Avis Budget Group Inc (CAR) 2007 Q3 法說會逐字稿

Good morning, and welcome to the Avis Budget Group third quarter earnings 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. David Crowther, Vice President of Investor Relations. Go ahead, sir.

Thank you, Jan. Good morning, everyone. And thank you all for joining us. On the call with me are: Chairman and Chief Executive Officer, Ron Nelson, President and Chief Operating Officer, Bob Salerno, our Executive Vice President and Chief Financial Officer, David Wyshner. If you did not receive a copy of our press release, it's available on our website at www.avisbudgetgroup.com or on the first call system. Before we discuss our results for the quarter, I would like to remind everyone that the Company will be making statements about its future results, which constitutes forward looking statements within the meaning of the Private Securities Litigation Reform Act. Statements are based on current expectations and the current economic environment and are inherently subject to significant economic, competitive and other uncertainties and contingencies beyond the control of management. You should be cautioned 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 protections specified in our 10K and 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 revenue increased 10% in the quarter to a record $1.7 billion, including separation-related expenses, our domestic car rental EBITDA grew 45% year-over-year. And in total, we generated $171 million of EBITDA and $119 million of pretax income in the third quarter including separation-related expenses. Now I'd like to turn the call over to Avis Budget Group's Chairman and CEO, Ron Nelson.

Thanks, Dave. Good morning to everyone. I suppose the headline for this morning's call is that we along with the rest of our industry had a very solid third quarter. Results for all of us were certainly helped along by a robust August. Enplanement growth was up over 5% and reported airport revenues were up over 16%. Both of our brands participated in the market strength with both Avis and Budget exceeding the market gains. In fact, August was the single most profitable month we've ever had. To be sure, July and September were healthy months as well. The third quarter always rests on the August results.

Beyond the specifics of the third quarter as we'll talk today, business volumes are generally good, pricing has been okay, ancillary revenues are strong and importantly we are achieving our objectives relating to disciplined cost reduction. I want to spend a minute on the third quarter results then focus on the progress we've made on our strategic initiatives, and then close with a comment about the fourth quarter. You recall our comments from the second quarter, we said that we held fleet because we saw a strong summer building. This came through as expected with both solid volume and price gains for the quarter. From mid-July through Labor Day, fleet was very tight for everyone and we were experiencing strong pricing gain across both brands. In fact, in many locations Budget was priced at or near Avis levels.

We also said last quarter that we expected domestic EBITDA excluding separation-related expenses, to be up at least 25%. We read in our release we significantly exceeded that with 45% growth, illustrating the operating leverage in earnings power inherent in our business when the pricing environment operates. Overall, rental days from our global car rental operations were up a solid 5% for the quarter combined with preliminary enplanement figures. And pricing across the quarter was up 4% and slightly outpaced industry wide fleet availability. Statistics released by the U.S. airports would indicate that we grew our share of the premium segment of the car rental market this summer. Both leisure and commercial business contributed to the pricing gain. With leisure, as you would expect, showing a dramatic change for the quarter. As we said before, leisure pricing is a spot market. It will be influence by time of year, industry fleet levels and other factors, which as a result will invariably be volatile as second and third quarters demonstrated.

With that being said, the peak summer travel months present opportunities that are not available on the shoulder season. I would remind that you pricing in both the fourth quarter of 2006 was up 7% year over year. But a word of caution not to extrapolate third quarter leisure pricing. Commercial pricing however does remain stable and consistently been in the 2% to 3% range for the year. Accordingly, we did retain 98% of our commercial accounts. This is our bread and butter. I'm on a soap box for a moment. We believe pricing can and should be higher for the product and service offer. Certain caveats playing for share is not a winning strategy. Every market participant has and will defend their market position even if the result is lower pricing. I need only to look at the volatility of pricing and the stability of airport share over the last five years to reach that conclusion. Nevertheless, we always look for opportunities to increase pricing and our third quarter results demonstrate that.

Switching to international for a moment. Our business concentrated mainly in Canada, Australia, Latin America and New Zealand, continues to perform well. Reported EBITDA grew 16% year over year, even without much of the benefit of foreign exchange gains. We had a substantial portion of our budgeted profits every year so the 16% growth is largely on a constant currency basis. In each of those markets are brands are the market leader. In fact, in Australia where our business is enjoying both a commercial and a leisure growth spurt, we recently had our first 100,000 rental month. Our truck business continues to face challenging market conditions along softness in self-moving rentals, especially one-way volumes, is overshadowing the strategic improvements that we are making in this business, thus putting our profit recovery on a slower than expected track. But we are making progress nonetheless and Bob will comment shortly.

But let me update you on our ongoing strategic initiatives. In the off airport market, we're continuing to expand our geographic footprint. We've opened 113 stores through September and have more than 100 in the pipeline. We went live with our insurance replacement software at four companies in the third quarter, immediately saw year-over-year gains in revenue of 32%. We have five more implementations scheduled for the fourth quarter. But while still early, we are excited about the growth we are seeing in the market. We have previously said we see 2007 as the last year of significant store growth. We now have the footprint necessary to compete. In 2008, the focus will shift to deriving the revenue and volumes to get the most leverage out of the investment.

