Avis Budget Group Inc (CAR) 2009 Q4 法說會逐字稿

Good morning, and welcome to the Avis Budget Group fourth quarter earnings conference call. Today's call is being recorded. At this time, for opening remarks and instructions, 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, and thank you for joining us. On the call with me are Chairman and Chief Executive Officer, Ron Nelson, President and Chief Operating Officer, Robert Salerno and Executive Vice President and Chief Financial Officer, David Wyshner. Also joining us this morning is Neal Goldner, our new Vice President of Investor Relations. Neal will be assuming our investor relations duties so that I can refocus all of my energies on our financial planning and analysis function. Please join me in welcoming Neal to Avis Budget. As I move to my new role, let me also say that while it has been a sincere pleasure working with all of you, and I am confident that the transition to Neal will be seamless and he will be even more responsive to the investment community.

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 the current expectations in the current economic environment and are inherently subject to 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 my differ materially from those expressed or implied in 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 night. If you did not receive a copy of our press release, it is available on our website at www.avisbudgetgroup.com. Also, certain non-GAAP financial measures will be discussed on this call, and these measures are reconciled to the GAAP numbers in our press release. Now I would like to now 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. As I think back to where we were just a year ago, I can't help but feel pretty good. Industry fundamentals have improved, the used car market is healthy, and the capital markets are once again open to us. We have changed as well. We have refined our business model to focus even more acutely on pricing and profit, and we have permanently lowered our cost structure by a readily identifiable $400 million. And of course, there should be a corollary, an outcome, if you will, from those dynamics, and there is.

Fourth quarter EBITDA increased $95 million year-over-year, excluding unusual items, despite the $100 million decline in revenues. For the year, the outcome was just as significant. EBITDA increased 44% to $243 million, again, excluding unusual items, despite a $800 million revenue decline. And our report card reflected our progress. Our stock recovered from its mind numbing level of under $1 and closed the year north of $13. The steal a line from our CFO, we are pleased, but not satisfied.

Let's take a minute and focus on our fourth quarter revenue drivers. I think the key takeaway is straightforward. We again saw an opportunity to trade off volume in favor of price, with an overall positive impact on profitability and took full advantage of that opportunity. Some additional color is useful. The significant improvement in EBITDA was driven by five things. Strong pricing, prudent fleet decisions, a decline in unit per fleet costs, a reduction in unprofitable business and the benefit of our cost savings programs. On the pricing front, while we reported a domestic volume decline of 21%, we also reported a composite pricing gain of 9%, which was split 4% on the commercial side and 14% on leisure. To be sure, market demand was by no means down that much. But I think it's probably fair to say that it was down. Considering that, approximately $0.90 of every dollar in price falls to the pre-tax line compared to $0.30 to $0.35 of every dollar of volume, we feel reasonably confident that we made a profit maximizing trade.

On the volume side, our fourth quarter results reflect the broader trends we are seeing, but were decidedly effected by the way we managed the fleet. Specifically, commercial volumes were better than leisure with commercial days down 17% and leisure days down 25% for the quarter. Clearly, fleet tightness caused us to leave some commercial and even more leisure business on the table. We can see it clearly in our turn downs during the quarter. However, there were some early signs that commercial activity has begun to pick up, but nothing I would characterize as a strong rebound. Despite that, because of the steps we have taken to reposition our Company, we were able to grow our earnings despite lower revenues and lower demand in travel services.

To realize the benefits of our pricing actions, we had to keep the size of the fleet aligned with our rental volumes. We were able to do thanks to a conscious decision to defleet somewhat earlier than usual, aided by a healthy used car market. This turned out well for us as vehicle residual values came down a bit in the fourth quarter from the particularly high levels we saw during the summer. Part of the volume declines centers around our continued efforts to reduce the amount of unprofitable or even marginally profitable transactions. Historically, our business has always performed best when fleets are tight, which inevadibly leads to stronger pricing. It has been our experience that it can be difficult to achieve that balance if your focus is solely on transaction growth. In that situation, fleets tend to be loose and pricing suffers as you are forced to attract less profitable business to utilize the excess fleet.

In addition, our decision to sell cars early did cut off some of the peak in August as we reported last quarter, and it also impacted our volume in October and early November. The consequence of all this is that we have seen our airport market share drop around one point. We understood that this was a risk when we set our fleet strategy in motion, aimed at eliminating unprofitable and marginally profitable transactions. But given our success in renewing and growing higher RPD commercial business, we felt this was the right decision.

