Avis Budget Group Inc (CAR) 2005 Q2 法說會逐字稿

Good morning and welcome to the Cendant Corporation conference call. Today's conference is being recorded.

At this time, for opening remarks and introductions, I would like turn the conference over to Mr. Sam Levenson, Senior Vice President of Corporate and Investor Relations. Please go ahead, sir.

Good morning everyone, and thank you for joining us. On the call with me today are our Chairman and CEO, Henry Silverman; our President and Chief Financial Officer, Ron Nelson; and our Group Vice President of Investor Relations, Hank Diamond.

Before we discuss the results for the quarter, I would like to remind everyone of four things.

First, the rebroadcast, reproduction and retransmission of this conference call and webcast without the express written consent of Cendant Corporation are strictly prohibited.

Second, if you did not receive a copy of our press release, it is available on our website at www.cendant.com or on the First Call system.

Third, the Company will be making statements about its future results during this call. Statements about future results made during the call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and the current economic environment. Forward-looking statements and projections are inherently subject to significant economic, competitive and other uncertainties and contingencies, which are beyond the control of management. The Company cautions that these statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements.

Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements and projections are specified in the Company's Form 10-Q for the period ended March 31, 2005 and in our earnings release issued last night and filed on Form 8-K.

Finally, during the call the Company will be using certain non-GAAP financial measures as defined under SEC rules. Where required, we have provided a reconciliation of those measures to the most directly comparable GAAP measures in the tables in the press release and on our website.

Before I turn the call over to our Chairman, let me briefly review the headlines of yesterday's press release.

* Revenue for the quarter increased 8% to $4.7 billion. * The Company reported second quarter earnings per share from Continuing Operations of $0.37, which was $0.02 higher than the midpoint of our most recent projection. * Free cash flow for the quarter was $702 million. * For the year-to-date,Free Cash Flow was $916 million, bringing us approximately half-way to our full year goal of $1.8 to $2 billion. * The Company has also announced its intent to increase the share repurchase target from $1 billion to $2 billion concurrent with the closing of the sale of the Marketing Services Division.

As Ron will discuss in more detail during this call, we're holding our full year 2005 earnings per share from Continuing Operations estimate to a range of $1.35 to $1.42, excluding the $0.20 per share in transaction related charges recorded in the first quarter due, primarily, to increased fleet purchasing costs in our rental car business. For 2006, we continue to project earnings per share from Continuing Operations of $1.62 to $1.72.

Now, I would like to turn the call over to Cendant's Chairman and CEO, Henry Silverman.

Thank you, Sam. I would like to focus my comments this morning on our capital allocation plans, which I know is of keen interest to all of you, and then Ron will review a number of our operating initiatives and our outlook for the remainder of 2005 and 2006. And then, of course, we will be happy to take your questions.

As we are speaking with you this morning, we expect to announce the completion of our realignment to a focused travel and real estate company with an agreement to sell our Marketing Services Division to Apollo for approximately $1.83 billion. The sale is expected to be completed in the fall, subject to customary closing conditions for transactions of this type.

The culmination of the sale of the Marketing Services Division will enable us to implement an increase in our current share repurchase program from $1 billion to $2 billion. Our intent is to purchase those shares over the next 18 months.

If all goes according to plan, we will have shrunk our capital structure by an additional 7% and returned approximately $4.7 billion to shareholders through share repurchases, increased dividends and the PHH spin-off by the end of 2006. This represents over 20% of our current market capitalization.

We will also have reduced our net corporate debt to less than $4 billion, which is consistent with what we have been saying with you for several years now.

Yet, as you know, we will still have some cash left to deploy.

Of course, to be prudent, we will continue to evaluate the opportunity for tuck-in acquisitions over time. But, to reiterate what we have said many times before, we weigh the returns of any potential acquisition against the attractive returns from repurchasing our own stock. Any acquisition must: (1) fit within our core real estate and travel businesses; (2) offer returns on capital at least equal to those from repurchasing our own stock; and (3) enhance the long-term growth rate of the Company.