That end, we've recently hired a 20-year car rental veteran with experience in both sales and marketing and operations to head up our off-airport business. On the ancillary revenue front, we're very pleased with the 22% growth we achieved this quarter in what is a very high margin revenue source. Our Where2 navigation product is the clear star here as it continues to hit all of our stretch targets. Our take rate now exceeds 8% at available locations. We also increased the price by $1 a day in many locations with no take-rate impact. The third quarter alone, Where2 contributed $15 million in revenues and more than $11 million in EBITDA, all of which is incremental. Beginning in the fourth quarter, we now have check the box capability to include Where2 in customer profiles. So that all of our counter bypass customers can now be automatically solicited at the point of reservation and provided a GPS without a stop at the counter. We're optimistic this will result in a step function increase in take rate. Growing our off-airport business and expanding our ancillary revenues are two key pillars of our strategy as we work to accelerate our growth and return margins to normal levels.

They also represent ways to get more revenues out of our existing customer base in addition to the day-to-day competition for new customers. As we explored ways to more deeply penetrate our existing customer base, one opportunity consistently distinguished itself. The opportunity to supplement our core car rental offering, the self-drive market with a with-driver ground transportation service. As I went on sales calls and met with existing and prospective customers, this opportunity came through repeatedly and clearly. The commercial customers often spend as much in chauffeured transportation as they do in car rental. Their travel managers are seeking a reliable, single provider, high-quality offering in this segment.

The market leader in this space is Carey International, with owned operations and franchises serving some 300 cities in North America and Europe, affiliates in 250 other cities throughout the world, an outstanding representation for premium service. A few weeks ago we delivered on the first step of what is clearly a customer-driven solution to that market need. We acquired a 45% interest in Carey International for $60 million, then an option to take our ownership stake up to 80%. We're very excited about this investment as it marries the premium brand and market leader in chauffer transportation, two of the best brands in the self-drive transportation arena. The opportunity for Carey goes beyond customers. The substantial majority of our nearly 30 million yearly transactions need transportation either to or from the airport at either end of the trip. The opportunity to cross market at the time of reservation whether by Internet, call center or travel agent is significant. So while the commercial opportunities clearly drove the acquisition, the retail possibility should not be overlooked.

Remember, our customers generally have average incomes well north of $100,000 annually, so we know they have disposable income to spend. Carey generates about $250 million in annual revenues a $5 billion marketplace. We expect that to double over the next five years assuming we exercise our option to take control of Carey next year. The chauffeured car EBITDA margins in the low teens with return on investment should be quite attractive, and strategically, we will be offering a complete portfolio of ground transportation solutions from brands that are each leaders within their segments. Last point bears emphasis. Joining forces with Carey, we are not only going to be able to better serve our customers, we are also adding the strongest brand in the chauffeured services to Avis, strong brand in the premium car rental segment, and Budget, strong brand in the value segment. No other company has a presence in all segments of the vehicle rental services category. No other company has as strong a portfolio and brand in these segments.

The final initiative I want to touch on is process improvement. If there is one message that I want to leave with you today it is that we're incredibly excited about the opportunity which leaves substantial cost savings and productivity improvement throughout our business. We are confident that our performance excellence initiative will allow to us reduce operating expenses by some $100 million to $150 million over the next couple of years. In July and August we were training teams. Since then, these teams along with local line personnel have been out at various locations, cataloging and evaluating different processes throughout the company. Items like shuttling, car turnaround, lot security, insurance claims processing, vehicle turnbacks and the like. We have currently identified several hundred processes that we will eventually evaluate. To date, we have studied 24 of these in detail at individual sites. A single site savings associated with these 24 projects alone will exceed $4 million. Of course with us having 200 airport locations and more than 1,400 off-airport locations, the opportunity to replicate the savings at multiple sites is in a word awesome. Thinking about this in simple terms, the $4 million in savings times replication in 50 of our largest airports is where the largest opportunity exists easily exceeds in the high end of our estimate. We've already expanded our efforts to seize these opportunities by seconding an additional team of 15 people focused primarily on replication. Our confidence that our estimates may be conservative grows with every project.

Before I hand this off to Bob, let me make a comment about the fourth quarter. As a back drop, commercial volumes continue to be solid, markets into which we dispose vehicles are strong, particularly with respect to trucks. Ancillary revenues are making significant contributions to our earnings. Our efforts to reduce costs throughout our business are gaining momentum. What has compelled us to move guidance to the lower end is really uncertainty over the leisure end of the market. We certainly [knew] going into the quarter that pricing comps would be difficult. We led the market last year with significant price increases in the fourth quarter, expected that the environment that has persisted most of this year would likely make increases difficult. The new information is that October leisure volumes were softer than we expected, the gap between advanced reservations and actual bookings has widened somewhat, creating a couple of percentage points of uncertainty in volume. We are adjusting our fleet levels in yield management activities accordingly. We think the responsible action is to provide to the lower-end assuming October is the (inaudible).

