Avis Budget Group Inc (CAR) 2009 Q3 法說會逐字稿

Good morning, and welcome to the Avis Budget Group third 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, Tanya.

Good morning, everyone, 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, and our Executive Vice-President and Chief Financial Officer David Wyshner.

If you did not receive our press release it is 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 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 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 in our earnings release issued last night.

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

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

Thanks, Dave.

Good morning to all of you.

My comments this morning are going to focus on two subjects, first, some of the strategy behind our third quarter results and, second, some of the dynamics we've seen develop over the course of the year and expect to continue to see for the foreseeable future and what this may mean for us in 2010.

I'm then going to finish up with a brief summary of some of the more important initiatives we have underway to evolve our business and enhance the car rental experience we offer our customers, which is arguably an equal if not more important dynamic for the future prosperity of our business.

But first, the third quarter.

For starters, I think the take-away from our results is straightforward.

Over the course of the quarter we saw and seized an opportunity to aggressively trade off fleet and volume in favor of price with an overall profit-positive impact.

We're clearly pleased with how this has driven our results.

Let me be clear about what it means.

One, market demand was by no means down by the 23% that our volume would suggest.

Structurally it was down, probably in the low teens.

So if you compare the margin impact of the incremental loss of volume we incurred, let's call it 10%, against the 9% gain in price we posted, margin trade offs are pretty compelling.

Just a reminder, we model $0.90 of every dollar of price to flow to the bottom line, whereas the comparable number on a dollar of volume is $0.30.

Two, to realize the desired benefits, fleet had to be reduced and we were aided by a healthy used car market.

Those sales did result in gains, but the majority of the gain was the result of over-depreciating cars in the first half of the year.

Remember, our fleet costs were up well more than others, some 15% to 16% on a per-unit basis in the first half of the year.

So the gains we realized in the third quarter were by and large an inadvertent shift of the fleet cost into the second quarter.

Given that the average life of our fleet is less than seven months, it would be a mistake to view these gains as anything other than fleet costs.

Three, we're continuing to consciously restrain volume in segments and channels where we can't realize profit-positive rentals.

Our educated guess is that this move, which was part of our five-point plan, cost us somewhere in the neighborhood of three to four points of volume.

And, four, none of this was related to capital or fleet constraints.

Out of the more than $2 billion of conduit capacity that we had, we never drew more than $1.4 billion during our summer peak and currently there is nothing outstanding under this facility.

In short, this is all about opportunity and profit maximization.

At the core of this is fleet strategy, which inevitably drives pricing, and the difference among competitors are relatively stark this quarter.

Bob will talk more about how we positioned ourselves last quarter, and how we plan to position ourselves for the rest of this year.

As for the argument that we may be giving up share in pursuit of short-term price, our view for the record is that much of the volume we are leaving on the table is price-sensitive and very transient in nature.

We, or for that matter any of our competitors, can grab share at the margin simply by lowering price.

For us, we concluded that lowering price to gain share in a market like we're experiencing this year is not the right strategy; one, because fleets are very liquid over the summer so there was no issue in adjusting fleets to optimize pricing; two, there is always the risk you won't take enough share to compensate for the price reduction; and three, and this is really a general comment, in the end essentially implies that an airport traveler has an equivalent price convenience alternative, not a theory we subscribe to.

To be sure, there are times when a share strategy makes sense, but when fleets are tied generally around the industry and the used car market strong, we believe that playing for price was the right move.

So our strategy left us with the advertised metrics, volume down 23%, pricing up 9%, and per-unit fleet costs down 5%.

The combination of those three variables along with cost savings that are now approaching a $400 million annual run rate, resulted in reasonably significant year-over-year growth and profitability for the quarter.

To understand the positive effects of these actions on our earnings, it helps to look at the year-over-year comparison.

The prior year quarter, Q3 '08, was not a bad quarter.

The recession was fairly mild at that point and enplanements were only down slightly.

Our revenues were about flat year-over-year.

There was little indication that we would soon be seeing the double-digit volume declines that produced the exceptionally weak fourth quarter results.

If you fast-forward to 2009, while nearly everyone expected us to have positive year-over-year earnings comparisons in the fourth quarter, showing EBITDA growth in the third quarter against a real comparison is something that can be labeled a real accomplishment, and a good one at that.

