Avis Budget Group Inc (CAR) 2008 Q4 法說會逐字稿

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  • Operator

  • Good morning, and welcome to the Avis Budget Group's fourth quarter earnings conference call.

  • Today's call 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.

  • Please go ahead, sir.

  • David Crowther - VP of IR

  • Thank you, Tanya.

  • Good morning, everyone, and thank you all for joining us.

  • On the call with me are our Chairman and Chief Executive Officer, Ron Nelson; our 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 avisbudgetgroup.com.

  • Before we discuss our results for the quarter, I would like to remind everyone that the Company will be making statements about future results and expectations, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

  • Such 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 are specified in our 10-K, our 10-Q's, and the earnings release issued last night.

  • Now I'd like to turn the call over to Avis Budget Group's Chairman and Chief Executive Officer, Ron Nelson.

  • Ron Nelson - Chairman and CEO

  • Thanks, Dave, and good morning to all of you joining us today.

  • Needless to say, the economic environment extracted a harsh toll on our fourth quarter results, and in turn, on our full year numbers.

  • I'll spend a little bit of time dissecting those figures for you, but I also want to spend some time talking about what we're seeing in the current quarter, what we think it means for the full year, and more importantly, what we're doing about it.

  • The obituary on the fourth quarter can easily be summarized.

  • Our largest business, domestic car rental, volume was down 6%; pricing was down 3%; and fleet costs were up 22% on a per-unit basis.

  • Our margins, even in a good year, can't sustain trauma of that magnitude, and along with some unfriendly comparisons from favorable adjustments in the prior year, well, the results speak for themselves.

  • To say it was remarkably disappointing and even more remarkably stressful is to state the obvious.

  • To go to a little beneath the numbers, let me tackle each one of the three key metrics individually.

  • The headline, however, is that there was really no good news on any of these fronts.

  • Volume declines started to accelerate in November after a relatively flat October.

  • Our commercial business was down approximately 10% during the month, which was followed by an only slightly better performance in December.

  • Leisure also began to decline after showing resilience for most of the year.

  • As we have seen throughout the year, transaction volume declined more than rental day volume, as we have consistently benefited from mid-single digit gains in length of rental.

  • We suspect travelers simply didn't take the one and two-day trips that they may have previously taken in better economic times, and that affected the average LOR more than anything.

  • As an aside, this has a counter-intuitive effect.

  • While longer LORs are the Holy Grail in car rental, and is certainly more profitable, it has a somewhat depressing effect on reported RPD, simply because the weekly rate is not seven X the daily rate.

  • Pricing during the quarter was really the Tale of Two Cities, pre- and post-November.

  • Commercial pricing, for the most part, reflected the competitive environment we saw in the first part of the year.

  • It has been a challenge to eke out any gains.

  • On the other hand, leisure pricing started to act more rationally beginning in November, with a series of price increases led by us and others that saw universally high adoption rates across the competition in most all of the available channels.

  • Clearly, there was a need.

  • Post-September 17, the availability in cost of credit changed markedly.

  • The residual values in the auction market took a deep plunge in the latter months of the fourth quarter.

  • Which brings me to fleet -- the third key metric.

  • It's been well-documented what drove the auction market in the fourth quarter -- capital was scarce, OEM bankruptcy rumors pervaded the climate; the residual values declined across the board -- all as the industry was in its natural cycle of de-fleeting.

  • In addition, sharply declining rental volumes accelerated de-fleeting and created a toxic mix with the weak used car market.

  • This reflected itself in a few ways in our fleet costs for the quarter.

  • One, we had to adjust depreciation rates to take into account the lower residual values on risk cars.

  • Two, our de-fleeting skewed more towards programmed cars, including cars that were at a relatively inexpensive point in their life cycle.

  • And three, as we accelerated de-fleeting to stay somewhat even with demand, we accelerated sale prep costs.

  • In addition, we had gains on car sales in the fourth quarter of last year, giving rise unto itself to a 4 to 5 point negative comparison.

  • All of these combined to produce an increase in fleet costs that was unsustainable at current price levels.

  • But we did end the year with our rental fleet down 13%, an average down 6% across the quarter, right in line with volume declines.

  • The off-body blow we took in the quarter was somewhat self-inflicted.

  • We got so excited when oil dropped 30% to below $100 a barrel that we hedged a meaningful portion of our fourth quarter gas requirements, as well as a portion of 2009's.

  • As oil marched down to the $50 level and below, our mark-to-market became material, and we ended the quarter with a $16 million mark-to-market loss.

  • So, volume, price, fleet, and gas, they all added up to a disappointing end to a disappointing year.

  • But don't mistake our disappointment for acceptance.

  • We can't change what we don't control, but we can certainly change those things that we do; and in fact, have not been the least bit timid about doing so.

  • It is frustrating that a lot of good work that our team has accomplished this year -- and in particular in the back half of the year -- is obscured by market forces largely out of our control.

  • And while we do understand that in the current environment, strategic and tactical accomplishments have to take a back seat to financial performance, they are still important, because they're going to define the manner and speed with which we emerge from this economic morass.

  • So, I want to share with you the progress we've made in our key initiatives, some of which are clearly tactical in direct response to the current environment, and some are more strategic, that we have been pursuing for awhile.

  • First, we delivered on our performance excellence process improvement goals, delivering $40 million of actual savings in 2008.

  • This is clearly strategic for us, but it has the benefit of providing near and long-term cost savings.

  • We exited the year at a monthly run rate approaching $7 million, which should drive savings of approximately $80 million in 2009.

  • In addition, we expect new projects to drive incremental savings during the year, ranging anywhere from $20 million to $35 million.