So let me wrap up with the following summary. Our third quarter results were strong with international EBITDA up 13%, domestic car rental up 45% all on an apples to apples basis. Our year-to-date earnings have been consistent with our expectations, pro forma domestic car rental EBITDA up 19%, and pro forma international EBITDA up 10%. We've achieved these earnings primarily through cost savings in a tougher pricing environment. We've invested in our future as a leading vehicle services company through our financially and strategically attractive investment in Carey Limousine. We're making good progress on our strategic initiatives which growth in ancillary revenues to make our existing base of car rental transactions more profitable, and on our performance excellence initiatives to reduce costs and achieve lasting process improvement. Finally, we continue to project pro forma revenue EBITDA and pre-tax income to increase in 2007 compared to 2006. And with that, let me turn it over to Bob to discuss fleet purchasing, truck rental and most importantly a performance excellence initiative. Thank you.

Thanks, Ron, and good morning. Last time we got together we were still in the process of negotiating our model year 2008 deals with the OEM. We also provided preliminary estimates of our per unit fleet cost increase of 4% to 6% per unit range. At this time, having completed and assigned most of the major supply agreements we are continuing to project our per unit fleet cost in that range with a likelihood that we will be closer to the lower end of that estimate rather than higher. Let me spend a moment on risk cars which could garner a lot of investor attention. Our experience in the used car market this year has been very good. Our ability to efficiently dispose of large -- larger number of risk vehicles has been proven. Our estimates of residual values in hindsight have been on the conservative side.

More generally, there are a few things about risk cars and dynamics in the used car market that I would like to point out which actually takes some of the risk out of risk cars. First is the type of cars that we take as risk units. We tend to concentrate our risk purchase volume in small and mid-sized four cylinder units. We also buy some small and mid-sized SUVs, many of which are six cylinder. 70% of our risk buy falls into these two category. Traditionally, and our recent experience would bear this out, these groups have turned in good, predictable residual performance relative to the net price we are paying for them. We also purchased at-risk many Asian vehicles that historically have outstanding results. This selection process calls out for our risk portfolio the vehicles with better residual value relative to our net cost. We avoid purchasing at-risk other models such as luxury cars, large SUVs and minivans, which are more volatile in the market and in recent times have not performed as well. These are more likely to be purchased under the buyback programs.

Second is our accounting. We set depreciation rates that will equate our carrying value to our expected residual value at the end of our projected hold period. We evaluate market trends by quarter versus our estimated residuals and adjust the depreciation rates as needed. In so doing, we are ensuring that we are depreciating the car as accurately as we can during the revenue earning life of the unit, without waking up to a surprise at the end of the hold period.

Third is the used car market itself. This market has become highly efficient and very transparent over the last 10 to 15 years. You should remember that we only participate in a small segment in this market, one-year-old used cars. These cars truly only come from one place, the rental car industry, and only account for about 10% of the total used car market. Consequently, you need to be careful with generalizations about used car values given the limited slice of the market that we sell into and the composition of our risk portfolio. This segment of the market actually has fewer cars being sold, less supply than it did just a couple of years ago. As the OEMs have been increasing prices, the industry has been purchasing fewer cars as we all extend the hold period. In model year 2008, we were buying and selling 90,000 fewer vehicles than we did just two years ago, even though we are growing our average fleet. Needless to say, reduced supply generally has the effect of raising residual values.

In addition to our analytical functions that are geared toward buying the right vehicles as risk units and attempting to forecast the future residual value of these units as accurately as we can, we operate a very effective on the ground vehicle remarketing operation. Our team has literally hundreds of years of used vehicle-selling experience. We have people in every major sales market representing our vehicles at open auctions, closed sales, special sales events throughout the country. In addition to our auction program, where 95% of our risk units are sold, we sell vehicles direct to dealers and to smaller fleet operators through traditional direct sales methods as well as new electronic channels, which have been recently opened. We do not participate in any retail channels. In summary, while we are increasing the risk portion of our fleet, we believe that we are prudently managing that risk in a small segment of the used car marketplace where demand is growing and supply is shrinking.

Let's turn now to our truck business. First, let me remind everyone that truck is less than 8% of our revenue in EBITDA, and while it is challenged, as Ron mentioned, we have installed a capable management team that is running this day to day and making the right strategic moves. While Ron, David and I are focused on this business, we are not distracted by it. We spend the appropriate time and energy on it, but are far more focused on performance excellence, price yield optimization and fleet optimization as we should be. Macro environment is certainly not helping the turn around of truck. Our business by its nature is tied to the housing market. And we need to see strengthening in that market before the negative trends in volume and rate meaningfully reverse. At the same time, we are confident that the strategic moves we are making are the right ones for the business.

