Avis Budget Group Inc (CAR) 2009 Q2 法說會逐字稿

Good morning and welcome to the Avis Budget Group's second 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.

Thank you, Tonya.

Good morning everyone and thank you all four joining us.

On the call are Chairman and Chief Executive Officer, Ron Nelson, our President and Chief Operating Officer, Bob Salerno and our Executive Vice President and Chief Financial Officer, David Wyshner.

If you did not receive a copy of our press release, it's available on our web site at avisbudgetgroup.com.

Before we discuss our results for the quarter I'd like to remind everyone that the company will be making statements about its 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 10K and our earnings release issued last.

Also, certain non-GAAP financial measures will be discussed and these measures are reconciled to the GAAP numbers in our press release which is posted on our web site.

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

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

This morning we're all going to comment on various aspects of our second quarter results, our cost savings initiatives and our outlook.

Before I do that though, I want to share a broader view of where we stand by reminding you of the issues that were an overhang on our stock and frankly an anchor on our company earlier this year and then provide you with a sense of the progress we've made on these particular issues.

Please don't misunderstand; we're not declaring victory by any margin.

There is still a lot of work to be done to restore profitability to acceptable levels.

But we are confident we're on the right track and even more confident we will ultimately get where we need to be.

So, let me list the issues.

The start of 2009, there were widespread concerns about our ability to achieve the cost savings we were targeting, our ability to meet our financial covenants, about used car prices which had declined sharply in Q4, about the potential for severe impacts from OEM bankruptcies, our fortitude to keep fleet levels in line with weak demand and finally our access to liquidity in the ABS market.

I suppose the headline on this is that these concerns are largely in our rear view mirror at this point.

It would be silly for me to say these that all these were unjustified.

To be sure, several of these were simply not in our control, but they did evolve the way we expected them to.

And for those that were in our control, well, I believe we went after them about as aggressively as any management team could.

First, on the cost savings front, we are well ahead of the projections we made when we developed the five-point plan in the fourth quarter of 2008.

We have increased our target sequentially over the last two quarters and continue to look for incremental opportunities.

Second, in the area of covenant compliance, I'll spare you the Mark Twain quote about premature reports of our death, and simply say that we expected our second quarter to be our tightest from a compliance standpoint and we actually exceeded our minimum EBITDA requirement for the quarter by 63% giving us approximately $60 million of cushion going into the back half of the year.

Third, the used car market has rebounded from its fourth quarter lows even more quickly and more dramatically than we expected.

It is actually stronger today than it was a year ago.

Bob will share some additional thoughts on this including the cash for clunkers impact in a few minutes.

Fourth -- while both Chrysler and GM did end up seeking bankruptcy projection, our dealings with them continue to be business as usual as we expected it would as both companies have assumed our contracts with them as they emerged from chapter 11.

Fifth, we have managed fleet levels as he we said we would but it did end up being more difficult than we expected, largely because we didn't expect the first quarter volumes to decline as much as they did.

Between selling cars early and negotiating our way out of purchase commitments, we eventually aligned the fleet with demand but it was not without cost as you'll note from our per unit fleet cost increase so far this year.

Thankfully it's now largely behind us and we will return to a more normalized fleet cost in the back half of the year.

But not coincidentally, our aggressive fleet management has contributed to our ability to achieve the leisure price increases we have all year.

And lastly on the liquidity front, we've laid out our plan for refinancing or our 2010 vehicle debt maturities and are executing against this plan.

Our recent $450 million term ABS offering was very well received by the market and when you combine this with our lease transaction announced in May, it means that we have already taken care of a significant portion of our non-conduit related domestic needs.

David will discuss this further, but I want to emphasize that we believe if the current environment doesn't change, we can be fully financed for 2010 well before the end of the year.

When we look back on this we're excited about the developments and the achievements that have helped us address all of these issues even as the economic climate and travel volumes have remained weak.

Maybe a more honest way to say this is that we are relieved about the developments and proud of our achievements.

Either way, this forward momentum positions us well as conditions improve.

Before we talk about the way forward though, let me relate some of these positive elements to our second quarter results, how they impact it or in the case of OEM bankruptcies, didn't impact our quarter.

Three months ago, when we looked ahead to the second quarter, all signs pointed to rental day volumes being down significantly year-over-year as the trends we saw in the first quarter were poised to continue.

This did turn out to be the case.

Demand for domestic travel services including car rental was weak.

