Avis Budget Group Inc (CAR) 2006 Q2 法說會逐字稿

Good morning and welcome to the Cendant Corporation second quarter 2006 conference call.

Today's conference is being recorded.

At this time for opening remarks and introductions, I would 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, Henry Silverman, and our President and Chief Financial Officer, Ron Nelson.

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

First, the rebroadcast, reproduction and retransmission of this conference call or 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 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 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 Quarterly Report on Form 10Q for the period ended June 30, 2006, including under headings such as “Risk Factors,” 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 and the press release and on our website.

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

Revenue for the second quarter increased 2% to $4.3 billion.

Second quarter EPS from Continuing Operations was $0.17 and EPS from Continuing Operations, excluding separation and restructuring costs and the foreign tax charge, was $0.24.

These amounts do not include results from Discontinued Operations, associated primarily with the Company's Travelport business, which is being sold.

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

As you know, this is our last earnings call for Cendant, a company that no longer exists as it did in the past, since our plan to separate the Company is now virtually complete.

Realogy and Wyndham Worldwide were spun-off to our shareholders on July 31st and each is now an independent, public company trading on the NYSE.

The sale of Travelport to Blackstone is proceeding as planned, and it is scheduled to close on August 23rd.

As previously announced, the net proceeds from that sale will be used primarily to reduce debt at Realogy and Wyndham.

Once the sale is completed, the only remaining business at Cendant will be Avis Budget.

On August 29th, shareholders will vote on a proposed 1-for-10 reverse stock split and a proposal to rename Cendant as Avis Budget Group, which will then trade on the NYSE under the ticker symbol CAR.

So, what was once a services conglomerate will shortly be four independent, pure play companies; three publicly traded and one privately held.

Each is a leader in its respective industry, and all are well-positioned to grow and prosper over the long term.

I know that the respective management teams and employees are motivated and excited to move forward as independent companies and create long-term value for their respective shareholders, especially if the template we have had with the prior separations of Jackson Hewitt, Wright Express and PHH is any indication.

Before I turn the call over to Ron, I want to again personally thank our shareholders.

We believe that the separation of the Company will ultimately reward investors once the market awards each new company appropriate valuations.

I look forward to speaking with many of you on the first Realogy call.

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

Thank you, Henry.

Given the completion of the spin-offs of Realogy and Wyndham and the pending sale of Travelport, my comments today will be relatively brief and limited to a discussion of the second-quarter results at Realogy, Wyndham Worldwide and Avis Budget, as well as the outlook for Avis Budget.

While I will not be discussing the outlook for Realogy and Wyndham Worldwide, since they are no longer part of Cendant, I would direct you to the 8-K that each of them filed last night providing supplemental financial information.

You should also note that, while Realogy and Wyndham will not be holding separate earnings calls, they will be filing their own 10-Q's later this month.

Starting with Realogy, if we strip out separation and restructuring costs, EBITDA was down 19%, as forecast.

Across Realogy's owned and franchise brokerage offices, price continued to show increases in line with historical averages, up 5%, while sides volume declined 16% at Franchise and 13% at NRT.

Excluding the impact of brokerage acquisitions, the relationship flips, with NRT sides declining 17%, while Franchise’s decline was 14%.

What is being reflected in the reported numbers is the result of NRT acquiring two large franchisees late in 2005 in Phoenix and Hawaii, and the impact of shifting those sides from franchise to owned.

There are two observations to be gleaned from this data: one, the trends in the second quarter continued to be indicative of a moderating real estate market, particularly in what had been some of the more heated regions like California and Florida; two, buyers' and sellers' expectations have yet to find an equilibrium and as a result prices remain relatively strong while volumes are weakening.

As to the latter issue, history along with economics would suggest price will moderate further but be offset as volumes respond and start to pick up, but that is not yet apparent based on purchase mortgage applications into Tuesday's Fannie Mae forecast.

The EBITDA decline reflects the operating leverage, both positive and negative, inherent in Realogy's operating model.

As we discussed in our first quarter call, Realogy has worked to rationalize NRT's fixed costs through office consolidation, headcount reduction and other moves, and expects to generate a $50 million annual run rate benefit from these actions beginning in the back half of the year.

The $11 million severance and facility closure costs incurred in the second quarter were a prelude to achieving that goal.

As to Realogy's franchise business, while management is vigilant about costs, there is a somewhat greater challenge to trim costs in a business which operates with 70% + EBITDA margins.

Turning to Wyndham Worldwide, the standout performer was again Timeshare Resorts, which continues to generate double digit revenue and EBITDA growth.

The true strength of Timeshare's results may not be readily apparent.

Excluding two items -- the effect of a required accounting change in the first quarter, which impacts the timing of when timeshare companies recognize revenue and expenses, and a gain on the sale of some land in the second quarter last year -- revenue would have been up 24% and EBITDA would have been up 39%.

All of Timeshare's metrics -- tours, close rates and average price -- improved year over year, reflective of a number of important management initiatives such as the decision to pursue a new Trendwest in-house sales program, a program which helped drive an over 20% increase in tours at Trendwest.