  • So that our full-year benefit from process improvement initiatives will deliver north of $100 million of savings in 2009.

  • Second, we moved aggressively to reduce operating costs; first, with actions taken in the third quarter, and later, in a more substantial way in the fourth quarter.

  • The third quarter actions resulted in cost take-out of over $50 million.

  • These actions delivered approximately $8 million of benefit in the fourth quarter, and we expect the incremental year-over-year savings in 2009 to be between $40 million and $45 million.

  • All told, we eliminated some 700 jobs in this action with over 15% coming from staff operations.

  • The fourth quarter actions, otherwise known as the five-point plan, were much more far-ranging in scope, depth, and amount.

  • We challenged ourselves to think differently about our business, looking at long-held beliefs and asking if they were really necessary, and if there wasn't another -- meaning, cheaper -- way of doing them.

  • There were no sacred cows in this exercise, other then the mandate to protect the brands for the future.

  • As we outlined in November, the principal components of the five-point plan are -- one, reduce costs across field operations and overhead expense areas; two, review and respond to underperforming or unprofitable business segments; three, improve the contribution from sales and marketing activities, including our sales and ancillary products and services; four, consolidate procurement; and five, further consolidate back office functions, and selectively consolidate customer-facing functions and locations.

  • Since announcing the five-point plan, we have eliminated more than 2,100 employee positions.

  • These are in addition to the 700 positions we eliminated in the third quarter for a current total of 2,800 or 16% of our full-time employment.

  • In addition, there are another 200 previously-notified employees scheduled to leave in the first half of this year, which will bring our total to 3,000 positions.

  • We have frozen salaries for our 400 most-senior employees.

  • We have paid no bonuses to corporate, domestic, and truck rental management.

  • We closed 27 unprofitable locations; substantially reduced our 401(k) match.

  • We instituted price increases, which took effect in December, January, and February.

  • We reduced advertising expenses, certain commission costs and loyalty program expenses, and increased insurance product pricing and various other fees.

  • We reopened model year 2009 negotiations with vehicle manufacturers; identified and began the process of bidding procurement opportunities, covering everything from advertising services to uniforms; and along the way, taken numerous other actions to reduce costs.

  • The savings from our five-point plan alone should exceed $200 million run rate by mid-year and deliver $170 million of actual savings in 2009.

  • When combined with performance excellence and the third quarter actions, we expect to realize north of $300 million from our cost initiatives during the course of 2009.

  • Not all of our accomplishments were cost-focused.

  • We retained over 97% of our existing commercial clients, and ended the year with an impressive net gain in anticipated revenue, signing more new business than we lost.

  • What business we did lose was, in many cases, unprofitable accounts that we opted to let go.

  • We also had solid growth in ancillary and off-airport revenues, and both of these areas remain important initiatives for us.

  • Ancillary revenues, excluding gasoline and customer pass-throughs, increased 12% in 2008, and our off-airport revenues grew 6%.

  • We do expect continued growth on the ancillary revenue front in 2009.

  • However, we will slow the pace of our investment in the off-airport sector until overall conditions improve a bit.

  • Finally, in the context of all that we are facing, probably our most critical accomplishment was the successful renewal of our conduit fleet financing and amendment of our credit agreements.

  • Normally, renewal of the financing that happens every year might not be considered an accomplishment.

  • Given the turmoil across the credit markets, it is certainly noteworthy.

  • I'd like to be able to tell you that one of these is more important than another; but truthfully, they're all important, and we have to execute on each and every one throughout 2009.

  • On the cost reduction front, when you look at our actions and total up the savings, over half will come from headcount reductions, and 91% of those were completed by 12/31/08.

  • With the run rate on pex, the completion of the third quarter initiatives, and many of the components of the five-point plan having been implemented already, we have tremendous confidence in our ability to meet and exceed the $300 million savings we have targeted.

  • On the revenue front, we're continuing our sales training initiative across the top 100 markets.

  • Where we have completed the training, we are seeing immediate gains in ancillary and up-sell revenues on a per-rental day basis, up on average 26% in those markets.

  • We also have to continue to renew our commercial and affiliate relationships, but we have to be more disciplined on pricing.

  • Half our revenue comes from commercial sources, and we can't continue to lock in $0 price increases, in light of the structural changes in fleet, leverage, and the cost of capital in our industry.

  • But commercial negotiations don't always have to be about price.

  • We need to be smarter about constructing the value proposition to include the productivity, marketing exposure, and administrative efficiencies that we can provide our commercial clients, so that the focus is just not T&M per day as the only measure of value that we can provide.

  • Additionally, we are closely analyzing other areas of potential revenue sources, and carefully studying many of the fees and revenue actions that other major travel companies, i.e., airlines and hotels, have successfully implemented.

  • And just to be clear, while we are very focused on our various cost reduction process improvement revenue initiatives, we can't lose sight of the fact that in the long run, our principal differentiating element is our service proposition.

  • We have to remain committed to our customers in providing a quality rental experience.

  • So what does all this mean for 2009?

  • The challenges ahead are significant.

  • While we don't intend to give guidance this year, I do want to put the $300 million of cost opportunities in proper perspective.

  • Among our challenges, aside from those the market itself presents, are -- one, an increase in interest expense approaching $80 million; two, with the strengthening of the dollar, particularly in the fourth quarter, our international operations start the year some 20% down in dollar terms, despite a plan that's comparable with 2008 on a local currency basis; three, our collective bargaining agreements and our non-union hourly employees will drive 2% to 3% increase in salaries; four, fleet cost, our largest expense, is expected to show a low single-digit increase on a per-unit basis; and finally, five, and most significantly, we do expect a single-digit decline in revenue in this environment.