For sure, our results highlight the work we have done to reduce costs, manage our fleet, increase pricing, and boost profitability, even in the face of sharply reduced volumes.

But more importantly, we think they showcase the benefits of our business model and in fact may suggest the possibility of a changed environment in car rental.

What characterizes this changed environment is less focus on share and more focus on driving sustainable profitability.

Our own experience mirrors what we see generally.

The first indicator is the overall price increases we saw, especially in a challenging market, and in particular in leisure pricing.

For us it was even more robust than in earlier quarters when the composite leisure pricing gain across growth brands of 13%.

Budget drove greater gains than Avis but both were substantial.

It is worth noting by the way, that for the second quarter in a row commercial pricing actually contributed modestly to overall RPD gains this quarter, up about 5%, but most of the strength in the under $1 million accounts.

The second important element in the pricing equation and a very key element of our profitability, our domestic ancillary revenues, which were up 13% for rental day.

Even in a tough environment, there is greater share of wallet to be had with our customers, and it is attainable simply by providing the proper sales training to customer facing personnel.

The biggest component of these benefits is actually car class up-sells, which isn't part of the 13%.

It is part of the RPD increase.

We suspect that one to two points of our leisure price growth results from up-sells.

Another key driver is fleet size and fleet cost.

Both of which, for us and for the industry, generally were down.

We trimmed our domestic fleet by 23%, which we think allowed us to optimize pricing.

Even more importantly, fleet costs declined year-over-year a quarter earlier than we had anticipated, due in part to the continued strength in the used car market.

And, last , but certainly not least, is the focus on cost savings.

The onslaught of the recession only accelerated our, and everyone's, efforts, to produce the best experience at the lowest possible cost.

Our cost reduction initiatives have developed well ahead of our plans and we ended the third quarter with a run rate of $400 million a year.

Generally speaking we expect the trends evident in the third quarter, strong pricing, weak volumes, per unit fleet cost that are down year-over-year, and rigorous cost controls will again be apparent in our fourth quarter results.

While it is still early in the quarter, it is encouraging that in a period of traditional defleeting, price has been holding.

So, stepping back, our third quarter results and the actions we're taking to position our business and our brands for the future, reflect the broader dynamics we're seeing.

At this point, however, the one trend that is yet to emerge is a strong rebound in economic activity or travel demand.

Clearly comps are getting better but a large proportion of that comes as we lap the challenges we faced in the fourth quarter of last year.

There are some early signs that the commercial activity has picked up a little bit but, nothing that would rise to the level of a strong rebound.

Despite that, we believe that the underlying intermediate term dynamics for our business are quite positive.

Why do we say that?

Well largely because of the manner in which we've reshaped our Company, along with favorable market forces, don't require a strong rebound for us to have a positive outlook on the fourth quarter, or even 2010.

The first reason for this is fleet, both access and cost, we as a Company and industry now have the best access ever to a broad array of high quality mid-priced vehicles produced by reasonably healthy manufacturers who all seem comfortable with, maybe even a little hungry for, a higher level of sales to the car rental industry.

We believe that everyone in the industry will be reporting declines in per unit fleet costs over the course of the next year, and for us, one point of decline in fleet costs drops approximately $12 million to the bottom line.

And just as important, if we see demand rising above fleet, there are a variety of options that we have to increase fleet commensurate with demand.

Second reason is that the entire car rental industry relies on principally on car rental for their profits.

We all have to profitably rent cars to generate returns for our shareholders.

This dynamic has crystallized over the last six to nine months as volumes dropped and financing became more dear, in terms of availability and cost.

Car rental companies raised pricing and they needed to raise pricing to help offset the volume decline in resulting revenue drop.

The "aha" moment in all of this was that as prices rose 8%, 10%, even 12%, it would be hard to say that the available customers sought other alternatives.

We all may have traded a tenth of a share point here and there, but the competitive balance in the marketplace was really undisturbed.

The third reason why we believe the industry is better positioned is the learning that we have taken away from the adverse conditions we faced over the last year.

With the cost of vehicles having increased and the cost of financing vehicles having risen as well, the cost of idle vehicles has grown.

The car rental demand is inherently uneven, mid-week demand outstrips weekend demand, volumes move sizably from week to week and month to month, and each geographic market has its own anomalies, depending on when the leaves change color, when sporting events or conventions come to town, or what the weather is like.

