Avis Budget Group Inc (CAR) 2005 Q4 法說會逐字稿

Good morning everyone and welcome to the Cendant Corporation's conference call.

Just as a reminder, today's conference is being recorded.

At this time for opening remarks and introductions, I would now like to 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 all for joining us.

On the call with me today are our Chairman and CEO, Harry Silverman; our President and Chief Financial Officer, Ron Nelson, and our Group Vice President of Investor Relations, Hank Diamond.

Before we discuss the results of 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's 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 and other forward-looking statements 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 in the current economic environment.

Forward-looking statements and projections are inherently subject to significant economic, competitive and other uncertainties and contingencies, which are beyond 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 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 September 30, 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 fourth quarter increased 7% to $4.3 billion. • The Company reported fourth-quarter earnings per share from Continuing Operations as adjusted for specified items of $0.23, which met our most recent projection, and we generated free cash flow of $445 million. • For the full year 2005, revenue increased 9% to $18.2 billion, earnings per share from Continuing Operations as adjusted for specified items was $1.28 and free cash flow was $2 billion. • Over the course of 2005, the Company returned over $2.5 billion in value, including over 70% of its free cash flow to its shareholders in the form of cash dividends, share repurchases and the PHH spinoff.

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

I will quickly update you on the status of our plan to separate Cendant into four publicly traded pure-plays and our search for the new CEO of TDS.

Then Ron will discuss our financial results and outlook.

With respect to the timing of the separation, the spin-offs are proceeding exactly according to plan.

We expect the audited financial statements for Real Estate and Hospitality to be ready around the end of March and mid-April, respectively and to file Form 10s with the SEC soon after the audits are completed.

I won't attempt to handicap the SEC review process, but our best guess is that the first two spins, Real Estate and Hospitality, will take place in June and July, respectively; and the spin of TDS in October, when we cycle the five-year tax requirement.

As we have previously indicated, we expect to complete the financing for the Vehicle Rental company in April and to finance the other new companies over the subsequent three months, so as to repay all of the Cendant corporate debt by the completion of the second spin.

Regarding the search for the new CEO of TDS, we have an active process.

Ron and I have seen or will see a number of highly qualified candidates this month, and I expect that we will zero in on two or three finalists next month.

So, we have done a lot, we have much left to do, and the coming months will be both challenging and exciting for Cendant as we complete the process of launching four new companies.

We are aware of and share your desire to complete the spin-offs as quickly as practicable.

Our management teams and employees are energized about the long-term growth prospects for each of the spin-offs, and the benefits that we expect will accrue to the shareholders of the four new companies.

With that, I would turn the call over to Ron.

I'm going to spend just a few minutes talking about our fourth-quarter results, and then I would like to talk a little bit about our 2006 outlook, particularly for Real Estate and Car Rental, since in a status quo scenario, those two businesses would otherwise be pivotal in the direction of Cendant's earnings in 2006.

I also plan to briefly update you on some of the progress we have made in addressing the challenges at TDS.

And then, finally, we know from hearing from a number of you this morning that there is some concern and/or confusion over the size of the impairment charge relative to the guidance we gave in December, so we will plan on explaining the nuances of that calculation at the end of our comments just before the Q&A begins.

Let me start with Travel Content whereTimeshare Resorts was clearly the star performer this quarter with revenue increasing 15% and EBITDA increasing 32%.

TheTimeshare industry has gained an enormous amount of visibility and momentum this year with many of our competitors now showcasing the business as an important part of their growth strategy.

We share the other industry participant’s enthusiasm, as evidenced by our decision to enter the business five years ago through two strategic acquisitions, and we now have a leading position.

We are positioned in the broadest part of the industry and somewhat differently than our competition - our primary customer is a middle-income earner with a family.

This business produces three income streams -- one, the profit on the initial sale; two, the financing spread that the majority of our customers pay us and three, the upgrade profit we harvest as we mine our customer base of over 750,000 members who are looking to go different places for longer periods of time.

As you know, we merged the management of our two businesses last year and it has proved to be the right change; at Trendwest, tour flow, close rate and pricing were all up year over year contributing to the strength of this year's results.

Given that this remains a relatively under-penetrated industry, with favorable demographics and a strong value proposition to consumers, we believe that timeshare continues to be a very strong long-term growth opportunity.

Our lodging franchise and RCI timeshare exchange businesses also continued to perform well.

We expanded our franchising portfolio to include an upscale brand with the acquisition of Wyndham in the fourth quarter.

We believe Wyndham is a strong brand with significant distribution opportunities.

This will enable the re-flagging of competitors and attract developer capital for room growth - the pool of capital available for upscale and luxury development is far larger than for economy, where most of our brands are currently positioned.