Share is not the arbiter of profitability if price is the lever you use to make gains. Frankly, much of the revenue we are leaving on the table is transient volume, business that comes from channels that are very price sensitive. So we feel that when these price sensitive channels begin to produce acceptable margins, we will not have lost any brand loyalty by selectively staying out. So at the risk of stating the obvious, our focus is on growing profitable business which will improve our margins and over time, allow us to profitably grow our market share.

One point I do want to call out is that given our fleet strategy, it would be reasonable to have expected an increase in utilization, but for the most part, our utilization has been flat for most of the year. The dynamic at work here is that our midweek utilization did, in fact, increase, but our decision to step away from unprofitable transactions negatively affected our weekend volume and utilization. Mathematically, it shows up as flat utilization, but weekend volume typically contains a significant amount of high mileage rentals and lower RPDs, so trading off midweek utilization for weekend utilization was a margin enhancing action, even though it appears flat from the utilization line.

Despite all these actions, you should not conclude that we are not focused on growth. We clearly understand the importance of growth, but only if that growth delivers bottom line improvements for our shareholders. The cost reductions we made this year largely came out of our fixed and semi-variable cost structure. We are resolute about not letting them creep back in. As a result, we feel we have reset the infrastructure of the Company to deliver meaningful improvements in profitability on significantly less revenue. In the process, by focusing on profitability, we have also reset the revenue level from which the Company will grow. Simply stated, we do not need to get back to a $6 billion revenue run rate by any measure to return to the $400 million plus EBITDA that we generated in 2007.

Reflecting on a 2009 as a whole, I want to take a few minutes to review some of our key achievements and what they mean going forward. First, our cost savings initiatives. While difficult on our organization, they were clearly the right thing to do. We started the year thinking that our year end cost savings run rate would be about $300 million. By the end of 2009, our cost saving initiatives were actually at a $400 million annual run rate, $100 million more than we expected.

It is important to reinforce the point that I made earlier. Because these cost reductions are over and above the actions we would normally take to reflect the seasonal or cyclical changes in volume and actually reduce the fixed cost structure of the Company, we have become a much leaner organization and permanently reduced the level of volume we need to drive profitable growth. These reductions are clearly visible on our P & L. Second, the resilience of our business model was tested and validated last year. I think there has always been some investor uncertainty about our ability to fully benefit from our 70% variable cost structure in a period of revenue contraction, and certainly, 2009 was a test of that premise. But clearly, with $800 million less revenue and lower direct operating cost percentages, I think the thesis was proved.

Third, the domestic ancillary revenues grew 15% year-over-year on a per rental day basis. These are high margin, value added services that demonstrate the payoff from the sales training initiatives we launched late in 2008. Fourth, thanks to the quality of our service offering and the hard work of our sales and marketing team, we retained more than 99% of our commercial accounts in 2009. We also added net new business in competitive situations, winning significantly more than we lost, and signed and renewed a number of marketing affiliations that will help us grow the leisure half of the business. Fifth, on the liquidity front, we completed more than $3 billion of financings in the second half of 2009, which positions us well for our peak funding needs in 2010. And finally, for the fourth consecutive year, Avis was named North America's Leading Car Hire and World's Leading Business Car Rental Company at the 2009 World Travel Awards. We are very proud of these awards as they illustrate the value that travel professions place on our service. As I have discussed previously, we continue to seek new ways to improve the customer experience while driving new sources of revenue for our Company.

Let me briefly update you of several of the strategic initiatives I discussed on our last conference call. Our decision to move to 100% smoke-free fleet has clearly been a home run, with customer complaints down significantly and our customer satisfaction scores up. Our move to a new emergency roadside service provider has been a huge success as well, which is not only showing up in our satisfaction numbers, but also paying for itself in improved customer recoveries. We are testing a new portable satellite radio product that, like our portable GPS unit, will be available as an add on to any rental. We are currently in seven test markets with additional markets scheduled for later in the year. This is another industry first for Avis, allowing us to bypass an expensive options from the OEMs, but still capture the revenue that can be gleaned from a highly desirable consumer option.

Finally, we have been pleased with our first checkout kiosk desks and will be expanding kiosks into additional markets. With these and other initiatives, we are currently expanding our use of our Voice of the Customer program. We typically survey by email by other 300,000 customers a year to get their impressions of how our service was, whether the vehicle met their needs and other aspects of the rental experience. The results are generally very reliable. In fact, this is how we came to the decision the move forward with our smoke-free fleet. We saw the growing trend in customer feedback that the smell of smoke was not only the most frequently cited complaint, but it was also the issue that was considered to be the most serious by customers. We firmly believe in the power of using insights in shaping our product and service strategies.