The fourth quarter of '08 was weak, the first quarter of '09 was even weaker and the second quarter essentially sustained the bottom of the first quarter weakness which occurred in March.

A 22% year-over-year decline in domestic rental days was greater than it was in the first quarter as a whole, but if there is a silver lining it is that demand clearly stabilized in the second quarter and began to show some signs of improvement as we moved into the third.

But while reported volume is an important data point, it is just one element in the overall equation and it needs to be viewed in the context of the other elements that make up the profit picture.

For us, those include, first, leisure pricing.

It was even more robust than earlier quarters with a composite pricing gain across both brands of 12%.

Budget's gain was higher than 12% and higher than Avis's, but both were substantial.

Its worth noting, by the way, that commercial pricing actually contributed modestly to overall RPD gains this quarter, up about 2% with most of the strength in the under $1 million accounts.

The second is ancillary revenues.

On a per rental day basis, our ancillaries were up 22% as we continue to see the benefits from the counter sales training initiative launched last year.

Actually our greatest success in this area has been in the area of car class upgrades, which is captured in our over all RPD stats and not in the ancillary revenue measure.

Our estimate is that car class upgrades account for one full point of our RPD gain this past quarter.

Third is headcount and fleet.

Both were down significantly as we flexed our business model in the face of declining demand.

At quarter end, we have now trimmed a total of 8,400 positions or over 25% of the work force and are running our fleet down 22%.

To be sure, some of these are due to the variable nature of our work force, but over 3,700 of these are reductions to fixed costs as part of our cost reduction initiatives.

And the last impact is overall cost savings, much larger than we had forecast in driving improvements throughout our business.

Our current forecast for cost savings across our business is now estimated to range between $380 million and $440 million on a run rate basis, by the end of 2009.

You don't need to look any further than our GAAP P&L, with no adjustments necessary I might add, to see the evidence of these last two items.

Our direct operating expenses are down some $160 million from last year and its ratio to revenue down by more than 200 basis points.

Our SG&A is similarly down by $40 million or 23% and it's ratio to revenue was down by 90 basis points.

And all of this is despite a revenue decline in the quarter of more than $250 million.

David will take you through this in more detail, so, I would encourage you to get your pencils ready.

All of this is the payoff from the relentless focus, hard work and sacrifice of our people.

Every layer from top to bottom in our organization has contributed to identifying and executing on our cost savings.

We've taken full advantage of the benefit of our business model by adjusting the size of our field organization to stay in alignment with volumes.

Even at a time when volumes were declining at unprecedented rates.

We are also addressing fixed costs and overheads and challenging the established ways of managing our business to generate additional savings.

And the pay off from all of these factors is that our second quarter EBITDA exceeded our business plan and we have significantly added to the cushion against our 2009 covenant requirements.

That's despite a volume drop-off that was not -- not only was substantially below prior years revenue, but also a fairly significant short fall from planned revenue as well.

That said, at some level volume is important but not all volume is created equal, not all our volume decline was market driven.

Our guesstimate is that 3 to 4 points of our volume decline relates to intentional actions to limit unprofitable volume in our mix.

You will recall as part of our five-point plan, we are going to look hard at limiting certain types of business and customers whose rentals do not make a positive earnings contribution.

The way we tried to do this was usually to increase the rate we were quoting in a particular channel, for a particular rental.

The primary objective being to win the customer a contribution positive rate.

And failing at that, we're okay with not winning the reservation at all since either winning at a higher rate or avoiding the transaction at a lower rate, represents a profit improvement.

And at the risk of sounding facetious though, the important part of volume is called revenue.

There is the reality -- the reality -- there is the reality that our revenue was down 17% during the quarter.

And while we were thrilled with the performance we delivered at the lower revenue level, unfortunately, not enough of it found its way down to net income.

Realistically we're not likely to overcome a 22% volume gap with pricing.

If we did the industry would be enormously profitable but the competitive dynamics are unlikely to allow that to happen.

Commercial volumes have been down close to 20% since the first of the year, leisure has not been much different, partially reflecting our internal actions on unprofitable transactions.

But both are really more reflective of the depressed state of the travel market than anything else.

The industry does need to see a recovery at some level to drive the volume that will deliver the levels of profit necessary to sustain the capital invested.

But we are confident it will recover and what is encouraging on this front is that with the cost reductions already in place, the level of pricing currently in the market and where we expect fleet costs to land next year, we can meaningfully increase our level of profitability next year at much lower levels of revenue.