Of course, this unevenness of demand is nothing new.

But what has changed, and what I think we and others have realized, is that the cost of fully adjusting fleet levels to shifting levels of demand is now greater than it was when cars were cheap and manufacturer repurchase programs were essentially free, and when financing was available on every street corner at 50 basis points over LIBOR.

As a result, we have consciously operated this year with fleet levels below peak demand levels and we have seen similar actions by competitors.

This trend is a favorable one for our ability to earn an economic return on our capital.

We believe these changes in the dynamics of our industry are all positives and what they could and should mean for Avis Budget Group is an opportunity to increase our margins in the coming years.

One of our principal goals is absolutely to get our car rental margins back to historical levels.

We see nothing that has changed structurally within the industry or our Company that precludes this from occurring.

With our cost cuts in place, we have changed the inflection point of margin growth within the Company so that we don't need to return to 2007 levels of volume to achieve historical profitability.

Our objective is not only to grow revenues and earnings when the volumes were down a bit, but also to grow our margins.

So what does all this mean for 2010?

While we're not going to be providing specific guidance, I do want to walk through some of the key areas to assist you in your thinking in modeling of 2010.

Starting with fleet costs, Bob is going to provide some detail in a minute, but the headline is that our model year 2010 negotiations are largely done.

We expect that per unit fleet holding costs will decline in the mid-single-digits next year.

As I said earlier, each point of reduction is equivalent to $12 million of domestic EBITDA.

In addition we anticipate keeping fleet levels in line with profitable demand, so overall fleet levels will be dependent on how the market evolves.

On cost savings, we expect to realize incremental cost savings in 2010 versus 2009.

Some will just be the impact of annualizing actions taken in 2009, others will be new items that we are continuing to find or execute against.

The combination of these items should contribute some $40 million to $60 million to the bottom line.

We've worked very hard to get these cost reductions and our goal is not to let these costs creep back into the system.

With that being said, given our variable cost structure to the extent that volume rebounds, we would naturally add head count in our field operations to service the rental increases.

But as we said before, none of the $400 million or so of cost cuts running through the P&L include reductions for variable personnel.

On the ancillary revenue front, we expect the growth we have seen in this area to continue, albeit at a diminished pace.

Although we start to annualize the sales training efforts as we move into 2010, we should still garner some additional benefits on this front from both new product offerings and better execution.

There are some offsets, even though we think they're more than covered by the positives.

First on that list is vehicle interest.

Good news, as David will discuss, is that our $900 million of ABS offerings, and our recent renewal of our conduit facility, mean that we have refinanced substantially all of our near-term domestic fleet financing maturities.

But it will cost us more to finance our fleet next year as risk has been repriced in the marketplace.

The cost of our recent term debt issuances are some two points higher than the debt they're replacing, and still give rise to a $20 million to $25 million negative impact, even if interest rates and fleet levels are constant year-over-year.

Next, despite the depth and breadth of our cost savings initiatives, our fleet cost savings and other benefits, there are still inflationary pressures, though modest, on the roughly $2 billion of non-fleet expenses we have.

We expect to offset some of these through productivity and other gains, but at the end of the day it is reasonable to assume a point or two of inflation here.

With these two areas covered, the last open items are the most important and difficult to answer, pricing and volume.

Since demand is largely out of our control and highly dependent on the timing and the depth of the US economic recovery, and pricing is somewhat dependent on competitive factors, we had previously decided not to publish volume and rate productions and heightened levels of variability we've seen of late really gives us no reason to change course with respect to providing those estimates.

Nonetheless, under most scenarios, the net effect of the points that I have highlighted is an expectation of meaningful growth in 2010, compared to 2009, with the ultimate level of growth depending on pricing and volume.

We are excited about our recent results and about many of the trends we see in our business.

And with a reasonable economic recovery, we are well positioned for earnings growth, not only in 2010, but beyond as we look to expand our margins.

Before I turn this over to Bob and David, let me spend a minute talking about a few of the customer initiatives we have going on in the Company.

We've taken a lot of steps this year to increase the profitability of each transaction on rental day and we usually talk about them in the context of fleet, volume, pricing and cost reductions.

We've also launched a number of programs to enhance the car rental experience we provide, which in the end can have an even greater impact on long-term profitability.