We are also running what we have better: excluding the addition of Wyndham and Ramada International, our lodging brands grew RevPAR by 11% this yearwhich, as in the third quarter, we believe will exceed the industry average for the economy segment.

RCI, our leading timeshare exchange business, generated another quarter of strong subscriber and transaction growth.

The earnings impact of that growth was muted by the restructuring charge we took in the quarter to rationalize the overheads of RCI Europe with our European Vacation Rental operation, which was merged into RCI in the second quarter.

This charge, which was the difference between the segment being up 16% and down a reported 4%, will begin immediately to add to income in 2006.

Turning to vehicle rental, our 17% growth in car rental volume reflects increased airport share for both Avis and Budget.

Domestically, commercial volumes were up 14% during the quarter while leisure volumes were up 19%.

At the same time, we increased our fleet utilization despite a 17% increase in fleet size.

In general, while we did see strong volume gains and improved pricing environment, these were not enough to completely offset the fleet related cost increases we bore in the fourth quarter.

There is no question that we have successfully restored the Budget brand to its roots as a value-priced, leisure focused - but business-family friendly company.

But the real benefit, we believe, is in having two differentiated brands with which to target differing pockets of demand for vehicle rentals.

We also continued to expand our local car rental presence.

We ended the year having reached a total of 980 domestic off-airport locations, adding over 100 locations in 2005.

We plan to add another 200 in 2006.

We were just shy of $650 million of revenue from this business in 2005 and continue to believe that the local car rental business remains a good long-term growth opportunity for our VehicleRrental Company.

On the pricing side, there have been three leisure price increases since June of 2005 in order to help offset higher fleet costs.

Generally, the price increases are holding.

On the corporate part of the business, however, price increases are going to take longer to achieve, as market conditions would suggest that most car rental companies are waiting until contracts come up for renewal before raising prices.

While this substantially accounts for the fact that overall prices were down modestly, year over year during the quarter, we did experience positive year-over-year pricing in December.

What is more important, however, and what I would advise you to focus on, is that overall pricing did increase sequentially from the second quarter 2005 to the third quarter 2005 by 6 percentage points, and from the third quarter 2005 to the fourth quarter 2005 by another percentage point.

While the increases from the third quarter to the fourth may not seem like much, keep in mind that pricing typically declines seasonally from the third to fourth quarter.

However, as we cycle more of the costly 2006 model year cars into the fleet, the absence of meaningful corporate price increases will have an impact.

As a result, we have modestly reduced our outlook for first quarter car rental pricing, which will affect the first-quarter EPS by about $0.01 or maybe $0.02 per share.

As we have said previously, it will be a challenge for this unit to generate the same level of EBITDA for full year 2006 as in full year 2005.

We do believe, however, the price increases will ultimately begin to more than offset higher fleet costs, allowing for EBITDA growth in 2007 and beyond.

The fourth quarter in residential real estate finally saw reality catch up with expectations.

The decline in sides that we have been talking about with you began to accelerate, particularly in the last month of the year.

Price remains strong, rising 10 to 12% in our market segments, but sides were down approximately 5%.

The most effected regions were, not surprisingly, New England, California and Florida, where the most speculation has been reported.

Together, these three regions were off on sides a composite of 19% at NRT.

That said, the remainder of NRT's market segments were up 4%, attesting to the value of the size and diversity of our portfolio and, more importantly, the local nature of the residential real estate business.

Looking into 2006, as we have told you throughout 2005, we continue to expect a soft landing for the real estate market in 2006, with roughly a slightly down market on a dollar volume basis.

We expect to outperform the overall market by about 2 percentage points in sides as a result of the annualization of franchise sales and NRT tuck-ins completed in 2005, plus additional activity in 2006.

Remember, and this is very important to keep in mind, the metric we use to measure the market is GCI, gross commission income, since it is commission dollars that drive our revenues and profitability.

Based on this market outlook for the full year 2006, we expect our Real Estate businesses other than NRT in aggregate to grow revenue and EBITDA versus 2005.

However, we do expect EBITDA at NRT to be down and, as a result, anticipate our total real estate segment's revenue to grow but EBITDA to remain flat in 2006 versus 2005.

As you know, NRT is more concentrated in some of the regions on the East and West coasts that are now experiencing double-digit declines in closed sides volume.

The real estate market in most of the remainder of the country remains healthy, albeit moderating as expected, and this accounts for why NRT's results should be weaker than our larger, more geographically diverse real estate franchise business.

To counter the impact of the slowdown in NRT, we have put in place a cost reduction program, which principally includes consolidating local offices in order to right-size NRT's cost structure to be in line with reduced volumes.

We expect these cost cutting efforts to possibly impact results beginning in the second half of the year.

Looking at the first quarter, we do not expect our results at real estate to be reflective of the results we anticipate for the full year.