Let me briefly review some of the key highlights. One, we have increased our truck sales force and the results are encouraging, with nearly $4 million of new commercial accounts in the third quarter, almost double last year. Fourth quarter commercial reservations are also up significantly. Two, to support this growth, we have commercially equipped some 30% more vehicles by adding more lift gate trucks and cargo vans all without increasing the overall size of our fleet. This has resulted in our improving the utilization of our commercially equipped fleet by over 160 basis points. Three, we are aggressively looking to increase ancillary revenues, which were up 2% per day in the third quarter despite a 9% overall revenue decline. To thwart these efforts, we have signed a new box supplier and are planning to add Where2 GPS units to our truck fleet this quarter, which should attractive to our customers especially as peak package delivery season approaches. Four, we have opened 15 corporate-owned truck locations and converted 36 other sites which were previously only single vehicle rental locations with dual car and truck rental locations. Five, we have become an approved truck rental supplier to the federal government for the first time.

Finally, we signed a joint marketing deal with Public Storage that will have our trucks available for rent at 200 of their locations within the next several quarters. We believe this opportunity alone is worth at least $20 million in revenue. We feel we've made good progress in our turnaround plan and we are confident that we are beginning to see the benefits of this progress moving into the numbers. Let's turn now to our performance excellence initiative. As Ron mentioned, we have launched a company-wide cost functional program to reduce cost and boost resource productivity. As a company, we have always had a culture that is cost conscious and we are not changing that culture. We believe, however, that we are reinvigorating this. It's not enough any longer just to manage costs by the numbers. We've always done that. To obtain significant additional savings, we now need to change the processes that we have in place throughout our operations. This is the excellence of -- the essence of performance excellence.

In the last 90 days, we've taken some of our best people out of their regular jobs and put them up against this initiative. We have trained them with the help of outside -- of an outside company in the discipline of process improvement. We've then sent them out and started assessing opportunities to attack. In this first wave, the team came up with 155 projects they felt would be worthwhile to address. Many of these projects are replicable across our 200 airport locations and some of them our 1,400 off-airport locations. They then ranked these projects as to value and difficulty. The first projects delivered early in meaningful wins and set the tone for the rest of the company as to what this initiative was all about. The first 24 projects have resulted in audited annual savings of $4 million, and these are all single-site projects. In other words, no replication. As we replicate and identify new projects, these savings will multiply across the company.

For us, the real issue in attaining meaningful savings now is the amount of time it will take to us replicate process change across the company. We are devoting more resources to this effort in a way that will not only identify additional opportunities and speed replication, but will also inculcate performance excellence into our culture. We believe that the performance excellence initiative will not only produce a step change in our cost structure, it really is one of the best things we can do for the future health of our business. With that, I will turn the call over to David Wyshner.

Thanks, Bob. This morning, I would like to discuss our recent results, our outlook and thinking around cash flow deployment. In the third quarter of 2007, we grew revenue by 10% to a record $1.7 billion, generated EBITDA of $171 million, and had pre-tax income of $119 million, excluding separation-related expenses. Reported results for third quarter 2006 had a significant amount of separation-related expenses, so the year-over-year comparisons I will make are on a pro forma basis.

Turning to our domestic car rental operations, revenue increased 12% reflecting a 5% increase in rental days, 3% increase in time and mileage per day, and a 23% increase in ancillary revenues. Insurance, gas, Where2 rentals and customer recoveries all contributed to the growth in ancillary revenues. Our average fleet size increased 7%, slightly higher than rental day growth, to capture incremental business and our fleet costs were up 7% on a per-unit basis. We continued to take actions to reduce our per-unit fleet costs, and our risk cars continue to perform well. We once again saw improvements on the expense side with many of our expenses down on a per transaction basis versus last year. Our operating expenses as a percentage of revenue decreased 140 basis points to just under 49%, and SG&A by 100 basis points to 10% of revenue. Key areas of cost savings for us were maintenance and damage, vehicle license and registration, employee-related expenses measured on a per rental day or a per transaction basis.

Moving to international car operations, revenue increased 15%, driven by a 3% increase in rental days and an 11% increase in time and mileage revenue per day due primarily to foreign exchange rates. Excluding the impact of FX, time and mileage rate were up 2%. EBITDA increased 13%, excluding separation costs in line with revenue. Australia is leading the way reporting strong results so far this year. Because we hedge most of our earnings exposure to foreign exchange rate moves at the beginning of the year, the rate changes that are benefiting revenues have a more limited effect on current-year EBITDA.

