Herc Holdings Inc (HRI) 2007 Q1 法說會逐字稿

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The company has asked me to read the following statement to you. Certain statements made on this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 199. These statements include but are not limited to the statements concerning Hertz Global Holdings' outlook, management forecasts, opportunities to increase productivity or profitability, implementation of productivity and efficiency initiatives, anticipated pricing and growth, future performance, management's plans, acquisitions, contingent liabilities, taxes, and liquidity. These statements may be preceded by followed by or include the words "believes," "expects," "anticipates," "intends," "plans," "estimates," "projects," "seeks," "will," "may," "should," "forecasts," or similar expressions.

Forward-looking statements are not guarantees of performance and, by their nature, are subject to inherent risks and uncertainties, and actual results may differ. Any forward-looking information related on this call speaks only as of the date hereof. Hertz Global Holdings undertakes no obligation to update or revise any forward-looking statements to reflect new information, changed circumstances, or unanticipated events. You are cautioned, therefore, that you should not rely on these forward-looking statements.

You should understand that the risks and uncertainties discussed under the heading of "Risk Factors" in the Hertz Global Holdings annual report on Form 10-K for the year ended December 31, 2006, could cause future results or outcomes to differ materially from those expressed or implied in Hertz Global Holdings' forward-looking statements.

I would now like to turn the conference now over to your host, Ms. Lauren Babus. Please go ahead.

Good morning, and welcome to Hertz Global Holdings first quarter 2007 financial results conference call. Earlier today we issued our press release and associated financial information. In a minute, I'll turn the call over to Mark Frissora, Hertz' Chairman and CEO, and Paul Siracusa, our Chief Financial Officer.

Mark and Paul will take you through a detailed explanation of our performance. In addition, here today are Joe Nothwang, Executive Vice President and President, Vehicle Rental and Leasing, the Americas and Pacific; Michel Taride, Executive Vice President and President, Hertz Europe Limited; and Gerry Plescia, Executive Vice President and President of Hertz.

We'll take your questions during the second part of our call. The operator will explain the process. Please note that our discussion today will include information on non-GAAP financial measures, all of which are reconciled with GAAP numbers as shown in our press release attachment. The press release and the attachments are also posted on our website, Hertz.com/investor relations.

Our call today focuses on Hertz Global Holdings, a publicly traded company but the results for a totally owned subsidiary, the Hertz Corporation, were identical for the periods discussed. And now I'll turn the call over to Mark Frissora.

Good morning, everyone, and thanks for joining us. Let me give you some financial highlights before we get into the separate business segment.

I am pleased to report yet again that Hertz generated record total first quarter revenues, $1.9 billion, a year-over-year increase of 7.6%. We were particularly encouraged by the improvement in adjusted pretax income and corporate EBITDA in spite of the seasonally low rental activity, which impacts how quickly we can absorb fixed and semi-fixed costs in the quarter.

Adjusted pretax income for the quarter was $16.1 million, an improvement of $27.7 million from the prior year. Adjusted net income for the quarter was $6.3 million, or $0.02 per share compared to a loss of $10.8 million or a loss of $0.03 per share in 2006 in both cases using the pro forma post IPO diluted share count of 324.8 million shares.

For the quarter, corporate EBITDA increased year-over-year by almost 20% from $198.7 million to $238 million. This was 12.4% of revenues compared to 11.1% for the same period last year.

At March 31, 2007, net corporate debt divided by corporate EBITDA for the last 12 months was 3.1 times showing significant improvement over the 3.3 times at December 31, 2006. This was due to the increase in corporate EBITDA of $46.1 million and a $122.9 million reduction in net corporate debt. This significant year-over-year improvement was driven by a reduction in direct operating expense of over 240 basis points of revenues on an adjusted basis, which more than offset increases in higher fleet depreciation and selling, general, and administrative expense.

The GAAP profit measurements I will report now do not fully reflect our ongoing operating performance because of certain noncash expenses and non-recurring charges relating to purchase accounting and debt cost amortization. That's why we want the investment community to focus on corporate EBITDA, adjusted pretax income, adjusted net income, and adjusted earnings per share. We believe that these non-GAAP metrics better reflect our profitability and the progress we are making on our financial goals.