Based on current trends, we now expect our first quarter EBITDA to be down 30 to 40% at real estate, year over year, reducing our first quarter EPS projection by about $0.03 to $0.05.

The percentage decline in this quarter is exaggerated significantly by the seasonality of the revenue stream. - the first quarter is clearly the slowest quarter at both NRT and our Franchise operations.

In fact, NRT traditionally loses money in the first quarter.

However, we do anticipate a natural market adjustment that will see sellers bring prices in line with lower demand which we believe will allow our real estate results to improve in the back half of 2006, which, when combined with the cost reduction efforts and seasonal increases in revenue, should result in positive comparisons in the third and fourth quarters.

Turning to Travel Distribution, both Orbitz and Gullivers are growing, are solidly profitable, and, we believe, are performing well versus their competition.

During the quarter, our domestic online gross bookings increased 21% on an organic basis.

Our Americas consumer packaging growth also continues to be strong, with gross bookings up 48% for the quarter and 72% for the year.

In addition, we increased our domestic merchant hotel mix by 1000 basis points to 64% during the fourth quarter.

Gulliver’s ended the year with gross bookings up approximately 16% on a constant currency basis to almost $1.3 billion.

And, while earnings comparisons from 2004 to 2005 are not comparable because of the integration costs that we had to incur in 2005, earnings nevertheless increased by almost 25%.

This is the asset, quite frankly, we are most enthusiastic about.

Gulliver’s was clearly run (quite successfully) as a true entrepreneurial organization, with the former five principles making all of the decisions.

Management information systems were fairly rudimentary and yield management non-existent.

This coming year, we will begin to introduce database management into the system so that we know what we have and when we have it, and begin to overlay yield management techniques on the massive hotel inventory that Gulliver’s controls.

Both will add to the 20-plus percentage growth rate we are forecasting for gross bookings in 2006.

With the exception of ebookers, our previous reductions to projections were primarily the result of forecasted revenue synergies proving to be too high; it was not the result of poor performance by these businesses or a failed investment thesis.

In fact, we believe both our domestic online business and Gulliver’s will be accretive to EPS in 2006.

We also continue to expect our overall TDS EBITDA to grow in 2006 versus 2005 from about $525 million to around a low end of our most recent projection of $575 to $625 million.

With respect to ebookers, that business currently is not profitable and will not be for the balance of 2006 for a variety of reasons, most of which are fixable, although few in the short term.

We are very encouraged by the remediation plan put in place by Mitch Truwit since he took over responsibility for these businesses.

First, the new management for the international online assets has been installed and has hit the ground running.

Mike Nelson, who was one of the original members of the Orbitz team, is running international markets and brings to the job a broad background in marketing supplier relationships and finance.

Second, an importantly, the new platform build is progressing on time and on budget.

This will ultimately automate many manual processes, improve site speed and stability and enhance the product offerings.

And third, we are moving aggressively to rationalize the cost in these businesses.

The cost savings will come in three primary areas: • One, shifting the business mix online: E-bookers still has too much web-enabled off-line business that is marginally profitable; we need to effect a shift and remove the associated costs • Two, we need to automate the platform and business system processes; the platform overhaul will accomplish that; and; • Three, we need to rationalize our investment across Europe; we have to look at the scale of our individual operations and deploy resources to those markets where we have the best opportunity for growth.

These actions should start to provide benefits in the back half of 2006 with substantial improvements in 2007.

Before we turn to our outlook for the first quarter of 2006, let us briefly comment on the highlights of our full year 2005 results.

For the full year, each of our core reportable segments generated revenue growth ranging from 9 to 36% and our total core segments’ revenue growth was 14%, including organic revenue growth of 8%, in excess of our stated target of 5 to 6%.

In addition, each of our core segments was profitable and our total core segments EBITDA growth was 4%, excluding the non-cash impairment charge of TDS.

We generated over $2 billion of free cash flow, which exceeded our projections, primarily due to timing benefits.

We returned over 70% of this cash to our shareholders through $423 million in cash dividends and approximately $1.1 billion of share repurchases, net of option exercises.

Together with the spin-off of PHH, we returned over $2.5 billion in value to our shareholders.

While we were disappointed that the results of certain of our TDS businesses muted the company's share price and performance in 2005, we are nonetheless encouraged that each of our businesses grew revenues organically and continue to generate substantial amounts of free cash flow.

Those attributes won't go away in each of the four new companies, and in fact, if our previous experience with PHH, Wright Express and Jackson Hewitt is a guide, they will only improve.

We expect that each of the four new companies will be well positioned for future growth and success.

Finally, a few additional words about our outlook - Our first-quarter outlook is described in detail in the press release and I won't repeat it here.