  • The first quarter hasn't changed the way we're looking at the year, by any measure.

  • With airline capacity down around 10% in the first half and broader economic conditions looking quite weak, we expect rental day volumes in the first quarter will be down in the mid-teens.

  • It doesn't help that this year's first quarter has one less day in February, and that the majority of Easter and Spring Break Week will be recorded in the second quarter.

  • Thus far, commercial volumes are the weaker segment, but leisure isn't far enough ahead to draw a dramatic distinction.

  • And we continue to experience longer LORs, which is providing mid-single digit lift to volume, and cushioning and offsetting what is otherwise a larger drop in transaction volumes.

  • On the other hand, pricing in used car sales so far in the quarter have been bright spots.

  • On the pricing front, we have initiated three price increases in the fourth quarter, two in the first quarter, and have been a fast follower on one other, since the first of the year.

  • While pricing was down in the fourth quarter as a whole, it was actually up over 2% in December, and this trend has continued into January and February.

  • Not surprisingly, we are realizing more of the price strength in Budget than in Avis, largely due to the contracted base of business that dominates Avis's mix.

  • In this environment, the art of fleet management is going to be a deciding factor in results.

  • Consider the variables that have to be considered -- balancing new car orders versus risk sales opportunities; assessing the trade-off in residual-value risk and risk cars with the perceived credit risk on program car dispositions; and managing longer hold periods with increasing mileage and maintenance, while sliding down a declining residual value curve.

  • Throw in a very volatile demand environment, and the result is a lot of multi-variable-dependent equations.

  • Now, they're made somewhat simpler by our fleet management tools, but certainly not crystal clear.

  • None of this stuff is simple, and there is no question that we're going to benefit from the decades of experience that Bob and his team have.

  • Just as important as pricing, this industry has not gotten the pricing it should for the capital required, but prospered nonetheless, because of the amount of leverage available in the market and the fleet cost impact of OEM marketshare initiatives.

  • We live in a dramatically different world now, and neither of those two benefits is available.

  • While price should never be an excuse for inefficiency, it does need to adjust to reflect the current environment for capital.

  • To emerge successfully from this environment, we are going to have to do it the old-fashioned way -- by earning our way out of it.

  • While a laser light focused on cost and efficiencies will be part of that, so too will price.

  • And we will attempt to take price wherever and whenever we can.

  • So let me conclude my remarks with a brief summary of how we are moving forward.

  • In our industry, there are some significant drivers to our business over which we have no control -- factors like demand, gas prices, the auto manufacturers, and our competitors' pricing policies.

  • So we are very focused on those costs we can control.

  • We've acted quickly.

  • We'll remain vigilant, not only to achieve the identified savings, but also to identify additional opportunities.

  • We do not view our recent cost reductions as temporary measures to help tide us over until the economy turns around.

  • We are committed to reducing our cost structure on a permanent basis, so that when demand does rebound, our return to profitability can be both accelerated and sustainable.

  • In other words, our objective is to move aggressively to help weather the current storm, but in ways that will make us a stronger company for the longer term.

  • With that, let me turn the call over to Bob Salerno.

  • Bob Salerno - President and COO

  • Thanks, Ron, and good morning.

  • I'm going to focus my comments this morning on fleet -- both the steps we've taken and how we are positioned heading into this year.

  • First, let's review the fourth quarter, in which our fleet costs were up 22% on a per-unit basis, which obviously, was much higher than the 11% per-unit cost increase that we averaged over the course of the year.

  • The 4 percentage points of the fourth quarter increase are due to favorable comps we had last year, relating to longer holds on certain program cars.

  • This year, we had the exact opposite occur -- we turned back many program cars earlier than we normally would have, as volumes fell off rapidly.

  • As we had said before, the longer one holds a car, the less expensive it is; so naturally, the converse is true.

  • Even excluding the year-over-year variance caused by this issue, though, there was still a significant increase, largely due to the used car market.

  • While the used car market was performing just fine through the third quarter, residual values begin to dip in late September.

  • And as the credit crisis deepened, auction conversion rates -- the percentage of cars actually sold from all sources -- declined dramatically in November and December.

  • Now, this time period is not one in which we typically sell a lot of risk cars; but this year, the conversion rates and achievable prices were so low, that we managed the fleet down principally by turning back program cars.

  • We were fortunate to have a well-diversified fleet, and a 50/50 mix of program and risk cars, since the seasonal need to shrink our fleet was magnified by the decline in travel volumes produced by a weak economy.

  • Another area where we build in and utilize flexibility is the timing of when we accept vehicles from manufacturers.

  • As we saw volumes decline, we pushed out the delivery dates on some of our model year '09 vehicles and canceled our purchases of many others.

  • This, combined with vehicle dispositions, is helping us to keep our forecasted fleet levels at or below demand levels for the first half of '09.

  • As a result of our actions, our average domestic fleet was down 6% year-over-year, slightly more than our rental days were.

  • At year-end, our rental fleet was down 13% versus a year earlier, so we started '09 in line with where we expect the first quarter to be.

  • Another key issue for us is what's going on and is going on in the used car market.

  • As many of you know, the Manheim Used Vehicle Index started at 110.8 in September, and finished December at 98.0 or nearly a 12% decline in the space of three months -- the largest, steepest decline in the 14-year history of the Index.

  • While this is clearly a difficult fact drop against which to operate, I believe there are four reasons why the Manheim Index may overstate the extent of the challenge we face.

  • First, the supply of late model cars will be declining, as we, as an industry, purchase fewer cars.

  • While demand may be decreasing for cars, the supply is also shrinking and will likely continue to shrink, as the car rental industry sees lower levels of demand and extends the hold period of the cars.