Finally, turning to truck rental, revenue declined due to a 3% decline in rental days and 7% decline in time and mileage revenue per day. The rental day drop reflected reduced demand for one-way rentals and our fleet being 5% smaller than in third quarter 2006. The decline in T&M revenue per day was also driven by a decrease in one-way rental rates which we believe is consistent with market trends by a decrease in the proportion of our revenues coming from one-way rentals which typically have the highest daily rate. We believe the volume decline reflect softness in consumer demand due to the decline in housing sales. So in total, we had EBITDA of $171 million, excluding $3 million of separation related expenses, depreciation and amortization of $21 million, net corporate interest expense of $31 million and pro forma pre-tax income of $119 million. While our GAAP tax provision is in the 40% range, our year-to-date cash taxes have been only $7 million. We expect full year cash taxes to be $15 million to $20 million, our diluted share count is approximately $105 million.

We continue to invest in our brands and our infrastructure. Capital spending totaled $19 million in the third quarter, primarily for rental site renovations and information technology assets. We currently estimate that full-year CapEx will be in the $95 million range as we are finding it economically attractive to tackle some infrastructure and development projects sooner rather than later. Finally, our free cash flow year-to-date was $111 million, which includes separation-related outflows of approximately $36 million, principally in the working capital section. Excluding separation effects, our year-to-date free cash flow is $147 million.

Our balance sheet and liquidity remain strong. Late October we renewed and upsized to $1.5 billion per principal asset-backed conduit facility with spreads on this facility increasing an eighth of a point. Our ability to renew and expend this facility amid the recent turbulent ABS market reinforces our view that the market views our asset class favorably. Accordingly, we still plan to tap the asset-backed term market in the first half of 2008 to refinance upcoming maturities. As we map out our financing strategies, the issue facing us in the ABS market is principally one of cost not availability. It appears that a significant portion of the increase in borrowing spreads that we are likely to see will be mitigated by the recent decline in general interest rates.

Turning to our outlook, last quarter we provided full-year 2007 ranges for revenue, EBITDA and pretax income. Despite our strong results in Q3, we currently project our full-year results will tend toward the lower end of those ranges. Revenues of approximately $6 billion, EBITDA of $410 million excluding separation costs, pre-tax income of $195 million. Our current plan still assumes modest economic growth with no major travel interruptions, domestic enplanement growth of 2% to 3%. We now know that the housing downturn is having more significant and more protracted impact on our truck rental results than we previously anticipated. We expect our on-airport rental day growth will approximate enplanement growth, we expect off-airport volumes to exceed that rate, bringing our overall increase in domestic car rental base to around 4% year-over-year.

In comparing domestic enplanements with last year, the third quarter was an easier comp while the fourth quarter will be a tougher comp, on top of which recent booking trends have been a bit softer than we had previously projected. In the area of pricing we expect to continue to achieve modest increases as we renew commercial contracts. We see leisure pricing becoming increasingly competitive. For growth off-airport, where the length of rental is longer, the daily rate is typically lower while also impact a reported growth in average daily rate. Most importantly, we consider our Q4 price comp to be difficult. We pushed price hard in the fourth quarter last year. It rose 7% domestically with the expense of volume, which was down year-over-year. We continue to estimate that our domestic fleet costs will increase about 6% to 7% on a per unit basis versus 2006. We're in the middle of our detailed 2008 planning process and are not yet ready to discuss our outlook for 2008, although we continue to target significant revenue and earnings growth in 2008 and beyond.

Last area that I'd like to touch upon is cash flow deployment. We neither paid down corporate debt or repurchase stock in the fourth quarter more because of the unprecedented disruption in the asset-backed credit markets than anything else. With the prices at which our corporate debt and our stock were trading, this was not an easy decision. A year ago, we committed to relook at how we deploy our free cash flow in the second half of 2007. The commitment we made with an eye toward augmenting corporate debt reduction with modest share repurchases. We did actively reconsider the alternatives throughout the third quarter, particularly as the fundamentals of our business continued to evolve as we had expected, but our stock struggled to find buyers. However, we decided not to use cash to buy stock or repay debt, because it seemed to us that the turbulence in the ABS market had not necessarily played itself out.

In addition, our capacity to repurchase stock is more limited than our cash balance would indicate, both due to ratings issues and restrictive covenants in our debt. From where we stand is that we will continue to reconsider the alternatives for cash deployment. The key input to that analysis will be the extent to which the ABS market stabilizes. At the same time, we are well aware of the decline in our stock price, the multiple compression that has occurred in our stock and attractiveness of purchasing our stock at the current price.

In summary, while our third quarter results reflected solid performance in our domestic and international car rental businesses, we have become more cautious with respect to our outlook for Q4. Looking further ahead, we continue to be excited about our prospects for 2008. Our plan to return margins to normalized levels is unchanged and is supported by three avenues. First is price, which can do this all by itself but is market driven. We will continue to look for opportunities to increase prices as our third quarter results demonstrate, but we need to be mindful of the constraints of our highly competitive industry. That is why we are pursuing additional alternative means for expanding our margins. One of these is revenue optimization, finding other ways to make our nearly 30 million rental transactions more profitable. We are focused on customer segmentation, booking curve management to improve yield, and adding high margin ancillary revenues, such as those from Where2 GPS rentals, electronic toll collection and gas and insurance products.