Just a reminder for everyone, when you have 20-plus million transactions and 100 million rental days as multipliers, small changes can have large impacts.

We are working on several areas of opportunity.

Just to name a few, smoke-free fleet, kiosks, new ancillary products and services, prepaid rentals, and direct-connect technology.

Let me give you a quick flavor of how they benefit us.

We are the first and so far only major car rental to provide a completely smoke-free fleet.

We took this step for a number of reasons.

For starters, the most frequent customer complaint we receive is about the smell of smoke in cars, despite extensive cleaning efforts on our part.

So by being smoke-free, we have eliminated our number one customer complaint.

Any time a business can eliminate its number one customer complaint at virtually no cost, we view that as a win-win situation.

In addition, we'll save time and money on cleaning cars, and lastly, I believe that this policy change may generate more revenue than it might cost us, because customers will appreciate knowing that whatever car they book will be smoke-free.

Next, we have a kiosk pilot running right now.

The early returns are positives and when rolled out more widely this provides yet another service enhancement to speed check-outs, and at the same time generate cost savings for us.

While we're certainly not the first to do this, we have spent significant time developing the pilot to ensure that we can capture ancillary revenue sales efficiently and effectively through the use of kiosks.

Turning to ancillary revenue products, besides the usual insurance coverages and our highly successful Where2 and e-Toll programs, we will have two new offerings.

The first is an emergency roadside product which covers the renter for costs associated with lost or locked-in car keys, running out of gas, and similar occurrences.

While mundane, these things happen more than one would think and these are items that the renter would otherwise have to bear the cost of.

We started offering this coverage in the past few months and have been pleased with the initial acceptance level.

Second new product offering is expected to be portable satellite radio.

Many people have this service in their own cars and this will allow them to get it while on the road.

Like our Where2 GPS, this unit will be portable so that all renters and all fleets have the opportunity to add satellite radio to their rental.

And like Where2, the customer will receive the service only if they pay for it.

We will begin piloting this in the next 60 days or so.

Separately, we've been offering prepaid rentals on the Budget website, and rolling out prepaids on Avis as well by offering a discount to buy now, we provide potential customers with an additional value option that helps us reduce no-shows and better management of the fleet.

The last example I want to mention is on the technology side.

We are expanding the use of direct-connect technology, which allows our system to connect directly with third-party booking sources and bypass the GDS systems and thereby eliminate the GDS fee associated with these types of transactions.

Some of these items are fully in place today.

Some are in pilots and others will be rolling out in the near future.

Most importantly, what this means is that while we've been very cost conscious this past year, we've not stopped investments in innovation to grow profitability and enhance our customer's car rental experience.

In the end, the product we provide is service, and we can't lose sight of that in quest to grow our margins.

With that, let me turn the call over to

Thanks, Ron, and good morning.

Most of these calls I talk about how we tailored the fleet to the demand that was in the marketplace.

This wasn't the case during this quarter.

We entered the quarter with a strategy of maximizing the pricing in the marketplace.

To take advantage of this we opted to run the fleet below where we thought demand might be.

Additionally as we got into the quarter, we found ourselves confronted with the unique car sales market that we also opted to take advantage of.

All this led to our average domestic fleet being down 23% for the quarter.

This strategy which had us de-fleeting in our domestic operation, at higher than normal levels before and during the summer had other benefits.

It did help us achieve a 9% increase in price, which was a few points higher than what we expected going into the quarter.

We achieved this primarily by not having to find volume at discounted levels to soak up fleet.

Another advantage was by cycling out of vehicles earlier and replacing these with less expensive 2010 models, we not only reduced costs, but we also gained the benefit of a younger, average fleet age.

At less than seven months old, we believe our fleet is currently the youngest in the industry, and we still have preserved the opportunity going forward to lengthen the age of the fleet, which would provide us with some additional incremental cost savings.

On our last call, we were expecting modest per-unit fleet cost increases in the third quarter, and a decline in per-unit costs in the fourth quarter.

Our assumptions for the fourth quarter have not changed, but in executing the strategy I just talked about, we achieved a decline in per-unit fleet costs this quarter, a full quarter earlier than we had anticipated.

The strength in used car prices during the quarter will also benefit us going forward.

While we expected a rebound in the used car market, the market improved even more than we anticipated.

During the third quarter we sold over 63,000 risk units, which was 50% more than last year.