Our portfolio is reasonably complete. There are no strategic "must-have acquisitions" and our pipeline is very modest. To be specific, our only area of focus currently is real estate brokerages for NRT and title agencies for our Settlement Services Group in order to accelerate licensing in locations where we have a significant real estate footprint. At the present time, we are not actively pursuing acquisitions in our Vacation Rental Group or an upscale hotel company as the available opportunities simply do not meet our acquisition criteria. So, just to be crystal clear, so no one is confused, we intend to return the overwhelming majority of our free cash flow and the proceeds from the sale of MSD to shareholders through dividends and share repurchases.

And now, I'll turn the call over to Ron to discuss our first quarter results and our outlook for the remainder of 2005 and for 2006.

Thank you, Henry. I would like to depart from our usual commentary on the quarter's results and spend the time this morning reviewing some of the opportunities and trends we see in our Real Estate, Travel Content and Travel Distribution businesses. I will also highlight some of the challenges that we face across our businesses and then spend a minute on how we allocated capital during the second quarter and our plans for the rest of the year. The last item I will cover briefly is an update on our projections for the remainder of 2005 and 2006.

Just a word, however, on the second quarter - As noted in the press release, we believe the health of the business is best exemplified by the organic revenue growth each of the segments experienced during the quarter. Not all of that growth found its way to the EBITDA line, as the organic EBITDA growth shows mixed results. The press release speaks to the important driving issues and Henry and I will be happy to address them during the Q&A, but to simply summarize, the EBITDA comparison was clouded by the absence of mortgage earnings, which did not receive discontinued operations treatment and by one time gains, principally in the Travel Content Division, in the prior period. The impact of both these items is well in excess of the $0.03 per share that we fell short of last year's $0.40 per share of reported earnings.

Turning to operations; first, on the real estate front, the market is continuing to remain stronger than expectations, and 2005 is now expected to be another record year. In addition, yesterday NAR increased its outlook for transaction size in 2006.

Revenue gains in the second quarter were almost exclusively driven by price, reflecting, in part, the continued favorable interest rate environment and tight inventory conditions and high demand for homes in the larger, more urban areas where job growth has fueled the local economy. Anecdotally, however, there are clearly signs of moderating growth, particularly in the higher end of the market where NRT has a significant presence. Inventory levels, and correspondingly days on the market, are starting to return to more historically normal levels in many regions, as we have been predicting.

Against that backdrop, we are maintaining a cautious forecast for the back half of the year with both our franchise and owned businesses projecting flat on sides with price gains moderating to the 10% level. Keep in mind the math involved in that equation -- if the average price was unchanged for the balance of the year, our year-over-year price comparisons would still be up in the 6% range due to the increases we've had in the first half of 2005. Nevertheless, we do see indications that the environment is becoming more rational, but we do not see signs that would cause us to think that 2005 won't be another record year or that there would be a change anytime soon in the sixty-plus year streak of year-over-year home price increases nationally.

Furthermore, we have consistently said that in a slowing environment, we would gain share through incremental franchise sales and additional NRT acquisitions. This morning I'd like to re-assert that comment and share with you some of the initiatives underway, besides the most obvious, of acquiring additional brokerages.

First is our lead router initiative. This is the proprietary technology tool that we began to roll out in the first quarter of this year. Its purpose is to ensure timely follow-up to internet-based leads with the presumption that such follow-up will increase our success in getting hired to assist a customer in buying or selling a property. We currently have over 67,000 agencies in lead router, including approximately 56,000 NRT agents. A realtor.com report indicates that only 44% of internet leads are responded to within 48 hours. We believe that more timely follow-up will increase our ability to capture disproportionately more business. While it is certainly too early to reach any long-term conclusions, early results would suggest that the use of lead router has more than doubled conversion rates on internet leads.

The second initiative is our Enhanced Service Delivery program. This is an in-depth business planning and accountability initiative which we rolled out to a select group of Coldwell Banker and Century 21 franchisees to help them improve their top and bottom lines. So far, the results have been impressive. For instance, Century 21 companies that have been through the program have shown an increase in GCI over the prior period of 23% compared with other brokers in the same markets, whose GCI was up only 11%. Additionally, the brokers' transaction sides increased by 11% in total compared with the other brokers in the same markets whose transaction sides decreased 4%. We are obviously pleased with these results, and expect to expand this initiative significantly as we move into 2006.

