Avis Budget Group Inc (CAR) 2006 Q4 法說會逐字稿

Good morning, and welcome to the Avis Budget Group, Inc. Conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. David Crowther, Vice President of Investor Relations, please go ahead sir.

Thank you. Good morning, everyone, and thank you all for joining. On the call with me today are our Chairman and Chief Executive Officer, Ron Nelson; President and Chief Operating Officer, Bob Salerno; and our Executive Vice President and Chief Financial Officer, David Wyshner. If you did not receive a copy of our press release it is available on our website at www.avisbudgetgroup.com or on the First Call system.

Before we discuss the results for the quarter, I would like to remind everyone that the Company will be making statements about its future results which substitute 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 and 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 our earnings release issued last night.

Before I turn the call over to our CEO let me briefly review the headlines of yesterday's press release. Our revenues from vehicle rental operations increased to a record 5.6 billion for the year. Our vehicle rental operations earned full year performance EBITDA of 405 million, and pro forma pre tax income of 172 million, in line with our previous projections. In fourth quarter pro forma EBITDA from our vehicle rental operations was 88 million, also in line with our previous projections. Now I'd like to turn the call over to Avis Budget Group's Chairman and CEO, Bob Nelson.

Thanks Dave, good morning to everyone. 2006 was certainly a historic year for both Avis Budget Group and the car rental industry as ownership structures changed and the industry faced the twin challenges of significant fleet cost increases, weak domestic employments. Given this backdrop to the year we are pleased that our fourth quarter results were in line with expectations and more importantly that pro forma EBITDA from our vehicle rental operations increased year over year compared to the declines in the previous two quarters. In addition, we maintained our position as a leading car rental company at U.S. airports and we expanded our off airport business significantly. All signifying positive momentum.

Looking forward into 2007 I'd like to spend my time this morning reviewing our strategic plans and how our accomplishments in 2006 set the stage for long-term growth. At its core our strategic plan to create sustainable improvements in margins and earnings has three basic tenants. Optimizing our twobrand strategy, expanding our revenue sources, and realizing the opportunities we have to capture incremental profit.

Our twobrand strategy distinguishes us from both our largest competitors. More importantly, our brands are well positioned to capture the two deepest pools of rental car demand. Avis is a premium brand for the corporate and leisure traveler while Budget is a value brand for cost conscious travelers. Given these distinct customer groups we feel it is tremendously valuable to have two separate and distinct brands in order to segment market demand, properly target customers, maximize fleet utilization while at the same time meeting their needs and winning their loyalty.

In 2006 we continue to provide products, service and pricing that complement each brand's positioning in the market. For example, at Avis we rolled out a suite of productivity enhancements including a portable navigation system, electronic toll payment with automatic billing, E-receipts and most recently portable Wi-Fi. We retained over 98% of our corporate clients and maintained our number one ranking in customer loyalty as measured by brand keys for the eighth straight year at Avis.

For larger urban markets we believe the investments we have made have improved our corporate travelers productivity by 30 minutes to as much as one hour, which more than likely pays for the cost of their car rental. For Budget we introduced a new small business program which was named best car rental value by Entrepreneur Magazine which allowed us to increase small business revenue by 19%. While 19% growth is certainly nothing to apologize for, Budget's revenue in this segment which is under 100 million still represents a small fraction of Avis' where it should be a multiple. With Avis' current book of business approximating 300 million you can get a sense of the growth we think exists with aggressive marketing of a quality offering.

Separately, Budget added USAA and AARP as affinity partners. We're very excited about these relationships and are confident that Budget's combination of value and service position us as an important cosourcing partner with a premium brand so as to present a well rounded offering to the 41 million members of these organizations. Most recently we entered into an exclusive multiyear comarketing relationship with Delta Airlines. We will offer Avis and Budget car rentals throughout Delta's booking and confirmation process on Delta's website. We expect incremental revenues well into the eight figure range annually as a result of this partnership, which our two brand strategy was key to us winning.

In the growing and important internet space our websites continued our leadership as the largest generator of car rental reservations on the internet. Even more impressive is that our largest source of internet reservations is our own brand sites which is great because these sites are also our cheapest source of reservations. With 2 million active members in our loyalty programs generating 35% of our revenues in 2006 our brands and the service that goes with them are powerful and we believe they allow us to attract demands and to achieve favorable rental rates compared to others in the industry.

Turning to expansion of revenue sources, there are two important initiatives that began in the fourth quarter of 2006 that will have an important impact on 2007 and beyond. Our GPS unit and our entrance into the insurance replacement market. Consider that we have 100 million rental days or roughly 30 million rental transactions a year. To look further, that our typical renter has an average income of almost $100,000. We have demographics that most consumer industries would swoon over, yet we still receive the smallest share of the travel wallet. Exploiting these demographics is critical to our long-term strategy, more specifically we are keenly focused on increasing the profitability of each of our existing transactions through high margin, value added ancillary services.