Going forward, we will be expanding the breadth of the survey and putting increased emphasis on the results, all with an intense focus on customer satisfaction. If we are to achieve the pricing our product deserves, we firmly believe that this is an imperative for delivering superior value to our customers. It will help us support Avis' premium brand positioning and premium price points to help us cement Budget as the leading brand for the price conscious traveler.

One other topic that has certainly garnered a fair amount of press and investor interest is no-show fees, or as we prefer to think about them, non-cancellation fees. As you know, the car rental industry is the only segment of the travel industry that doesn't require a credit card in order to hold a reservation. Just as for hotels and airlines, car rental customer no-shows give rise to operational inefficiencies and increased capital costs. This issue is of particular concern during peak periods when we operate with a very tight fleet. As a result, we have asked our booking partners to make sure their systems can support steps for us to require a credit card for reservations, as well as collect a non-cancellation fee. No-shows have always been a problem of varying degrees for the industry, and we have seen industry participants take small steps to address this in recent months.

For example, one of our competitors now requires a credit card when making a reservation for a monthly rental. Our counterparts in Europe, Avis Europe and Budget Europe, have each moved forward with a credit card requirement and non-cancellation fees, primarily in the leisure space. The other competitors have built into their channels the option to provide a credit card at the time of reservation in return for a discount. In our case, if you wanted to reserve a specialty vehicle like a passenger van at a major destination this summer -- this past summer, our call center would ask you for a credit card to hold the reservation. All of these would seem to naturally lead to the direction of a non-cancellation fee. We have been pleased the results of the various initiatives undertaken this past summer, and our plan is to expand the implementation of non-cancellation fees, albeit carefully and prudently. Our initial focus will likely be on high demand periods, such as Georgia during Masters week, Indiana during the Indianapolis 500, Florida and Colorado over President's weekend and spring break and certain convention markets. It may also apply to certain types of special rentals such as four-wheel drive vehicles, passenger vans, hybrids or mini vans.

Before I turn the call over to Bob, let me say a few words about our outlook. While we are not going to give specific guidance, the basis of our planning for 2010 is that the macro economic climate will continue to be challenging in the first half, with a modest recovery beginning in the back half of the year. We think this will manifest itself in a continuation of lower volumes and year-over-year price increases early on, with sequential improvement in volume over the course of the year that gives rise to a moderation in pricing. That environment, combined with lower fleet costs and additional cost reductions, should give us a significant opportunity to grow our EBITDA. Through the first six weeks of this year, the general trend has been proving out, although volumes have been somewhat weaker than we expected and pricing somewhat better. Nonetheless, our EBITDA was on plan in January. Commercial volumes are continuing to improve, especially as we move into February, but you should expect that the unusual weather in the mid-Atlantic and in the south will have some modest impact, as well as the Toyota recall. All things considered, we are cautiously optimistic about the prospects for the year. For reasons of weather, recall and comps that were trending down but not bottoming last year, I would not expect our optimism to reflect itself with much buoyancy in the first quarter.

But to end to where I began, we are pleased and satisfied with the actions we have taken to reposition the Company to benefit from an improving economy, and we are confident that as volume returns, and it will, we will be a much more profitable Company. With that, let me turn the call over

Thanks, Ron, and good morning. I would like to discuss several issues related to our fleet. As Ron mentioned, in the fourth quarter, we continued our strategy of keeping the fleet in line with rental volumes. As a result, our average domestic fleet was down 19% for the quarter. It was only some weather related issues and our decision to step away from some unprofitable weekend transactions that caused our fleet to be down slightly less than rental days. Maintaining a tight fleet did help us achieve a 9% increase in price and enabled to to avoid searching for volume at discount prices to utilize excess fleet. The used car market remained healthy the fourth quarter, but did exhibit its normal seasonality and then some, as the temporary boost from Cash For Clunkers subsided.

While the Manheim Index numbers are off the charts on a year-over-year basis due to the unusually easy comps, a more meaningful measure is that the index was 5% higher in fourth quarter 2009, than in the fourth quarter 2007. Having taken advantage of strong market conditions in the third quarter, we didn't have to sell as many car in the fourth quarter, and we had no significant gain or loss on vehicle dispositions in the quarter. As we mentioned in the past, we believe a generally strong used car market is likely to persist for some time. The most important factor supporting used car values is supply, and for the third year in the row, there were more cars scrapped than built. What's more, according to Adesa, the car rental industry purchased 25% fewer cars in the 2009 than in 2008.