Our online vehicle sales in the quarter set another record, with about 10% of our sales going through these channels as we continue to increase the volume of vehicles sold through this lower-cost method.

We believe that participation rates will continue to grow as more dealers will take advantage of time savings and cost savings that this channel has to offer.

Manheim has reported that used vehicle values were up nearly 7% in September, which is the fifth consecutive month of year-over-year increases and the ninth consecutive month-over-month increase.

The index of used vehicle values has increased more than 20% on a mix and mileage adjusted basis from the end of 2008.

While this string of consecutive increases obviously will not continue forever, we believe generally strong used car prices are likely to persist for some time.

The most important factor supporting used car values is supply.

We purchased nearly 30% fewer cars in model year 2009 than we did in model year 2008, and we plan to buy fewer models in 2010 than we did in '09.

With Adesa reporting that new car sales at rental companies are down 40% for the first half of the year, the rest of the car rental industry seems to be acting similarly.

Needless to say, this will have significant impact on supply of late-model used vehicles into the future.

In addition, Cash for Clunkers had the effect of clearing out new car inventories, which is providing near-term support for late model used car demand, and because Clunkers had to be scrapped, the program did not increase the supply of used cars at all.

A more important long-term factor is that automakers have reduced capacity and scaled back production.

In the past ways of producing too many vehicles and then dumping the vehicles with attractive incentives, under leases or into car rental can no longer be supported in today's higher cost capital environment.

Manheim believes that the unbuilt new cars of 2008 and 2009 will constrain used vehicle supply in 2011 and 2012, when buyers of late model used cars will find fewer of them available.

For these reasons we believe the current dynamic support long-term strength and late model used car pricing.

It is important to note, however, we don't need the used car market to be as strong as it's been over the last few months to do just fine on our risk car disposals.

Now I'd like to provide you with an update on our 2010 fleet deals.

At this point we've completed our negotiations with the manufacturers on our core purchases.

We expect our manufacturer fleet mix will be a record low 55% to 60% domestic, and correspondingly record high 40% to 45% foreign, as we have intensified our efforts to diversify our fleet, reduce our reliance on any one manufacturer, and to enhance our bargaining power.

In model year 2010, we will have cars from seven foreign-owned manufacturers with the largest components coming from Hyundai, Nissan, Kia, and Toyota.

In terms of diversification we hit our target of not having any one manufacturer be more than 25% to 30% of our fleet buy, and we reached this target at least a year earlier than we expected.

Most importantly, we are projecting that our per unit fleet cost will actually be down in the range of mid to high single-digits for model year 2010, more than offsetting the higher borrowing costs in this environment that Ron mentioned earlier.

While the model year 2010 costs will be down in the mid to high single-digit range, fiscal year are impacted by three model years, '09, '10, and '11 vehicles.

So the model year cost decline that we can predict won't always line up point for point with fiscal year figures.

After a difficult period for fleet in the back half of '08 and first half of '09, I'm encouraged by the longer term trends in the used car market, the OEM negotiations, and by our ability to nimbly manage our fleet for opportunities and the expected benefits of lower fleet costs in 2010.

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

Thanks, Bob, and good morning, everyone.

I would like to discuss our recent results and our financing activities.

Starting with our results, excluding unusual items, in the third quarter revenue fell 14% to $1.5 billion.

EBITDA was $165 million and our pretax income was $102 million.

EBITDA increased 17% from the $141 million we reported in third quarter 2008, and our EBITDA margin improved by three points to 11%.

On a constant-currency basis, all three of our operating segments reported growth in EBITDA this quarter, which clearly reflected our Company-wide cost reduction efforts.

At quarter-end, our total head count was down nearly 7,000, or 23%, compared to a year earlier.

In our domestic segment, EBITDA increased 34% for the quarter due to higher pricing, lower fleet costs per vehicle, and the effects of our cost savings initiative, partially offset by lower volume.

Third quarter revenue decreased 16%, reflecting a 23% decline in rental days, and a 9% 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 industries.

And revenue per car increased 9% year-over-year as we maintained fleet utilization despite the rental day decline.

As Ron mentioned, domestic ancillary revenues were up 13% on a per rental day basis in the third quarter as we began to lap our sales training initiatives.