In terms of our outlook for full year 2006, if Cendant had remained together, we would expect that our total core reportable segments to grow revenue in the high single digits and EBITDA in the low single digits, excluding separation costs and the fourth-quarter impairment charge at TDS.

We are clearly in a cycle of reversion to the mean in real estate, but our long-term growth objectives remain unchanged.

Last, we plan to hold our investor day on March 21st in New York City.

At this investor day, we plan to have presentations by the senior leadership of the first two spin-offs, Real Estate and Hospitality.

Richard Smith, Steve Holmes and their management teams will describe their businesses and give projections and other financial data for these new companies.

We will also update you on the 2006 projections for the rest of Cendant.

We then plan to hold a second investor day in late summer or early fall, at which time we will have presentations by the senior leadership of TDS and Vehicle Rental who will give projections and other financial details for those two companies.

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

Before we get started with the questions, I'll see if I can tackle the impairment charge for you a little bit.

I know you are all scratching your heads on the size of the charge, so let me take a minute to explain some of the nuances of how and why it got to be larger than we expected.

The interaction of FAS 142 and FAS 144 is complicated.

The first step in the 142 analysis allows you to benefit from the portfolio effect.

Namely, if some assets in a measurement group have a greater fair market value than carrying value, you can use the overages in one to offset shortfalls in another.

However, if that first step analysis suggests that the combined value of all the assets in the group is less than their combined carrying value -- in other words, you fail step one of the test and step 2 of the process requires analysis at a more detailed level, you have to measure each intangible asset in the measurement group on a stand-alone basis to determine if there has been any impairment first of intangibles, then of goodwill, for the group.

In general, you lose the portfolio effect on all the assets in this step.

In prior years TDS was one measurement group.

Everything was bundled together for purposes of measuring step one of the test and resulted in no impairment.

This year, with the net acquisitions, we had to redefine the measurement groups and the online business globally became its own measurement group.

So we had a combination of recently acquired high-multiple assets, combined with recently acquired high-multiple assets that underperformed.

So, as well as some of the businesses are doing, they did not produce enough excess value in step one to overcome the deficits presented by E-bookers and certain other online assets in the group.

So now we will move to questions and hopefully that helped explain a little bit why the impairment charge was larger than we thought.

(OPERATOR INSTRUCTIONS).

Chris Gutek, Morgan Stanley.

First, Henry, is there any situation under which the Company would consider an LBO of the whole Company at these stock price levels?

And if so, would that have any consequences for the tax-free nature of the spin, if those conversations didn't result in a transaction?

Well, the answer to the second part is no, they wouldn't, because the spins are not pursuant to a plan to sell the businesses.

In other words, there's no prearrangement, no dialogue that would lead that.

On the first question, yes, we definitely would; and if anyone on the call wants to acquire us for $25 or $30 billion, we will be happy to accept it.

Our advisors don't think at current levels even with a normal premium, that there's enough capital in the world to affect an LBO.

The funding hole is too big, and therefore, the ability of doing an LBO at prices that our Board would accept and which we would get a fairness opinion is really not an available option.

To follow up on your comments on the real estate business, the Q1 guidance would imply that the real estate markets are slowing a bit more than you had previously expected.

I'm curious if you could elaborate on that in terms of what specifically is different?

And you do talk in the press release about some cost-cutting activities.

Could you try and quantify how much costs you can take out?

And then, finally, interest rates have gone up that much, and they are still low by historical standards.

I would assume you would have to have contingency plans to take out costs much more aggressively if rates were to go a bit higher.

Could you comment on that as well?

While we have been expecting on a quarterly progression basis real estate to continue to soften, we have been quite surprised at how strong it remained for most of 2005.

Frankly, in excess of our budgets on every month, every quarter, until the month of December, when we saw a real acceleration and a lot of data points that would indicate that the market is softening -- one being, for example, that our default rate or cancel rate, meaning people that did not close on contracts spiked by about 30% just in December alone.

That would indicate -- and in the markets you would expect, Chris, meaning the markets where, as I said, most of the speculation had been reported.

And that says, as all the homebuilders have said, that the flippers and speculators either have or are departing the market.

So we certainly saw some of that.

Really, a quite interesting phenomenon based on where we were on open contracts in mid-December versus how the month ended.

I think the market is basically where we expected it be, but because it was higher than we had thought for most of 2005, the deceleration or lack of acceleration is greater, meaning you are coming off a higher base.

And it's particularly exacerbated at NRT.

Let me try to help you with that.

NRT has fixed expenses of about $300 million per quarter and has revenues after -- which is about $1.2 billion -- broker commissions of roughly $1.6 billion.

So you should, in theory, make about $400 million a year, and that is also after taking out the royalty pay to the real estate franchise group.