Clearly we have not had to narrow by any stretch the entire 22% gap.

So, let me take a minute and talk a little bit about the third quarter, the rest of the year and perhaps some thoughts about modeling next year.

Despite some signs that the worst may be over in terms of the recession, we do expect that 2009 will continue to be a challenging economic operating environment.

Comps will certainly get easier as we move into the September, December period and I'm moderately optimistic that the stimulus package will benefit certain key segments of the commercial market.

But, the airline industry is continuing to show year-over-year declines in enplanements and capacity, so, I think it would be imprudent to expect a meaningful turn around.

As an aside, our truck business has been stabilizing as of late, nationally showing an uptick in earnings.

Notably in the more profitable one way segment, as people move in pursuit of employment opportunities.

Similarly in our international business, the year-over-year comparisons have been challenging largely due to the US dollar being about 20% weaker than a year ago.

But we are seeing unusually favorable pricing dynamics there too, with increased pricing in our two largest markets, Australia and Canada, that started in Q2 and is continuing into Q3.

This is helping narrow the gap created by the FX translation issues.

While we don't intend to give specific earnings projections, I do want to mention a few key points, some positive, some negative, about our domestic business, that may be important to those who model our results.

First, the third quarter is shaping up much like we expected, fleets are tight across the industry and almost everyone is posting some kind of length of rental restrictions or in certain markets, suspending availabilities each week, for the balance of the summer season.

This is obviously having a salient affect on pricing, we are continuing to see pricing gains, though not at the same level as in the second quarter, throughout the summer.

This is despite the high level of pricing gains we enjoyed last year.

We are also continuing to sell cars and in so doing, are consciously cutting off some of the summer revenue peak, but our July results would suggest that most of what we lost in revenue we're picking up in pricing and utilization.

Mid-week utilization rates are higher than we have ever seen them across both brands, as we manage the fleet as aggressively as possible.

Just to put a finer point on this, while we expect volumes to improve from the second quarter bottom, you should still expect them to be down double digits probably somewhere in the mid-to high teens.

So, while we may be constraining the top line somewhat in the third quarter given these actions, it should result in greater risk mitigation in the fourth quarter when the industry is typically over fleeted, selling cars in a declining used car market.

We will still need to be selling cars but nowhere near the levels that we have over the last eight weeks and clearly no where near the levels of last year.

We do think however, that the overall tightness of fleet levels should bode well for keeping pricing rational as we move through the third quarter and into the fourth.

For the balance of the year, we think fleet costs will improve fairly substantially for a few reasons.

One is that the comps get far easier.

Last year's four quarter may have been the worst quarter we've ever experienced for car sales and we are having to dispose some relatively inexpensive program cars to get fleet aligned with demand, which caused our retained fleet costs to rise.

Another is what I alluded to do a minute ago.

We are well-positioned on fleet levels, and do not think we will be selling anywhere near the volume of cars we did in the early part of the year.

Both of these mean that fleet costs in the back half of the year ought to get back to somewhere close to the levels we would have originally expected, in the low single digits.

For the full year, we think fleet costs on a per unit basis will likely average between 7% and 9%.

And next year, as you will hear from Bob, we are expecting a decline in fleet costs on the order of mid to high single digits.

That combined with the cost reductions, the stable pricing assumption, and only a modest increase in volume from 2009's depressed levels, should auger well for significantly improved profit performance for 2010.

So, despite the current weakness in demand that we need to continue to manage through, as we begin to look ahead and potentially see some green shoots of economic recovery, I am becoming cautiously optimistic.

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

Thanks, Ron and good morning.

I'm going to focus my comments this morning on fleet, both the steps we've taken to reduce fleet levels and what we're seeing in the used car market and also give a brief update on our 2010 negotiations.

As Ron mentioned, we continue to manage the fleet down aggressively based on demand.

Our average domestic fleet for the quarter was down 22% year-over-year in line with the decline in rental days and at quarter end our fleet was also down about 22%.

Shifts of this magnitude are not without cost.

It's important for you to remember that our fleet costs include depreciation, disposal costs and any gain or loss on disposal.

These were up 17% on a per unit basis this quarter.

Since we did not anticipate double digit volume drops when we signed the model year '09 fleet deals last summer, the rapid decline in demand from the fourth quarter through the first quarter pushed up per unit fleet costs, and this continued into Q2 as we continued to right size our fleet.

