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Hertz Global Holdings Inc  (NYSE:HTZ)
Q4 2018 Earnings Conference Call
Feb. 26, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Hertz Global Holdings Fourth Quarter and Full Year 2018 Earnings Call. Currently, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. I'd like to remind you that today's call is being recorded by the Company.

I'll now turn the call over to your host, Leslie Hunziker. Please go ahead.

Leslie Hunziker -- Senior Vice President of Investor Relations & Corporate Communications

Good morning, everyone. By now, you should have our press release and associated financial information. We've also provided slides to accompany our conference call that can be accessed on our website.

I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance and by their nature are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of this date, and the Company undertakes no obligation to update the information to reflect changed circumstances.

Additional information concerning these statements is contained in our earnings press release and in the Risk Factors and Forward-Looking Statements section of our 2018 Form 10-K. Copies of this filing is available from the SEC and on Hertz's 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 non-GAAP metrics. Our call today focuses on Hertz Global Holdings, Incorporated, the publicly traded company. Results for the Hertz Corporation are materially the same as Hertz Global Holdings. On the call this morning, we have Kathy Marinello, our CEO; and Jamere Jackson, Hertz's Chief Financial Officer.

Now, I'll turn the call over to Kathy.

Kathryn V. Marinello -- President and Chief Executive Officer

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 and 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 breadth and quality is now of the best in the industry. Last year, we expanded royalty 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 app and CRM capabilities and innovations 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 helped ensure we had the right cars 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 growth in the highest earning customer segment. Last year, we reduced unit depreciation expense in the US, in part due to a favorable residual market, but primarily because the result of a better fleet acquisition strategy, opportunistic fleet rotation, 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 US monthly depreciation expense per unit in 2018.

Driving long-term sustainable value creation required rigorous attention to people, processes and systems. When it comes to our people, in addition to rebuilding our leadership team to leverage diverse background, fresh perspectives and relevant experiences, we focus every day on personifying our culture and values throughout the organization. Culture and values provide the foundation upon which everything else is built. They will arguably become our most important competitive advantage. We're reinforcing our focus and priorities and creating a sense of urgency for our people.

We're driving accountability, simplifying goals for the greatest impact and earning trust products through regular transparent employee communications. What I 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 brands. 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 US. By this (ph) our strong performance in 2018 show that our turnaround has momentum. Over the last two years, the investments to grow the 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 commit significant energy toward completing our turnaround plan. We've been clear that this is a 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 cost 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 returns 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 goal, 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.

Savings through the productivity improvement initiatives will help offset the impact of higher technology spending, as we begin to roll out the systems 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 improvements. Jamere and I hired a team determined to continue to explore every avenue and options to make sure our businesses are working smarter and have the resources and flexibility to maximize their potential in the years to come.

When it comes to the transformation, our systems goals are to better serve our customers by leveraging real-time visibility into our fleet and operations and to more actively predict future trends, so that we can make smarter decisions faster. Our major platform transformation include cloud-based implementations for CRM, mobile apps, reservation, rental, fleet management and our back office systems. As part of the upgrade, we are 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 fleet is the next step in our systems evolution.

Consumer rental data will allow us to enhance our customer satisfaction, support sales and marketing goals during customer acquisition, optimize marketing and channel benefits, further improve inventory planning and inform service and life (ph) design. Connected fleet data, which we have been collecting and managing since the acquisition of our Donlen Corporate leasing business in 2011 will allow us to lower costs and provide a better customer experience. Donlen has been generating vehicle data since 2010 through our proprietary driver for telematics and information platform with roughly a third of Donlen's customers connected today, growth is accelerating.

In 2018, we increased the number of new connected account by 50% year-over-year. Driver points capabilities include monitoring route efficiency, driving behavior, fuel levels, GPS logistics and maintenance diagnostic codes. And Donlen's next generation advanced diagnostics device launched in March of 2018 have the incremental ability to track higher pressure odometer levels and oil life, all in a dynamic analytical tool that allows its customers, the ability to optimize cost and productivity savings.