An excellent example of this is our new GarmGPS unit which we call Where2. We began rolling this out in the fourth quarter for our Avis customers and started this month to roll it out to Budget locations. We believe that with this unit we are able to provide state of the art technology and leapfrog the competition with the best GPS offering. This unit is incredibly easy to use, is more intuitive than many OEM installed units, plus it can download traffic information from XM satellites and provide realtime rerouting in case of traffic jams saving busy corporate travelers time and money. We now have nearly 12,000 it units in the field and expect in 2007 with several times that number. We are pricing this unit at $9.95 a day, or $49.95 a week with margins that are north of 70%. We're supporting the rollout with a national advertising campaign that started last week. Early results all of which were generated without the benefit of any advertising are especially encouraging with take rates now averaging over 4%.

While much smaller in scale we recently an announced the availability of portable Wi-Fi service for our travelers. Our objective with Wi-Fi is to provide a better mouse trap, if you will, product that is portable, easy to use, available shortly after landing versus waiting until you've checked into your hotel room and works anywhere, any time. We view this as another significant enhancement to the productivity of business travelers and should prove popular with leisure travelers as well. Like the lost damage waivers and insurance products we offer to customers, this is another source of ancillary revenues as we offer products and services that our customers want and will pay for. Portable Wi-Fi is priced at $10.95 a day and also has high incremental profitability and will be available in ten major business markets initially.

The most significant component of our revenue source expansion is our off airport or local market growth initiative. We opened 197 new locations in 2006 for a total of 300 over the past two years. We ended the year with 142 locations in the pipeline, most of which are scheduled to open in the first half of the year. Our off airport revenues were 750 million in 2006, a 37% increase from just two years earlier and our goal is to add a total of 200 locations in 2007 to better serve our customers. Our strategy is to open the majority of these as agency locations so the capital investment required for this growth is quite modest at 30 to 40,000 per site on average and we typically bring them to profitability in six to nine months. While we are still early in the growth phase of our off airport initiative our business model has allowed this segment to already become a profitable business for us today and should increase in the future.

While we have a large growing local business we have very little presence in the insurance replacement segment, which is the largest component by far of the off airport market. There are two predicates to operating in this business on any scale. Broad geographic footprint and an IT system that integrates the car rental process with the insurance company's claims management system, we now have both. We ended 2006 with more than 1450 off airport locations, which cover almost 80% of the U.S. population. In the fourth quarter we rolled out a new IT system for insurance replacement transactions. Since its rollout we have added three major insurance carriers to our insurance replacement client roster.

We're also supporting this effort by putting in place a local sales force that will be calling on body shops, claims adjusters, car dealers, and others to drive business to our local locations. We grew our insurance replacement business 64% off a small base in 2006 without the benefit of an insurance replacement system or a sales force. Expect growth for 2007 and several years beyond to be at least that rate, if not higher. Considering that we have a 32% airport share year-to-date but only a 1% share in insurance replacement we feel confident that we will migrate some of our loyalty customers to our insurance replacement offering and for all others our lean position on airport has taught us how to compete successfully when we're side by side with other car rental companies.

The third tenant of our strategic plan is taking advantage of the opportunities we have to capture incremental profit. These opportunities exist in a number of areas including cost containment, the turn around of our truck business, and-ye management. In terms of cost containment we have refocused on efforts on containing costs throughout our operations as we went through our annual budgeting process and operational reviews. Particular area of focus for us in 2007 is reducing maintenance and damage expenses which have increased significantly as we have grown our leisure business. We are instituting programs not only to reduce gross damage costs but also to increase our ability to recover such expenses. We hope that we can build on our success in another area. Since 2004 we have instituted a variety of programs to reduce on the job injuries and workers compensation costs and have lowered reported claims by some 35% over the last three years. Finally, we are looking at different alternatives to better use technology and the rental process and checkout, especially in the critical cost areas of fuel replacement and damage control, both of which have the potential to be a win-win as we improve the customer experience, reduce costs.

The turn around of our truck business is certainly another area that will enhance margins in the coming year. We believe the truck rental operation should be able to achieve margins consistent with our domestic car rental operations. As with the car rental business we believe that there is no viable substitute service available to many truck rental customers. The embedded nature of this demand and the strength of the Budget truck rental brand we believe make it well worth the effort to strengthen this business.

As we discussed last quarter we intend to do this first for the cost savings associated with the consolidation of back office functions into the car rental operations. Second, by increasing utilization of our assets. Third, by strengthening our network including supplementing it with company owned hub locations. And fourth, through the increased sale of packing and moving supplies and over highmargin ancillary products.