Direct operating expense declined 210 basis points as a percentage of domestic revenue despite the steep decline in volume as we continue to benefit from our cost saving initiatives, and also had much better net gasoline costs compared to 2008.

Excluding performance-based incentive compensation expense, SG&A costs dropped 30 basis points as a percentage of revenue.

In our international operations, revenue decreased 6% year-over-year, driven by a 9% decrease in rental days and a 4% increase in time and mileage revenue per day on a reported basis.

Excluding foreign exchange effects, T&M per day up 9%, and ancillary revenues increased 7% per rental day, reflecting our initiatives in this area.

Fleet costs rose 10% on a per-unit constant currency basis, including our hedges, foreign exchange had a negative $10 million impact year-over-year, excluding FX, EBITDA increased 10% year-over-year, as we kept our fleet size and operating costs in line with lower volume levels.

In our truck rental segment, revenue declined 9% versus last year due to a 9% decrease in rental days.

Average pricing stayed relatively constant year-over-year, and EBITDA grew due to lower fleet cost, more favorable mix of business, and cost saving initiatives.

We are managing our capital spending judiciously.

Expenditures were just $5 million in the third quarter, and $19 million year-to-date; amounts that are both down more than 70% year-over-year.

As I have mentioned previously, we have aggressively curtailed discretionary capital items and prioritized projects based on necessity and those that generate returns in less than one year.

We've also had the benefit of some airport-driven projects starting later than expected.

Several of these projects are gearing up now.

I expect that Q3 will be the last quarter in which our capex is in the single-digit millions.

As a result, total capex for 2009 will be around $40 million to $45 million, about half of 2008 levels.

Our cash balance at quarter-end was $470 million, and that figure does not include any proceeds from our convertible debt issuance, which closed in early October.

Our free cash flow year-to-date was $93 million.

In terms of covenant compliance, we exceeded the minimum EBITDA requirement by 118% and ended the quarter with cushion of nearly $100 million.

The next topic I'd like to cover is our financing activity.

Since the end of the second quarter, we've completed four financing transactions totaling more than $3 billion, and in the process have taken care of our domestic car rental liquidity needs for the next year.

Let me take you through some of the details.

I mentioned during our last earnings call that our plan was to address about $3.5 billion of existing vehicle back debt and/or capacity coming due by the end of 2010.

Based on our actual 2009 and estimated 2010 peak fleet levels, we projected our domestic vehicle refinancing need for 2010 to be around $3.3 billion.

Comprised of a little bit over $1 billion of ABS term debt maturities and the annual maturity of our $2 billion bank conduit facilities.

Term debt maturities are almost entirely covered by the two ABS offerings we've recently completed, each sized at $450 million and one structured to a single-A rating and the other to a triple-A rating.

In aggregate, the two deals will provide an advance rate of 66% against eligible collateral.

Perhaps most importantly, the market appetite for our paper was very strong, with each offering generating more than $1 billion of investor orders.

Following the two term ABS deals, we successfully renewed our annual maturing vehicle back conduit facility for $1.95 billion, consistent with our goal of a $1.8 billion to $2 billion renewal.

All eight of the lenders who participate in the facility renewed, and we were able to reduce the cost of the facility by 100 basis points, from 325 basis points over LIBOR last year, to 225 over this year.

We also put in place approximately $300 million of operating lease financing in May.

In total, then, we have arranged all of the $3.3 billion of domestic vehicle backed financing capacity we need for 2010.

While our strong access to multiple sources of liquidity is definitely reassuring, I am most encouraged by our ability to reduce conduit pricing year-over-year.

To me, this indicates that the financing markets on which we rely are truly beginning to normalize from the anomalous levels we saw in late 2008 and the first half of 2009.

With the ABS and other financing markets beginning to normalize, we have also relooked at our liquidity and capital structure.

As we went through our summer peak this year, we always had several hundred million dollars of available debt capacity to fund incremental fleet, as well as significant unused corporate debt capacity.

We ended the quarter not only with $470 million of cash, but also with $320 million of corporate debt and letter of credit capacity, $2 billion of capacity under our vehicle backed financing program, and $750 million more collateral in our domestic car rental financing structure than was required.

We clearly had ample liquidity.

Nonetheless, our corporate debt ratings are non-investment grade.

We are reliant on the asset-backed financing market to fund our fleet.