Turning to Hospitality Services, revenue grew 15% and, again, if you strip out the impact of the foreign tax accrual at the European Vacation Rental Group, separation costs and a small restructuring charge, EBITDA would have increased 6%.

Margins contracted because the Wyndham acquisition contributed revenue but not EBITDA, since fully 80% of its revenue related to pass-through reimbursement of our property management company expenses.

In fact, the top line drivers of Wyndham Worldwide's legacy businesses were strong, as lodging franchise business again grew its RevPAR, excluding the Wyndham Hotels and Baymont acquisitions by 10% and TripRewards, our loyalty program, grew its revenue by 43% year over year, reflecting an increase in both member stays and members.

This loyalty program typically operates on a breakeven basis, as the incremental revenue is generally re-invested in the program.

In addition, year-over-year growth in subscribers and cottage weeks sold resulted in an increase in subscription and transaction revenue for Wyndham's vacation exchange and rental business.

I'll spend the balance of my time on Avis Budget, which, of course, will be the remaining Cendant business following the close of the Travelport sale.

In the second quarter, car rental revenue grew 12%, driven primarily by a 9% increase in price.

The price increase came mostly from the leisure side, as leisure price increases instituted over the past year have been holding.

Keep in mind that year-over-year change in price is more dramatic in the second quarter as the second quarter of 2005 represented a low point in pricing for the last two years.

As we begin to lap price increases that commenced in June of last year, year-over-year price change will be meaningful, but certainly not as dramatic.

In addition, commercial price increases, which have been slower to come, contributed to year-over-year pricing growth.

The first six months have been very competitive in the commercial market but Avis has maintained its airport share and at the same time increased price.

Rental day volume ended the quarter growing 3%, reflecting lower-than-expected domestic on-airport demand driven by flat enplanements through April, and a negative year-over-year trend for May and June based on the preliminary data posted by the Airline Transport Association, reflecting the reduced capacity in the airline industry.

With enplanements declining and our year-over-year revenue growth being off of a base in 2005 which was some 13% to 14% higher than 2004, we would not characterize our performance in this environment as laggard.

With regard to pricing in the quarter, we believe that the leisure side of the market has generally reached equilibrium, with pricing now covering model year 2006 fleet cost increases.

The same cannot be said on the commercial side, and the increase in interest rates has only exacerbated the margin compression.

As a consequence of rising fleet costs, EBITDA declined year over year as we had indicated it would during our Investor Day meeting in March.

The look forward on fleet costs is not much rosier: we have nearly completed the negotiations on the model year 2007 purchase and expect that per unit fleet costs will increase approximately 20%.

We're hopeful of driving our composite increase a few percentage points lower through a variety of actions including increasing the amount of risk cars in our fleet, adjusting where possible the mix of cars and manufacturers, and extending the holding period of cars in the fleet.

Historically, we have been among the most conservative with regard to the risk component of our fleet; in 2006 risk vehicles comprised only 6% of our total purchases; for the 2007 model year, we anticipate an approximate doubling of the risk portion to between 10% and 15%.

While each of these initiatives can have an impact on fleet costs, the message to take away here is that the car rental industry, including our two competitors who are expected to go public in the Fall, will need increased pricing across the board, both leisure and commercial, to continue to grow profitably.

Fleet and interest costs currently account for approximately 30% of our overall cost structure, so the math on the composite increase required becomes fairly easy.

So let me spend a minute on the back half of the year.

Based on the trends that are evident in our second-quarter results, the outlook for Avis Budget in the second half is clearly a mixed bag.

On the opportunity front, we are continuing to see year-over-year improvement in pricing.

As noted, it will not be as dramatic as it was in the first half as we're lapping last years increases, but it will continue to increase.

We believe we are holding our market share and at the same time we have been pushing to achieve price increases.

We are actively managing our infrastructure and fleet levels to reduce expenses.

From a balance sheet perspective, we have the second-highest credit ratings among the car rental companies, and our liquidity profile is very strong with over $1 billion of unused capacity in our revolving credit agreements.

We will introduce, towards the end of the quarter, a new GPS product with features we believe will leapfrog the competition.

Priced at $9.95 a day, our Where2 mapping unit matches all the features that the competitors provide, but in addition, downloads traffic data and automatically reroutes the driver around congestion.

The product is both a time-saver and comfort to corporate and leisure travelers alike.

More importantly, it should provide incremental high-margin revenues.

In our local rental initiative, we opened 89 new off-airport stores through July, and have an additional 53 in the queue for the third quarter.

We remain on track for our target of approximately 200 new stores this year.

Our off-airport locations are performing well: same-store sales are up 22% in the second quarter and our overall growth rate in the segment is approaching 26%.

Our branded Websites, which are our lowest-cost distribution channel, continue to perform well, with second-quarter reservations up 11% and revenue up 20% year over year.

The challenge, of course, is that we are seeing inflationary-type increases and operating costs, higher- than-general-inflation increases in fleet costs, and a sharp year-over-year increase in short-term borrowing costs due to the 9 Fed rate hikes since last June.

At the same time, we are planning for domestic enplanements to remain relatively flat.

In addition, we have recapitalized Avis Budget in conjunction with Cendant's separation plan, in order to put a capital structure appropriate for Avis Budget on a stand-alone basis.