The third initiative is the growth and development of the Sotheby's franchise. When we acquired Sotheby's, we noted that there were some 3,200 zip codes that qualified under our license agreement with Sotheby's that could technically accommodate a franchisee. While it is unlikely that we will license 3,200 franchisees, we are clearly going to ramp up well beyond the handful of affiliates in place when we licensed the Sotheby's name. This brand will continue to grow independent of the market. By year end, including owned offices, our office count will be up to 130 and the run rate on GCI will approximate $500 million. Keep in mind that most of last year was spent getting a franchise offering document approved, and integrated in the owned offices, so we're still very early in the ramp-up process.

Fourth, is our ongoing effort in signing additional independents as franchisees. At Investor Day, we provided our franchise sales forecast of $580 million of gross commission income. Through the second quarter, we're almost to the halfway mark and certainly expect to hit our full year forecast. For some perspective in 2003, franchise sales totaled approximately %380 million. Last year it was approximately $510 million and, obviously, we expect to beat that by a significant margin this year.

And finally, and the most obvious is our ongoing acquisition efforts. We have long said that in softer times the pipeline for brokerage acquisitions would become more robust. Acquiring share by acquisition is certainly not organic, as are the four previous initiatives, but the returns on capital we enjoy from brokerage acquisitions are very attractive; certainly attractive enough to compare favorably with share repurchase. At Investor Day, our forecast was that we would acquire brokerages aggregating at least $300 million of gross commission income during the year and we have now increased that target to $380 million. That level of GCI roughly corresponds to an annualized rate of 6 - 7% in sides growth.

So, the point here is that we are not completely dependent on the vagaries of the market. Nor are we sitting idly by debating whether real estate will have a hard or a soft landing. As a management team, we're taking steps to ensure our view of a soft landing is the operative one.

The next area I'd like to focus on is our online travel agency businesses which I know are of keen interest to you as they are a major driver of our earnings growth in 2006. I'll spend a minute on the status of the integration efforts, the economic impact of our recent acquisitions and recent trends in the merchant hotel space.

With respect to our integration efforts, we have: * One, successfully migrated CheapTickets.com onto the Orbitz platform both ahead of schedule and under budget; * Two, outsourced ticket fulfillment to a third party and reduced the per ticket cost by 40%; * Three, begun the transition of ebookers distribution to Galileo from Amadeus which we expect will be completed in the third quarter; * Four, increase the share of Avis and Budget business on the Orbitz platform by some 50% since acquisition and as previously reported, achieved all cost and revenue synergies relating to reduced headcount, partner marketing agreements and merchant hotel margins; * Finally, we have now accelerated the integration of Gullivers, both as to content integration on all of our marketing platforms (including the GDS) as well as operational integration to a public company standard.

Early results of the migration of CheapTickets.com to the Orbitz technology platform are extremely encouraging as we have seen a meaningful uptick in conversion rates from "lookers" to "bookers". Looking ahead, we expect to migrate both Travelport and Lodging.com to the Orbitz technology platform by September and ebookers by the middle of next year. In addition, we have added hotel content from Gullivers to the Orbitz offering as well and should have at least 4,500 of the Gullivers properties live by year end. This is an obvious cross-marketing initiative that will drive incremental value to both acquisitions and, moreover, to our base GDS business in Europe.

Not coincidentally, our strategy for integrating all of our online travel assets bears a strong resemblance to our Avis and Budget strategy -- multiple brands serving different customer bases, all serviced by a common infrastructure across the global footprint.

As to the economic impact of the acquisitions of Orbitz, ebookers and Gullivers, we continue to forecast that their 2005 EBITDA contribution, net of significant integration costs, will be over $150 million. In 2006, their contribution is expected to expand to between $325 - $375 million.