  • In addition, in harder economic times, people will often trade down to a used car versus a new car.

  • This can be seen in January, as sales of certified, pre-owned cars increased 10% over last year.

  • Second, the weakness in the market has been significantly weighted towards luxury cars, SUVs, mini-vans, and trucks, which represent 60% of the used car universe, but only 28% of our risk fleet.

  • Small and mid-sized cars continue to fare much better than the Index overall.

  • Third, there is a favorable bigger picture trend that should bode well for the used car markets over time.

  • In 2008, cars salvaged or junked as a percentage of new cars sold, is expected to be at the highest level in recent years.

  • Based on current projections, I suspect we could see salvaged cars actually outpace new car production in 2009.

  • To the extent this shrinking of the vehicle population occurs, it will eventually produce a supply/demand dynamic that is favorable for used car prices.

  • Fourth, and perhaps most importantly, almost as soon as we turn the calendar into 2009, the auctions began to perform much better.

  • Residual values have risen noticeably.

  • From December levels, conversion rates are up for us and for the OEMs.

  • And we have been selling more units than we had planned just a month before.

  • While seven weeks does not a trend make, however, we are much more optimistic about the market than we were in December.

  • The most recent Manheim data showed a 3.8% increase in January, and this was directionally consistent with our experience, as it usually is.

  • So, turning to 2009 -- access to cars is plentiful, and with our recent refinancing, concluded we should not have any issue obtaining the cars we need to meet our summer peak levels, which are well below '07 and '08.

  • We are currently forecasting that our per-unit fleet costs will increase several points year-over-year.

  • This will depend on the used car market, the mix of '08, '09, and '10 models we ultimately have, and our model year '10 negotiations with the manufacturers.

  • We expect that the year-over-year fleet cost increases will again be elevated in the first quarter, but not to the extent of the unusual Q4 number.

  • We expect our risk program mix to be generally similar to last year, with our domestic fleet being comprised of roughly 50% of each.

  • Our manufacturer mix will also be generally similar, although Chrysler component of our fleet will be down, and the percentage coming from the foreign manufacturers will increase.

  • The other very important part of our fleet management work has been actions taken recently to reduce our model year '09 purchases.

  • We were always planning to purchase fewer models in '09 than we did in '08, but we struck our '09 deals, which include volume incentives, before the economy went from bad to worse in the fall.

  • We have been working very closely with the manufacturers to right-size our buy, keep most of our incentive monies, and even reduce our exposure to risk vehicles.

  • In total, we expect to purchase about 28% fewer cars in '09 than in prior model year.

  • I'll do the math for you.

  • That's about 120,000 fewer cars.

  • Most importantly, and as I mentioned earlier, we expect to have our rental fleet generally in line with the demand we are seeing, and we expect that will continue to be the case, even if volumes should turn out to be a bit weaker than we anticipate.

  • There seem to be an assumption in the marketplace that we in the industry were dramatically over-fleeted in Q4.

  • And while we were about 0.5 a percentage point heavier than when we would have liked in Q4, in the scheme of things, that's rounding.

  • I think that the real take-away is that we, and others in our industry, showed again, like we did after 9/11, that a distinguishing feature of our business model is that we can adjust our inventory levels pretty rapidly to reflect changes in demand.

  • With that, let me turn the call over to David Wyshner.

  • David Wyshner - EVP and CFO

  • Thanks, Bob, and good morning, everyone.

  • Today, I'd like to discuss our recent results, our free cash flow, and our liquidity.

  • In fourth quarter, our revenue declined 9% to $1.3 billion.

  • EBITDA was negative $81 million, and pretax income was negative $143 million, excluding unusual items.

  • EBITDA declined from the $86 million we reported in fourth quarter 2007, primarily, as Ron discussed, due to domestic results that were impacted by increased fleet expense, higher gasoline costs, and declines in both pricing and volume.

  • We also reported lower results in our international and truck rental businesses.

  • While the decline in truck reflected weak commercial demand, international results were driven by foreign exchange, as the Canadian and Australian dollars each declined by about 20% year-over-year versus the US dollar.

  • We had $22 million of unusual items in the quarter, most of which were severance costs stemming from the elimination of more than 2,100 positions, as part of our five-point cost reduction initiatives.

  • We have reduced our total workforce by about 16% versus a year ago.

  • You should expect to see some additional restructuring expense in coming quarters, as we complete the already-announced actions to reduce costs, but such expenses are expected to be smaller than the fourth quarter charge.

  • Turning to our segments.

  • I'm not going to repeat the drivers and trends that Ron covered, but I do want to quantify the components of the decline in our fourth quarter domestic EBITDA.

  • The volume and price declines together impacted EBITDA by more than $40 million, since pricing changes follow almost straight through to the bottom line.

  • The large increase in per-unit fleet costs had an impact of more than $60 million year-over-year.

  • In the mark-to-market of our gas hedges and tough comparisons in self-insurance costs, together represent another $30 million reduction.

  • What this means is that substantially all of the year-over-year EBITDA decline was caused by these four items and the restructuring charge we recorded in 2008.

  • Domestic EBITDA for the quarter benefited from cost savings from process improvement and lower SG&A expense.

  • In addition, our ancillary revenue increase of $11 million in Q4 reflects considerable progress intake rates on insurance products, and the penetration rates we achieved on Where2 GPS rentals were more than 15% higher this quarter than in the fourth quarter of 2007.

  • But clearly, the benefit of ancillary revenue growth and productivity were fully offset by lower volume and inflationary pressures impacting gasoline, wage and fleet costs.

  • Excluding gasoline expenses and insurance expense benefits that we recorded in 2007, our direct operating expenses in the fourth quarter were up more than three points as a percentage of revenue year-over-year.