The change in our capital structure, which reduces our reliance on vehicle-backed debt through the issuance of Avis Budget corporate debt, reduces our above-EBITDA vehicle-related interest expense, increases below-EBITDA corporate interest expense, and (most importantly) does increase our aggregate interest expense, year over year.

In light of the recapitalization of the business in April 2006, we think some of the most meaningful year-over-year comparisons are made on a pro forma basis.

As we initially discussed in March and disclosed in more detail last month, we expect that our vehicle rental earnings will be down in 2006 compared to 2005.

In particular, we currently expect our Avis Budget Car Rental subsidiary’s pro forma EBITDA less corporate interest expense to be in the range of $260 to $295 million in 2006, compared to an approximately $356 million in 2005, on an apples-to-apples pro forma basis.

This assumes we can continue to make some progress in achieving price increases and at the same time that we reduce our operating costs.

The projected year-over-year variance is largely attributable to four items: • On the plus side, increases in car rental day volume, car rental pricing, fleet costs and other operating costs, which together are boosting earnings modestly year over year, in part due to the cost-reduction initiatives we have undertaken and which will be continuing; • On the negative side, higher interest rates, which will cause our vehicle-backed interest expense to be approximately $45 million higher this year; • An increase of $25 to $30 million in truck fleet costs, which we discussed at our Investor Day” meeting in March; and • EBITDA on our truck rental business being down an additional $15 to $20 million year over yeardue to relatively weak demand.

To those who follow our business closely, the “new news” over the last few months is that model-year 2007 cars will cost us more than we had anticipated and that truck rental demand has been weaker than expected.

Just a couple of words on Truck.

Over the course of the last two years we have enjoyed margins in the high teens and low 20's in our truck business, as we benefited from a low-cost but aging fleet acquired in the Budget transaction.

As we have re-fleeted to keep our network of dealers competitive, our margins have naturally declined as higher-cost new trucks replaced older lower-cost trucks.

In the ordinary course we would have expected margins to stabilize and the fleet to reach the targeted average life we were shooting for in 2006.

As we noted at our March Investor Day, we expected that would impact fleet costs by approximately $25 to $30 million in 2006.

In addition to this, we have experienced a softness in the one-way consumer business and in commercial volumes, somewhat related to the slowdown of the real estate markets and somewhat related to the re-emergence of U-Haul out of bankruptcy.

This is what has contributed to the $15 to $20 million of additional softness that we expect over the course of 2006.

Clearly, we're not happy with our performance and are taking all appropriate actions to remediate.

We also understand that Cendant's quarterly financial statements, which will be impacted by the separation plan at least through year end, may not be helpful for investors and analysts trying to understand the results of our Avis Budget vehicle operations.

Accordingly, we have posted a variety of supplemental information, including our full-year projections for Avis Budget, on Cendant's website to try and enhance the disclosure that is available to you.

Before I close, just a quick word on free cash flow for the quarter, which was described in Table 7 of the Earnings Release.

Note that Cendant's usual measure of Free Cash Flow was highly impacted this quarter by our separation plan, particularly the repayment of vehicle-backed debt with Avis Budget corporate debt, which shows up as a significant use of cash in the Management Programs line item.

As a result, Free Cash Flow is not comparable to last year and I would encourage you to focus on the line item Free Cash Flow before Management Programs as a more meaningful apples-to-apples comparison.

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

(OPERATOR INSTRUCTIONS).

Jeff Kessler, Lehman Brothers.

Once you sell Travelport, what is the format for getting the money over to the two businesses that are now not formally connected with Cendant?

When they were spun off, there was contingent notes put inside of each of those companies that require us to take the Travelport proceeds.

There is a waterfall of how they get allocated;

One - , certain monies will go to repay Travelport debt;

Two - monies will go to reimburse Avis Budget for taxes that it might incur on the sale; and then it gets split five-eighths/three-eighths between the two companies.

It's through those notes that that cash gets distributed to them, and then they will use that to pay off the debt that they incurred to pay off the Cendant debt on July 31.

There's some questions about the addition or lack of addition of NRT royalties to the intercompany royalties to the franchise business in Realogy, those $96 million of royalties.

Without them, we're talking in terms of something along the lines of $128 million.

Formally, when we model this, are we going to be adding those $96 million just as pass-through, or should we be just considering knocking those $96 million of royalties out because it was not included in Table 3 in your press release.

It is eliminated in consolidation, but there are still royalties on an inter-company basis paid from NRT to the franchise group.

But how you want to model that is up to you, but we still account for it internally as a royalty of 6% from NRT to real estate franchise group.

With regard to guidance on Realogy -- I realize that you have said that this is not a Realogy call.

However, if you did come out with a filing last night, could you give some idea of whether or not the guidance that has been given along the road show and reiterated, actually reiterated for the quarter -- does that still extend for the whole year, in terms of EBITDA and the net income that was on the road show numbers?

Well, Jeff, as you know, the summer is Realogy's Christmas season.

So our performance in July and August is going to be crucial to our results for the remainder of the year.

I will tell you that we have not finished and finalized July yet, and we haven't finalized our open contract information for August.