The benefits to drive point account versus traditional leased account shows connected customers have 11% lower total fleet operating costs. 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 US and global rental car fleet should be straightforward, as we leverage Donlen's decade of end market experience.

We've established real momentum in creating long-term sustainable value with strong leadership teams in place and 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 performance.

Jamere Jackson -- Executive Vice President and Chief Financial Officer

Thank you, Kathy, and good morning everyone. We had another great quarter and a strong finish to 2018. Our growth initiatives are delivering and moving 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 offerings, customer service and brand building marketing along with disciplined pricing of 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 US 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 US RAC segment along with moderate growth in our International RAC segment. In addition, our Donlen business was up 39% due to 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 US 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 revenue 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 US operation. Adjusted net loss for the quarter grew 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 billion, up 8% led by strong performance in our US RAC segment and solid growth in international. Adjusted corporate EBITDA for 2018 was $433 million, up 62%, a strong revenue growth and lower vehicle depreciation more than offset operating investments and vehicle damage. 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 $3.94 in 2017. As a reminder, the 2017 results were driven by a $679 million benefit recorded in 2017 related to US tax reform.

Now, let me provide some additional color on the quarter starting with our US RAC segment and let me start with revenue. Our US RAC business had an outstanding year. Whole US RAC revenues were $1.6 billion, up 10% versus prior year and up 7% excluding fleet dedicated to ride-hailing or TNC fleet. We saw strong volume growth with a 6% increase in transaction days and solid pricing, with T&M rate up 6%. Total RPD was up 3% versus the prior year and ex-TNC, total RPD grew 4%. Our TNC business continue 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.

US 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, and those investments such as the recent roll out of CLEAR will enable new products and service offerings that will drive growth and future productivity.

Our US 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 from 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 fleet. Vehicle utilization was 81%, up 10 basis points, as we continue to use sophisticated predictive analytics tool and data science to match capacity to profitable demand. Leveraging the tools and talent in 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 cost in the US against the backdrop of strong market demand.

Moving to depreciation, monthly vehicle depreciation expense of $256 per unit decreased 15% versus the prior year quarter. The decrease in unit vehicle depreciation expense was a result of disciplined fleet acquisition, residual value strength and solid execution. We'll continue to aggressively manage our vehicle acquisition costs and utilized 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 a competitive advantage. In 2018, our sales will continue to make us one of the top used-car sales operators in the country on a stand-alone basis. As I said previously, we have a world-class sales team, we're expanding into profitable new locations and our web-based platform is driving revenue growth and profitability. We will continue to invest in these assets that they have tremendous synergies with our RAC operations and create 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 to our international organization and expect to reap similar benefits, as we have seen in the US. The International RAC segment also reported adjusted corporate EBITDA of $8 million, a $3 million decrease versus the prior year quarter, driven by higher interest costs.

Now, I'll move to the balance sheet and cash flow, and I'd 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 7.7 times from 4.7 times at year end 2017. We continue to focus on delevering the business, as our operating results improved. 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 1.4 times was well inside the required 3 times.

In February, we executed a series of vehicle financings to cover our US 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 commitment for March 2020 to March 2021. In addition, we had commitments under the US revolving ABS facility and a new seasonal facility to round out coverage for our fleet needs. We also remain focused on managing the maturity profile of the non-vehicle debt stack 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, higher European Vehicle debt advance rate, and favorable ABS fair market value marks on our US fleet consistent with a strong residual value market this year.

So 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. The growth initiatives are delivering. We're winning with our customers. We have tremendous momentum in early 2019. Many of the challenges of the past two 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 catalysts 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?

Questions and Answers:

Operator

Thank you. (Operator Instructions)Our first question will come from the line of Chris Woronka from Deutsche Bank. Please go ahead.

