put vehicles in that business at 40,000 miles. We even do buy some incremental leased vehicles in the market. We have a fairly extensive dealer network that will buy some as well based on the demand. And we generally take those vehicles out at about 70,000 miles, where we believe you maximize keeping maintenance expenses and pollution expenses down, but that at the same time, our retail car sales guys love these cars. If you ask any dealer out there, they will tell you these cars are extraordinarily attractive, they have great margin and candidly, they pull buyers into our -- when we have these very affordable cars with relatively low mileage and fairly new cars, we attract a lot of buyers into our retail shops because -- and a lot of times, they will buy up and what they actually end up purchasing. So they're all around this business based on the demand is filling and the need is filling in with ridesharing. And at the same time, how it bends the curve on our assets and puts the used cars we've already invested in. And then when we go to sell them, we sell them at attractive margins and they're a great marketing device to pull incremental business into our lots. It's -- we've been doing very well with it.
Yes, a couple things I'll add is, we expect this to be a very competitive market. This is -- there's a lot of growth that's available, if you look at the growth in the ride hailing business. I think if I think about those businesses and those business models, one of the constraints that they have is having enough cars and enough drivers to be able to service that demand. And so we expect this to be a marketplace that is a growth driver for us, but to also be very competitive. And then to your point on the different models that are out there, whether it's what we're doing or what 767 is doing, I mean there are going to be lots of models that service this industry. 767 is obviously a very small part of our business today, and it's an interesting model. We'll see where that shakes out in the industry. But we expect this to be a very competitive market and we don't expect that there won't be multiple entrants coming in, but there's a lot of growth available here and we're happy to be capturing some of that today. Again, it puts a couple points on our U.S. RAC business.
We have a question from the line of David Tamberrino from Goldman Sachs.
Kathy, could you just remind us what the elevated level of IT spend has been on an annual basis the past two years?
Yes, so I'll take that. So we've had somewhere in the neighborhood of, call it $100 million-or-so associated with the technology transformation spend. And we're going to have elevated expenses in 2019. As I said, a big chunk of that will offset with our productivity initiative as we move forward. So I think the focus for us inside the company is: One, getting that technology transformation completed, but then it isn't just with development costs associate with it, but it's also the redundant costs that we have because we're now in the period where we'll have dual running costs between the old system and the new system. We'll need to see that run off. So we're on track. We expect to deliver the productivity associated with other areas in direct operating expense and SG&A to be sort of a bill payer associated with that. And then as we move into 2020 and 2021, we'll start to have some of that elevated spend roll off and you see the margin [indiscernible] with it.
Yes, I think as I'm sure over the last two years, the focus has been on how much are you spending? When will it be over? And at what point does it bring you back to industry competitive levels? And again, structurally, there's no reason given the three things I talked about: Our brand, our retail car sales and our corporate fleet business, why we shouldn't be as good if not better than industry average earnings levels. The reality is, is we focused on and brought the growth back, we got in line and I would say, had industry -- very industry competitive cost of cars. Honestly, the easiest part of this turnaround is now getting the waste out of the expenses, closing -- maybe the third hardest is finishing up the technology transformation, but an easier part is getting waste and productivity out of the expenses, which we're very focused on and we have the right team to do. So if we look at it why we've been elevated in expenses, it's about 1/3 efficiency, it's about 1/3 technology spending and in the past, it's been about 1/3 rebuilding some things that have been broken and not paid attention to. So as we go into '19, we should see that incremental spending coming down and having an impact -- further impact on expanding our margins and contributing to how we've been expanding our margins. And then as we move to the other side of 2020, the bulk -- there's no excuses, the work is done.
Okay. So $100 million elevated spend, you've got $98 million of information technology adjustments for the year. Is that same spend that you're adding back into your adjusted corporate EBITDA?
Yes, the $98 million is the FX. [Technical Difficulty].
I'm sorry, the $98 million adjustment for information technology and financing transformation cost, part G represents company's information technology and finance transition programs?
That's an add back of the $100 million elevated spend. So am I misinterpreting that?
Yes. No, the $98 million is the add back. That's correct.
Okay. So look, just trying to understand your walk if that elevated spend comes down, but you've already adjusted for it, your corporate EBITDA doesn't improve, but I won't follow up with that any further. For 2019, what are you expecting from a free cash flow perspective? It looks like 2018, you benefited from some of the fleet growth. Trying to understand how much core improvement could actually get to a positive free cash flow generation or if it's just similarly going to be a factor, driven by fleet or if you don't think you're going to get back to positive free cash flow in 2019?
Yes, we're not planning to get back to positive free cash flow in 2019. As you recall from this year, we did have the impact of favorable marks from a residual standpoint, a little bit of a windfall which we don't expect that to repeat next year just given where residuals are. The second thing is that we also had a pretty significant benefit associated with our European facility that enabled us to increase the advance rates there. So those are 2 big things that sort of impacted us. What I would say is that we're focused on improving the operating cash flow profile of the company and we'll see where some of those other dynamics pick up [indiscernible] but we're not planning on it for 2019.
[Operator Instructions]. We have a question from the line of Komal Patel from Goldman Sachs.
I wanted to clarify your earlier comments on proactive addressing non-vehicle debt. Are you thinking about just tackling the 2020s or both the '20s and '21s? And given that the company has had a couple opportunities to come to market since the mid-last year, what makes the coming month the right time to do the refi? Is it capital structure or specific coupon that the company's targeting?
We'll be opportunistic about addressing the stack, which could include both 2020 and the 2021 stack. We plan to do that in the coming months as well. And as I've said before, we've been balancing sort of entry into the market with improvement in our results. We are pleased with the way that the improvement in our results has impacted the market. We're well aware of that, and as I said, we'll be opportunistic in the coming months to address this back in the [indiscernible] quite frankly, could include both the 2020s and [indiscernible].
Thank you, please go ahead.
Thank you very much, and have a great day.
Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.