But unfortunately, the way it works is 25% of the costs are each quarter, but generally only 15, 16 or 17% of the revenues take place in the first quarter; it's about 30% in Qs 2 and 3 and about 23% in Q4.

So you are generally going to lose money in NRT.

The operating leverage is very simple; you have a fixed base of costs, so every nickel of revenue above that goes to profits and everything below that doesn't really help you in terms of mitigating the loss.

And that's exactly what we're forecasting for the first quarter.

We think, to some extent, that that is also a function of the media, which is reporting on a daily basis that the real estate market is going over the cliff.

That may have convinced buyers to become more cautious.

Anecdotally, we are being told that.

In terms of your second question, we think we can take out about $50 million of costs initially.

That requires some office closings.

It's not a dollar-for-dollar benefit because you do have some breakage, and so you do lose some of the benefit of having the agents in those offices who may leave and work for the person across the street because they like that particular location.

But we think that there's probably about a $50 million cost reduction overall that we should be able to accomplish that will start taking impact in the second half of the year.

Jeff Kessler, Lehman Brothers.

(technical difficulty) adjustments you have to make to the EBITDA numbers to get there (technical difficulty) the other question that's directly (technical difficulty) free cash tax rate for (technical difficulty)

Unfortunately, you broke up and we couldn't hear any of your question.

If you can send us (multiple speakers) --

Can you hear me know?

Yes.

The specific (technical difficulty)

You are still breaking up.

I would suggest -- if you can send (multiple speakers) anyhow, Jeff, (multiple speakers).

This is Scott Schneeberger;

I'm with Jeff.

Can you hear me okay?

The question Jeff was trying to ask was, if you guys could provide some type of free cash flow guidance for 2006 and give us an update on where you stand with NOL, what remains and when that will be done?

Let me take a crack at that.

We probably have somewhere, after we redeem the debt and pay off de novo costs between 5 to $600 million of NOLs to use on the consolidated return.

We will, more than likely, not be a cash taxpayer other than foreign and certain state taxes through the first half of this year.

And then, following the spin-off, we do expect that the real estate company and the hospitality company will be cash taxpayers.

Car rental will not be a cash taxpayer, and TDS will be a lower-rate tax cash payer because most of their income comes from offshore sources and is taxed at a lower rate.

On free cash flow, can you guys come up with for total corporation -- I know it's going to be separated, but for looking ahead to the year, can you give us an idea of where you think that number will be?

And if not so, maybe a guidance relative to EBITDA?

I think what we will do, as I said earlier, we will present some of that detail on Investor Day on March 21st.

We really have not done a roll-up of free cash flow for spending consolidated for this year because it's an irrelevant calculation because there won't be a center consolidated for this year.

(multiple speakers).

Of the $256 million, we know that that was primarily E-bookers.

But I imagine there's a sizable amount of other in there.

Could you guys specify what that might be?

Well, it is goodwill generally in the online assets.

And you look at it as a group, Scott, and then you write down your goodwill in total without allocating it to any given asset.

So, while the majority of the intangible write-off is certainly related to E-bookers, which you can specifically identify, the goodwill write-off is only attributable to the measurement group, which in this particular case is the B to C group or essentially the online assets globally.

Let me try to help you with that.

For those of you who are on the buy side on the call and are not accountants as I am, I try to give the analogy that I was told by our chief accounting officer works, and that is, assume your portfolio for the year was down 1%.

That means you failed the test.

And then you would then be measured on all of your positions in which you handle a loss without taking into account your performance based on those in which you had a gain.

So, even though you might be down only 1% on an absolute basis, your portfolio might be marked down, for example, 25% based on the calculation.

That is effectively what FAS 142 requires you to do.

So I hope that's helpful for those of you who are non-CPAs.

Turning to another area we would like to talk about a little bit, corporate relocation.

I imagine that's probably doing fairly well.

And that wasn't highlighted too much in the write-up.

Can you guys comment on that all?

Well, that's a highly competitive business.

As you know, it's very strategic for us because it is still a big carrot and stick for our real estate franchise businesses, as well as for NRT.

It provides some volume in our mortgage companies; it's an important part of the value circle.

But it is a low-growth business; it grows in the single digits, top-line, bottom-line.

So it makes sense for us to own because of the reasons that I just identified.

It represents about 10% of the EBITDA of the real estate group in total.

The other thing I would add to that is that mobility used to receive some income from PHH, which, for the predominance of this year with PHH being spun, it didn't receive that income.

It will anniversary that going into this year, but if you factored out the income in the fourth quarter that PHH used to pay, they would have had up revenues during the quarter.

The final question is about so many acquisitions are key in the latter part of the year, when it's not profitable.

Is that what occurred?

Would it not exacerbate the NRT decline in EBITDA in the latter part of year?

Yes, it did.

We had 83 more offices in Q4 than we had in Q4 of 2004.