Chris Woronka -- Deutsche Bank -- Analyst

Hey, good morning everyone. Wanted to ask if I could where you -- in terms of the TNC business, how -- how significant could that become, I mean, you mentioned $300 million in revenue more than doubled versus 2017. Is there a -- is there a certain level that -- that could get caped out or that you're targeting for this year or next year?

Kathryn V. Marinello -- President and Chief Executive Officer

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 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'll grow it responsibly and we'll maximize the assets 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 there are 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 -- of ride-sharing. And so we continue to grow it, it's growing profitably and it will continue to be a contributor to the overall growth of our business. But we're going to do it sensibly and so far, it's been going pretty well.

Chris Woronka -- Deutsche Bank -- Analyst

Okay. great. Just a follow-up on the -- on the fleet costs, 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 cost?

Kathryn V. Marinello -- President and Chief Executive Officer

Well, I guess, it's hard for me to say, what I'm most proud of the team delivering the growth or the ability to buy and sell cars at an industry best level. And so those -- my background, I used to be a long time ago as CFO and controller and I'm always looking at the P&L, and those are the two biggest lines in our business, and we've made enormous progress with both of those lines. And we've done it getting both ride-in volume, which is a -- has been a tough achievement, but we're pretty proud of it and it is just, 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 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 lot, and we have a great team, a great leader in the retail sales business. I think we're number eight at this point in the sales of used-car 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 and between add great utilization levels. So now, the next challenge and I think we mentioned -- we might have mentioned it earlier, we got -- we can do better on utilization by a point or two maybe on getting a lot of service (ph) 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 freed up, we know where to buy cars too. So the best way to get through any kind of residual downturn is your ability to 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. I mean, so far, the year is starting off fairly well.

Jamere Jackson -- Executive Vice President and Chief Financial Officer

So the only thing I'll add is that, as you saw from our result, the monthly dep per unit was down 16% for 2018. As Kathy said, we do expect to see some decline in residuals in the low single digit range in 2019 and this is consistent with what we're seeing from external forecast. But the reality is that the absolute numbers, more nuances, it depends on a variety of factors such as the market condition, our execution on acquisition, our execution on retail disposition, the vehicle mix by car class, what we have in terms of volume exposure and model year. So it's tough to put a normalized depreciation number because at any given point in time, there are a number of things that impacted.

So what we can tell you is that our execution, no matter what the market conditions are will be solid and those were the kinds of capabilities that we built that Kathy mentioned are execution around 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 to our highest-return channel. Those will be the determining factor for where we actually end up, and I feel very good about the capabilities that we built in the organization.

Kathryn V. Marinello -- President and Chief Executive Officer

And as -- probably as you know, what the OEMs do clearly impacts residual values, and so far we're not seeing any unusual behaviors, just spark any real concern. So I think, oh, no the environment is holding up pretty well.

Chris Woronka -- Deutsche Bank -- Analyst

Okay. Very good. Thanks.

Operator

Thank you. Our next question then will come from the line of Brian Johnson from Barclays Capital. Please go ahead.

Brian Johnson -- Barclays Capital -- Analyst

Yes. Good morning, team. 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 sales portion of the domestic residual performance?

Jamere Jackson -- Executive Vice President and Chief Financial Officer

So if I -- if I look at our depreciation results and you look at the results that we had year-over-year about you know, I'd say about two-thirds of that was actually driven from our performance, the combination of what we're doing acquiring the cars and what we're doing in terms of moving cars through the retail channel. We follow-up with you on the exact numbers associated with it, but that should give you (inaudible) growth.

Brian Johnson -- Barclays Capital -- Analyst

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 take out 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?

Jamere Jackson -- Executive Vice President and Chief Financial Officer

Yeah. So here is what I'd say is, our investments in 2019 are primarily related to the tech transformation. So 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 in operations and SG&A and quite frankly, this will serve as bill payer, if you will, for 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 margin improvement in 2019 and then incremental improvement in 2020, as Kathy mentioned, as we complete the tech transformation.

Brian Johnson -- Barclays Capital -- Analyst

Okay. Thanks.