The third profit opportunity I mentioned was yield management. While we have reasonably sophisticated yield management systems in use today we have a number of initiatives underway to improve these systems and hone our algorithms. These include optimizing our fleet management -- optimizing how our fleet management and yield systems interact, improving these systems predictive capabilities and finally improving the dynamic ability of the systems to evaluate industry pricing on a marketbymarket, daybyday basis. Since $0.85 to $0.90 of each price dollar drops to the bottom line incremental improvements in these areas have meaningful impact. We expect that these three strategies, optimizing our two brands, expanding our revenue sources, and realizing incremental profit opportunities along with the hard work of our very dedicated and very capable work force will allow us to grow our revenues nicely and our earnings faster over the next few years.

As we look at 2007 we continue to face a challenging and highly competitive environment. Nonetheless assuming a decent economy and more reasonable fleet cost increases for model year '08 we should get to the necessary equilibrium between pricing and fleet costs over the course of 2007 which will put us on the road to restoring margins to normal levels. Make no mistake, financial results in 2007 are highly dependent on our ability to get pricing in both the commercial and leisure arena. While we continuously manage our costs as carefully as anyone we cannot cut our way into growth. The full year impact of higher fleet and financing costs cannot be overcome simply with cost reductions. As a result I would like to ask Bob Salerno our President and COO to talk a little bit about fleet costs and pricing.

Thanks Ron. Over the past couple months there have been many headlines from Detroit and other statements made about production cuts, reduced sales from OEMs for the car rental industry and finally, the availability of cars. First the production cuts. The encouraging part of the recent production cuts is that capacity is being taken out as well. We view this as a positive step for the industry and ultimately a positive step for pricing. With capacity reduced and hopefully aligned with demand there will be less opportunity for vehicles being pushed into the car rental channel which in turn should keep the industry from on overfleeted situation. With fleet more constrained the industry should be better able to achieve needed pricing increases. Along the same lines the likelihood of somewhat reduced fleet sales by OEM's should also be a positive for the industry because of a more constrained supply should also lead to a more rational pricing environment.

Now, what impact has this had on our ability to secure fleet that we need to operate the business, really none. We have two guaranteed supply contracts. In fact, we the largest purchaser at Ford and the third largest at General Motors. At the same time we have significant purchasing relationships with Chrysler, Hyundai, KIA, Mitsubishi, Subaru, Suzuki, and Toyota. We have been able to secure all the vehicles we need for 2007 whether risk or program and do not anticipate any issues for model year 2008 and beyond. I do not believe the major car rental companies will be impacted by reduced OEM fleet sales other than being incented to hold cars a bit longer and probably purchase more risk cars both of which should have favorable impact on aggregate fleet costs.

Let me make a quick comment on model year '08 fleet costs. These negotiations do not begin in earnest until the second quarter and continue in the third and sometimes into the fourth quarter. We are expecting a return to more normalized fleet cost increases for the '08 model year, although costs may still increase at a rate faster than overall inflation. In any case it's still far too early to handicap this process. One final fleet note, we are actively in negotiations to add hybrid vehicles to our fleet. And expect these vehicles to enter our fleet this summer. This is an example of how we continue to seize opportunity to add energy efficient vehicles to our fleet. In fact, half of our domestic fleet gets better than 28 miles per gallon highway based upon our EPA estimates.

Now turning to the pricing environment. Our time and mileage revenue per day increased 5% in 2006 versus '05 in the face of significant industry wide fleet cost increases. Leisure pricing was up in the mid to high single digits while commercial pricing lagged in the low to mid single digits. Through the fourth quarter and so far this year pricing has continued to be strong on the leisure side and mixed on the commercial side. As we discussed on our earnings call in November we have seen some occasions where our competitors actions have permitted them and us to achieve price increases in the range we consider appropriate in light of higher fleet costs.

Over the course of the last six months commercial contract renewals have resulted in price increases sufficient, if only barely so, for us to achieve our forecasted level of earnings. In short, while we are continuing to get commercial price increases they are not as high as we would like them nor are they as high as we feel the market will tolerate. Largely due to competitive actions. But while we enter 2007 having achieved lower than expected commercial price increases in 2006 we did achieve price increases and we are seeing signs that things are improving albeit in a somewhat random fashion. As Ron indicated, 2007 results are going to be highly dependent upon continuing to get leisure price increases and accelerating the commercial price increases we have been achieving.

I should also comment on truck pricing. We were recently described by a competitor as quote, ridiculously cutting prices in the oneway market. Which is a fairly strong statement. Especially given that our time and mileage revenue per day decreased only 2% year over year. Since we are a distant second in this market we find it hard to believe that our rate decrease is a driving force behind our competitor's implied declined rate of more than 7%.