So we had --

(technical difficulty) did about two-thirds of your (technical difficulty) acquisitions were from the last part of the (technical difficulty) in NRT --

Well, you had 83 offices, which presumably don't make money more, and the same thing -- really, more in the first quarter than in the fourth quarter.

So you have 83 more offices in Q1 that are unprofitable than you had last year, but it will be more profitable in Qs 2 and 3.

And that will cycle out over the next year?

Say again?

That will cycle over the next year, hopefully for the better?

That's correct.

Justin Post, Merrill Lynch.

First, on your comments I think you said 21% domestic growth for online travel.

In the release I think it's 16.

Could you reconcile the difference there?

I have to go back to the source, Justin, to see what number you are really talking about before I comment it.

If you have another question, we will chase it down --

Sure, absolutely.

I think also in the release you said maybe some incremental E-bookers investment might lower the range for the travel distribution to the lower end.

What types of investment is that?

Is it marketing or is it more technology focused?

Well, it is both, as a matter of fact.

We are clearly spending some more marketing in the first quarter this year and actually have started to see some upticks in conversion and transaction value in the last few weeks, which is encouraging.

The second place is technology.

Some of the platform costs that we are incurring get charged to the P&L, so that is pushing earnings down.

And then, in the third area, we're looking to beef up our hotel supply staff in the international markets.

And so that's what is causing it.

And I would say, generally, we have got a management group that is being very conservative about how they approach their forecasting this year after the challenges that we had last year.

On your question the 21 versus 16, the organic total of growth was 16%; domestic was 21%.

Could you maybe comment on GDS outlook for next year?

It looks like in the quarter bookings were solid, up 6%, but revenues were actually down year over year.

What is your outlook for just the GDS industry next year?

I think Sabre has indicated they think revenues can kind of be stable next year.

Can you give us any comments on that?

Well, I think revenues are going to be stable after everyone concludes their negotiations with the PSS2 carriers.

Sabre has concluded two agreements.

It's hard to sort out because there are a lot of puts and takes as to where they actually ended up.

The encouraging part of it was they were both five-year agreements, so that should provide some stability to the revenue line.

The FAA is projecting employments are going to be up 4 to 5% for the next three years.

And in our particular case, Galileo has actually reversed a share loss trend in the past year and gained share modestly in both the domestic and the international markets.

Did you sign some new contracts, or is it just because you are mixed more international on the GDS business?

No, it is (inaudible) wins.

[Christopher Heckert], Relational Investors.

Last year at the investor day back in December, when you guys provided guidance, you guys from core operations you provided guidance of about $3.1 billion for '05 and for '06 guidance of about $3.7 billion.

And yet, obviously, you have fallen quite short of that for 2005, about 8% if you exclude VM charges, and also now providing guidance for '06 that looks like coming in just south of probably about $3 billion, which is about 20% short of the original guidance.

So, with yesterday's disclosure that the executive management team is receiving performance bonuses close to what it looks like their original targets of 200% of base salary, I was wondering if you could provide a little bit more color on what exactly the performance criteria the comp committee uses in awarding those bonuses and also provide a little bit more color on what the decision process is going forward on Henry's performance bonus computation and why the decision hasn't been made yet?

Well, I'll answer the question about me.

It hasn't been made yet because we haven't finished all the metrics that are around my contract and my contractual benefits that, as you know, were approved by both the court and shareholders last year.

I would expect that to be done in the next few days and the comp committee to act on that.

With respect to my colleagues, remember, the bonuses were for 2005 and not 2006 and really don't take into account performance in 2006, as the year obviously doesn't count for 2005 bonus.

And it looks at a variety of responsibilities.

In the case, for example, of two of my colleagues, Mr. Holmes and Mr. Smith, their businesses actually exceeded their budgets for the year back in December of 2004.

So I think this is something we are happy to discuss with you off-line, but we feel very comfortable that our comp committee acted appropriately.

Chet Luy, Barclays.

Just to clarify earlier comments on the tender for your outstanding corporate bonds, can we expect the details of the tender to be announced sometime in July?

Is that a reasonable assumption, and can we envision a scenario wherein tender plans are completely discontinued?

Nothing has changed about our debt refinancing plans.

We have not yet concluded whether we are going to tender or whether we are going to take effect of our call rights and redeem the bonds.

And I think, as we said on the last call, that we trigger the substantially all clause with the spin of the hospitality company, which would be -- sometime, we believe, in July.

So nothing has really changed with respect to our plans for the debt.

Steven Kent, Goldman Sachs.

Two questions.

Just to go back to the LBO question, and in terms of just a full-scale LBO, could you just talk about are there any restrictions on a more aggressive share buyback program over the next six to nine months?

And then just on the management incentives for this current year, maybe you haven't set them yet.