To put this in perspective, EBITDA for the Travel Distribution Services Division is expected to approximate $900 million in 2006 as compared with a range of $640 - $670 million in 2005, or an increase of roughly 35%. The online assets that we acquired are also expected to grow over 10% top line domestically and in the mid-twenties overseas. So, the returns on these acquisitions, which incidentally accelerate our growth rates overall, are very clear, and deliver not only a strategic benefit, but an economic one as well, that compares favorably to share repurchase.

Last, I would like to touch upon our domestic merchant hotel business. At Orbitz, its original five founding airline owners had differing strategic objectives and as a consequence did not pursue the merchant hotel business aggressively until early 2004. As a result, Orbitz has been somewhat behind the competition in this arena. Over the past few months, we have implemented a number of changes to more effectively penetrate this opportunity with the most significant news on this subject being an announcement we made just a few weeks ago in concert with Priceline. We have agreed to terminate our existing outsourcing relationship with TravelWeb, which enables us to work directly with the major US chains for their merchant content. Not only will we enjoy higher margins through this synergy contemplated at the time of the Orbitz acquisition but the direct relationship will allow us to more prominently feature, and thus sell, financially attractive properties to consumers. We also announced an agreement with Priceline to have them become our exclusive provider of opaque inventory effective January 1, 2006. This is a great partnership that we believe has significant opportunity and we are very excited about it.

Our changes are already yielding results. Revenues in our merchant hotel business for the second quarter have increased 162% versus the prior year, sales of packaged inventory by Neat in the second quarter have increased 86%, and Orbitz package growth alone in the second quarter increased 115%.

What should also not go unnoticed, however, is the significant growth at CheapTickets. Completely independent of the conversion to Orbitz' platform, CheapTickets results reflect the benefit of the marketing and content initiatives that we have made over the past year. As noted in the press release, bookings were up 28% and profitability was up sharply. These successes are clear examples of the terrific work being done by the team in our online travel business and a Testament to the leadership of Mitch Truwit who joined us from Priceline last January.

Let me spend a few minutes discussing one of the challenges facing us currently and that is the increasing cost of the 2006 model year cars for our rental car fleet. It has been widely reported, announced by GM last week and included in the Hertz IPO prospectus, the OEM's are dramatically reducing many of the incentive programs previously offered to rental car companies. Several weeks ago, we implemented daily rental price increases at both Avis and Budget to offset the OEM cost escalation and, to be sure, additional rental price increases will be necessary over the course of the 2006 model year in order to offset the higher average price of the vehicles in our fleet. Our forecast incorporates that assumption. We have also taken a number of other steps such as reducing the size of fleet purchases this year as well as changing the mix of vehicles to help offset the cost increase. This will be an evolving situation for the balance of this year and into next, so we have remained cautious with our EPS projections.

On the positive side of our ledger is our Timeshare business. It is a true growth engine with revenue up 14% and EBITDA up 26% in the last quarter, respectively, inclusive of the gain on land that was no longer needed for development. Trendwest, in particular, has really turned around, with 24% revenue growth, a 10% increase in average price per transaction and a 100 basis point increase in the close rate in the past quarter domestically. As most of you know, Fran Hanning, who was CEO of our Fairfield Resorts business took on the additional responsibility for running Trendwest as well and clearly, the results of his initiatives are showing. We expect to continue the positive close rate comparison for the remainder of the year.

Before I turn to the discussion of capital allocation and our earnings outlook, I would simply note that the balance of our travel businesses, which we have not discussed in detail on the call today, continue to benefit from an improving economy and you can track the increases in our lodging RevPar, time-share exchange subscribers and so on, as we provided that detail in the earnings release. To date, the hurricanes in Florida have had more economic impact than the current spate of terrorist activity but we continue to view that as an evolving situation which could ultimately impact all travel businesses.

Now, a couple of words on cash generation and deployment.

During the quarter we generated $702 million of free cash flow. We deployed almost $100 million of our cash to return value to shareholders through dividends, utilized $158 million of cash, net of option exercises, to repurchase stock and reduced our diluted share count by 7 million shares in Q2 versus the end of 2004. We are maintaining our forecast of $1.8 - $2.0 billion of free cash flow for the year, although additional state and unanticipated AMT tax payments relating to the asset sale may cause us to be closer to the low end of that range. With the PHH dividend we have returned approximately $2.1 billion to shareholders through June, and expect that to approach $3.5 billion by year end.