The issue is that least expensive month in a car's life is often the last month.

As a result, demand weakness that causes us to sell or turn back vehicles sooner than we had planned, imposes an incremental cost on us.

However, at this point the significant fleet costs increases are behind us, as our projected overall 7% to 9% per unit fleet cost increased for the year indicates.

We are expecting modest increases in the third quarter and a decline in per unit costs in the fourth quarter.

Compared to our competitors our average fleet age is more than 15% younger, so, we expect our hold periods to lengthen going forward and we believe this dynamic will benefit fleet costs for the remainder of the year and into next year.

The improved conditions at the used car auctions will also benefit us going forward.

While our forecast anticipated a rebound in the used car market, the market has improved even more so.

During the second quarter, we sold over 50,000 risk units, and as the used car market continues to be strong, we are continuing to sell cars in higher than planned volumes so far in the third quarter.

Our on-line vehicle sales in the quarter set another record with over 10% of our sales going through these highly efficient channels.

In total for the first six months of 2009, the Manheim index of used vehicle values increased more than 12% on a mix and mileage adjusted basis and it is now up 6% versus a year ago.

I'd like to remind everyone that while the Manheim index is a generally a good directional indicator of what we are experiencing with our risk cars, it is not a perfect match for two principle reasons.

First, the index is for the entire used car market and we participate only in the one-year-old used car market.

And second, our mix of risk vehicles skews towards the small and mid-sized cars so to the extent that this sub-segment diverges from the overall index which is more heavily weighted towards pick-ups and SUV's, our results could differ.

But as we've discussed in the past, there are many factors that are contributing and that should continue to contribute to the strength of the late model used car market this year.

We also do not expect the cash for clunkers program to change that.

The key driving force behind the late model price strength is that we are purchasing nearly 30% fewer cars this model year than we did in model year 2008 and the rest of the car rental industry appears to be acting similarly.

Anecdotally, cash for clunkers buyers seem to represent a new demand to the market, meaning that they wouldn't have otherwise bought a car, but for the incentive.

We're not the only ones who are seeing minimal impact on residual values.

Manheim was quoted yesterday as seeing the same thing.

I guess the most important point is that the program is not adding any additional supply to the used car market.

We are well into our 2010 model year negotiations at this point.

Overall things are progressing well with an ample supply of both risk and program cars available.

Our model year 2010 buy is expected to be significantly smaller than our 2009 buy, as we look to extend the average hold period and keep fleet levels in line with demand.

Our manufacturer mix will probably shift a little more towards Asian fleet and less domestic as we continue the diversification efforts we started four to five years ago.

Most importantly when we roll everything up, we expect that our per unit fleet costs will actually be down in the range of mid to high single digits for model year 2010.

So, after certainly one of the most difficult periods I've ever experienced in this industry I'm pleased by the positive developments in the used car market, which should continue, by our own fleet management activities over the last few quarters which will also continue and by how our model year 2010 fleet is shaping up.

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

Thanks, Bob and good morning everyone.

I'd like to discuss our recent results; our cost savings initiatives impact our income statement and our financing strategy.

Starting with our results, excluding restructuring costs of $8 million.

In the second quarter revenue fell 17% to $1.3 billion.

EBITDA was $67 million and our pretax income was $6 million.

EBITDA declined modestly from the $77 million we reported in second quarter 2008, but excluding restructuring costs, our EBITDA margin was actually higher than it was a year ago.

In our domestic segment, EBITDA declined for the quarter due to lower volume and higher fleet costs per vehicle, the effects of which were partially offset by our cost savings initiatives and pricing gains.

Second quarter revenue dropped 17% reflecting a 22% decline in rental days and a 7% increase in time and mileage revenue per day primarily due to price increases for leisure rentals.

We believe the increase in time and mileage rates is a testament to the car rental business model which has inventory flexibility that makes it quite different from the hospitality and airline industry.

As Ron mentioned, ancillary revenues, excluding gas increased 22% on a per rental day basis.

Direct operating expense declined 300 basis points as a percentage of domestic revenue, despite the steep decline in volume and SG&A declined 110 basis points as a percentage of revenue.

These improvements demonstrate how we have attacked infrastructure costs in addition to reducing expenses to mirror declining volume.

In our international car rental operations, revenue decreased 20% year-over-year driven by a 10% decrease in rental days and a 12% decline in time and mileage revenue per day, which was entirely due to foreign exchange.