To give you some perspective on the new fleet discipline in the industry, the 1.1 million vehicles purchased by the car rental industry last year was half the number of cars purchased in 2006. The number of vehicles Avis Budget purchased in 2009 was down 30% year-over-year. We, as well as Manheim, believe that the unbuilt cars of '08 and '09 will constrain used vehicle supply in 2010, 2011 and 2012. Also, with new vehicle leasing volume down significantly in 2008 and '09 , there will be fewer two to three year old vehicles to compete with off rental used cars over in next several years. For these reasons, we believe current market dynamics will support strength in late model used car pricing over in the next few years. It is important to note that while the Cash For Clunkers boost was nice, all we need is a normally functioning used car market to dispose of our fleet as demonstrated this quarter.

I would now like to turn to our model year 2010 fleet outlook. Our negotiations with car manufacturers for model year 2010 purchases have been completed. We picked up a few attractive deals at year-end, but overall, our assumptions remain essentially the same. We expect our manufacturer fleet mix will be a record low, 55% to 60% domestic and record high, 40% to 45% foreign. Driven by our efforts to diversify the fleet and reduce our reliance on any one manufacturer. More broadly, in terms of diversification, we hit our target of not having any one manufacturer be more than 25% to 30% of our fleet, and we reached this target a year earlier than planned. Diversification improves our negotiation position and reduces the impact a single manufacturer can have on the residual value risk of our total fleet.

I want to say a word about Toyota. These vehicles have always performed well in our rental fleet, and Toyota remains a valued business partner with our Company and a well accepted unit with our customers. We have been able to manage through the disruption associated with removing about 16,000 recalled Toyotas from our fleet of approximately 260,000 cars. We have received the required parts and have completed the needed repairs on essentially all of effective vehicles and have returned these vehicles back to our rental fleet, including our Prius models.

Looking forward, we are projecting the per unit fleet cost to be down in the range of mid to high single digits for model year 2010. Fleet cost this is year will also be impacted by model year 2009, 2010 and 2011 vehicles, so we expect our average per unit cost will decline 4% to 6% in calendar year 2010. We continue to believe that a prudent way to manage the fleet is with a mixture of program and risk cars. We temper our risk program mix based on rental demand, seasonality, our projections of future residual values and the particular manufacturer offerings available to us. Program vehicles offer us the flexibility to add and delete vehicles based on our rental business, regardless of the current used vehicle marketplace, and they also allow us to provide new vehicles to cycle in and out of the fleet. We continue to have a substantial portion of our fleet at risk, which has a lower cost and allows us to capitalize on the used vehicle marketplace, should an opportunity arise. While there is a lower cost associated with risk vehicles, we do not feel that the savings is sufficiently large enough to outweigh the advantages of fleet flexibility and reduced exposure to the used car marketplace that come with having a significant program component to the fleet. You need to look no further than the fourth quarter of '08 and the recent Toyota recall to reinforce that point.

In addition, because of our mix of risk and program vehicles which allowed us to undertake aggressive car sales in both Q3 and Q4, we now have a fleet that has an average age of less than seven months with 95% having less than 30,000-miles. Utilizing both car sales and program units has allowed us to replace higher cost 2009 units with lower cost 2010 units much more quickly than a predominantly risk fleet would have allowed. Our overall mix of risk and program units is projected to be 50/50. We will continue to evaluate all factors in the deciding our risk program percentages. We are beginning to talk to the manufacturers about our model year 2011 purchases. Initial conversations are promising, and we will keep you advised as things progress. So after a difficult period for fleet starting in the back half of 2008, I am encouraged by the pricing we have been able to achieve with the help from our fleet strategy, by the anticipated decline in fleet costs, by the trends in the used car market and by our ability to nimbly manage the fleet for opportunities. With that, let me turn the call over to our Chief

Thanks, Bob, and good morning, everyone. I would like to discuss our recent results, our liquidity and our outlook for 2010. My comments this morning will focus on our results, excluding unusual items. As Dave mentioned, these results are reconciled to our GAAP number in our press release.