Operator

Thank you. Our next question then will come from Mike Millman from Millman Research. Please go ahead.

Michael Millman -- Millman Research -- Analyst

Thank you. A follow-up on the last question. When you compare with Avis, you were about half of the margin, EBITDA margin, they did kind of -- it would 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. I guess at 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?

Kathryn V. Marinello -- President and Chief Executive Officer

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 in our used -- our eighth largest used-car sales business, as well as our corporate leasing business in Donlen, it is 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 through 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 is just dramatically cut costs without any kind of strategic focus to it and pump up our EBITDA, which we sometimes done in the past. Instead, we are taking the right course, which is investing in the assets of the Company, where they haven't been invested and in particular, in our infrastructure and our technology, as well as we reenergizing our brands.

And -- and the 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. Well, we've really been driving the bulk of the investments 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 years old, 40 years old, we are a 100-year old company, so enhancing the entire need of repair. I think the good news is for the last several quarters, we have been consistently improving our rate and price that we're getting on cars, consistently reducing the cost of cars and then consistently expanding margins from when I first came in and started turning around the business from the downturn it had been in.

So if -- if we look forward, the best predictor is you know, 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, 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 asked to do something they get it done, and they 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 on productivity and any kind of cost and ways that we have out there and using that to pay the bill 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.

Jamere Jackson -- Executive Vice President and Chief Financial Officer

Yeah. So as Kathy mentioned, our first order of business quite frankly was investment, returning the Company's top line growth and that's what you've seen us do. Simply put, we 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 helped us enable driving price, utilization, and we're just getting a better return on the capital that we're investing and the great fleet that we have. So all of these investments that we're making in technology and service quality and brand-building marketing, all underpin this strategy, and the capabilities -- these are capabilities we fundamentally -- that we fundamentally must have, as you move forward.

That being said, the next leg of the stool for us is to drive productivity, and we're running the productivity played with intensity across operations and SG&A. We have opportunities in virtually every line item of the P&L, and we're attacking that. And so we have a 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 tech transformation in 2020 perhaps not only a faster growing business, but a higher margin business.

There is no structural impediments for us to not be a industry-leading growth rate and margins and that's the focus inside the company. So I'm excited about the capabilities that we built, we've built them the right way, we've built them with rigor and we've built them with discipline. And now, we have an opportunity to go drive productivity in a way that we can help us move the needle from a margin standpoint and get the EBITDA margin calories back into the business.

Michael Millman -- Millman Research -- Analyst

So I appreciate that. And I guess, to drill down into what analysts always want to now is some sort of timing and level of EBITDA that you can reach on a reasonably good market conditions?

Kathryn V. Marinello -- President and Chief Executive Officer

I -- I think, best predictor of the future is the path 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'll say significant EBITDA improvement in '19 and carrying that forward into '21, the bulk of our technology double redundant cost and the efforts to get new technology in and the old technology out, we should continue that kind of -- of double-digit EBITDA growth into 2020.

And at that point, there is no reason to think that we're not at very industry competitive EBITDA level. It should also help get our cost of -- of debt down, and clearly at that point, our leverage should be down in the four range, as versus where we're going to go out this year. So we have very focused plans on bringing this Company backup 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.

Jamere Jackson -- Executive Vice President and Chief Financial Officer

Yeah. I think from a -- 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 -- a very profitable way. And on top of that, as I mentioned, we're going to drive productivity. So the comments that I made about our DOE and SG&A growing at a significantly lower rate than our revenue growth suggests that we're going to have margin improvement in 2019, and you're going to see that carry through to 2020. So I'm confident in the capabilities that we've had. Again, we've done it fundamentally that's the right way and adding productivity is the next leg of -- to the stool if you will, we'll create the kind of Company that I -- that I mentioned in my comments, which is we are growing faster. We've done a great job of returning -- returning to top line, and we're rather a higher margin business, and we have a leaser focus on that inside the Company.