Excluding the effects of FX, T&M per day was up 4% and ancillary revenues increased 6% per rental day reflecting our initiatives in this area.

Fleet costs rose 8% on a per unit constant currency basis.

In total, while reported EBITDA declined $7 million, $5 million of this decrease was due to foreign exchange movements and $1 million was due to restructuring costs.

In our truck rental segment, revenue declined 8% in the quarter versus last year due to an 8% decrease in rental days.

Average pricing held constant year-over-year, and EBITDA increased due to lower fleet costs, cost savings initiatives and a more profitability mix of revenue.

We are managing our capital spending judiciously.

Expenditures totaled just $6 million in the second quarter, which is a 75% decline versus last year.

As I noted previously, we are aggressively curtailing discretionary items and prioritizing projects based on necessity and those that generate returns in less than one year.

Capital expenditures will be higher in subsequent periods, than they were in the second quarter, as some larger projects, including some airport mandated projects are scheduled for the back half of the year but the total for 2009 will be considerably below 2008 levels.

On a separate topic, several investors have asked us about how to see the benefits of our cost savings programs in our income statement.

Given the overlapping effects of volume declines, price changes, inflation and foreign exchange, the answers to this question may not be readily apparent from our consolidated results, so, I'd like to try to provide some clarity.

For starters our performance excellence program, our third quarter 2008 actions and our 5-point plan all primarily impact the operating expense and SG&A expense lines.

But our initiatives also affect revenue, fleet costs and interest costs.

Examples of why this is the case include our efforts to increase revenues for gas related recoveries under our PEx project or our work to shrink unprofitable segments of our business which reduces revenues and costs of all types.

Now, let me focus on our domestic car rental segment and provide a walk-down based on the way we have discussed our business model in the past and the way I believe many of you think about our business and its sensitivities to changes in key metrics.

I think such a year-over-year walk down can help crystallize the cost reduction benefits we're realizing.

To start, second quarter 2008 EBITDA was $46 million.

From there, the EBITDA impact from a 22% year-over-year volume decline was negative $82 million using the 30% drop-through rate per volume we have discussed in the past and $1.24 billion as second quarter 2008 domestic revenue.

The 7% increase in time and mileage revenue per day, had a positive EBITDA impact of $46 million as pricing dropped through at nearly 90%.

The 17% per unit fleet cost increase reduces EBITDA by $50 million as we mentioned in the earnings release.

Gas margin improved by $10 million and per unit interest cost increases had a negative EBITDA impact of $12 million.

And finally, growth in ancillary revenues per day had a positive EBITDA impact of roughly $13 million.

We will post all of this in a new investor up-date deck on our web site, so the numbers will be available to you, even if you fell behind on your note taking.

But when you add these up and compare the sum to our second quarter 2009 EBITDA of $43 million excluding restructuring costs, you'll see that we had net cost savings of $72 million for the quarter.

And it's important to note that these are the net savings realized after overcoming inflationary pressures on the roughly $600 million of non-fleet costs we had in the quarter.

If you do the same math for the year to date domestic results, it totals $111 million in net cost savings.

While our own tracking and analysis of cost savings is based on much or detailed data, I hope this top-down approach is helpful to those of you who are struggling to find a way to parse our results to confirm that we are indeed achieving substantial cost savings.

Please remember, though that these numbers are for our domestic operations only and do not include the savings that we are generating in our international and truck operations as well -- as well as actions that impact pricing or ancillary revenues which are also part of our savings initiatives.

The last topic I'd like to cover is our financing strategy.

Our cash balance at quarter end was $434 million.

We had $315 million of available LC capacity under our corporate credit facility and we had $1.4 billion of available capacity under our vehicle financing programs.

Our access to capital was more than adequate to meet our 2009 peak in fleet levels, which occurred, as it usually does in mid-July.

I mentioned during our last earnings call that our peak funding needs in 2009 were taken care and the financing work we were doing is to prepare for 2010.

As of June 30, in our domestic car rental business, we have $2.5 billion of existing vehicle back debt that comes due over the next 18 months.

As does $1.1 billion of available but unused capacity.

As a result, and based on our actual 2009 and estimated 2010 peak fleet levels, we estimate that our domestic vehicle funding capacity needs for 2010 will be $3.3 billion, comprise of the annual maturity of our $2 billion plus bank conduit facilities and a little bit over $1 billion of ABS term debt maturities.