The other key source of margin improvement opportunity is cost reduction and optimization. We are managing our fleet costs through optimizing the use of risk versus program cars, careful disposition planning, diverse group of manufacturers and longer hold periods. We will be deploying new systems capabilities to help us reduce fleet costs. We are managing expenses down in a number of areas and we are confident that our process improvement program will deliver significant additional opportunities. Each of these items alone has the capacity, if fully realized, to restore margins to normalized levels. And it would be unrealistic to assume that each one will produce the maximum benefit, we have provided ourselves multiple avenues that deliver on this important goal. With that, Ron, Bob and I would be pleased to take your questions.

Thank you. We will now begin the question and answer session. (OPERATOR INSTRUCTIONS) One moment, please, for our first question. Jeff Kessler from Lehman Brothers, you may ask your question.

Thank you. Could you give us some idea of what your growth in your insurance business is -- insurance replacement is as a percentage of your total off-airport business? How has it grown over the last year or two as a percentage of that business, so we can get an idea of what's been generally used and what is insurance-related use?

Well, our insurance, Jeff, this is Ron -- our insurance in terms of days is up about 32% during the quarter and it's actually been right around that number for most of the year. We entered the year with insurance replacement being somewhere around 10% of our total off air -- total off-airport business. I think we ended last year right around $800 million, so we were doing about $80 million. And so 10% of that is about -- so 10% of that will be $80 million.

And that $80 million has grown 32% this year?

Right.

Okay. Could you give some idea of what percentage growth or type of percentage growth also in the ancillary business as a percentage of your total non -- as a percentage of your total other area? In other words, the programs that you put many place such as GPS and Wi-Fi, how much traction are they getting as a percentage of the total ancillary programs?

Yes. I don't think we're going to break them out, Jeff. I think as we disclosed, our ancillary revenues were up 22%, 23% this year. So the big push there is coming from Where2, and I honestly think that you can't just look at revenue. You have to look at how strong the margins are in that. So just in the third quarter alone, Where2 was $15 million in revenue, but it drops $11 million of EBITDA down to the bottom line. Incremental gains and insurance actually drop 90% to 100% down to the bottom line. So, the -- you need to keep that in mind. We're not going to break out how much was insurance and how much was GPS.

Right. Okay. The Carey investment seems like an interesting investment. Right now, is that going to be an equity line item, and over what period of time are you going to evaluate as to whether to take it up to 80%?

It is going to be an equity line item. We have a one-year option to take it up to 80%. And I think our -- thinking along those lines was twofold. Most importantly we wanted to get our corporate sales guys in with their sales guys and make sure we understood how we can bundle and package this product and best approach the corporate market. Secondly, we wanted to get our arms around how we would do it in a retail setting so that we could get it on our website and be ready to go when we exercised our option and then start the reporting process. Sitting here today, we have every intention of exercising the option. We just wanted to allow ourselves some time to get the people who actually have to execute on this day-to-day basis, to have the opportunity to understand the business and understand the product and move forward. So, I look sometime around the second or third quarter next year for us to exercise this option. But unless we learn something, or see something, or something happens which suggests it's not a prudent move.

Okay. Final question. That is, of the programs that you have enunciated that what you said any of which could be a big factor in getting you back toward your -- we'll call it five-year average or normalized pretax and EBITDA margins, which of those programs do you have the most faith in that we should look at from mile posts to take a look at whether you're succeeding in getting those programs moving so you can get those margins moving?

Clearly performance excellence. That's the one that we control. That is solely within our control. Pricing is obviously market driven. And pricing optimization, I think is one where it's really going to be more -- I don't want to say trial and error because I think it's going to be more intelligent than that, but it's going to be a little more scientific than just waiting for the market to move pricing. So I would put performance excellence on the top of that and follow closely behind by fleet optimization.

Hopefully the market will pay for pretax and pretax margin as opposed to just corporate EBITDA down the line. Thanks.

Thanks, Jeff.

Chris Agnew from Goldman Sachs, your line is open.

Thank you. Good morning. I just wanted to first of all to clarify to make sure I've got the right points on your outlook. You're saying talking about normalized margins hopefully achievable in 2008. First of all, could you remind me what that range is? Also, I think, David, you talked about each alone could restore normalized margins. Is that by 2008, or is that more of a longer term goal if you're thinking about each on their own?

Sure, Chris. We think about normalized margins for the car rental business to be in the 9% to 10%, maybe 9% to 11% range, and that's based on what we have achieved, as you know, in the not too distant past. That's what we look for. In terms of how quickly the pieces could move us there, price certainly could move us there immediately if that were to happen. I think the performance excellence-related initiatives are really looking for the savings to come into a two to three year time period, although with things having gone as well as we could have hoped in the first several months we really do want to emphasize how excited we are about the likelihood of delivering there and about our ability to try to accelerate that to the extent possible. Then with respect to pricing -- with respect to yield optimization and pricing, that probably is, as Ron indicated, is something that we would incrementalize into rather than seeing a near-term change.