So I am not prepared to comment on our projections at this time.

As you know, the long-term outlook for housing remains highly positive, which is driven by demographics, but you can't turn on the TV or pick up the newspapers.

Every day, you read that the shorter-term macroenvironment is highly volatile, and we will continue to monitor it.

I know you haven't asked this question yet, but I know you will.

So, then, let me address the second question you're going to ask, which is our plans for share repurchase at Realogy.

I don't want to speak for Wyndham, obviously, or Cendant/Avis Budget.

But at Realogy, we do expect to delever significantly post the sale of Travelport, which, as I said earlier, is scheduled to close August 23rd.

At that point, if the Realogy Board of Directors deems it appropriate, we may incur additional debt and use the proceeds for general corporate purposes, including the repurchase of Realogy common stock.

As you probably know from [Bob Willan's] call last week, we have the flexibility to buy back a little less than 20% of our stock in the near term without adversely impacting the tax-free nature of the our spin-off.

I'm glad you gave a little plug to Bob there.

Moving off to Cendant and the auto business, your at-risk cars -- Avis has traditionally been well below Hertz, Dollar Thrifty, in the at-risk area.

And yet, there are some investors who are a little bit nervous about both Hertz and Dollar Thrifty potentially and dramatically increasing their at-risk exposure and the residual exposure that it brings, essentially becoming an investment in the residual value of the automobiles.

How is Avis going to balance, number one, the need to go more at-risk because it's going to be cheaper to the investors' nervousness over having too much of a risk exposure?

I think you are absolutely right.

It's a fine line that you have to walk, but if you look at the risk cars that are in Hertz and Dollar Thrifty, they are at least 2X what we're planning to do -- and more than that, actually, of what we're planning to do for this year.

I think at the level of 10% to 15% of the fleet being risk cars, we are able to pick and choose those that we think we will either optimize the gain or minimize the loss, however you think they are going to play out.

But it really is still at a level where we can be very selective, I think, and not take any undue risks.

This subject was, I guess, somewhat of an argumentative, controversial subject when you bought Budget.

I guess, because of its performance, it still is.

Are you still committed to keeping that truck business?

I realize that you're doing a re-fleeting operation.

On the other hand, obviously, the numbers that are being shown are not very encouraging.

The question is, will trucks ever be the type of driver that you need inside of Budget to make it worth keeping?

Well, we think it will be.

We did commit last year to the business that we were going to keep it and have it be a permanent part of the Avis Budget portfolio.

I think we were living a little bit on borrowed time over the last couple of years.

We have a very cheap fleet.

Truck margins were north of 20% in 2003 and 2004.

Last year, they were just a little bit south of 20%.

This is a business that shouldn't operate too much differently from a margin standpoint than car rental.

I think that we will stabilize somewhere down around the low double digits when we hit the targeted life for the fleet that we have set out, which we are at.

So I think we have got some work to do in our truck operation.

We have got a plan we're going to put it into effect.

There are only four players in the truck rental business and we are number two.

We think, if it's run properly and run well, it could be a source of competitive advantage for us.

So we're going to keep it.

The $1.875 billion of corporate debt that you have taken on the balance sheet of CD -- will any of that be backed by automobiles. or is that all going to be -- I mean, Hertz has a structure that is similar, secured debt that is not backed by automobiles.

Since this was a part of your facility that had been asset-backed, will you be using any of this essentially buy at-risk automobiles, or will it all just be pure corporate debt?

Well, all of the cash, the proceeds from those financings, did go into the securitization trusts to act as the overcollateralization for the current vehicles that are in that trust.

We think our cap structure is going to look, in the long term, very much like everybody else's, where it's going to consist of a substantial amount of ABS, some corporate debt and some equity.

Right now, the corporate debt I think you can consider -- even though it's unsecured, fully unsecured, it is acting as the collateral for the secured portion of the structure.

So it is a proxy for those automobiles?

Yes, I think it currently is.

When or if it stops being a proxy, I think we will break it out, because the good thing about this industry is going from being all private six months ago to being all public in about four months.

So everybody is going to want to be able to do an apples-to-apples comparison.

So we will be striving to make sure everybody understands what is backing cars and what is not.

You know there's been some rumors that have been around that the sale of Travelport to Blackstone is scheduled to close on August 23rd.

You are highly confident that that is going to happen?

Yes.

As of 10:32 this morning, I was in contact with the CEO of Travelport, who had just gotten off a phone call with the Travelport underwriters, who are proceeding with the current timing of closing the order book tonight and pricing the deal tomorrow.

That obviously is after the terrorism alert of this morning.

So it may cost a bit more; that is really not an issue that I am concerned with or involved in.

But every indication is that the transaction will close as scheduled on August 23rd.

Great.

Good luck, guys, and I'll be talking to you in the future at your respective companies.

Zafar Nazim, JPMorgan.

A few questions on the car rental business.

First, I was wondering if you can provide us a breakup or split between the price increases that you got on the commercial side of the business versus the leisure side?

Yes.

Leisure price increases were over -- the composite increase was 9%.

Obviously, leisure was higher than that and business and commercial was lower.