As we have discussed, our plan is to renew our conduits for approximately $2 billion, although depending on our needs this could be lower.

We plan to have non-conduit funding of roughly $1.5 billion, probably comprised of operating lease financing of $300 million and about $1.2 billion of term debt, to be issued over the next 12 months or so.

In May, we completed an operating lease facility for roughly $325 million.

And in July, we completed the first term asset backed securities offering by a rental car company since 2007 generating proceeds of $450 million.

So, as Ron mentioned, we have already made significant progress toward meeting our 2010 need.

In addition, we expect to have discussions in the fall about the renewal of our 364-day conduit facilities, although they don't mature until year end.

With respect to our recent ABS deal, I should note that it was not a TALF eligible issue but rather was structured to a single A rating, giving us an advance rate of nearly 70%.

The three year notes carry a 9.31% coupon, which compares very favorably to some other recent transactions in the ABS market.

With Standard and Poor's having backed away from rating car rental ABS transactions as they had for more than ten years, we don't know whether our car rental company will be able to meet the TALF requirement of two AAA ratings.

But the good news is that we were able to tap significant interest in our ABS debt even without the benefit of TALF.

Our plan continues to be to be take an opportunistic approach to addressing our 2010 financing needs; we will be looking at several sources of funding, including the asset back market and operating lease structures.

Most importantly, though, based on our recent experience, we believe there is an appetite at either the single A or AAA level, for the ABS debt we want to issue to meet the rest of our needs and we will likely access the market again in the second half of 2009.

Stepping back, we highlighted how we believe key investor concerns are being resolved favorably.

Our ability to achieve cost savings, the rebound in the used car market, potential impact from OEM bankruptcies and the management of fleet levels and fleet utilization, are all areas that are largely behind us.

In terms of covenant compliance, we've met our requirements for the last three quarters and ended the second quarter with a $60 million EBITDA cushion.

On the liquidity front, we are executing against our financing plan and completed the first car rental ABS deal in two years.

We remain focused on executing against opportunities that we control.

We enter the back half of the year in a far better place than we began the year and we remain excited about our longer term prospects.

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

Thank you.

(Operator Instructions) Our first question comes from Jeff Kessler with Imperial Capital.

You may ask your question.

Thank you and hello, guys.

You hear me okay?

Just fine, Jeff.

Okay, great.

First, first question is about fleet.

The need for your fleet management and your holding periods are we going to be seeing an era of 30,000 mile cars out there based on -- for the industry as a whole, and do you think that the customer is going to be able to handle -- the increased mileage that, is probably going to be needed to increase fleets not just for you but for everybody.

Hello, Jeff you how doing.

Hey, Bob.

Yes, I think that you -- this industry will see higher mileage units out there.

I think as the manufacturer and the manufacturer programs become more rational, if you will, than perhaps they have been through the 90's and even the late '90's and early 2000, I think the need to increase the mileage on the cars will go up as we hold cars a little bit longer.

As you well know for someone who's been covering this industry for a long time, we used to hold cars a whole lot longer.

The cars today are really much more able to withstand the mileage than they maybe we're 15 or 20 years ago.

Our belief is that -- if the car looks presentable, smells presentable, and runs in a -- in a good fashion, that the mileage actually, up to a certain point, is acceptable.

So, a lot of our -- a lot of our operational objectives right now revolve around the three things I said.

And so far, we haven't -- we haven't had much problem on this at all.

And prior to us reducing the fleet the way we have, we were -- we were edging up there as you will recall, we had longer holds on the cars an I think that's what we're going to return to and I think it's something that across the industry is -- we're going to necessarily have to do that to obtain the profits we need.

As you know, this is my fourth good-around with this industry and back in the late '80s, 20,000 miles and above was not unheard of at all in fact it was fairly common.

The mix -- normally you guys have a very aggressive program to mix -- changing your mix of cars from -- back and forth between program and at-risk in the third and fourth quarters to basically hone out your fleets the way you wanted to at the end of the year.

What are you going through right now to change your fleet and get it ready for the leaner part of the year?

Well, that's an interesting question, Jeff.

We -- as Ron and David talked about, some of the -- some of the volume decline you see in the -- you saw in the end of the second quarter and even according right now has been self-inflicted for two reasons.

One, we talked about unprofitable pieces of business that we had taken out but the other thing is we have -- we have spent the money to bring the fleet down exactly where we wanted it to be and it has allowed us to increase our pricing.