In the fourth quarter, revenue decreased 8% to $1.2 billion, EBITDA grew by $95 million to $14 million. Our pre-tax income, in this seasonally slow quarter, was negative $51 million. All three of the operating segments reported growth in EBITDA, which reflects our companywide cost reduction efforts. In the end of 2009, the total headcount was down nearly 7,000, or 23% compared to the end of 2007. In our domestic segment, EBITDA increased $82 million for the quarter due to higher pricing, lower per unit fleet costs and cost saving initiatives, partially offset by lower volume. Fourth quarter revenue declined 13%, reflecting a 21% drop in rental days and 9% growth in time and mileage revenue per day. Commercial pricing was up 4% year-over-year, and leisure pricing was up 14%. We believe the increase in time and mileage rates is a testament to our business model, which has inventory flexibility that makes it quite different from the hospitality and airline industries.

Domestic ancillary revenues were up 9% on a per rental day basis in the fourth quarter, driven by growth in loss damage waivers, insurance, electronic toll collection and Where2 GPS rentals. Direct operating expense declined 460 basis points as a percentage of domestic revenue despite the steep decline in volume, as we continue to benefit from our cost savings actions, lower insurance costs and lower gasoline costs compared to 2008. Excluding performance-based incentive compensation expense, SG & A costs decreased 80 basis points as a percentage of revenue.

In our international operations, revenue grew 18% year-over-year, driven by a 34% increase in time and mileage revenue per day, partially offset by a 10% decline in rental days. Excluding foreign exchange effects, time and mileage revenue per day was up 10% and ancillary revenues increased 5% per rental day, reflecting our initiatives in the this area. Per unit fleet costs increased 6% on a constant currency basis. EBITDA increased year-over-year, primarily due to these same issues, stronger pricing and a favorable impact from foreign currency, partially offset by lower rental days and higher fleet costs. Excluding the impact of foreign exchange, EBITDA increased slightly.

In our truck rental segment, revenue declined 2% versus last year due to a 2% decrease in rental days. EBITDA grew primarily due to lower fleet costs and our cost cuts. In the fourth quarter, total unusual items consisted of $5 million in restructuring charges and a $32 million impairment charge to write off our investment in Carey International. In the full year, Avis Budget generated $243 million of EBITDA , excluding unusual items, an increase of 44% versus 2008. Our operating segments benefited from our pricing strategies, healthy used car markets and substantial cost reductions from our five point plan and Performance Excellence initiative. Direct operating expense declined by 150 basis points as a percentage of revenue, and SG & A declined 60 basis points, excluding the effects of incentive compensation. In terms of covenant compliance, we exceeded the minimum EBITDA requirement in our credit facility by 70% and ended the fourth quarter with cushion of more than $100 million.

We have also been managing our capital spending judiciously. In fact, CapEx totaled $39 million in 2009. As I had mentioned previously, we aggressively curtailed discretionary capital items and prioritized projects based on necessity and those that generate returns in the less than one year. We also had the benefit of some airport driven projects starting later than we expected. Several of these projects are gearing up now, so I expect that CapEx in 2010 will return to historical levels, will be more in line with non-vehicle depreciation and amortization. Free cash flow was positive, $105 million for the full year, excluding the impact of vehicle programs. Vehicle programs had a negative impact on free cash flow, primarily due to some use of international cash to pay down vehicle debt in Australia and Canada and our buying out maturing truck leases in the fourth quarter. We expect to refinance the trucks that were bought out, so approximately $70 million of the 2009 use of cash should reverse in the next few months. Including the impact of vehicle programs, free cash flow for the full year was negative $96 million.

We ended 2009 with $482 million of cash, $761 million in letter of credit capacity, $2.3 billion of capacity under our vehicle backed financing programs and $900 million of excess collateral in our domestic car rental financing structure. We clearly have substantial liquidity. While we have already addressed our peak 2010 domestic fleet financing needs, we will look for opportunities to access the ABS markets to prefund late 2010 and 2011 maturities of vehicle-backed debt. We have also been looking at our corporate debt maturities. Over the coming weeks, we expect to have conversation with lenders about ways to extend some of our corporate debt maturity, including our senior corporate credit facility. Also, as you probably read, S&P recently upgraded our corporate credit rating two notches, noting that we are benefiting from improved industry fundamentals, cost cutting measures and efficiency improvement initiatives.

Let me now turn to our outlook. By and large, our playbook for 2010 will look very similar to last year in terms of the Company's focus. As Ron mentioned, the key elements of the strategy continue to be rigorous cost controls, focusing on price and profitability, keeping our fleet right size, growing ancillary revenues and refining and improving the vehicle rental experience we offer to customers. We think that we will see a modest economic recovery this year, and that this will drive increased car rental demand, although it will also likely coincide with a moderation in pricing. As we have said in the past, pricing is a function of demand and fleet levels, and we have seen relatively few over-fleeted situations. As we did in 2009 , we will continue to focus on driving price in our business. Based on our activity to date, we expect to have positive year-over-year pricing in the first quarter of 2010, and we intend to maintain our focus on driving price. But the comparisons will clearly become tougher over the course of the year. In addition, while ancillary revenue per day growth rates may slow in 2010, we expect to garner incremental revenue and profits as rental volumes return and with expand our offerings.