We had about a 50/50 mix between business and leisure during the quarter so I don't want to get any more precise than that.

The lower price increase in leisure -- is that just a function of contracts rolling over, over time?

Or is that actually resistance from the commercial customers with respect to price increases?

I assume you meant commercial?

Yes, commercial.

That's right.

It is a function of contracts rolling over time.

As you may recall, we attempted to do mid-contract price increases last October.

The competition did not join with us, so for all intents and purposes, it meant that we couldn't do that.

The commercial market has been very competitive in the first six months of this year.

National has been very aggressive in going after commercial business.

If you read their S-1, their commercial in the first quarter was up 18%.

But we have been keeping our shares, so we haven't lost any meaningful amount of business.

I think they have taken share from the other competitors.

But in that environment, it is very difficult to get price increases that are much more north of low single digits.

So in the commercial side, even on contracts which are rolling over, you are not getting price increases sufficient to offset the fleet cost increases (indiscernible).

That's a fair conclusion.

I guess, once you have these price increases, you will then come up against another fleet cost increase.

So you will have to wait for the next time you can roll over the same contract on which you just increased prices to get, I guess, even again?

Yes, you know, I think there is a bit of a leapfrog aspect to all this.

But a lot of it depends on what the competition is doing.

When fleet costs increase, more than 10%, a number of our contracts have re-openers in them.

So it depends on what your competition is doing.

The good news about Hertz and National going public in the next quarter, I believe, is that everybody is going to need to show quarter-over-quarter gains.

They are going to need to recover their fleet costs.

I think it's going to cause everyone to act rationally when it comes to commercial pricing, particularly given that commercial is a very big part of all three of our rental portfolios.

If you can just remind us again, what is the average duration of your commercial contracts?

Anywhere from one to three years.

It really depends on the size of the customer.

Then, the $45 million increase in vehicle debt interest expense in 2006 versus 2005 -- are you talking about an increase on a pro forma basis or of the pro forma 2005 number?

Yes, it's a pro forma increase.

What is the pro forma fleet debt interest expense for 2005?

I think it's in our disclosure.

I think approximately 4.5% would be the rate.

On the truck rental side, I just wanted to confirm -- did you just mention that during 2006 or the remainder of 2006, you would have replaced all of the low-basis trucks with the newer trucks?

Or will there still be some trucks that need to be replaced in 2007?

I think we still have about 20% of our fleet that are in low-basis trucks, and I think we're looking very carefully at next year's fleet purchases as to whether we actually do cycle those out.

It may be more economic, actually, to maintain them and keep them in the fleet a little longer.

We will be making some commitments to change the mix of our fleet a little bit.

One of the reasons why our commercial business is soft is that we have had too few 24-foot trucks with liftgates, which is what you need to get commercial business and, in particular, midweek commercial business, which increases your utilization rate.

So you'll see us make commitments in that area, but I think we're going to be pretty happy with the fleet as we have it, other than 24-footers right now.

So the 20% of the lower-basis trucks, which are 20% of your fleet right now -- we should expect those to be in your fleet for the next few years?

Well, it's all a trade-off between maintenance and depreciation.

Those that we can maintain and keep in the fleet at a low basis, we are going to do it.

But, once you cross over the line, then obviously it just makes good economic sense to replace it.

If you were to replace these trucks today, what would be the incremental impact on EBITDA?

What is the additional EBITDA decline that you can expect if you were to replace these remaining 20%?

Well, it's hard to say, because you don't know what kind of deals you would strike.

I would say, last year, we bought 7,000 or 8,000 trucks and replaced 7,000 or 8,000 old trucks.

We took an incremental hit of $25 million or so of depreciation.

So that's probably not a bad proxy.

I missed your comment on what the eventual margins in the truck business are expected to be once the low-basis trucks have cycled out.

Did you mention low double digits?

Low double digits is what I said, yes.

We have been in the high teens/low 20's, sort of cycling down over the last three years.

So you're talking about EBITDA margins over here?

Yes.

When you say that truck rental EBITDA is going to decline $45 million in 2006, are you comparing this with the $103 million of EBITDA that you reported in 2005?

That number sounds right.

Finally, just in terms of the capital structure, are you contemplating any kind of additional debt issuance at the holding company, once everything is spun off and you're just left with the car rental business?

Are there any thoughts on perhaps issuing more public market debt, perhaps, to buy back stock or use proceeds for any other corporate purposes?

No.

Certainly, buying back stock would impact our credit rating and we actually would like to improve our credit rating a little bit.

So stock repurchases, I think, are not something that we can contemplate in any meaningful size for some time.

As far as another debt issuance, we have over $1 billion of capacity on our revolver.

There would be no reason to do anything in the financing markets.

As a consequence, we are not planning anything.

Chris Gutek, Morgan Stanley.

Henry, starting with the big-picture question, Cendant shareholders obviously have not done that well since the breakup was announced last year.

Assuming you would agree that the components to the old Cendant are undervalued, I'm curious how long you would want to wait or need to wait, or what other considerations you might have that would go into the equation before you would consider proactive and public auction of Realogy?

Ron, if you could address the question for Avis Budget as well, please?

I can only speak for Realogy.