Before I hand the call over to David let me spend a minute talking about our on airport car rental market share. If you follow our industry you know that in the fourth quarter we lost over a share point at the airport compared to last year. Although our share is still about the same as 2004. You have heard us say time and again that this is really not so much a share ga as it is a pricing, fleet, and utilization puzzle. In truth we push leisure prices at Budget and to a certain extent t Avis in the fourth quarter probably beyond where the natural hierarchy of the brands would suggest. As you saw in our Q4 metrics we suffered in volume which in turn means we suffered in share.

So while revenue gains were still of positive and EBITDA was up year over year for the first time all year, we believe some market specific price adjustments were necessary and nipped and tucked a little in January. Not a lot, but enough to stimulate demand. Consequently our res build responded favorably bring utilization into line. The point of this is twofold. First, you need to look beyond share to assess performance. Second there are multiple solutions to the profit equation, because the model is three dimensional involving price, fleet, and utilization. With that I'll turn the call over to David Wyshner.

Thanks Bob. This morning I would like to discuss our recent results and our outlook focusing on the results of our vehicle rental business and it's three operating segments. In 2006 we grew Avis Budget car rental revenue by 6% to a record $5.6 billion, generated pro forma EBITDA of $405 million, and generated pro forma pretax income of $172 million. All in line with our July and November projections.

In the fourth quarter our revenue is $1.3 billion as it was in 2005. More significantly Avis Budget car rentals pro forma EBITDA increased compared to last year. For the quarter on a pro forma basis ABCR generated EBITDA of $88 million and pretax income of $33 million. Our revenue growth was driven by a 6% increase in car time and mileage revenue per day and a 4% decline in car rental days versus the prior year. We have said that we are serious about taking price increases where possible and our fourth quarter results reflect that commitment and its favorable impact on margins. I should point out though, that while our fourth quarter rental days declined 4% year over year they have increased 12% versus 2004 levels. Clearly we were facing a very difficult rental day comparison in the fourth quarter.

Turning to our domestic car rental operations revenue increased 2% reflecting a 7% increase in time and mileage revenue per day offset by a 5% decline in rental days. As Bob mentioned we made the decision in the face of significant fleet cost increases to forgo some marginal rentals, reduce fleet size and strengthen our pricing. As a result of this dynamic and lower operating costs domestic EBITDA increased significantly in the quarter to $52 million. Our average fleet size decreased 5% in line with our volume decline. Our fleet costs were flat year over year. The decline in average fleet was offset by per unit cost increases. There were two things that favorably impacted fleet cost comparisons in the fourth quarter.

First, we had higher than usual excess mileage charges in the fourth quarter of 2005 due to holding cars for hurricane related rentals. Second, is a timing issue related to manufacturer incentive credits which we earned more of in the fourth quarter and less of in the third quarter this year than in 2005. These timing issues are not unusual in our business and therefore we caution against extrapolating our fourth quarter per unit fleet costs. For the full year our fleet costs increased 12% due to higher per unit costs and a 1% increase in our average fleet.

Our operating expenses excluding fleet related costs declined slightly versus last year as a percentage of revenue. Our cost saving initiatives and favorable experience in our health insurance costs allowed us more than offset increased maintenance and damage costs. In the self insurance front we have been seeing favorable claims experience over the last 18 months, including settling two of our largest outstanding claims. This experience provided savings in the fourth quarter and as importantly has reduced our projected accrual rates for 2007. We benefit from favorable trends in this area on a somewhat delayed basis as our experience feeds into time based actuarial models used to determine our accrual rates and reserve balances.

Moving to international car operations, revenue increased 9% driven by a 5% increase in rental days and a 2% increase in rate. Increase in rental days was virtually all organic as we anniversaried the Budget Toronto acquisition in October. Reported EBITDA increased in line with revenue.

Finally, turning to truck rental, revenue declined due to 21% decrease in rental days and a 2% decline in time and mileage revenue day. The rental day decline was driven by a 7% reduction in fleet, and declines in demand across all rental segments. Decline in T&M per day reflected a decrease in oneway rental rates which we believe is consistent with market trends. We believe the volume decline reflects softness in the local consumer market in line with the decline in housing sales.

Commercial volume was principally impacted by some Fortune 100 accounts that reduced their rentals for a variety of reasons including increasing their own fleet size. The reported 29 million decline in truck rental EBITDA has three principle components. First, we recorded an $8 million restructuring charge in 2006 reflecting the action we have taken to streamline management and integrate most truck related administrative functions into our existing car rental infrastructure. Second, were onetime benefits. In 2005 results included a one time $13 million benefit relating to refinement in how we estimate repair and refurbishment cost. Third, were actual operating results. This remaining $8 million decrease is split almost evenly between fleet cost increases which were anticipated and the revenue decline. So while we are certainly not pleased with the results of this business, the decline in core operating results is not as dramatic as the reported EBITDA might suggest.