On the expense side, we intend to keep the size of our rental fleet in line with demand. As Bob mentioned, we expect our per unit domestic fleet cost to be down 4% to 6% this year, which should offset higher interest costs and inflationary cost increases in other areas. Our cost saving initiatives will also provide incremental benefits. The combination of having a full year benefit in 2010 from actions taken in 2009 and continuing to improve efficiency through our Performance Excellence initiative should generate incremental cost savings in 2010. We estimate that the incremental cost savings in 2010 compared to 2009 will be in the range of $40 million to $60 million. For those of you who want more detail about our cost savings initiatives, please refer to the appendix in our latest investor presentation which will posted on the website later today.

Finally, our 2010 GAAP tax rate is expected to be in the 40% range, and we expect cash taxes to be in the $35 million to $40 million range. We will probably become a partial cash tax payer in the US in late 2010 or in 2011. As we look over the longer term, we are focused on and excited about our potential to return margins to the levels we achieved just a few years ago. In fact, our hope is that our cost reduction actions, our increased emphasis on profitable rental transactions and the increased diversity of our fleet sources give us the opportunity to exceed the margins we achieved during the last cycle. 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 comes from John Healy with Northcoast Research. Sir, you may ask your question.

Good morning, guys. Question for you, Ron, on strategy. You have really done a good job this year with showing the pricing discipline. And I want to understand the strategy with the Budget brand a little bit. It seems to be that you guys have done a good job of moving pricing, even in the middle market of the hierarchal pricing structure in the industry. I want to give your thoughts behind how you feel Budget is positioned today. Is it positioned more as an alternative to the middle market of the car rental customer, or do you believe it is still kind of -- can be an alternative for the lower end customer who is looking for a rental experience with you guys? Just trying to understand how the brands are positioned today and how you see those brands positioned over the next couple of years.

I think, John, Budget is somewhat unique in the value sector in that they have both a commercial and leisure aspect to their customer profile. And so as a consequence, you have got to be careful about how you manage your leisure business. We are pretty happy with how we're positioned. Right now, we're probably at the top end of pricing for the value sector. But, given where it is sitting, it is also an advantage for us in the commercial market where somebody doesn't really want to pay up for the level of service that Avis provides. Look, I think this is an issue that we watch hourly and daily. And with Budget, we understand that we have to be competitive, but we think the brand profile is different enough that it is able to command a premium in the value space and still deliver good value to the commercial customer. So it is a little bit of a tweener, and I think we are pretty happy with where we are positioned now, but the market is so dynamic at the value end that I don't think you can look at something today and say that it is going to be that way forever.

Okay. That is helpful. David, I was hoping you could try to give us a little color on interest costs as we move into 2010. Just kind of how we should think about the incremental expense associated with the new fleet borrowings and some of the corporate debt levels. I was hoping for a little color around those items.

Sure, John. We expect interest cost to be up this year. But the amount that will be due changes to rates and spread is probably be in the $20 million to $25 million range. So our hope, and in addition to that, to the extent that volumes are up, we will also have increased borrowings and increased interest due to higher volumes. But the rate related impact is sort of in the $20 million range, we think. So our hope is that the cost savings that we have coming in the lower fleet costs will more than offset the impact of higher rate related interest costs.

Okay, great. And just a last question. When you guys think about the longer term margin goals for this Company, is it safe to assume that even if vehicle depreciation expense maybe reverts a little in the next two years or so and that you guys do begin to encounter increased fleet costs on a holding basis, that maybe something -- the 8%, 9% EBIDTA margins, is that a realistic goal, do you think, over the next cycle, or is it closer to the 6% or 7% level like we have seen a few years ago?

No, we actually believe that we can get to the 8% to 9% margin goal with what I would call more normalized increases in fleet costs. We build models that go out three to four years, but as you know, John, those are primarily math exercises. But the way we build the models are to put modest amounts of fleet cost increases, as well as very modest amounts of pricing. And, you know what it shows is that the impact that we have been able to achieve by lowering our fixed cost structure under most reasonable scenarios allows us to get back to those 8% to 9% margins without getting back to revenue level that is we had in 2007. So, a long answer to a question that could have been answered by yes.