Kathryn V. Marinello -- President and Chief Executive Officer

And I -- where I'd end is, if you ask any operating CEO, what are the two things that keep them awake at night and are most important, and they may change up the order, but it's generally these two things having great leaders in place, and then secondarily, getting growth. And obviously, the easiest thing some -- any CEO has to do was cut costs that's in our control. So I think the -- the tougher battle over the last two years has been getting the right leadership in place and bringing growth back to the Company and growth at a higher rate, which we 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.

Michael Millman -- Millman Research -- Analyst

So at one time, there was talk in the industry of 13% to 15% EBITDA margins, is that in your future?

Jamere Jackson -- Executive Vice President and Chief Financial Officer

Well, I mean, I think it will -- it will depend on a number of things, as you well know or depend on number of macro factors, in terms of how fast the industry is growing and whether or not, there is growth available, for instance out there. It will obviously depend on what happens with the cost of vehicles and depreciation and a big chunk of that will depend on our execution. I think what I'll say is that, again, there are no structural impediment for us to not be a industry-leading toward margins, if you will, and we're building -- we're building the fundamentals of the business that strengthens our business from where we are in the cycle.

So all of the discipline that we put in around managing the fleet, doing the right things from a revenue management standpoint, and now driving productivity underpinned by a -- by a technology stack that is going to be enabler for both growth and productivity. There will be a lot of confidence that on a like-for-like basis, we have the ability to be a faster growing, higher margin business and -- and be an industry benchmark and that's our focus inside the Company.

Michael Millman -- Millman Research -- Analyst

Okay. Thank you. Sorry to try to keep pushing to get a number, but that's what we do?

Jamere Jackson -- Executive Vice President and Chief Financial Officer

I think we did it.

Operator

Thank you. Our next question then will come from the line of John Healy from Northcoast Research. Please go ahead.

John Healy -- Northcoast Research -- Analyst

Thank you, and 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 is a perception out there that the rental car business is not really growing your results fight back on that. And was just hoping to understand two things on the revenue line. If you look at 2018, what do you believe the industry rental revenue career (ph) in the US, in the airport business, I know there's a lot of airport congestion data that you're reporting and actually, I see a lot of that. So I'd be curious to know what you thought the market career? And then, secondly, can we 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 to produce those types of returns?

Kathryn V. Marinello -- President and Chief Executive Officer

What you know, I guess, what we're focused on is -- is to drive progress, right. So every year being better than the year before and seeking that high single-digit will it be fabulous obviously as well double-digit well, if I think any -- any CEO would be happy with those kind of rates. I think embedded in the industry right now is probably about three -- mid-single digit economic growth. We are -- there is different airports that grow at different rates. So I think we've been very focused on, where is the greatest demand, and we're people willing to pay the price, and we have great analytic tools, and we're learning every day with those tools and getting better at it. And that's part of the reason why we saw grade (ph) improvements at the same time, we saw of course, significant growth, particularly in the US.

So I do think, there are -- the one interesting story that I share with people when they ask me about where is the rental car industry going, there is two -- two things I point them to. So the first is, the eclipse, when I first came, we got blown out of the water and hit all the new stations because we couldn't provide people cars. So people need cars in all different places and ride sharing 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 Company started moving toward new one (ph) unless they found that -- that was dramatically more expensive than renting a car. So there is still so many reasons, whether you're leasing a car and you want to rent a car to avoid the miles, whether you're moving somebody into college, and you need a great big SUV, there -- there continues to be multiple reasons, why people rent cars and no leases all the time. So that goes in our favor just the general population in mid-single growth.

Then you add to it in, from an autonomy prospective, we are a unique company and 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 our 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 terms of partners that are approaching us around building for the -- 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 eight 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 plan. So overall, we see great assets with future growth and ways that we're not necessarily seeing today. Within the economy though, we are seeing a pretty stable mid single-digit economy supporting our business.