While truck rents only about 10% of our revenue EBITDA our new management team for this business is intensely focused on repositioning it for future growth. The closing of the Denver truck headquarters and the merging of truck administrative operations into the existing back office of our car rental operations is now well underway and on plan. This will result in the net reduction of approximately 50 positions about 20% of the staffing levels in Denver. We're also adjusting our fleet mix and targeting our sales initiatives to capture more midweek commercial business. Build out of a new sales force focused exclusively on the commercial truck, insurance replacement, and local market segment opportunities is well underway.

Lastly, we are moving to increase the number of corporate owned stores we operate, to augment our network. While some of the restructuring actions can be completed quickly others will take time to implement. Especially the development of corporate owned stores and the expected strategic refocusing of this business. The benefit from these actions is anticipated in 2008.

So looking at our Avis Budget car rental subsidiary in 2006 on a pro forma basis we had EBITDA of $405 million, depreciation and amortization of 96 million, net corporate interest expense of 137 million, and pretax income of 172 million. All in line with our projections. On the tax line there were a number of one time separation related charges which inflated our full year GAAP tax rate to about 55%. On an ongoing basis we expect our GAAP tax rate should be in the 39 to 41% range, and our cash tax rate will be substantially lower as we're not a meaningful federal cash taxpayer, but do pay some state and international cash taxes. At year-end our diluted share county was approximately 102 million. We continue to invest in our brands and our infrastructure. Avis Budget car rental capital spending totaled $32 million in the fourth quarter primarily for rental site renovations and information technology assets. Bringing our full year CapEx to $83 million.

Turning to our outlook, we have completed our model year 2007 fleet negotiations and our annual budgeting process. Our 2007 business plan assumes modest economic growth with no major travel interruptions and domestic growth of 2 to 3%. We expect our on airport rental day growth will approximate growth. We expect off airport volumes to continue to grow rapidly bringing our overall increase in domestic car rental days to 6 to 8% year over year. Comparing domestic with last year, the second and third quarters should be more favorable while the first and fourth quarters will be tougher comps.

Turning to pricing, our domestic price assumptions call for an increase of 3 to 5% in daily time and mileage rates. Our growth off airport where length of rental is longer, but daily rate is typically lower will drag the average down. We expect our fleet costs will increase about 10% on a per unit basis versus 2006. Truck rental we expect revenue to be down in the first quarter, but comparisons should improve over the course of the year. We will be facing some earnings head wind as we cycle through the final portion of our fleet modernization program. We expect an increase of about 15% in our per unit truck fleet cost and therefore expect that truck rental EBITDA will bottom out in 2007, lower than 2006 results excluding restructuring costs.

For the first time in 2007 we have entered into a fuel hedging program. We have hedged approximately 50% of our annual fuel purchases in order to try to reduce our exposure to rising fuel prices, which negatively impacted our 2006 results. This hedge must be mark to market for quarterly reporting purposes. We will quantify the effects each quarter when we report our earnings but wanted to highlight the potential for timing differences as a result of the mark to market requirement. Based on the above we expect to grow our revenues, EBITDA, and pretax income in 2007 compared to our 2006 pro forma results. As we have discussed the extent of our growth is highly dependent on price increases.

We believe price increases excluding any mix impact in the 4% range are necessary to overcome the impact of higher fleet costs as well as inflation in our normal operating expenses. This is comprised of about 2.5 points to address fleet cost increases and close to 2 points to offset other cost increases. As we look at these dynamics and our 2006 results on a quarterly basis we expect first half comparisons to be tougher than back half comparisons. On a pro forma basis we expect first quarter margins to be somewhat depressed as our fleet mix shifts to more model year 2007 cars and commercial contracts signed in early 2006 with relatively low rate increases have yet to come up for renewal. By the third quarter we expect to see significant margin improvement.

In summary, our margins and our return on capital are not where they have been or where we would like them to be in either 2006 or 2007. Finding equilibrium between pricing and fleet costs has taken longer than we expected. We continue to be excited about our prospects for the back half of 2007 and into 2008 for two important reasons. First, is simply history. History suggests that we should find a balance with price and fleet that is north of our current margins and returns. And second there is a more tangible reason for our optimism. The structural changes at the auto manufacturers have for the first time in 20 years put the rental car companies back in control of their fleets. In this business having control over your fleet begets greater control over pricing which begets margin improvement. With that Ron, Bob, and I would be pleased to take your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Jeff Kessler with Lehman Brothers, you may begin.

Thank you. I actually have about 40 questions, but I will instead of boring everybody, I'll just ask a couple. Hi, Ron and hi Dave and hi Bob. First question is 10% fleet cost estimate for 2007, while this is kind of in line it's actually slightly lower than what you were alluding to a few months ago. Is this because you were looking at initial discussions with the auto manufacturers or are you assuming that with such things as higher percentages of international cars coming into the mix the auto, the OEM's are getting it that they can only raise pricing so much and maybe they have already gotten enough of what they wanted out of the program, nonprogram mix.