Well, I appreciate it. Thank you, guys.

Sure.

Our next question, Chris Agnew with MKM Partners. You may ask your question.

Thank you very much, good morning. First question on fleet costs. I am thinking about quarter-to-quarter volatility. Should we expect a similar pattern on your per unit per month fleet costs to last year? And then maybe, finally, what kind of residual value assumptions have you built into your fleet cost estimates? Maybe if you think about where the Manheim index to use as a proxy is today? Thanks.

Let's work backward. With respect to the second question, the assumptions we make about our fleet costs and residual values are essentially done on where the market is and has been over the last several quarters, and we update that on a regular basis. We are -- when we set our residual values, we are not taking any view that the market is going to be significantly different than what we are seeing and what we have seen over time. So, I think that we try to take a middle of the road approach there. With respect to the fleet costs on a by quarter basis, clearly, there was a fair amount of noise in 2009 by quarter, and what I think what we would expect to see is that that will normalize a bit this year, so that in the first half of the year, we have easier comps. In the second half of the year, they are a bit tougher. So the 4% to 6% decline we are looking at will probably be doing a little bit better than that early on and closer to that, or maybe a little bit less down in the back half of the year.

Thanks, David. Then, one more question. Is it possible to quantify the impact from store closures? The volume impact? And also the volume impact from eliminating these unprofitable transient transactions? So really, what I am trying to get to is as we go through the quarters in the 2010, how do you anniversary the impact of your actions last year? How should we be thinking about a kind of a same store number?

I think in terms to have impact of store closures, Chris, you ought to figure it is about a 1% revenue impact. And there will be a few more score closures this year, but it won't move that number materially. So that is one segment. The -- reducing unprofitable transactions, it is always hard to get your arms around that because you don't know what baseline you are measuring off of, but the number we use is about a 6% revenue hit, so that is the second category. The third category which you ought to be aware of is that as of January 1, we returned the Budget LAX sublicense back to its license holder. We just weren't making any money in LA, and when we went through and did all our analysis of where we were making money and where we weren't, this one clearly stuck out like a sore thumb. So ago of January 1, the licensee holder is operating Budget, that is going to have about a $100 million revenue impact. So when you add all that up, it is probably about 2% to 3%. So, maybe a 8% to 10% revenue from those three things.

And just --

On the LAX thing, it is going to be seamless to the customer. He has already fleeted and up and running and servicing customers, and it is much easier to make -- LAX is a tough market to begin with, but when you are not having to pay a royalty to a license holder, it is a easier market to justify the capital that you have to invest in the fleet.

Okay. Just to clarify, is that January 1 this year, so the impact will be for subsequent quarter of this year?

Yes.

And then the 6% sort of transactions impact, obviously, you started to pair those back last year. So what I am trying to get at, does that sort of -- it is still hitting you 1Q, 2Q this year and then you start to normalize the year-over-year impact?

I think you are absolutely right. It started to get a lot of traction starting in the third quarter, so you will see some year-over-year bigger reductions and then it will flatten out by the back half of the year.

Excellent. Thank you very much. I'll get back in queue.

Thanks.

Our next question is Emily Shanks with Barclays Capital. You may ask your question.

Good morning, everybody. David, I have a housekeeping question to kick off with. How much of the convertible debt is included on the balance sheet debt number in the press release?

All of it is. It was a $345 million issue, and that is in the debt number.

Okay. Perfect. So it doesn't -- because didn't GAAP change that you have to file differently on your balance sheet?

Not given our structure. All $345 million is reflected.

Okay, super. And then what was the revolver draw?

There were no revolver borrowings at year end.

Okay, and how many LCs were outstanding?

I believe it was about -- I believe there was about $460 million of LCs outstanding at year end.

Okay, perfect. And then as we look at this amend and extend, can you comment at all if you would look to come back to the capital markets, whether it be for equity or debt, to do any refinancing within the capital structure?

Sure. With respect to equity, we certainly -- we never say never, but we don't have any current plans to go to the equity market. With respect to debt, it is something we will look at from time to time.

Okay, great. And then my last and final question is related to the legacy Cendant IRS settlement. We heard from Realogy that they are looking for the examination to be done by the second or third quarter of this year. And I just wanted to see if you could give us an update in terms of your involvement and potential liability there?

Sure. We are very involved because we are the legacy tax payer, but our exposure, we think, is very limited to the extent that there are any payments related to legacy issues that would have to be made, those would be made by Realogy and Wyndham. So it's a pass through from our perspective.

Okay, super. Best of luck. Thank you.