  • To provide a little more detail on this increase, 2 points can be attributed to the T&M per day decline, as pricing has little impact on direct operating costs.

  • Another 0.5 point is rent for the 90 new off-airport locations we opened in 2008, with a final portion reflecting the effects of inflation and the revenue decline on the fixed portion of our expenses, offset by cost-saving actions.

  • SG&A expenses remained flat as a percentage of revenue year-over-year, reflecting our cost reduction efforts.

  • In our international car rental operations, revenue fell 20% in Q4, driven by a real 1% decline in time and mileage rates per day, and a 21% impact from exchange rates.

  • Ancillary revenues grew 9%, excluding FX.

  • EBITDA decreased 26%, driven by the revenue decline, higher fleet costs, which were up 6% on a per-unit constant currency basis, and higher self-insurance costs, due to favorable adjustments recorded in 2007.

  • Excluding FX impact in restructuring costs, revenue increased slightly, and EBITDA declined about $3 million.

  • In our truck rental segment, revenue declined 8% in the quarter, due to a 10% decrease in rental days, offset by a 1% increase in time and mileage revenue per day.

  • EBITDA declined, as the lower fleet costs and operating cost savings were more than offset by the volume declines.

  • The increase in T&M per day reflected lower pricing in the local consumer channel, offset by an increase in the proportion of one-way rentals, which typically carry the highest daily rates.

  • For the full year, the Company generated $169 million of EBITDA, excluding unusual items.

  • Our international operations contributed most to EBITDA, and we're right in line with our 2008 plan, due to strong growth in ancillary revenues, moderate fleet cost increases of only about 1%, and rigorous cost controls.

  • Our domestic and truck rental operations were negatively impacted throughout the year, but particularly in the last four months of 2008, by the dramatic economic downturn, as our cost reductions could not keep pace with the deterioration we saw in volumes and pricing.

  • As you know, the recessionary environment affected the credit markets and used vehicle residual values, and created a need for us to de-fleet aggressively in the fourth quarter.

  • As a result, our full-year fleet costs increased by 11%.

  • If you compare these full-year results to our 2008 business plan, the entire shortfall, and then some, can be traced to volume, pricing, fleet costs, and gasoline -- all of which were unfavorable.

  • As discussed on Table 4 of our earnings release, our free cash flow for the year was $236 million.

  • We pursued opportunities in working capital management and in our vehicle programs to reach this target.

  • We had minimal cash taxes.

  • Even excluding cash from vehicle funding, our free cash flow of negative $19 million exceeded our pretax income, excluding impairments, of minus $81 million.

  • We are also managing our capital spending judiciously.

  • Expenditures totaled $83 million for the year, primarily for rental site renovations and information technology assets.

  • A substantial majority of our CapEx was infrastructure-related.

  • We aggressively curtailed discretionary items, especially in the second half of the year.

  • We are trimming our capital expenditures further, due to current economic conditions, with prioritization of projects based on necessity and those that will generate returns within one year.

  • As a result, we expect our capital expenditures in 2009 to be less than in 2008.

  • With that, let me turn to liquidity, including the recent amendment of our principal credit facility and our fleet financing.

  • In December, we announced that we had completed the renewal of our $1.35 billion principal asset-backed conduit facility, and our $1.1 billion seasonal conduit facility, both of which are used to finance cars for our rental fleet.

  • These facilities, by their nature, come up for renewal each year, and are now rated AA by both Moody's and S&P.

  • We were pleased to maintain the $2.45 billion of aggregate capacity, particularly in the current environment, since that should provide sufficient funding to meet our 2009 peak needs.

  • The principal conduit facility was extended until December 2009, and the seasonal conduit facility will have a final maturity in November 2009, following 25% reductions in borrowing capacity in each of September and October.

  • Borrowing spreads for these facilities are unchanged from the levels we moved to in October.

  • Unfortunately, that means the spreads are reflective of the current credit environment we all find ourselves in, which translates into an increase of about 3 points from prior levels.

  • In December, we also amended our senior credit facilities to replace the leverage and interest cover ratios that we wouldn't have met with the minimum EBITDA covenant that is applicable until June 2010.

  • The minimum EBITDA requirement for full-year 2009 is $155 million.

  • But please note that EBITDA, as calculated under the credit facility, excluded certain unusual items, stock-based compensation, and corporate overhead costs.

  • As a result, our EBITDA, as calculated for covenant purposes, will generally be higher than our reported EBITDA.

  • For example, our EBITDA for covenant purposes in 2008 was more than $210 million.

  • Furthermore, the EBITDA levels in our credit facility are based on negotiations with our lenders, and should not be considered as guidance or projections.

  • The amendment of our credit facility also provides for a reduction in capacity from $1.5 billion to $1.15 billion, and a 2.5 point increase in the cost of borrowings and letters of credit.

  • During the amendment in conduit renewal profits, we spent a significant amount of time with our lending banks.

  • Many of those discussions focused on our cost-reduction plans and our experience cutting costs and managing through downturns and integrations.

  • Needless to say, we believe our ability to obtain financing during the peak of the current credit crunch is an indication of our bank's confidence in the Company's ability to execute on its five-point cost-reduction plan, and its process improvement initiative.

  • In total then, we ended 2008 with $1.7 billion of available liquidity, comprised of $250 million of cash; $275 million of available capacity under our credit facility; and more than $1.1 billion of capacity under our vehicle-backed programs.

  • We had no borrowings outstanding under our corporate revolver.

  • We have only $300 million of domestic asset-backed term debt maturities in 2009.

  • And our funding requirements this year will be lower than in 2008, as long as demand and hence, our fleet levels, remain down.