As Henry mentioned, concurrent with the closing of the sale of Marketing Services, we intend to double our share repurchase commitment for the second time this year. As you will recall, our initial share repurchase target was a minimum of $500 million. Three months ago we doubled that commitment to $1 billion, and now we expect to double that commitment again to $2 billion which we believe we can complete by the end of 2006.

As to our EPS outlook, as Sam mentioned, we're holding the full-year range at $1.35 to $1.42. While the second quarter came in about $0.02 per share above our initial estimate, we need to remain a bit cautious about rental car pricing. To size this issue for you, it is about a penny per quarter for the balance of 2005. Not Chernobyl, but a reason for caution. The next rate increase opportunity will be late in the third quarter as the rental car companies adjust the size of their fleets for lower demand in the fourth quarter and, consequently, we will have a better perspective on this issue by the third-quarter conference call. Also factored into our forecast is the delay in the collection of a claim settlement that was scheduled for the fourth quarter.

Looking to 2006, we believe the combination of continued strong organic growth, the significant year-two earnings contribution from our acquired travel distribution businesses (once the integration expenditures are completed), and the impact of shares repurchased in 2005 should enable us to meet our projections of earnings from Continuing Operations of $1.62 to $1.72.

With that, Henry and I would be pleased to take your questions.

(OPERATOR INSTRUCTIONS). Chris Gutek, Morgan Stanley.

A couple of questions. If I could start with the divestiture proceeds for the Marketing Services Division, I guess I am curious why, relative to your previous quote of price substantially in excess of $2 billion, we are now looking at less than $2 billion. What changed over the last couple months?

I think three things. The first is that the high-yield bond market really backed up when GM and Ford were downgraded. And so, since this is an LPO and the L is reduced, typically the price comes down with it. We probably lost a multiple point in terms of purchase price and therefore proceeds through that.

Second, we definitely ran into a more aggressive legal and regulatory climate in the last several months, particularly the last several weeks, than we and our final bidders had anticipated. I think, on the margin, that didn't help either, obviously.

And then, last and probably most importantly is the fact that, ironically, the synergies that Walter Forbes had described when we did the HFS-CUC merger eight years ago really came to pass. These businesses became inextricably intertwined over the years in that a pretty significant portion of the profits of MSD resulted from different marketing programs within Cendant.

Now, when the same set of shareholders are sharing those economics it's really just a management issue as to whose P&L it hits. However, when you have different sets of shareholders then it becomes much more relevant. Also, figuring out how to preserve the ability going forward in an evolving landscape to effectively compete with a company that we have just sold was also an issue of valuation. So we basically traded future upside as the world evolves for our current cash. And those three reasons combined to change the pricing dynamics of where we were perhaps one conference call ago.

And one more question, if I could, on the real estate business. I guess, when I look at the recent data for existing home sales, and especially in the context of Ron's comments about all the initiatives the Company is undertaking to improve market share, I guess I am a little disappointed with the transaction growth, both on the franchise side and the NRT side. Is there anything at work there in the quarter, a timing issue, any longer-term trend with attrition of agents, anything else that you could point to that might explain what would seem to be a modest decline in market share, despite the initiatives?

Well, there is a little bit of timing because we were up a bit in the first quarter on our market share. But I don't think you ought to look at market share in size. We really think that is a bad metric because commission income, which drives our profitability, is not based on size but on the product of size and dollars. On a dollar volume basis we believe we significantly gained market share because we are, as you know, focused quite a bit -- both at NRT, at Sotheby's and in our Coldwell Banker franchise offerings we're focused on much higher-priced homes. So what we focus on is dollar volume.

On a size basis we are, we believe, somewhere in the low-twenties, in terms of share of all homes sold through brokers. But on a dollar volume basis, we are somewhere in the low-thirties. That is what drives our revenues and our profitability. So, I would not get worried about the size issue at all. I would get worried if our market share in dollars begins to go in the wrong direction which it's not; it is actually increasing.