Okay. So for 2008, you'd realistically need a combination of all three. Then on the -- your performance excellence initiative, your previous target if I'm right, is $100 million to $150 million over two to three years but you outlined, I think 24 initiatives which you believe generates $4 million in savings, you said over $50 million. To me that adds up to $200 million and yet it's not even touching in all of the initiatives you're talking about. So are you effectively raising that target range today? And also, is there a number you could talk to in 2008 that we could maybe likely expect?

Chris, I think we're trying very hard to convey our excitement and enthusiasm here without getting ahead of ourselves in terms of increasing the range.

Okay. Okay. Fair enough. And final question. If we go back to the beginning of the year and you were talking about modest enplanement trends, about 6% to 7% growth in rental days. And most of that coming from off-airport. And today we're talking 4% rental day growth. Can you talk to what in the off-airport segment has from the beginning of year has caused you to be incrementally disappointed?

Sure. This is Ron. Clearly, Chris, it's in the insurance replacement area. I think if you look back at our first quarter call and our second quarter call we talked about the time to implement the insurance replacement system as taking longer than we had hoped it would. And so the -- I mean, the learning curve for the service agency, either on the insurance side or on our side was taking longer and integrating our system with the insurance company system was taking longer than we expected. I think the likelihood, as we probably weren't realistic about the amount of time it was going to take to get people comfortable with it and integrated. This actually is the first quarter where I think we've now delivered on some implementations. We're going to start moving faster. And I think the growth that we were talking about in the first quarter is ultimately going to be there, it's just going to be a little delayed. I don't think it's anything wrong in the product. I don't think there's anything different in the market opportunity. It's probably just a bigger dose of realism in terms of our ability to move it up the curve as fast as we thought.

Okay, great. Thank you very much.

Christina Woo from Morgan Stanley, your line is open.

Great, thanks. Thanks so much for the prepared comments regarding the used car market. I was hoping that you could comment, you've given the range of 4% to 6% increases for model year 2008, and it sounds like it's on a combined basis with risk and program cars. I was hoping you could separate that somewhat and give a little bit more color on what we could expect on just the pure program car rate D&A rate increases for next year.

Christina, I think we're reluctant to go into that level of detail and some of the -- it's too easy to start backing into things that we've agreed in confidentiality provisions not to talk about. I think it is fair to say that both program cars and risk cars are going to increase more than 4% in terms of the costs that we'll be facing, and the key way we're managing the aggregate impact to the 4% to 6% range, as Bob mentioned, hopefully the low end of that range is through the shift from 20% risk cars up to the 48% to 55% risk car range.

Christina, I think it's also fair to say that in both categories they are -- they have come down appreciatively from last year. So manufacturers get back into a more normalized rate of increases that doesn't require substantial pricing gains to offset.

Okay. You -- I was also wondering if you could give us the gains on sale during the third quarter?

Yes. The number we'll report in our 10Q is in the $16 million to $17 million range. It includes retention moneys that we received from the manufacturers on salvage and opportunity vehicles, but that's a number that we'll report.

And previously, you've broken out the retention money and other versus the core. Do you have that to share with us?

No, that we don't have.

Okay. And one final question. You commented that the leisure pricing market has been very challenging across the board, or has been challenging over the past quarter. I was wondering if you could provide us just a bit more color on whether that's been in particular limited markets within limited car classes or whether it's been across the board?

It is sporadic at times, it is (inaudible - technical difficulties) at other times you could see it almost across the board. It appears that this has a lot to do with competitive fleet posturing and how people's fleets are sitting (inaudible - technical difficulties) vehicles on line.

Okay. You were cutting out a bit. It sounded like the answer was in places it's sporadic and other places it appears cross the board having to do with competitive fleet posturing?

That's our opinion on it, yes, Christina.

Okay, thanks. You were cutting out. So I wanted to make sure I heard properly. Thanks so much.

Hakan Ipekci from Merrill Lynch, your line is open.

Okay. Thank you. Two questions. One is on the fleet sourcing, how important is the macro environment when you're deciding between risk and programs? I mean, if the macro environment deteriorates further, would you make -- would you go in the other direction more program cars? And then the other question is, can you remind us what your share repurchase authorization is currently? And how is that moving forward? Thank you.

On your last question, I'm not sure that we had one other than the one that was a holdover from (inaudible), since we were the successor company, so it probably bears little or no relevance to -- or to an authorization to buyback shares. I think on your first question, I think the first thing that we're going to start with obviously is pricing from the manufacturers. I think that's going to dictate by and large how we're going to split risk and programs going forward. I then think that we're going to look at the availability of models and our needs and as we said in our comments, there are clearly some models that we're simply not going to buy at risk. Those being large SUVs or luxury cars or even new model introductions to a certain extent, we try and stay away from. The economic environment I think look, you have to consider it's going to impact ultimately what your projection is for days and your days are really what's going to determine how big your fleet is. But I think at this level, there's an argument to be made that when you get into tougher economic times that the one-year-old used cars actually have a more value in the marketplaces. People move away from new cars and their spending. But, I can't tell that you it would be the first thing that we would consider in trying to determine our risk versus program car.