And as we've all seen over the last 18 months, the credits markets can at times be wildly unpredictable.

As a result, in early October we took advantage of an opportunity to access the market, issue $345 million of convertible debt.

These new notes carry a 3.5% interest rate, are covenant light, were issued at the holding company level and give us flexibility to use the proceeds to pay down corporate or vehicle back debt.

Since the offering, we have already repaid $100 million of borrowings that were outstanding under our revolving credit facility.

Initial conversion price for the note is equivalent to $16.25 a share, and, as is fairly common in transactions of this type, we entered into a convertible note hedge and warrant transaction that raises the effective conversion price to $22.50 per share.

Going forward, our game plan will continue to be to refund, renew, or refinance upcoming debt maturities in advance of their stated maturities dates.

Those of you who know us, know we'll consider available alternatives from a variety of perspectives as we try to balance cost, risk capacity, uncertainty, and other factors.

Most importantly, though, our renewed access to the asset-backed term markets and our successful renewal of nearly $2 billion conduit facility position us well.

Our focus as a management team will continue to be on executing against opportunities that we control, including containing costs and pursuing a number of very promising process-improvement initiatives that have the potential to improve our service offering at the same time they help us reduce cost.

We will enter 2010 with two strong and differentiated brands, an outstanding combination of new and longstanding customers, the most diversified fleet in our history, a remarkably lean cost structure, and significant opportunities for growth, particularly in income.

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

Thank you.

At this time we are ready for the question-and-answer session.

(Operator Instructions)

Our first question, John Healy, with Northcoast Research.

Sir you may ask your question.

Good morning.

I just wanted to ask you guys a little bit about fleet heading into 2010.

It seems that (inaudible) wild card and I was just hoping you would provide a little bit of color regarding how you're thinking about increasing the fleet and maybe your negotiations for buys going into 2010, and, if we were to assume that volumes could grow, maybe 2% or 3% next year, how you would move the fleet accordingly?

Morning, John, I think our strategy for managing the fleet will continue to be what we've done throughout 2009, and by that I mean keeping the fleet very much in line with demand levels, and in the process continuing to have utilization relatively constant on a year-over-year basis.

So are you guys -- when you negotiate with the OEMs, do you have more or less flexibility compared to 2009 to change your fleet levels as you see demand come on, do you think?

We actually have quite a bit of flexibility going across next year.

We have been very pleased with the negotiations we had with the OEMs, and we think there's a potential for more cars if we want them, and we think there is a potential to move the fleet around as we need to across the year.

So, as I said, we feel very good about it.

Okay.

Great.

I might have missed this David, when you went with your prepared remarks, but did you mention what the gain on sale -- the gain on this addition of vehicles was during the quarter?

We didn't, but I can give that to you.

In total our gains and losses on vehicle dispositions, net of any disposition costs, was a gain of $29 million, and about 80% of that was in domestic car rental.

The remainder was in international.

Okay.

Great.

And then, just kind of a big-picture question.

I know you guys did the convert transaction.

As you look at having enough enhancement for the 2010 timeframe as you look at 2011 and 2012 maturity, how do you guys feel about the liquidity that you have at the corporate level today?

I mean, do you think we're in a scenario now where enhancements upon growth in the fleet, that cash or that equity comes from what you guys are able to generate in terms of the core business, or do you see yourselves tapping the capital markets again in the future for any other types of transactions?

Just trying to get your thoughts around how we should think about funding enhancements going further -- going forward.

Hey, John, this is Ron.

You know, I think the simple answer is that we have all of the liquidity we need for certainly this year, and the markets continue to improve on a day by day basis.

You saw how much Hertz's offering has improved from our first offering in the ABS market.

And so we actually think we're going to have more than ample ability to access capital markets.

I think that putting $350 million of junior capital in place was the right thing to do.

But I think at this point in time it's all we need to do.

I think about the momentum we have coming out of the third quarter -- our fourth quarter, without giving a forecast, is going to be substantially better than it was last year.

We're positive about next year fleet costs are down.

We're going to annualize our expense reductions.

With that kind of momentum, we think -- and given the fact that we don't need any capital -- we actually we're in really good shape.

The world could change but I don't think that we have any concerns at this point in time about raising additional capital, or even needing to put any additional capital into our capital structure.

Great.

Thank you guys so much.

Our next question, Emily Shanks with Barclays Capital.