Thank you.

Our next question, Michael Millman with Millman Research. You may ask your question.

Thank you. First, can you talk about whether the higher costs of doing business currently than with the case a few years ago, primarily financing require a higher return, and maybe you can quantify that. Then I have some other questions.

The interesting thing is that over the last couple of years, while spreads have widened, the base interest costs measured in terms of LIBOR have actually been down, and on top of that, we are starting to see spreads in the asset backed markets normalize a bit. So in net, there really hasn't been much of a change in overall financing cost between what we were paying a few years ago and what we are paying currently. A little bit more of it is in spreads now, less of it is in base interest costs, say LIBOR. So I don't think that has changed very significantly in the last few years.

Thank you. On the commercial side, can you talk about why you feel it's necessary to recontract, if you will, 99% of the business? I would think some of that commercial business is trying, if you will. And related to that, can you talk about what the cost differential is, cars and service, for commercial day versus a leisure day of rental?

On the commercial side, we do look at each commercial account and look at the profitability of each commercial account. And you are right, they are all different. Some are more profitable and some are less profitable. When you talk about renewing 99%, we worked over the years to develop a portfolio that we think is right for us. As I said, some are less profitable and some are much more profitable, but it is our intent to continue to keep and guard our -- what we view as our core business for Avis and significant business for Budget. But that is how we do it. We do do it with an eye to the profitability of each account.

And can you talk about the other part of the question, the cost differential between commercial and a car service, et cetera and a leisure day?

We can. It is David. The issue of how to allocate costs and measure them is a complicated one. Perhaps a little bit outside the scope of what we can address here, but let me cover a few points. The first is that the same car may be rented to a commercial traveler during the week and a leisure traveler during the weekend. In fact, that is often the case. And that makes the issue one, more of an allocation question than anything else. But the big difference between a commercial renter and a lot of the leisure business we do is the length of rental. And as a result, we see -- we tend to see higher per day pricing, but there are a number of costs that really aren't tied to the number of days, but are rather tied to the transaction itself. And that is a big driver of the difference between the two and how we analyze them.

There are also differences in terms of commissions that we pay and maintenance and damage. Maintenance and damage costs tend to be higher on the leisure side. And then lastly, mileage accruals tend to be different. With leisure, particularly weekend travelers putting on higher numbers of miles per day on average. That all factors into the relative profitability of transactions. But you are right in that how you allocate fleet cost does matter quite a bit, and there's no perfect way to do that. We look at it based on days and mileage. But one of the questions you always have to try to address is who pays, or which transaction pays for a car when it is not being rented? And that is what makes the analysis particularly challenging. I hope that helps a bit in what is a question and an issue we spend is a lot of time thinking about. Not an easy one to answer.

Could you give just a rough quantification difference?

In terms of the fleet costs, we -- I don't think there is an easy way to allocate the fleet costs. It is more complicated than just saying business travel tends it's to be four and a half days of the week, and leisure travel happens to be the other two and a half days, for all the reasons I mentioned.

Okay, thank you.

We only have time for one more question. Yilma Abebe with JPMorgan, you may ask your question.

Good morning. I believe you said your volumes in the quarter were down, more than the market, because or your fleet management. Can you give us a sense for how much you think that the market was down in the quarter?

Well, I think it's -- I am going to have to give a guesstimate. We get airport revenue numbers, which give us individual airport shares, and the revenue numbers during the quarter at the airport were probably down 3% to 4%. So if you assume that everybody got some pricing during the quarter at the airport, that is a little hard to tell, because people aren't going to -- they may not break out off airport and airport pricing for you, but if you assume there was maybe four to five points of pricing in there, then your volume is probably going to be off somewhere in the 7% to 8% range. I mean, look at enplanements. That is generally a pretty good surrogate.

And going forward into the first quarter and beyond, is your expectation that your real volumes, that the company level will be lower than overall market? Similar to what you saw in the fourth quarter?

Yes, I think they will. Because we are continuing to turn away unprofitable business. We are not aggressively going after unprofitable business. And as I said, we have got Budget LAX out of the mix. We are closing some stores, so, I would think that those things are going to have a negative impact. But, looking at our res build, it is clear to us that our commercial volume is improving and that the market is getting better. The other thing that will have a modest impact to the plus side is that part of Easter is going to shift into March into the first quarter.

That is all I had. Thank you.

With that, I guess we will call the call to a close, and we look forward to talking to all of you at the end of the first quarter, some time in April. Thank you very much.

This concludes today's conference call. You may disconnect.