I was trying to get a sense of how sensitive the used car prices are typically from a macro standpoint and fall on to the share repurchase question. So you need to have a board meeting, is that how that would work if you want to repurchase shares or --

I mean, the board would meet and authorize a certain amount of share repurchases and have to obviously be in line with our ability to actually affect it, because the covenants in our debt and cash that we have available. But you're right, that's the general process.

Okay. Thank you.

Zafar Nazim from JPMorgan, your line is open.

Yes. Thank you. David, I was wondering if you could just comment on the -- you mentioned that the ABS market is still not stabilize as of yet. But I was wondering, what is the correlation between the cash on your balance sheet and your ABS affiliate? Are you required to retain cash? Or is that something just used to provide comfort to the ABS facility investments? How does that work?

I think the key in looking at our cash is that the monthly rent or lease payment that we make to the domestic ABS facility occurs on the 20th of each month. So any time you look at a year-end balance sheet -- a quarter end or month-end balance sheet, we have to have built up about a third of the amount of the monthly lease payment that we need to make. And typically, the domestic lease payment for cars is in the $200 million to $225 million range. We'll usually look at about $70 million or $80 million of our cash balance at month end as being the build-up for the upcoming lease payment.

Okay. And then from your comments, I got the impression that in or around the ABS market stabilized, and given where your stock is right now, would it be fair to assume that the number one priority for you in terms of free cash would be to buy back stock?

I think that the right assumption in light of the -- in light of everything that's going on in the credit markets is that thinking about our debt ratings and preserving them in this environment is going to be an important factor for us as we think about it. Within that context, I think as I indicated in my remarks, it certainly makes sense for us to consider and reconsider share repurchases. But I think it's going to have to be within that context.

Okay. Great. And just, finally, the next 35% of Carey that you can potentially purchase, is there a price that you can talk about, what that costs?

It is a fixed-priced option. And while we haven't disclosed the amount or the costs that would be associated with that, you should be aware of that Carey does have debt on its books as well. So moving from a minority position to a significant majority position would be -- would involve probably assuming or more likely repaying that debt, so the cost is different than would be implied by just doing the math at the 45% for $60 million that we previously announced.

I see. And can you tell what the debt is on Carry's balance sheet?

It's in the neighborhood of $150 million.

$150 million. Okay. Great. Thank you.

Emily Shanks from Lehman Brothers, your line is open.

Hi, good morning. Thank you for all of the details. Just a couple of follow-up questions. When you commented around the fourth quarter booking trends being different than I think you said the difference between the advanced and the reservations. Can you just give us a sense on what you think is driving that?

It's hard to say with any specificity but historically when that's happened, Emily, its just been people waiting longer to book their reservations. So the gap between your advanced res growth and your actual growth when you finally get all the checkouts for that day widen somewhat. And so what it tells me is that in a kind of economic environment that consumers find themselves in, they're probably doing more shopping.

Great. That's what we were looking for. Thank you. And then around the $100 million, $150 million of cost savings, can you give us just a couple of hard examples of what one of those 24 projects would be?

Sure, Emily. One of them was the (inaudible - technical difficulties) team members went into (inaudible - technical difficulties).

I'm sorry, you're fading out. I can't quite hear you.

How's this.

Better, thanks.

We went into Cincinnati to see, and they were watching the turnaround process on cars, servicing cars that come in from rental, preparing them for rental again, and noted how the folks there were doing it. And by streamlining the process, effectively, they really saved about $100,000. Now, the point of all this is not the $100,000. The $100,000 for Cincinnati is good stuff, but isn't really going to make a big dent in our cost structure here for the company. It's that the same type of change that they made in Cincinnati can now go across the company virtually to every location and that's the replication part we're talking about. And as you put that in, you get to multiply that $100,000 savings by a pretty significant factor, we believe. And you're talking about millions of dollars in savings. That's what it's about. That answer your question?

It does, thank you. And just one final one. One of your competitors was out this morning with numbers and they indicated that they are going to have some supply issues from their OEM in terms of vehicles. Do you see any issues in the fourth quarter with supply?

Well, I think the issue centered around Chrysler. And in fact, we have seen some delay in new cars coming in from Chrysler, however, Chrysler's about 15% of our total buy. And given the time of the year where we're really switching the fleet out anyway it's not a significant issue to us. But it is, in fact, true that Chrysler has had some delivery issues. Our other OEMs haven't been a problem.

Great. Thank you.

Since we have reached the top of the hour, there is no time for further questions.

All right, great. I want to thank you all for joining the call. And we look forward to talking to all of you at the end of the year. Have a nice holiday if I don't talk to you before then.