But I guess the thing I'm struggling with is, what are the operating divisions' management incentives to meet near-term earnings goals for the next six months?

It would seem to me, working on other spin-offs, that the management teams like to set the expectations pretty low when they come out of the box.

What prevents them from doing that this time around and making sure that, in fact, the goals that you have set today are, in fact, exceeded?

Our management teams will not receive shares in their new companies until the spin-offs occur.

In the meantime, there are significant restricted stock units, incented stocks where the incented stock between now and the spins will go up or down based on performance, that certainly should be a significant incentive to maximize performance, although I hope that we don't really need to have any -- I don't have any of these, but I just have the stock and options.

But I hope all of us don't need any more incentive to perform to the height of our abilities.

With respect to your first question, the gating item on buying more stock back, in addition to what we have announced, is that we are in dialogue with the rating agencies on what ratings the new companies will receive.

And obviously, the more stock you buy back, the less cash you have and/or the more debt you have that you have to then refinance, and that would be at odds with what we have presented and what we have told our investors.

So it's highly unlikely that we would increase our share buyback between now and somewhere in the second quarter, when the first spin occurs.

Michael Millman, Soleil Securities.

It's actually Michael Millman from Soleil Securities.

In any event, just kind of following up, I did want to follow up on, I think, Chris's first question on the real estate.

I guess the bottom line of it is, -- it's possible that interest rates will continue to go up.

It doesn't seem that your projection takes into account some of the potential negatives, and maybe you can discuss why you thought it was appropriate to come out with the forecast that you did.

Secondly, following up on some of the questions on travel, I'm curious -- I think he said that Gulliver’s was up on a constant -- bookings were up 16% on a constant dollar basis.

What is surprising is, typically, we have seen international bookings up more than double that generally for most of the companies that we analysts tend to follow.

Maybe you can talk about why that seems to be below it.

And then, on Sabre's GDS, following up on that question, it seems clear that Sabre has very carefully crafted their deals to help them.

I was kind of wondering if you had to go into some of the same deals if you would be significantly dis-advantaged?

And finally, on travel, is the job considered highly desirable?

Are you getting a lot of resumes over the Transom for your travel CEO?

Mike, I will try to address, first of all, we know who you are.

But, more importantly, let me address the search process because I'm basically accountable for that.

We have a search firm that we have hired.

They identified about 200 people that they thought would have the specs that we outlined for them in the job description.

We probably narrowed that down to about 50 people.

They contacted each of those 50 people.

From that we ended up with a list of maybe 15 or 20 that we thought were both interested and interesting.

There are obviously issues about relocation for certain people and a lot of other reasons why people do or do not want to assume something.

But we have a very, as I said, highly qualified list.

There seems to be no objection.

No one is saying, gee, I'm not really interested either in the business or in this position.

In fact, we have been surprised by how anxious some people are that we had really thought or the recruiters thought might not be available -- how anxious they are to pursue this because it's very rare that someone is given a public company to run and it is basically their company.

Usually you are hired by a legacy Board of Directors.

Here, we don't have that.

There will be a new Board of Directors of a new company -- very intriguing possibility for what is still a growth business.

As we said on the call, we expect the EBITDA to be up this year by whatever that is, 8, 9, 10, 12%.

So this is not like, gee, a challenged business that I've got to fix; this is a business that's growing.

And it's growing nicely;

I've got to accelerate the growth curve.

So we don't think that this is necessarily something that is going to be a challenge at all.

In fact, the biggest issue I have right now is I've got too many qualified candidates.

Your first question was, what?

About size and price, right?

In real estate.

Well, we continue to forecast a soft landing.

We think size will be off maybe 5, 6, 7, 8% in the market, that price will be up 3, 4, 5, 6%.

The budgets are done very -- these are not wild-ass guesses; the budgets are done bottoms up.

We start with a consolidation or a combination of NARs forecast and Fannie Mae and Freddie Mac and a variety of other industry pundits.

And then we overlay to that what we can do based upon franchising and NRT acquisitions to figure out where we think will be on price and size.

And typically, as you know, our increase in price is typically twice the industry because we sell more high-price homes than anybody else, and we are about where the industry is on size.

So these are very well calculated budgets; we don't just make them up.

There is probably going to be more acquisitions and more franchising, if we have a down-market.

The impact of that is probably more a 2007 impact because, even if you sold more franchises, you have to assume you only get the benefit for six months, and in NRT's case, as we said earlier, the more you buy in the first quarter, the more you lose in the first quarter.

But we do think that those will accelerate.

If there is a huge rate spike, then we would redo the forecast.

And we would tell people who are investors in the real estate company, we are assuming a gradual increase in mortgage rates but nothing that we think is going to have any real impact on the market.