Scott Schneeberger, Lehman Brothers.

A couple questions to start off, in travel, if I could. The bookings in online travel obviously looked pretty strong. So far in July, are you seeing a continuation of that?

We're seeing a decent amount of growth but there certainly is not an acceleration of growth in July. So I think the trends are consistent with what we have seen for the first six months of the year.

And then, GDS was a little bit stronger than we had anticipated. Outside of a better travel environment, is there anything else that you have done there to improve that?

Well, we have picked up some additional travel agency customers And we have grown share. There is no question that Sam and the team have done a very good job of recapturing share particularly in the off-line and the major travel agencies. Remember that GDS basically serves a travel agency constituency; it really is the collective voice of travel agents with suppliers and we have done a good job of increasing share.

Finally, on the benefit plan change in Travel Distribution Services, about a $10 million hit to EBITDA in the quarter and I think an $11 million hit in the first quarter. Will that remain elevated or at that level through the end of the year? What should we expect on that?

What it was, Scott, was that we terminated a retirement plan last year and enjoyed a benefit in each of the four quarters throughout the year. It's about $38 million for the total year. So the negative comps relative to that item will persist through the third and fourth quarter and then in '06 it will be apples-to-apples.

One final question, then I'll hop out. You mentioned a claim settlement in the fourth quarter that may slip to the first quarter. Could you give any quantification or more detail on what that might be?

It's about $0.01, and it was a D&O claim that we expected to get from a bankruptcy estate for a former insurer of Cendant. The payment date slipped from fourth quarter sometime into 2006 and will get reflected in corporate. It's not in the operating units.

Thanks a lot. Nice job on the quarter, as well.

Richard Haydon, Omega Advisors.

It's related to the first question about the proceeds in the marketing services. Thank you.

Laura Starr, Equinox Capital Management.

I just had two quick questions. On the real estate, when you said you were held back a little bit by lower volume on the coast, is that both coasts or it mostly California? That was my first question.

It's both coasts, Laura. The pricing gains are the highest there. There's very little inventory - that's the problem. It's not that we can't sell. We have it, just we don't have as much as we would like. And it's primarily the Northeast, Florida as well as the West Coast.

And then the second question on Hertz. As Ford disposes of Hertz -- I mean, if they sell the whole thing to one of these supposed buyers out there, how do you think that is going to affect the new management of Hertz and what might happen there would change the whole environment? Do you think it will get healthier that Hertz is not held by an OEM?

Yes, I think so. If you look at Vanguard, Cerberus has been much more disciplined on pricing at Alamo National than the prior owners. And so, we would expect then if a private equity group or this company goes public where their motivation is to make the most amount of profitability, as opposed to taking 20,000 Tauruses on the 1st of January because Ford needs to sell more cars. So we can't see any downside to this only see upside.

The other nice thing is that having more public comps out for part of your business will make it easier for people to value us and based on what we understand the valuation of Hertz will be, that will be an upside, as will the valuation. Also, if you look at Expedia which is trading one issue, that's an upside also. The more comps you have out there that the market can value, the better off a mult-idimensional company like Cendant is because it's easier to value us.

And if the valuation on Hertz got that high would you consider Avis, Budget or non-core assets and sell it? Or is it integral to the whole on-line distribution part of your business, so much so that you don't really want to sell it?

Well, let's talk about that. Hypotheticals are always very dangerous. -When Hertz is either sold or goes public we can have a dialogue on that topic.

Michael Millman, Soleil Securities.

.On the car rental business, could you give us a breakdown between Avis and Budget in terms of their second-quarter volume and price?

Let me get it in front of me here. The volume at Avis was up 12% during the quarter; volume at Budget was up 20% and the T&M was down about 5% at both brands.

Staying with the car rental, depreciation was up over 30%. How do you break that down between price increase and volume increase?

Well, just generally, if you recall in the last conference call we said that there was a true-up of retention costs that we benefited from in the second quarter of last year that was not going to be repeated this year. And so, a piece of that gain that is sort of out of sync with the revenue gain in the business is related to that. I'm not going to get into generally the difference between what is fleet and what is price.