Let me answer your first one. I'm not sure at what point in time we're trying to draw the distinction Jeff, but, early at at least in the middle of the summer we were talking about 20% fleet cost increases and those all related to the cost of program cars. Over the course of the third and fourth quarter by buying risk cars, by extending our fleet, changing the mix on our fleet we have reduced the per unit cost down to 10%, which we feel pretty comfortable we're going to be able to sustain throughout the whole year. Program cars still went up 20%, there's no mistake about it. But when you average them in with all the other actions we took you get the composite down.

The point I'm getting to is as, if you change slightly given that the mix, you have gotten your nonprogram car mix up a little bit and maybe there we're seeing some more rational discussions with the OEM's on the program cars, do you think this augers better for 2008? I know that Bob prefaced this whole thing by saying that we've still got a ways to go before the discussions start, but obviously a lot of investors are interested in kind of what your take on 2008 fleet costs are going to be on a blended basis.

Ye, let me say the following. I think the issues that we're driving the significant increase in the program cars, we think have largely been corrected. Those issues were the difference between the put price and the fair market value of the cars. As they have increased or reduced the foot price we think they have gotten the majority, if not all, of the squish out of the difference between the foot price and the fair market value of the cars. So we take some comfort then that the price of fleet ought to rise in line with what their pricing is up. So I think that's what gives us some comfort is they have taken care of the majority if not all of their problem.

Okay. Second question, you mentioned 750 million of off airport, that was -- it's a significant increase against two years ago. It seems like it is a much smaller annualized increase, maybe virtually no increase against 2005, am I wrong, and what type of growth are you seeing in the two, I know you mentioned 37% over two years, what are you really seeing at this point on an annualized basis in, you know, in the off airport business.

Yes, we weren't trying to hide the, 2006 was up 18%.

Okay.

They were both up about the same. The only thing I will say is when you look at where our increases are the large majority of them are still in the local market general use. I mean, we have big percentage increases in insurance replacement, but it's still a small, small component of our overall mix in the off airport.

Okay.

I just want to add one point it to your fleet thing because I think it's important. In terms of considering what our composite fleet costs might be in '08, don't forget the fact that we still have the risk lever to pull. I mean, our risk percentage is still relatively low compared to the rest of the industry. And we have been very cautious wanting to understand how the redistribution of risk cars from car rental companies to dealer networks affected pricing and we still have the ability to substantially increase our risk component next year, which gives us, at least our P&L an advantage of being able to lower fleet costs.

Your collateral requirements that you are seeing on the part of, part of the rating agencies, are those -- are those continuing to rise with respect to two major players, and have they risen to a point at which there's almost no difference between a program car and a nonprogram car, at least in the eyes of the rating agencies versus the two U.S. OEMs.

That's correct Jeff, this is David. The way the agencies are looking at enhancement levels for our structures, they view Ford and GM cars as essentially equivalent to risk vehicles in terms of the enhancement that's required.

Okay. So is it, is it fair to say that given the level that you're at, that we have already gotten to a point, unless the credit rating completely explode downward, are we going to be seeing a little bit less of the second derivative, a little bit less of an acceleration in the amount of collateral that's been had to been put up versus what we have been seeing in the last couple years, is that rate of rising going to be slowing?

That rate is going to be slowing. The one issue we're still -- that we have been expecting all along is that as our historical term ABS deals mature we're going to be replacing them with new deals that have credit enhancement levels that are tied to the current way of looking at things. So that will cause the enhancement requirements in aggregate to continue to rise over the next few years, that's something we have been planning for for the last 12 or 15 months. But because those existing ABS deals roll off over a period of time the rate at which we're going to see any increases is going to slow down.

Okay. One final question, I'll leave for others. On pricing, can you sustain -- obviously you have been dependent on leisure pricing doing really well and the marketplace within the auto rental industry, determines a lot how much you can get there. Do you -- how long can you sustain let's call it high single digit type of leisure pricing in your view without running into undercutting. And on the commercial side, do you think that the combination of Dollar Thrifty with Vanguard will provide more discipline on the commercial side.

Hi, Jeff, how you doing.

Hi Bob.

Listen, on the first part, as long as the market continues to move along on the leisure price side, which it has been doing, all throughout '06, fairly well in synch as least as well as I've ever seen it move, and it appears this is continuing on at least early on in 07, as long as that goes on I think there's, I think there's pricing ability here. Clearly there's pricing elasticity for the consumer in this area. There's a lot of room yet to continue to move car rental pricing that we haven't tapped at all. So I guess that's a long way around to say as long as the industry allows it I think leisure pricing will continue. On the commercial side, relative to Dollar Thrifty and Vanguard, I have no idea Jeff. I don't know what will go on over there or combinations or what that will mean for commercial pricing. We have been attaining commercial pricing increases just not at the rate that we want nor is it at a rate that I think the market would accept if we were allowed.