  • Nonetheless, we will continue to look for opportunities to issue asset-backed term debt or to tap alternate sources of liquidity.

  • As you know, the government's efforts to unfreeze the credit markets haven't borne much fruit yet, but we continue to be optimistic about the potential for future actions to be helpful.

  • One distinct possibility is that Treasury would make car rental fleet-backed debt eligible to participate in the term asset-backed lending facility often referred to as TALF, just as consumer auto loan paper and dealer floorplan paper already are eligible.

  • Of course, it's always hard to handicap what Washington will do, and we're not relying on TALF eligibility, as we explore funding alternatives.

  • Turning to our outlook, Ron and Bob have discussed our expectations for enplanements, which are our principal source of demand, for the first half of 2009 to be weaker and certainly to face tougher comps than the second half, or how we will adjust fleet levels to reflect car rental demand, for modest per-unit fleet cost increases, and for the cost savings we expect to realize from our process improvement initiative, from the actions we took in the third quarter, and from our five-point plan.

  • One other point I should mention is interest expense.

  • We will see significant increases in vehicle-related and corporate interest expense, due to the terms of our recent conduit renewals and our credit facility amendments.

  • Beyond that, and continuing with past practice, we are not going to give specific projections for 2009.

  • Let me just emphasize, though, that we expect comparisons in the first half of the year to be quite difficult, and volumes will be down year-over-year.

  • Airline capacity remains well below last year's levels.

  • Per-unit fleet costs remain elevated in Q1, and the weak macroeconomic climate persists.

  • Let me also reiterate that our focus remains on delivery of our planned cost reductions, both from our performance excellence process improvement initiatives and from our five-point plan, which serve as both a tactical necessity and a strategic objective in our work to become a low-cost provider in our industry.

  • We are as disappointed as anyone with our recent results in the current economic climate.

  • We are focusing on taking actions to respond to the challenges we are facing, in a way that will not only produce meaningful near-term benefits, but will also preserve our ability to provide outstanding service to our customers, and position us for greater long-term prosperity.

  • With that, Ron, Bob, and I will be pleased to take your questions.

  • Operator

  • (Operator Instructions).

  • Jeff Kessler, Imperial Capital.

  • Jeff Kessler - Analyst

  • Can you give some idea of any trends that you have seen into February, with regard to the auction process?

  • Has that continued?

  • What's gone on in January?

  • And more importantly, are you -- at this point, I know you said you're not able to do this for the year, but at least for the foreseeable future, the next couple of months, are you able to start making some decisions on fleet size and the mix of your fleet, based on trends at the auction level?

  • At least on your risk cars.

  • Ron Nelson - Chairman and CEO

  • Let me take the first part of that, Jeff, and Bob can talk a little bit about fleet.

  • Actually, the market -- we've sold more cars in February than we did in January.

  • We haven't seen much price -- frankly, we haven't seen any price erosion at all from January to February.

  • And we're continuing to push as many cars out of the pipeline as we possibly can.

  • This is an environment where re-fleeting is going to be a lot easier than de-fleeting.

  • So it continues to be strong and we don't see any changes.

  • But your visibility on this market isn't any more than maybe a month ahead, so I hesitate to offer a forecast for the second quarter.

  • In terms of our ability to adjust fleet, I'll let Bob talk a little bit about what we're doing.

  • Bob Salerno - President and COO

  • I mean, as we go through -- we said, been negotiating with the OEMs, cancel orders, move orders around.

  • In that process, generally, it's been a pretty constructive dialogue between us and them.

  • And we've been able to move models a little bit differently and kind of shift models between risk and program car in a way that, in the near-term, we think will help us.

  • So, this is still ongoing.

  • We're not completely done with it yet.

  • But I guess what I'd leave you with is one, we feel pretty good about the process so far, and what's been going on.

  • And two, as we look at our future projections for volume, we're not anticipating any great increases in the volume.

  • And we have our fleet in line with what we see coming up.

  • Jeff Kessler - Analyst

  • One other quick question on your fleet mix.

  • And that is, in the past, you've been -- you obviously were striving to get some type of balanced mix between US brand and international.

  • I'm wondering, obviously, you've mentioned that you expect to see a bit less Chrysler cars in the mix than you were talking about previously.

  • Can you give us some general idea of how that mix of cars may look, including international cars, toward the end of the year?

  • Assuming that the trends that you're seeing now remain in place.

  • Bob Salerno - President and COO

  • Yes, sure.

  • I think what you're going to see is, as we've said all along, we were looking to get our international mix up.

  • Originally, we said we wanted it in the 25% range.

  • I think what you're going to see is going to be all of that, maybe a skoch more.

  • Jeff Kessler - Analyst

  • All right.

  • Are international companies as -- still as unwilling or just let's say, as reticent to get involved with fleet as they were previously?

  • Or does that mean that the terms that they're going to be negotiating with you are going to be just hard as before?

  • Bob Salerno - President and COO

  • I would say that some of those who classically have been more focused on retail, I haven't seen a lot of change in.

  • Others, we found very easy to work with and are continuing to do that.

  • And we're just beginning the 10 negotiations.

  • We've talked about starting these early, so we can get a much clearer picture earlier than we normally would, because it clearly is not a year for fleet business as usual.

  • So, I think at the end of the day, we're going to have some flexibility with some of the Asian manufacturers.

  • And we'll do a lot of business with them.

  • And those that we don't, we'll see what we do.

  • Jeff Kessler - Analyst

  • Okay.

  • Finally, one final question, and that is, you're beginning the process now, even though it goes on throughout the year, a larger part of your negotiations with your commercial customers begin at this point in time.

  • Are you -- what is the tone of those negotiations at this point in time?