You did indicate earlier that you expected to reduce the fleet this year and change the mix?

No, I think what we said was that we're reducing our purchase of new fleet somewhat and then changing the mix of cars in terms of volume or midsize and economy and compact cars.

Does that suggest you might be holding onto the cars longer?

Yes, that is exactly the inference because we're not going to reduce the size of the overall fleet particularly given the volumes that we're enjoying. And, frankly, the advanced res build through the rest of the summer looks like we will continue the trends that we enjoyed in the second quarter.

I think you indicated that on the market service sales that there is going to be some tax, and I thought that you were going to use the NOL to cover the tax. Have you changed that thinking? And if so, how long will you continue to be a non-fed taxpayer?

Two questions, two answers. No, we haven't changed that. In some of the states that we do business in, you're not entitled to use all of the NOL to offset the taxable gains.so we had some state taxes we had to pay. And then, because we're using so much NOL we got ourselves into an AMT situation on the federal side. So, between Marketing Services and Wright Express, we're going to have somewhere between $50 and $100 million of tax payments that we had not originally contemplated which is why I guided towards the low end of free cash flow.

In terms of when we become a cash taxpayer for federal purposes I would look towards the first half of 2006. It is not clear yet because we have not really done all of our gain computations on the sale of MSD, whether it will be the first quarter or the second quarter; but I would plan to the first half.

And what does that suggest that we should be looking for, in terms of free cash flow, for '06?

Well, at the moment, I don't know that we have given a projection. But I can tell you on a run rate base it is going to be lower for sure because we are going to pay some federal cash taxes as I look at it today.

That's lower than this year?

Lower than this year. And on a run rate basis, I think we've forecast previously that our GAAP tax rate is going to probably range between 34 and 35% and our cash tax rate should be somewhat lower, in the 27 to 28% rate. So we will have better clarity on that in the third quarter, Mike, and we can give you a better sense of when and what we expect to pay by the third-quarter conference call.

Neil Deaton , Davenport & Company.

Congratulations on a solid quarter. As far as looking out to 2006 with your increased share buyback plan, is it reasonable to assume that diluted shares outstanding could fall below 1 billion shares?

I don't think so, but of course it depends where our share price goes because, obviously, that is going to be impacting, under the treasury methods, whenever options are still outstanding. But I think, if you do the math, it's going to be pretty hard to get below 1 billion. But we'll buy as much as we can as cheaply as we can. Whatever it is, it's obviously accretive, so we will keep doing it.

Justin Post, Merrill Lynch.

A couple of questions. First, it looks like the royalty fees, as a percentage of the franchise volume, was down year over year. Do you think that indicates anything to do with commission pressure, as far as your kind of take rate on sales in your franchise business, or was there another factor involved? Can you give us any explanation of that?

The majority of that, Justin, relates to rebates that the larger brokers get as we move on in the year. They get rebates on their royalty, based upon the volume of GCI that they produce. There's a few basis points of average broker commission rate erosion, but the more meaningful element is the rebates.

So you are giving bigger rebates this year than you were last year?

They are up a little, yes.

It's not that we are giving them, it's a function of the agreement that we have. The better they do, obviously, the better we do. And, therefore, in dollar terms as a percentage, the better they do because we're happy to pay a larger percentage on a larger amount of payment from our larger brokers. There's also some true-ups that go on, as Ron said, during the course of the year. So it is probably a number you want to look at on an annual basis as opposed to a quarterly basis which could have some skewed results.

I think if you looked at our results last year, by the way, Justin, we had the same phenomenon moving into the back half of the year, where revenue growth does not track with the addition of size and price.

The reason why that occurs is because the marketing fee is constant.

Second question -- the corporate EBITDA looks like it is going to be, at the midpoint, $165 million. What is in that, and how do you see that trending next year?