So, some of that is -- some of the volume decline is because of that.

Having done that, however, and as we continue in July and in August to sell cars in a really good wholesale market, we think as we get into the late third and into the fourth quarter, that we don't have a lot of pressure to dispose of risk cars.

We will have pretty much done it at what I -- I think might be the peak of the market.

So, long story short, I feel very, very good about the fleet as we turn the quarter into the winter months and into next year and how we're looking at the 2010 buy, also looks very, very favorable.

One other question and that is despite the fact that you guys have learned that you have to make lots of money during the rental period, a lot more money than during the rental period now than you ever have to offset -- to offset the decline in volumes.

Nevertheless, some of these like kind exchange programs that have been out there and have been helping you on the -- on the end of the car life are going to potentially expire in a year or two and I'm wondering if you guys are preparing or if you guys are looking at what type of accelerated depreciation or other types of like kind exchange programs may be in the works to supplement or replace what's in -- what's in -- what's in the drawer right now.

Jeff, the -- the like kind exchange program really just impacts our -- our tax treatment of the vehicles, so from the perspective of -- of you know, how we manage the fleet, I think what -- you know what matters the most is the -- you know, is the range of deals we're able to enter into with various manufacturers and as Bob indicated, I think those are -- you know, those are going pretty well so far in model year 2010 and we continue to see the manufacturers you know, being -- being very willing to work with us to come up with things that work for us as a company, us as an industry and for them as an industry as well.

Okay.

Can you give us some idea of where you see foreign -- foreign cars as a percentage of your mix in 2010?

It's obviously growing.

The question is can you get (inaudible), so just a little more exact?

Okay, yes, as you know, we have been increasing the -- the foreign manufacturer mix of our domestic fleet fairly consistently over the last five years and I think we will look for that to you know, to continue going forward.

Okay.

Great.

Thank you very much.

Good to hear from you guys again.

Likewise.

Our next question Brian Johnson with Barclay's capital.

You may ask your question.

A couple of questions.

In light of the pricing you're able to get on your ABS deal, how are you thinking about financing costs over the next 12 to 16 months, and assuming that similar financing terms for your competitors, do you think that will be reflected in pricing or are we going to have to use some of your cost cuts to offset the interest rate increases?

Hello, Brian, I think we are expecting interest costs to increase as, you know, as debt that was issued several years ago, matures and we replace it with you know, with new debt that reflects where risk is currently being priced in the market.

I think the -- the good news is that the impact of that is -- while we're not going to project a number, the impact of that ends up likely to be significantly smaller than the benefit associated with having a several-point decline in fleet costs.

And as a result, we -- we can offset the impacts of higher interest costs either through pricing or through lower fleet costs, and I think our hope and expectation is that we'll have both avenues available to us.

And in lower fleet costs, the manufacturers always claim that they're getting better pricing in rental, yet at the same time you're talking about lower fleet costs.

Is that just because you're aging the cars longer are the negotiations far enough along that you're actually thinking you're getting a better deal on model year 2010 versus model year 2009.

Got you.

I think there's a bit of both going on.

You know, certainly the -- certainly we are, as Bob mentioned, looking at holding cars a bit longer, which will help bring down the costs.

There's the fact that we held -- because volumes were light this year, we -- we didn't hold cars as long as we had hoped or expected to.

And you know which produces a year over benefit that's available to us next year.

And the real issue is that you know, over the last two or three years, we have seen very substantial increases in the costs we're -- we're paying or the costs we are incurring for fleet.

And so even if we get a few points back next year, you know, it's still the case that the manufactures have significantly call it 40%, 50% in total, increased the costs that we're paying for vehicles compared to where they were three or four years ago.

And final question, could you comment maybe a bit on pricing vis-a-vis your competitors, overall you were up compared to the larger competitor in the market.

What are you seeing in the on airport and is their performance maybe not as strong in the on airport or -- and if so, is it business leisure or is it just simply a mix and the work the other competitor is doing, vis-a-vis insurance and other lower priced longer term rentals?

Brian, this is Ron, I think the answer to that really lies in what your fleet strategy is, an clearly if you have more fleet, you're going to be more aggressive at going after more volume and you know, we're the first ones to say that there is more volume out there to be had, but it is certainly all on the leisure side and that spot volume and you can always get it back by adjusting your pricing.

I think, you know, if you look at actions since really the fourth quarter of last year, I think everybody's been moving, acting the same way in the same way in terms of raising retail and leisure pricing.