  • I mean, who's asking -- they're not doing well; you're not doing well -- who's asking what for what at this point?

  • Ron Nelson - Chairman and CEO

  • You know, I think, Jeff, we have ongoing negotiations day in and day out with our commercial customers.

  • Everybody's on a different cycle; there really is no season to it.

  • The tenor of the negotiations aren't any different.

  • They want lower prices and we want higher prices.

  • I think the thing that we have to do, as I mentioned in my comments, is that you can't just make the discussion all about RPD.

  • We've got to get into the mix.

  • We provide a lot of productivity enhancements through GPS availability.

  • There's an ability to structure marketing programs and various -- to the consumer companies that can help them.

  • Our online tracking provides a lot of administrative efficiencies.

  • And I think we just have to do a better job of selling and making sure they understand that the value proposition just isn't about $0.50 a day.

  • I suspect that the climate is not going to be much different, but I think what will be different is that we're going to have to make some tough decisions on accounts that either aren't profitable or so unprofitable that we can't afford to service them in this environment.

  • And I don't think we'll be alone in that.

  • I think everybody's looking at what capital costs and how their -- the availability of credit.

  • You don't want to put yourself in a position of locking in a revenue stream that's uneconomic.

  • Operator

  • William Truelove, UBS.

  • William Truelove - Analyst

  • I know that you talk about a lot of things you can't control, but how much in terms of investing cash flow for 2009 -- that's clearly a lot under your control.

  • How much do you anticipates spending on new vehicles in 2009?

  • David Wyshner - EVP and CFO

  • It's David.

  • With respect to the purchases of new vehicles, as Bob mentioned, our fleet purchases are going to be down about 28% this year versus the prior model year.

  • William Truelove - Analyst

  • That's in dollar terms or in units?

  • (multiple speakers)

  • David Wyshner - EVP and CFO

  • -- that's part of it.

  • But with respect to cash flow and vehicle purchases, our vehicle purchases will essentially all be funded with vehicle-backed debt.

  • And so we essentially look at that as being largely cash flow neutral from our corporate perspective.

  • Ron Nelson - Chairman and CEO

  • I think the one thing, too, William, you've got to keep in mind, there's a difference between fleet investment and fleet purchases.

  • Our fleet investment is going to be consistent with our volume.

  • And whether we extend hold periods or buy a new car, we're still going to need a car to deliver on the demand.

  • So, in terms of overall fleet investment, you should assume that it will be consistent with our demand projection.

  • And maybe there will be a little bit of gain in utilization here and there, but I don't think we've programmed in meaningful amounts.

  • But in terms of actually new cash flow going into the fleet, the number that David gave you is the new fleet investment.

  • It will be down by about 120,000 cars or so, and figure $20,000 a car.

  • Operator

  • Emily Shanks, Barclays Capital.

  • Emily Shanks - Analyst

  • David, you had mentioned that EBITDA the [LLC] for fiscal year '08 was greater than $210 million.

  • Can you please give us the exact number?

  • David Wyshner - EVP and CFO

  • Emily, what was the question again?

  • I'm not sure I understood.

  • Emily Shanks - Analyst

  • Sorry.

  • You had said that EBITDA at LLC was greater than $210 million for fiscal year '08?

  • Can you give us --?

  • David Wyshner - EVP and CFO

  • Yes, 2008 EBITDA for our covenant purposes was greater than $210 million.

  • And the point I was making is that the EBITDA we report publicly is different than the calculation that's required for our covenant purposes.

  • So while in our release, you would have seen EBITDA for the year of $169 million; for covenant purposes, the calculation that gets compared to the requirement in the credit facility, actually ends up being north of $210 million.

  • Emily Shanks - Analyst

  • Right.

  • I completely understand, but what I'm asking for is what is the exact number?

  • Is it meaningfully above $210 million?

  • Or should we assume it's right around $210 million?

  • David Wyshner - EVP and CFO

  • It's right around $216 million.

  • Emily Shanks - Analyst

  • $216 million.

  • Okay, that's great.

  • Thank you.

  • And then in terms of the availability under the ABL, hopefully -- or excuse me, under the revolver on the corporate balance sheet, hopefully, I understood correctly that it's $275 million.

  • What was the number of LC's outstanding?

  • David Wyshner - EVP and CFO

  • LC's outstanding were right around $820 million under that facility at year-end.

  • Emily Shanks - Analyst

  • Okay.

  • And then as we look at the vehicle program debt, this was the first release which you didn't break out what the current investment in AESOP LLC was.

  • Can you give us what that amount was, as the portion of the vehicle program debt?

  • David Wyshner - EVP and CFO

  • Sure.

  • It was around $120 million at year-end.

  • Emily Shanks - Analyst

  • Okay, so that's down a lot then, sequentially.

  • David Wyshner - EVP and CFO

  • It is.

  • Emily Shanks - Analyst

  • Okay.

  • So, then hopefully, you can help a little bit here.

  • I'm trying to understand conceptually how fleet debt has increased year-over-year but the fleet size has declined.

  • How should we think about that?

  • David Wyshner - EVP and CFO

  • There are -- I guess there are a couple of items impacting that, the most significant of which you can really see from the free cash flow statement, where we did have a little bit more than $200 million of cash -- what had been cash invested in ASAP, coming out of our vehicle financings, which benefited our free cash flow.

  • Emily Shanks - Analyst

  • Okay.

  • So you actually -- it's just the transfer of money out then.

  • Is that the right way to think?

  • David Wyshner - EVP and CFO

  • Correct.

  • The other piece that you'll see in our balance sheet when we file our 10-K is that our receivables were up a bit.

  • Our manufacturer receivables were up a bit at year-end.