Well, it's basically the overhead for running the corporate operations, plus there's always a lot of one-time issues that get recorded in that number. Last year, as you recall, there was a fair number of one-time gains that were recorded in the corporate expenses that reduced them which is why the overall estimate for the year is up, I think, some 60 million or so. I would guess that on a run-rate basis next year, we obviously do have this claim settlement that we talked a little bit about that will be reflected in it, but I would think it's going to be in the same range as it is this year.

And last question - I think you gave some new guidance on the travel EBITDA for '06 which I have in my notes at $900 million -- correct me if I'm wrong. If I take the $900 million over the $650 million or so for guidance this year, that's $250 million. It looks like a $0.15 impact. Is that consistent with your previous guidance for travel and has anything changed there?

I don't think we have changed much. What we said is that it's going to be approximately $900 million and the only thing we did was we pinched the higher end of the guidance for 2005 in travel distribution EBITDA.

Jim Wilson, JMP Securities.

I just had one question related to the real estate side of the business. I'm trying to get a sort of same-store. Is there any level of office count increase or agent or realtor count increase that you could provide out of either bulk of the franchise or the NRT side of the business?

If you look in the press release in the text of the press release, the sides and price relating to NRT is an organic number, whereas if you look at the back in the tables, it's an absolute number. Roughly what it is going to show you is that the same-store sales or sides were up 8% compared to an absolute sides of 6%. The price was within 1%; it didn't move much.

And you did the same with the franchise?

In franchise, the number is not going to vary much, organic to total.

Paul Keung, CIBC.

Most questions have been asked. I guess a couple of minor ones -- one on the rental car. Can you give us some specifics on how much you're assuming in price increase on the cars versus where you were originally? And, given you mentioned earlier some strength in advance bookings, why would you want to pull back some of your fleet purchases if you feel pretty good about the demand side of the equation?

Well, let's start with the first question. The industry price increase that seemed to be adopted by the industry last month was on the order of 4 to 5%. We probably need another 1 to 2% over the back half of the year to offset the fleet cost increases and then over the course of next year, on average, it probably needs to be up 5% from where we sit today or an incremental 4%.

Keep in mind on those increases t where you have the ultimate flexibility is in leisure car pricing. Those price increases are across the entire fleet. We do have some flexibility in some cases to increase corporate pricing and we're looking very carefully at that. But you really do have to balance the competitive dynamic of moving corporate prices.

On your second question, as I think I discussed with Mike Millman on the earlier question, we're holding cars longer so that we are buying fewer new cars. So we are keeping the fleet constant and the fleet level today really does satisfy demand increases on the order of 12% or so that we have experienced in the second quarter. And, as I said, what it looks like at least through the summer, the advance res build would suggest we're going to have, as well.

I can give you some color on that, Paul. The OEMs are making the bet that they can sell the cars they don't sell at a loss in the other rental car fleet to the consumer. My own personal viewpoint is that they have sucked that pipeline so dry with the family and friends sales that they have done, that we will get to the back half of the year and they will be sitting with lots of cars. I have been through this now since 1995 and we will be able to buy cars at attractive prices.

But what we are preparing for is not doing that and therefore we will hold the cars a bit longer. So when you rent a car from us, the car will be a little bit older and probably a little bit smaller and, hopefully, a bit more expensive then what you will be used to. And if all that happens, as Ron indicated, then the OEM's price increase should be relatively immaterial to us.

And then, I guess, one more follow-up on time-share. It's a very good quarter on time-share numbers. To what extent is that strength, really, a timing of the sales? Or is that strength something that you have seen acceleration stretching to the next couple quarters?

We expect the balance of the year to be double digits in the time-share business. As Ron said, we think we have clearly turned the corner at Trendwest, although Trendwest's problem was probably more in our minds than it was in reality in that the growth rate was less than we anticipated but it wasn't like we were losing money. Fairfield continues to perform very well.

Gentleman, it appears we have no further questions at this time. I would like to turn the call back over to Mr. Henry Silverman for any additional or closing remarks.

I would like to thank you for joining us on the call. We will see you again in the third-quarter call in October.

That does include today's call. You may disconnect at this time.

This is a verbatim transcription of Cendant Corporation’s 2Q 2005 Earnings Results Conference Call. It has been edited from its original version for transcription errors.