You know why I'm asking that question, you have a competitor over there who has been, let's call it the force that's perhaps kept some of these pricing increases down below what you would have liked, hopefully that's easing if these companies combine into a public entity.

I'm not sure Jeff, that the competitive balance, merging Dollar, and ational affects commercial pricing at all. Dollar Thrifty is by in large a leisure rental company and frankly, when you look at the results of our acquiring Budget, the primary benefit you get is cost take-out. And so if something happens between Dollar Thrifty and national I assume there's going to be some cost takeout and they will be more profitable on a combined basis. I don't know the structure of the transaction so I don't know whether they will be all private or all public. But presuming that they will be all public then I think that that adds additional level of discipline on both fronts. And having a more profitable player in the business I think makes for a more profitable industry and that's good for everybody.

Okay, thanks a lot guys and it was a surprising quarter. Thank you.

Thank you. Our next question is from and that is with [Jaffar Naseem] and that is with JPMorgan.

Yes, hi, good morning, thank you for taking my question. On your fleet financing I was wondering, David, if you can tell us what amount of your fleet will come up with you in '07 and what does that do to your fleet interest expense.

Sure. About $700 million of our fleet debt rolls off this year and in the impact of that rolling off and being replaced isn't going to be material on our rate. It may work out to about a quarter of a point depending on where rates are over the course of the year, but that runoff really doesn't have much of an impact on our bottom line.

Okay, great. And then you mentioned that maintenance and damage expenses were up in '06, I was wondering if you can tell us what the total amount was and what the increase was and what expectations are for this line in '07?

I really can't. It's a -- it is a line that has increased along with the growth in leisure rentals. We have also had some changes in our terms and conditions that create some line item geography within our detailed P&L. And so it's a rather complicated answer, but we do feel that there's a -- that there is opportunity for us in in terms of how we operate and manage the business to work on maintenance and damage costs and our recoveries of them. Even while we continue to expand the leisure business that just by its nature has higher M&D rates associated with it. So it really boils down to an area where we have seen some increases and we feel that there are operational and day to day actions we can take to help the bottom line there.

Okay. And then in the off airport side, can you give us a dollar amount for the insurance replacement business you have, of the total revenue.

As I think we said, we estimate that we have about a 1% market share of about a $7 billion market.

Okay. And forward-looking guidance you mentioned that first half of '07, margins are likely to depress, any quantification of this, is it 50 business points you're talking about, 25, 75.

We have decided not to try to quantify any quarterly numbers and that's going to be our approach as we go forward.

Okay. And lastly, some questions around free cash flow. Cash taxes in '06, what were these?

I'm sorry, I missed your question.

Cash taxes in 2006, what were these?

Cash, the cash taxes really pertain to the international operations and some state taxes. We're still finalizing the exact number, but relatively small, I think in the $20 million range.

Okay. And your CapEx budget for '07?

It's in line with the -- with our 2006 spending, probably in the 75 to $85 million range. All right, thank you very much.

Thank you sir. Our next question is from Chris Agnew with Goldman Sachs.

Thank you, good morning gentlemen. First question, a little bit of detail, did you provide the forecast for the average fleet increase in 2007?

We -- our estimate was an average per unit increase of about 10% in 2007.

Sorry, not--.

And then, we haven't talked about the aggregate cost increase, but if, as we grow -- as we grow volumes in the 6 to 8% range and then ideally have maybe some modest impact in utilization over the course of 2007, the per unit cost and the growth in volume and fleet end up being essentially multiplicative in terms of our growth. So it probably ends up being in the 15 to 17% range when you combine those two assumptions.

Okay. So you would be assuming average fleet increase of about 5 to 7%, is that--?

We need to support the additional volume that we'd expect to have in the 6 to 8% range.

Okay. Because I mean what I was trying to do is back out what the sort of implied utilization increase was.

Yes, and that we're -- we're not talking specifically about a planned utilization increase. We're not issuing a specific forecast there. But we are very focused on opportunities in the business to try to squeeze basis points, tens of basis points out of utilization where we can.

But I mean would I be right in thinking that if you're -- a lot of this, because you're talking about [Inaudible] growth of being moderate and I'm assuming that's sort of 2, 2.5% and therefore a lot of the rental day increase talking 6 to 8% you must have very high increase in rental days in your local segment business. And therefore, because the longer rental periods, you should be seeing a jump in your utilization. Am I thinking along the right lines there?

Yes.

Okay.

All those things are correct.