Jamere Jackson -- Executive Vice President and Chief Financial Officer

Yeah. 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 the price and volume standpoint. Historically, we've looked at data like employments, we've looked at GDP growth, but quite frankly, when we're managing our business on a day-to-day basis, this is a very data rich environment and we're not just looking at the macro data on employments and GDP, but also market level demand signals that help us plan capacity and placing the cars.

And so like I said before, we'll continue to build our capability with both systems and people. We have talented data sciences and revenue management and forecasting, and these are all things that are helping us to drive -- drive growth. So to be really clear, we do see growth available in the marketplace and the capability that we're building are allowing us to capture that both from a volume standpoint, but also from a pricing standpoint. And again, that -- that's largely based on the capability that we've built inside our Company.

Operator

Thank you. Our next question then will come from the line of Derek Glynn from Consumer Edge Research. Please go ahead.

Derek Glynn -- Consumer Edge Research -- Analyst

Good morning. Thanks for taking my questions. How do you characterize industry fleet conditions and the competitive environment today in the US? And do you find your competitors acting rationally? Or has there been any change in behavior in the last couple of quarters?

Kathryn V. Marinello -- President and Chief Executive Officer

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 like selling cars. So you got to make hay while the sun is shining and I think we're seeing a fair amount of car sales, as well. Then I think overall that does tend to help us around keeping price up. It is a world of supply and demand.

As -- 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 cars 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 cost and minimum wage is going up and the cost of cars in general are going up, we have to see -- we have to have a rational industry, I mean, we have to maintain decent margins for the shareholder. And the only way to do that is make sure the fleets are tight and get price for those cars.

Jamere Jackson -- Executive Vice President and Chief Financial Officer

Yeah. 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 team, and I'm really impressed by the capability that we have in general and the tools that we're using, it's such a data rich environment that the teams are using artificial intelligence, they're using machine learning. Fred is adding data scientist to this 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 -- with some certainty, the number of cars we need to have by location and it's helping us to -- to plan capacity and keep capacity tight, and importantly, helping us to drive pricing and utilization, and I think that's reflected in our results. So those were the kind of capabilities that you need to maintain a healthy dynamics that we have in the marketplace, and I'm encouraged by what we see on the competitive environment as well.

Derek Glynn -- Consumer Edge Research -- Analyst

Thanks. Appreciate that color. And then just 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 has been one time or limited to the fourth quarter for some reason?

Jamere Jackson -- Executive Vice President and Chief Financial Officer

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 happened this year, as you all know is the leasing rules changed, where basically operating leases were 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 -- many customers had operating leases, they kept those off the balance sheet, if they are now all moving on to balance sheet, people may make some -- some trade-off 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, if we see any spikes on having more capital leases, where it's all upfront we'll share that, Derek.

Operator

Thank you. We have a question from the line of Hamzah Mazari from Macquarie Capital. Please go ahead.

Hamzah Mazari -- Macquarie Capital -- Analyst

Good morning. Thank you. 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 that's remaining, as you complete the tech transformation, I guess, you'll have duplicate systems running, any -- any sort of color around -- around execution risks?

Kathryn V. Marinello -- President and Chief Executive Officer

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 just was an employee and I've spent the entire time, I've been here and so we spent a lot of time making sure, we're on the right track. We have very committed partners. Behind this was 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, I've been on both sides of these types of transformations that things will go on, and we're anticipating that and we're prepared for it.

And I think the efforts that we have in place and how we're doing it, we'll mitigate some of the risks along those lines. So we do have a phased-in approach in North Americas, starting actually in a couple of months and going throughout the year with 2020 anticipated full roll out. 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, she's built the great team around that. We're all hands on deck throughout the business in supporting the efforts, and we're going to get it done.

Hamzah Mazari -- Macquarie Capital -- Analyst

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? Or are you assuming just status quo of what the OEMs are doing? Or are you assuming sort of a step-up in incentives given US auto inventory levels are pretty high?