The Company is not for sale.

That said, we are a fiduciary, so if somebody wants to come talk to us, we would be happy to listen to any and all proposals.

As you probably know, under the tax laws, under 355 of the code, in theory we could sell the Company tomorrow morning.

But you'd have to make the case, if the IRS were curious, that there were no plans or arrangements pre-spin to sell post-spin.

We have no plans or arrangements, but I think the tax lawyers would feel more comfortable waiting a bit longer.

So we have not had any -- no one has come to see us yet, and we are not making any outbound telephone calls.

I'm not sure I can say anything different.

I think our task at hand is to manage and operate the Company and grow the revenue and EBITDA as best we can.

Whatever comes down the pike comes down the pike, and we will deal with it when it happens.

Just to follow up on that, to truly avoid the legal questions that might arise, wouldn't it be necessary, then, to wait a minimum of two years?

Or would there be a shorter window that would apply?

No.

There really is no longer a so-called bright-line two-year Safe Harbor issue.

It really is, again, a matter of passing the smell test.

If we announced a deal tomorrow morning, I think that if you were working for the IRS, you would say, well, how could they have gotten a deal done eight days after their spinoff?

They must have been working on it pre-spin.

So you want to at least allow enough time between the spin and any announcement to make sure that you can, in fact, as I said, pass the smell test that obviously you didn't have anything going on before the spin.

Again, speaking only for Realogy, since I just said to Jeff a few minutes ago that, all things being equal, we would be a buyer of our own stock in the market, because we think it's significantly mispriced.

Obviously, we would have to get it done first, prior to any dialogue with a private equity buyer or any other buyer.

So I think, from a timing standpoint, you will just have to see how this thing plays out.

Let me just clarify one other point I think that Jeff Kessler raised.

NRT has always been a franchisee of the real estate franchise group, Jeff.

It's treated that way, pays full royalties.

So I'm not quite sure why there would be any confusion on that issue, but I hope I cleared it up if there is any.

Just a couple of follow-ups on the Avis Budget side, if I could.

Ron, putting aside any changes in the capital structure for Avis Budget, and to avoid any confusion over the interest expense, the two different types of debt, maybe focusing at the pretax margin line, and putting aside trucks, just the auto, what do you think a normalized margin is on a pretax basis for Avis Budget auto rental?

What do you think the timeframe is to get there?

If you think that normalized margin for your company would be different versus your competitors, what would explain that difference?

Let me answer the second one first.

I think the difference is going to be in the near-term, I think, leisure -- those companies that are leisure car renters are going to probably operate at higher margins until we get some equilibrium back in commercial pricing.

So over the long term I think that should settle out, but I think in the near term you're going to see some dislocations like that.

The other thing that I think you have got to take into consideration is that -- and I noted this in the S-1 and National and Dollar Thrifty's results-- they have a lot more franchising income as a percentage of their revenue than we do.

That income drops right to the bottom line, so it increases their margins over ours even though we obviously earn more absolute dollars.

As to where the pretax margins are going to settle out, I don't think I really want to speculate on that until we get some sense of pricing and fleet costs back into equilibrium.

Our EBITDA margins at the car rental company, putting aside financing, have been in the 8% to 10% range for the last few years.

Our pretax margins have been a couple hundred basis points lower than that. frankly I think, once pricing gets back into equilibrium with fleet costs, I don't see any reason why the structural margins in the industry ought to change.

Is there anything in the history of the industry to give you confidence about what that timeframe would be for the pricing to catch up with the costs?

Well, six months ago, I said I thought it would come at the back half of the year, mostly predicated on the view that I thought fleet costs were only going to go up 9% to 10% this year.

I think -- and I don't mean to sidestep the question -- but I think it's going to be enormously helpful to have us all be public and have the pressure of reporting quarterly earnings increase, because I think it will create a more rational pricing environment.

I don't think anybody is going to want to hang out there too long, from a competitive standpoint, and not move prices when fleet costs move.

Once we're all public, I guess I would say it's going to be faster than it would have been a year or so ago.

Why not take more of a leadership position and focus more on the long-term profitability of the Company and the industry, and focus less on short-term market share and be much more aggressive raising prices?

Because it would seem as if the others would follow given the dynamics you spoke to.

So why not be more aggressive and give up a little bit of share, but meaningfully improve that profitability and set the stage for higher margins for the industry over the longer term?

Let me just give you a real-time example of that.

That is exactly what we were talking about in June.

About three days after we decided we were going to do it, National beat us to the punch and raised prices, I think, $70 a week effective October 1.

We, Hertz, National and Alamo matched 100% in every market and Dollar Thrifty was moving up (I think they were at 30and then they went to 45 or 50).

Enterprise was at 0.

After about two or three weeks of posting those price increases, Enterprise moved up to,I think, about 25%.

And in those markets where they didn't match, they actually lowered prices.

So what happened is -- and you see this every time you get a pricing increase -- there is a decline, a delay curve in that, and everybody started pulling back on their prices because you lose your res build.

Losing your res build is going to be more deleterious than hanging in there to try and prove a point on prices if the industry doesn't match.

We really don't focus on share.