You may ask your question.

Good morning.

David, on your response to that opening, or the second question that the prior caller asked, the gains or losses on used car sales of $29 million, is that 100% flow-through to EBITDA?

Yes, it is.

As Ron mentioned, in many ways, though, the gains or losses that we recognize are really just another component of fleet costs, so they show up in fleet costs in our numbers and in a nutshell the reason we had gains in Q3 is that it turned out that the depreciation rates we had used and estimated in the first half of the year, particularly in the second quarter were a bit conservative in light of where things ended up.

We really just view fleet costs more typically as all combined whether it is depreciation or gain or loss.

Okay.

That's helpful.

And in your prepared remarks you had made the comment that -- I want to make sure I have my numbers right -- that there was an incremental $750 million of additional collateral sitting at AESOP than what was needed.

Is that pro forma for all of the new conduit facilities in place as well as the ABS set?

Well, it's not a pro forma number.

It was the actual number, but that number doesn't really change very much as a result of the other transactions that we've -- that we've done.

The conduit renewal has advance rates or enhancement requirement that are very similar to where it was.

And the other ABS transaction requires a little bit more collateral, but, again it only represent about 4% or 5% of our aggregate fleet.

So it doesn't move the numbers significantly.

Okay.

And is that incremental collateral in the form of fleet or equity?

Primarily in the form of fleet.

Okay.

So are there longer term if we look at this, because clearly you have a lot of LCs that are posted to service collateral, is the idea to eventually unwind that, or what's the plan around over collateralization of AESOP over the next 12 months?

Generally speaking, we will continue to have overcollateral or excess collateral in the form of fleet at all times during the year, and then during our seasonal peak, or seasonal up-fleeting, those are the times when we tend to use some additional letters of credit to support our borrowing.

So there a minimum LC requirement that is always there.

And then we use some additional LCs when we are at or near our peak, and that strategy, I think, will -- we expect to continue.

Okay.

Great.

Thanks very much.

Our next question, Yilma Abebe with JPMorgan.

You may ask your question.

Thank you, good morning.

One question from me.

Obviously you're sitting on a lot of cash at a corporate level, and as you go forward in terms of in the use of cash from the balance sheet, and then free cash flow, how do you think about use of cash as relates to your capital structure on the corporate side?

Thanks.

We are going to be continuing to look at that, but I think our approach is going to be one of being conservative with respect to our liquidity and how we approach cash balances and uses of cash.

So I think you should expect to see that we'll continue to have a fairly decent cash balance, and I don't see us rushing to use it until it makes sense for us, to continue to evolve and update the corporate maturities that we have.

Thank you.

That's it for me.

We only have time for one further question.

Our next question, Mr.

Michael Millman, with Millman Research Associates, you may ask your question.

Thank you.

I have a couple of questions.

One, as you suggested or was suggested, is that at least Hertz seems to be focussed a little bit more on utilization and price, and does that present kind of a lid problem on pricing?

Secondly, on depreciation, should we assume or are you assuming the current residuals going forward, or are you somewhere between the past and the current, and then is there any -- do you have any liability from Realogy?

Those are three disparate questions.

Let's start with the first one.

Hertz has just played a different game, they've been focusing on utilization.

And I think the only time that you affect pricing in the market is when you have fleet -- when you have excess fleet, and you need to soak it up -- you need to soak up demand for the fleet to work.

We haven't seen any problem in getting the pricing increases that we have even though obviously there was a big difference between us and Hertz in terms of realized price increases over the third quarter.

Your second question related to residual values and the approach there is that, no, we have not assumed that the strength of the used car market that existed in the third quarter would persist.

Our depreciation rates assume that things will normalize a bit from the strength in Q3, and as a result we have not assumed that level of strength going forward as we set our depreciation rates.

And your third question, Mike, related to Realogy.

We continue to hold a letter of credit, close to $500 million from Realogy securing all of the liabilities and Realogy and otherwise that flow through our balance sheet for them.

I guess the concern is that if they have to declare bankruptcy.

Then we'll call down on the letter of credit.

That will still be good.

Yeah.

Great.

Thank you very much.

Thanks, Mike.

I guess if there are no other questions we'll sign off and say thank you for joining the call and we look forward to talking with you at the end of the year.

This concludes today's conference call.

You may disconnect.