Kathryn V. Marinello -- President and Chief Executive Officer

For the most part, we already have the -- 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 cars. I think as you know, I spent 10 years on one of the OEMs Boards and I -- and before that I spent five years buying more cars than anybody else in the United States. And what I've seen is a dramatic change and how rationale the OEMs are across the industry.

And I watch all the time, every month, who they're selling to, how much they're selling, what residual -- what are incentives they're doing, and frankly I continue to see across the Board, fairly rational behavior. And so they figured out to -- 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 they -- 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 a '20 (ph) buy, any kind of rationale behavior.

Operator

Thank you. We have a question from the line of Adam Jonas from Morgan Stanley. Please go ahead.

Adam Jonas -- Morgan Stanley -- Analyst

Thanks. Just a brief question here. What is enterprise doing in the TNC rental business arena that you can comment on?

Kathryn V. Marinello -- President and Chief Executive Officer

I honestly do not know. And we stay very focused on candid, what we're doing. I admire enterprise as a company. But right now, the only real -- real sizable action that we're seeing is in the rental company space, as ourselves.

Adam Jonas -- Morgan Stanley -- Analyst

Okay. I mean, but you would be aware I can 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 -- 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?

Kathryn V. Marinello -- President and Chief Executive Officer

Obviously and candid, I really don't know.

Adam Jonas -- Morgan Stanley -- Analyst

Okay. Okay. And then just as a follow-up. Could you tell, you mentioned that the vehicle that enter the TNC fleet have a 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 the -- this program for couple of years, if there, 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 cars, the leasing company VIE, how much of the 38,000 units are owned by 767 and kind of where does that go ? Thanks.

Kathryn V. Marinello -- President and Chief Executive Officer

Well, I'm not going to comment on the 767 business, but I'll 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 -- we generally put vehicles in that business at 40,000 miles. We even do buy some incremental vehicles in the market. We have a fairly essential dealer network that we'll 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 collision expenses down, but at the same time, our retail car sales guys love these cars. If you ask any deal -- dealer out there, they will tell you, these cars are extraordinarily attractive, have great margins, and candidly, they tell buyers into Auckland. 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 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 it's showing and the need it's showing with ride sharing, 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 are great marketing device to pull incremental business into a lot is -- is we've been doing very well with it.

Jamere Jackson -- Executive Vice President and Chief Financial Officer

Yeah. And couple of 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 TNC or ride-hailing business. I think -- if I 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 it to be a marketplace that is a growth driver for us, but also to 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 -- 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 -- where that shakes out in the industry. But we expect this to be a very competitive market, and we don't expect that -- there maybe 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's worth a couple of points on our US record.

Operator

Thank you. We have a question from the line of David Tamberrino from Goldman Sachs. Please go ahead.

David Tamberrino -- Goldman Sachs -- Analyst

Good morning. Kathy, could you just remind us what the elevated level of IT spend has been on an annual basis for the past two years?

Jamere Jackson -- Executive Vice President and Chief Financial Officer

Yeah. So, I'll take that. So we've had somewhere in the neighborhood of call it a $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 initiatives, as we -- as we move forward. So I think the focus for us inside the Company is one getting that technology transformation completed.

The spend isn't just the development costs associated with it and but it's also the redundant cost that we have because we are now in the period, where we'll have two running costs between the old systems and the new systems and we'll need to see that run-off, but we're on track. We expect -- 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, you'll start to see some of that elevated spend rolled off, and you see the margin accretion back into the business.

David Tamberrino -- Goldman Sachs -- Analyst

Okay.

Kathryn V. Marinello -- President and Chief Executive Officer

I think, as -- as I'm sure over the last two years, the focus has been on how much are you spending, when will it be over, at what point does it bringing back to industry competitive level. And again structurally, there is no reason given the three things I talked about our brands, our retail car sales and our corporate fleet business line, we shouldn't be as good as not better than industry average earnings levels.