We need volume to cover our fixed costs but we really can't ignore what others do.

Michael Millman, Soleil Securities.

Also a bunch of car questions of some maybe 30,000 feet questions.

Given, Ron, what you have been talking about in the environment now, why do you think Vanguard and Hertz think this is a good time to do IPOs?

I don't know.

You'll need to ask them why they think it's a good time.

I understand Hertz's equipment rental business is doing very well, and so they look pretty good.

I think doing IPOs is sort of in the ordinary course of a private equity.

Cerberus bought Alamo and National, I guess, three or four years ago.

It's about the time in the cycle to get their capital out.

But they are obviously going to be better able to answer that than me.

If you were in that position, would you be doing it now?

There's so many factors attendant to the decision that without, really, a detailed understanding of what is going on in their companies, it's hard to say.

You talk about how you think it will be beneficial having Vanguard and Hertz public but as you kind of noted in passing, the biggest factor is non-public that seems to march to or drive to their own drummer.

Can you talk a little bit about what you think Enterprise's goals are, and how and why they would be wanting to go along with the industry?

Well, I think Enterprise is a very tough, very smart competitor.

They have, as you know, basically owned the off-airport market and, in particular, the insurance replacement market.

I think, like everybody else, they are trying to grow their business.

The logical place for them to go to grow their business is in the on-airport market.

So I think they are shifting their focus and competitively coming after us on the airport.

Now, their share of the airport market, I guess, is still in the 7% range; they are a long way from our 32% and a long way from Hertz's 29%.

But I think that's what their ambitions are.

They have a different model for acquiring cars or fleet than everybody does.

They buy virtually everything at risk.

They have a better credit rating.

So you have to look at them and consider them a very tough, smart competitor.

At the same time, as you know, we're going very aggressively into the off-airport market, and we're trying to grab share in their business.

So it's competition at its best.

On the off-airport market, can you talk a little bit about what your profitability is there, what average prices are compared to airport?

Yes.

Just generally, you really can't look at average price.

T&M per day, I would venture a guess broadly is lower, but the length of rental is substantially longer.

So you have less operating costs attendant to the transaction.

At the margin, our off-airport businesses are more profitable than the on-airport business, just by virtue of the fact that the same level of fixed costs and airport concession payments.

For the most part, all of our -- I want to be careful when I say all, substantially all of our off-airport stores are profitable within six months.

To the extent that they are not -- I think I may have said this before -- we have a very modest investment in opening up one of these.

It's approximately $40,000 to $50,000 in capital and a one to two-year lease at $2,500 a month for a storefront.

So I think our model is a little different than Hertz, and consequently I think at the margin, we probably have a more significant contribution.

When you look at some of the data you gave out, it looks like utilization really didn't change very much 2005 to 2004 which seems to surprise me.

Can you talk about why that has not changed, and if you could get utilization up, or if it's up this year, and to what extent 1 percentage point of utilization improvement translates to what on the bottom line?

Again, let me answer the last one first.

About 1 point of utilization is worth about $15 million of EBITDA.

Utilization has been in for us in the last two years on average between 73% and 75%.

It's obviously a very critical metric.

It's one we watch very closely.

I think the challenge, from your vantage point, is that everybody defines utilization differently.

You really do need, if you're going to do comparisons from one company to the other, to ask them how they compute utilization for that purpose.

Michael ,Millman: I was really more asking for Avis Budget - that it hasn't increased despite combining the two companies.

That was the surprise.

Why hasn't, internally, utilization increased?

Well, it's hard for me to say, because I wasn't here in the pre-Avis Budget days.

I think our utilization has gone up 2 to 3 points since the acquisition of Budget.

Truthfully, about 18 months ago, we made the affirmative decision to really go after some volume on Budget and trade off utilization for volume in order to maximize profit.

I think that was a good strategy in 2004 and a good strategy in 2005, and I think it remains a good strategy if we hadn't gotten a little whipsawed by fleet costs.

But again, I think that will even out over time.

On the maturing ABS, how is that going to impact interest costs in 2007/2008, just on a straight -- going from wherever it is to current market?

That's a good question.

Just generally, what is rolling off is around 4%.

What would be added is about 6%.

That's the current market for ABS.

This actually was a big year for us.

We had about a $1.5 billion rolloff.

Next year, we have around $900 million rolloff.

The 10-Q suggested that prices were up 10% US, 3% in international.

Why the big difference?

Well, international -- you know, we're only in Australia, Canada and New Zealand.

The biggest market, by far, for us is Canada.

Hertz is very competitive in Canada, and pricing hasn't moved much there in at least a year.

We are the market leader in Australia, and I think the number two and number three car rental companies in Australia are coming after us with price as well.

So it has been hard, particularly in those two markets, which are the substantial majority of our international revenues to get price increases.

Michael Connelly, T. Rowe Price.

Given the anticipated increases in fleet costs and anticipated volume growth of the car rental fleet, what do you anticipate your net capital expenditures for the car fleet to be in 2006 and 2007?

Most of the increase that we're getting in fleet costs is coming through a lowering of the repurchase price, so it really affects our depreciation.

Cap costs are up modestly, but in the low single digits, not much higher than that.