I think commercial pricing is still very competitive and you're not likely to see any big gains in commercial pricing over the course of the next -- at least the next 12 months.

But you know, I think that you -- you have to look at volume and price in tandem and you know, they're -- there're always multiple ways to skin the same cat.

I mean, our competitors' volume was much better than ours, but their pricing wasn't quite as good and their fleet wasn't down as much.

On the other hand our fleet was down pretty substantially, I mean our volume was down equally, but our pricing was up.

So, I think it's just a matter where you want to position yourself with fleet and how you want to attack the marketplace.

Okay.

Thanks.

Our next question Emily Shanks with Barclays Capital.

You may ask your question.

Good morning guys, thanks for taking the questions.

I have just a couple of follow-ups.

Specific to the OEM lease financing, the $325 million amount that was announced, is that a renewal or extension of something that what was already in place or is that something new?

The lease financing transaction was new.

Okay, great.

And then can you update us on where you stand around outstanding shelf registrations if -- and specifically I'm just wondering if you have the capacity right now to issue common or convert or if you have to file a shelf for that?

We currently don't have a shelf that's available to us.

Okay.

And then apologies but I missed the outstanding revolver availability, currently.

What was that?

Sure.

There's available LC capacity under the revolver of $315 million, 3-1-5.

But can you draw that?

I'm sorry, $175 million of is it is available for borrowings and $315 million is available for LC's.

Okay, okay, the amount that was drawn on revolver was that used to fund required collateral or enhancements requirements in the non-health ABS deal?

Yes, I mean, I just -- cash is -- cash is fungible.

We really look at the fact that our pretax income in the first six months of the year was negative and our business generally speaking is a cash business, so, I actually think of the borrowing or the -- the borrowing as being used to fund the working capital needs associated with having a pretax loss over the first six months.

Okay.

Then maybe let me ask it this way: Did you have to draw further on your revolver to fund required enhancement levels post quarter end?

No.

Okay.

So, availability is still kind of in that $175 million range?

That's correct.

Okay.

Okay.

Great.

Can you give me what your cash balance today is by any chance?

I -- Emily, I don't have that -- that number on hand.

Okay.

You know, we typically don't and I think we're typically not going to talk about where we are from a cash standpoint during the quarter.

And -- and you know, it certainly varies a fair amount over the course of the month.

Since as you know we pay rent essentially to AESOP on the 20th of the month so we have fairly substantial swings in our cash balances you know, over the -- over the course of a month, but our cash balance you know, does continue to be fairly significant.

Okay.

Okay.

That -- that helps and I guess that's it.

And the updated slides, will it go through -- you had given some numbers around what your financing plans are, will that be covered in your slide deck as well?

It will.

There -- we've had a slide in the past that walks through the -- the 2009-2010 financing needs and that slide will be updated to do reflect the comments I made during the -- the initial remarks on this call.

Okay.

And actually if I could squeeze in one more, sorry for all the questions, but around the ABS -- or around the conduits, have you already begun discussions with your lenders group on that?

No formal discussions.

We talked to you know, our bank relationships on a very regular basis, but no, given that the you know, the maturity of that facility is -- is in December, you know, we wanted to get through the second -- second quarter file our Q and have a really good sense of where the summer is shaping up before we do that but we -- as I mentioned, we do expect to be having more formal discussions with the banks in the Fall.

Okay.

Great.

Thanks, guys.

Good luck.

Thank you.

Our final question comes from Yilma Abebe.

Because -- our last question because -- because of (inaudible) call scheduled at 10.

Ma'am, you may ask your question.

Hello.

One quick one for me.

Can you remind us your seasonality for free cash flow quarter-to-quarter historically and how do you think that would play out this year?

Yes, as I mentioned, our cash flow generally follows our pretax income.

There can be a lag of a few weeks or so, but generally speaking it follows income and as a result, you should see free cash flow seasonality that's generally in line with our earnings seasonality, which means the third quarter tends to be our strongest from a number of perspectives.

Thanks.

That's it for me.

We're going to wrap it up.

Now, for those of you if have you have additional questions that we didn't answer, please feel free to call any of us.

We'd be happy to answer them.

We know you have to get on another call and really don't want to jam you one up against the other.

So, anyway, thank you for listening in today, and we look forward to reporting the results of the third quarter to you sometime in late October.

Operator?

This concludes today's conference.

You may disconnect.