  • And that's also a piece of why debt increased more than what you can see in the vehicles line.

  • Emily Shanks - Analyst

  • Oh, okay.

  • And was that --

  • David Wyshner - EVP and CFO

  • (multiple speakers) And by the way, the reason that debt receivables were up at year-end is that we turned back a lot of program cars in November and December.

  • And we had a receivable at December 31, and we ended up collecting those in January and February.

  • Emily Shanks - Analyst

  • Oh, you did.

  • Oh, good.

  • Okay.

  • I think that that's it.

  • If I could squeeze in one quick last one.

  • What's the current age of your fleet?

  • And where do you guys think that will go over the course of '09?

  • David Wyshner - EVP and CFO

  • The current age is just under 10 months.

  • I think it will expand or grow a bit from there.

  • But it will still stay generally in that ballpark.

  • Emily Shanks - Analyst

  • Great.

  • Thank you so much for all of the answers.

  • Operator

  • We only have time for one more question.

  • John Healy, with FTN Equity Capital Market.

  • You may ask your question.

  • John Healy - Analyst

  • Just a clarification question, when you guys talked about demand in the first quarter.

  • Did you say that you expected to be down mid-teens domestically?

  • or was that mid-teens commercially?

  • Ron Nelson - Chairman and CEO

  • No, that was across both segments (multiple speakers) -- it's across commercial and leisure.

  • John Healy - Analyst

  • When I think about demand for this year and I think about fleet, I know you mentioned you exited the year down about 13%.

  • And in the press release, it seemed that you guys were expecting utilization to be stable.

  • Your other peers have kind of talked similar -- to that similar kind of context.

  • What is preventing you guys or what's preventing the industry from pushing fleet down even further and seeing some utilization improvement in this environment?

  • I'm just trying to understand with all these headwinds, why the industry wouldn't be moving more aggressively towards that?

  • Ron Nelson - Chairman and CEO

  • Well, I think their reason really is pretty simple.

  • As the industry moves from a very heavy program of mix to a program risk mix, and even others in the industry are a little heavier than ourselves in the risk, it takes a little longer to get rid of a risk car than it does a program car.

  • Basically the program car comes off ramp.

  • We prep it; and within five days, it's back and it's off our books.

  • It doesn't quite work that way on a risk car, especially in the -- some of the volatility we saw in the fourth quarter.

  • So look, I think we're always going to push for more utilization, but in terms of how we forecasted it, it's pretty flat.

  • John Healy - Analyst

  • Okay.

  • That's helpful.

  • And then when you guys negotiated your EBITDA covenants with your bank partners, what sort of discussions did you have with the bank partners regarding a potential organized or unorganized bankruptcy of an OEM?

  • Obviously, your bank partners are probably aware of that risk and what it could do to your residual values, but how willing do you think they are to negotiate or work with you, if that type of event were to take place?

  • Ron Nelson - Chairman and CEO

  • Clearly, and particularly in November/December, the risks associated with some of the domestic manufacturers were an important consideration.

  • Based on how we look at things, we continue to see a lot of incentives for a manufacturer, even one in distress, to want to continue to work with us and honor the programs that we have.

  • And if you look at GM's restructuring plan that they provided to the government, I think you can -- you see us, you see the car rental purchasers being grouped together with suppliers as critical vendors or critical partners of them, that they would look to treat and continuing to work with in a way that would be favorable.

  • And I think as our banks looked at this issue, and in our discussions, they generally came to a very similar conclusion -- that the manufacturers have such a significant incentive to work with us, that as long as they are reorganizing and producing cars, they're going to want to continue purchasing cars from us, so that we can buy cars from them.

  • And once again, when you look at what GM had to say in their filing, a fundamental element of their plan is to avoid further revenue loss from bankruptcy.

  • So we think they're going to try certainly to avoid bankruptcy, if they can.

  • But if they end up going down that path, that they're going to want to everything they can to avoid any revenue loss or disruption in our buying.

  • John Healy - Analyst

  • I guess my question is more focused on what would happen to the residual values of your vehicles.

  • I know you can't -- no one can forecast what would happen to those vehicles today, but if you did see a write-down in your fleet -- I guess what I'm trying to say, how willing do you think your bank partners are of looking past that, to extend or modify additional covenants?

  • David Wyshner - EVP and CFO

  • A couple of things.

  • First of all, if there were a bankruptcy and a change in residual values, one of the areas of flexibility we have is to hold onto the cars we have for a longer period of time, to continue depreciating them either at the rates we are, or even a potentially higher rate, and use a longer hold period to essentially allow depreciation to catch up with where the market value is, particularly if there's sort of a near-term disruption in the market.

  • So I think that provides us with some flexibility.

  • And as I look at -- as I think about scenarios that could obtain in the future, I think the banks would have a lot of incentive to work with us through a one-time slip or a disruption, or even a one-time write-down that we were to take, rather than creating a situation where we were disposing a lot of cars at the same time that there was a lot of disruption in the marketplace.

  • It's always very hard to -- it's very hard, particularly in the current environment, to predict what some of those scenarios would look like; but I do think we have levers that we control, as well as the opportunity to work with our banks, who have acted as very helpful partners to us in many situations in the past.

  • John Healy - Analyst

  • Okay, great.

  • Thank you, guys.

  • Operator

  • For closing remarks, the call is being turned back over to Mr.

  • Ronald Nelson.

  • Please go ahead, sir.

  • Ron Nelson - Chairman and CEO

  • I just want to say thank you all for joining us today.

  • And thank you for your continued support.

  • And we look forward to talking with you at the end of the first quarter.

  • Thanks very much.

  • Operator

  • This concludes today's conference.

  • You may disconnect.