It really coming from a reduction in the repurchase price.

But that should affect your net capital expenditures, your purchases less your resale of cars, shouldn't it?

Well, it should.

But I think if you're looking at our net, the net would be, obviously, the gross purchases less the net repurchases.

The repurchase price would be the former gross less the amortization.

I'm sorry, I'm not following your question, I guess.

I just want to get an idea of what the net spending level on cars for 2006 and 2007 is going to be.

Well, if you assume a constant fleet -- let's do that.

If you assume a constant fleet, then our gross purchase of vehicles in 2006 was $11 billion.

You should expect that number to go up in the low single digits because that's the increase in cap costs.

You would expect, then, the amortization to run through the P&L.

Right?

Yes.

So the cash comes through the P&L, it gets added to a (if it were $4 billion of amortization) it would get added to $7 billion to buy $11 billion the following year, plus whatever cap costs increase.

So let me ask, what do you anticipate the proceeds from the sale of fleet to be in 2006 and 2007?

Our depreciation factor is in the low 20's.

So, again, take the $11 billion, subtract 20% of $11 billion, and that would be the net repurchase price.

Jennifer Pinnick, Morgan Stanley.

I've got a few questions on Realogy.

Can you update us where you are in terms of new franchise growth and acquisitions in the first half of the year?

We had good franchise sales in the second quarter.

We had already reported our first quarter to you on our first-quarter conference call.

We're running at or ahead of our goal of adding about $600 million of gross commission income each year.

With respect to acquisitions by NRT, we just announced one this morning, of a company, the largest independent in Suffolk County, Alan Schneider.

We would expect that we will be able to meet our goal of buying about $300 million of GCI through NRT.

So I think both are on track.

The issue that, obviously, we are studying as a buyer is the same issue you were studying as a potential buyer of Realogy, which is, where is the market going?

Ron mentioned that the market is weakening in his comments.

So if the company we're looking at has X million dollars of EBITDA, how sustainable is that?

What we typically are doing is putting a significant portion of the purchase price into an earnout, which both motivates and incentivizes and retains the managers or the owners, but also provides our shareholders with some mitigation of risk in the event that the market continues to go sideways or down, as opposed to recovering in the near-term.

Just to give you a precise number, affiliate franchise sales were up 38% in Q2 versus last year.

I'm sorry, I didn't have that number in front of me when you asked the question.

I do now.

That would be typical of our premise, which is that in a weakening environment, whether it's Steve Holmes' franchise sales in hospitality or Richard's in the real estate business, in a weakening environment, franchise sales typically spike.

With regard to the annualized $50 million of costs you are taking out this year at NRT, can you give us some kind of sense of what kind of additional capacity you have to take out of NRT, if the residential real estate market remains under pressure for longer than expectations?

Well, the answer is I don't know.

I don't think anyone knows, because the hypothetical question is, how bad does it get?

Remember, every time you take costs out, which generally is closing offices, you're also losing incremental revenue and therefore, potentially, incremental EBITDA.

So would there be some more?

I'm sure there would be.

But my own sense is the order of magnitude would not be in the $50 million range, but significantly less.

In the current environment, we're done with cost takeouts at NRT.

You're speculating about a worse environment.

I really don't have a good answer for you on that.

Then, the debt for this year repurchase program -- would you use your revolver?

It's not a debt repurchase.

It would be a share repurchase.

Is that the question you're asking?

Yes, the debt that you would use -- you have three lines of debt -- the interim loan, the term loan and the revolver.

Well, there's a bridge loan, which presumably we would pay off.

Then, we would either -- if we wanted to re-lever, to some extent, to buy back stock, we presumably would either put in place another bridge against permanent financing or, if the timing works, simply do permanent financing.

The capital markets are quite receptive.

As you know, Realogy is investment-grade rated at BBB.

So that's really not an issue for us.

In the 8-K that you put out, you noted that on a stand-alone basis there would be an extra $10 million of expenses.

Given the manner in which Cendant managed Realogy and the allocation of corporate expenses, am I to infer that that's the additional public company expenses?

Or do I layer extra public company expenses on top of that $10 million?

I think the answer is the latter, that you would layer the additional public company expenses.

But it's all in the numbers which we have laid out in our pro formas.

There's no change; this is not a change from what we had disclosed in the Form 10's.

Just to complete your thought, if I may, there are some silver linings in a declining environment that really don't involve taking costs out of NRT.

One is that the agent commission split with us goes up, because it's based on volume.

Second is the royalty rate that our franchisees pay goes up because, again, it's based on volume.

So there are some benefits.

I would much prefer to pay higher commissions and higher royalties in a growing environment, but it's not a total 1-for-1 decline.

It appears that we have run out of time.

That concludes today's question-and-answer session today, and at this time, I would like to turn the conference back over to management for any additional or closing remarks.

Okay.

Well, thank you all for all of your years with us.

This is the conclusion of the last Cendant conference call.

There will be Realogy, Wyndham and Avis Budget conference calls in the fall, and we all look forward -- those of us who will be on those -- to speaking with you then.

Once again, ladies and gentlemen, that will conclude today's conference.

We thank you for your participation.

You may now disconnect.