Okay. So I mean would it be fair to think that -- well, actually maybe ask in another way. I mean given that utilization is driven by this off airport mix and you've shown in charts in your presentation for every 1% increase in utilization you get around I think it's 19, 20 million of incremental EBITDA, does that still hold true given that its being driven by off airport.

No, I don't think that that's the case. I think in order to apply that sensitivity I think you really have to look at on airport and off airport separately. So that if we improved on airport utilization by a point and we improved off airport utilization by a point we would get that $20 million pickup. But we don't necessarily get that benefit from a mixed shift. Because you need higher utilization, to your earlier point you need higher utilization in the off airport market to operate at the same margin levels.

Okay. Okay. So have you actually quantified, do you think you can get your local rental business to achieve the same level of profitability as you are targeting for your overall business, and do you have a timeframe for that?

Yes, Chris, this is Ron. In terms of that question, our off airport business is already profitable. We think that it's in the same margin range as the on airport business. And I would say, I would -- just to elaborate a little bit on the utilization question you were asking David, we have programmed about 0.5 point of utilization increases into our forecast for next year. That's a composite across both airport and off airport. Since we only have one fleet and the hub of the fleet is really at the airport and effectively we move cars in and out of the off airport market it's hard to measure utilization sort of in the on airport and off airport. It intuitively, well, you're right, off airport utilization is probably going to be modestly lower than on airport. What you have going for you in the on airport business is that you have longer length of rentals, which tend to balance it and give you better utilization. Yes. The other thing that I just want to point out is that in terms of profitability, we have relatively low fixed costs at our off airport business compared to on airport business. So the cost structure sort of offsets the impact of the lower rate, which is why when you look at it across the board they both end up being about the same level of margin and profitability.

Okay. Thank you. And then one final question, reading in your outlook guidance and then comments on the call, I just want to clarify when you're talking about the seasonality, I know you're not going to give specific numbers, but are you talking about seasonality in the first half of the year being lower than -- below normalized margins that you're thinking of achieving or actually being below what they were year over year?

With respect to seasonality if you will, or the build out is tied to the progression we expect to have, and in the first quarter, we are expecting a difficult or negative comparison as I mentioned, improving to better comparisons in the back half of the year.

And that's on a year over year basis, you're talking about, comparisons?

Year over year pro forma so that we're comparing apples to apples.

Okay, excellent, thank very much.

Thank you. We do have time for one last question from Christina Wu with Morgan Stanley.

Hi, thanks. I was hoping you could speak to the fleet holding period. You've mentioned that as a means of cost savings you're holding your fleet for longer periods of time, what's the average mileage maybe on the fleet in the past versus what your aim is?

The hold is going up approximately almost a full month. And you can think about that as about 2000 miles.

2,000 did you say?

Yes. When we did this we paid a lot of attention to how this would be received by customers, in our opinion it will almost be transparent.

And what percent of your fleet is up-to-date with its preventive maintenance?

We have been running preventive maintenance for the last 20 years, all our fleet is up-to-date on preventive maintenance and recalls and everything else.

Okay. So extending it by one month you're not expecting a significant increase in the preventive maintenance cost?

No, we will be well below the threshold that that would occur. The preventive maintenance other than tire rotation and oil change, really nothing more than that. Until you really get a lot more miles than we put on the cars do you get into more significant cost increases.

You mentioned in response to Chris' comments that you have the strategy of moving some cars in and out of the off airport market and swapping them. As you look at expanding the off airport business, particularly with the insurance replacement business, are you anticipating keeping a fleet of cars more readily available in the off airport market?

Well, we do not separate the fleet out. We think that's inefficient. However, having said that we do keep a specific number of cars in the off airport market that we think is necessary to service and grow the business. Because the business there runs very differently from an advance reservation standpoint airport market. We also spend a lot of time thinking about what cars go out there, the types, the size of car, the type of car, and so that will continue on. We think it's also efficient to supplement the off airport market in particular periods, slower periods, on the airport market with cars. And vice versa, so we do that. So you can think about it as kind of a base fleet out there, then there's a little bit of fleet on the top that moves back and forth.

Are you anticipating I guess any change year over year in the fleet strategy for off airport to make sure that the off airport operators have enough vehicles for the insurance replacement, for the growth, or is it more that you're increasing your overall fleet.

Yes, only to the point the change is really a continuation of the strategy that we believe to grow continuation of the strategy that we believe to grow this business fleet has to be out there. We have been a little more forgiving on fleet being out in the off airport locations than we are at the airport locations.

Okay. Great, thank you.

Thank you. I would like to turn the conference back for any closing remarks.

I would just like to say thank you all for listening in today, and asking, what I think, are some really good questions. We look forward to talking to you at the end of the first quarter, bye.

Thank you for participating in today's teleconference call. You may now disconnect.