The reality is -- is we're focused on and brought the growth back, we got in line. And I would say, as industry comparative -- industry competitive caused the cars, obviously the easiest part of this turnaround is now getting the waste out of the expenses, closing maybe -- maybe the third hardest (ph) 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 thing to do.

So if we look at why we've been elevated in expenses is about a third efficiency, it's about a third technology spending and in the past, it's been about a third. We're building some things that hasn't 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 is no excuses, the work is done.

David Tamberrino -- Goldman Sachs -- Analyst

Okay. So $100 million elevated spend, you've got $98 million of information technology adjustments for the year, is that the same spend that you're adding back into your adjusted corporate EBITDA?

Jamere Jackson -- Executive Vice President and Chief Financial Officer

Yeah. The $98 million is the -- is the add back.

Operator

One moment, please go ahead.

David Tamberrino -- Goldman Sachs -- Analyst

I'm sorry, the $98 million adjustment for information technology and financing cost, part G represents Company's information technology and finance transition process?

Jamere Jackson -- Executive Vice President and Chief Financial Officer

That's correct.

David Tamberrino -- Goldman Sachs -- Analyst

That's -- that's an add-back of the $100 million elevated spend. So am I misinterpreting that?

Jamere Jackson -- Executive Vice President and Chief Financial Officer

Yeah. No, the $98 million is the -- is the add-back. That's correct.

David Tamberrino -- Goldman Sachs -- Analyst

Okay. So look -- I -- just trying to understand your walk if that elevated spend comes down, but you've already been adjusted for it, your corporate EBITDA hasn't improved, 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 you to positive free cash flow generation or if it's just similar 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?

Jamere Jackson -- Executive Vice President and Chief Financial Officer

We're not planning to get back to positive free cash flow in 2019, if you recall from -- from this year, we did have impact of favorable marks from a residual standpoint. It's a little bit of a windfall, which we don't expect that to peak next year, just given where our residuals are. The second thing is that we also have a pretty significant benefit associated with our European facility that enabled us to increase the advance rate there. So those are two big things that sort of impacted this year. And 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 shake out, as it relates to the digital (inaudible) potential could get us a little bit better. So we're not planning on it for 2019.

Operator

Thank you. (Operator Instructions) We have a question from the line of Kamal Patel (ph) from Goldman Sachs. Please go ahead.

Kamal Patel -- Goldman Sachs -- Analyst

Hi, thanks for squeezing me in. I wanted to clarify your earlier comment on proactively addressing non-vehicle debt. Are you saying about just tackling the 2020 or both the '20s and '21s and given that the Company has had a couple of opportunities that come into market since mid last year, what makes the coming months the right time to do the refi, is it capital structure or specific coupon that the Company is targeting ?

Jamere Jackson -- Executive Vice President and Chief Financial Officer

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 or so. And as I've said before, we've been balanced and sort of entering into the market with an improvement in our results. We're pleased with the way that the improvement in our results have interacted with the market, we're well aware of that. And as I said, we'll be opportunistic in the coming months to address the stack and it quite frankly, could -- could include both the 2020s and 2021 stack.

Operator

Thank you. Please go ahead.

Kathryn V. Marinello -- President and Chief Executive Officer

Thank you very much, and have a great day.

Operator

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.

Duration: 67 minutes

Call participants:

Leslie Hunziker -- Senior Vice President of Investor Relations & Corporate Communications

Kathryn V. Marinello -- President and Chief Executive Officer

Jamere Jackson -- Executive Vice President and Chief Financial Officer

Chris Woronka -- Deutsche Bank -- Analyst

Brian Johnson -- Barclays Capital -- Analyst

Michael Millman -- Millman Research -- Analyst

John Healy -- Northcoast Research -- Analyst

Derek Glynn -- Consumer Edge Research -- Analyst

Hamzah Mazari -- Macquarie Capital -- Analyst

Adam Jonas -- Morgan Stanley -- Analyst

David Tamberrino -- Goldman Sachs -- Analyst

Kamal Patel -- Goldman Sachs -- Analyst

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