Let me handle your other two questions.

Keep in mind, with respect to Gulliver’s bookings, that 70 to 80% of their business is the traditional tour operator business.

So they are not benefiting, so to speak, from a channel shift like the online growth rates this year that I think you are referring to with Expedia and Travelocity.com and Priceline.

Now, Octopus is benefiting from channel shift, and their growth rate is in line with what the other online services are forecasting.

And I think the third thing to keep in mind is that this is pure hotel.

Gulliver’s does nothing in the AR sector, so we are really talking about just all hotel bookings.

Secondly, on the GDS side, as I said earlier, it's really hard to sort through the Sabre deal and understand exactly what they got and what they didn't get.

There was some pre-petition bankruptcy debt that was part of it; there were some litigation settlements that seemed to be part of it.

So it's hard to comment on whether we can live with it or not.

We are in active dialogue with all the airlines; we expect that, over the summer, we will have concluded our negotiations.

And I think it would be unwise for me to talk anymore than that about the nature of those discussions.

Without getting specific, and maybe, I guess, getting specific, do the airlines in Northwest and United Air come in and say, here's the deal we have; match it or beat it?

Well, I think it's a negotiation, like all things in life.

There's a bid and an ask, and you try and resolve your differences with all the levers that are at your disposal.

So I have not heard that anybody has come in and said, take it or leave it.

So basically you are not looking at or the industry is not looking at the Sabre deals as setting the industry standard?

Well, I can't speak for the industry.

I can only tell you how we feel, and we are not entirely sure what exactly the deal was.

And even if we knew, I'm not sure that we would probably tell you.

It's only our deals that are relevant.

And when we conclude our deals, we will be happy to share generally the terms of those.

I think what's important is that we have assumed the next round of negotiations in the forecast that we've given you for TDS and in the forecast we will continue to give you at the second investor day for TDS.

So we are not oblivious to the fact that there will be another GDS agreement toward the end of '06, nor should you be oblivious to the fact that two-thirds of our GDS business is out of the US.

So we are a little different than Sabre in many ways.

Jim Wilson, JMP Securities.

I really just had one question left.

Could you give us the number on same-store side sales without acquisitions for both the franchise and for NRT?

Do you have that available?

You broke up; could you repeat the question again?

Perhaps you are on a cellphone.

We couldn't quite hear the question.

I wanted to get the same-store side sales numbers for both franchise and for NRT, if those are available?

Well, we actually measure it in terms of dollars, which I think might be more helpful because size is irrelevant.

Meaning if you did 10 transactions and the commission was 10,000 per transaction, wouldn't you be better off doing one transaction when the commission was $300,000?

So we measure on a dollar-volume basis, which, as I said earlier, drives revenue and profitability.

And on that basis, we saw an increase in both NRT and in the franchise world on a same-store sales basis because we saw an increase in GCI of 11%.

I think that's the important number you need to focus on.

Just to follow up on the auto rental business, the volume growth continues to be really high.

And I assume that part of that reflects the strategic price reductions at Budget about a year ago.

That should be pretty close to annualized by now.

And frankly, that would almost seem to be irrelevant.

The point is that the volume growth is really strong, and the Company is gaining share.

Why not grow in line with the market and be more aggressive, leading the industry toward higher prices?

Well, I think that's certainly a strategy.

But I think as long as we can continue to grab share and get pricing improvements and increase utilization and decrease turndowns by having the available fleet, we would much rather take the growth and be profitable.

I think, at this juncture, the incremental growth is providing incremental margin to us.

I think, if that were to turn around, if our pricing were to have to soften in order to move the fleet, then we would move pretty quickly to restrict the fleet and do something on pricing.

But right now, we've actually been the price leader in the market for most of the last six months, both on the leisure side and on the corporate side.

And your premise going into it is correct; we anniversaried the Budget price reduction back in October.

Are you guys seeing any change in pricing strategy from Hertz, given the ownership change there?

And what are you seeing currently from the auto manufacturers in terms of what you expect for the cost increases for your vehicles for the fleet for this year?

I don't think we have seen any change in pricing strategy since the acquisition of Hertz.

They revised their terms and conditions a couple of weeks ago, and I think we're looking very carefully at them and determining whether or not we are going to match.

And it's still a little early to talk about the fleet for 2007.

We haven't yet begun those discussions.

I would like to now turn the conference back over to our presenters for any final or closing remarks.

We'd like to thank you for the call.

We hope to see many if not most of you at our investor day on March 21st here in New York.

And thank you for being with us this morning.

Thank you.

That does conclude today's teleconference, and thank you all for your participation.

At this time, everyone may disconnect.

This is a verbatim transcription of Cendant Corporation’s 4Q 2005 Earnings Results Conference Call.

It has been edited from its original version for transcription purposes.