In the quarter we reported a loss before income taxes and minority interests that is pretax loss of $90.6 million versus a loss of $63.3 million in 2006. Included in the pretax loss for 2007 are $32.6 million of costs related to our restructuring and delayering project, in incremental noncash interest of $16 million primarily related to the reduction in our senior term loan facility. Without these costs, our pretax loss would have been $42 million, $21 million better than the prior year.

The net loss was $62.6 million, or $0.19 per share on a diluted basis compared to a loss of $49.2 million, or $0.21 per share in the first quarter of 2006. The fully diluted weighted average number of shares outstanding for the first quarter 2007 was 326.6 million compared to 229.5 million shares used for the same period in 2006.

Our cash flow performance also reflects improvement. Levered after tax cash flow, after fleet growth for the quarter, was positive, and we reduced net corporate debt by $122.9 million from year-end 2006. This improvement was driven by reduced Hertz fleet growth, capital expenditures, improved working capital, and stronger corporate EBITDA.

As of last night before our earnings press release was issued, the market value of our equity had increased 55% since our initial public offering on November 16, and 34% since December 31st.

The latest data available from the Department of Transportation shows domestic employment growth for January 2007 of 2.3%. International employment growth reported by the Federal Aviation Administration for January was 6.1%. The current outlook for 2007 is for domestic employments to increase by 3.7% and international employments by 4.7%. The Association of European Airlines reported strong employment growth of 5% versus 2006 for February year-to-date. Employment numbers are good directional indicators for our business but not directly correlated as to magnitude.

Non-residential construction of growth as reported by F.W. Dodge for February year-to-date was flat relative to last year with great volatility from month-to-month, which is not unusual during the winter months. The forecast for full year 2007 continues to be 4.1% with stronger growth expected in the first half of the year than in the second half.

As will be seen in the business segment section, there continued to be hurricane-related rental activity in the first quarter of 2006 both in car rental and equipment rental, which impacts the respective comparative growth rates. This will also affect the year-over-year comparisons for the second quarter although at a lower level before it subsides.

So let's talk a little bit about operating performance, specifically worldwide RAC segment. I'll give you some details on our first quarter 2007 performance starting with the worldwide car rental segment. Revenues increased in this segment 7.6% to $1.53 billion. Corporate EBITDA was $74 million, or 14.7% higher and adjusted pretax income more than doubled from the first quarter of 2006 to $36.9 million.

Given the seasonality of our business is especially significant to corporate EBITDA and adjusted pretax income grew faster than revenues demonstrating our ability to execute on cost reduction and improve efficiency. Revenue growth was driven by a 4.2% increase in worldwide transaction days and rental revenue per day before the impact of foreign exchange was flat year-over-year.

In the United States, volume was 3.2% higher, and revenue per day was flat. In our international operations the volume increase was 6.6%, and the pricing improvement was four-tenths of 1% before the impact of foreign exchange.

In both markets we were successful in raising business rates, while the leisure rate environment was more challenging. I will talk more about pricing in a few minutes.

As most of you know, our corporate accounts are renewed throughout the year, and we have achieved price increases of about 4% in most of our renegotiations so far this year. On a net basis, we continue to sign new accounts, adding to our strong commercial revenue base.

In Europe we continue to win new travel industry and commercial accounts that have a very high success rate for renewing existing accounts. Hertz continues to be number one from a customer satisfaction perspective based on an independent research study we commission periodically to ask airport renters which one car rental company is best overall? Results from the December 2006 survey are consistent with previous study.

Hertz continues to be cited almost twice as frequently as the next-highest rental car company among airport rentals regardless of rental purpose.

Already in 2007, and most such announcements come later in the year, we have garnered three major awards. Hertz was named Best Car Rental Company in the UK by Business Travel World; Most Trusted Brand of Car Hire Company in the 2007 Reader's Digest European Trusted Brand survey; and Best International Car Rental Agency in a survey conducted by a leading Brazilian travel publication.

With regards to pricing, we face a tougher year-over-year comparison than our competitors for the period. The reason is that in the first quarter of 2006, our rental rate revenue per day increased by 3.1% versus first quarter 2005, while other competitors reported increases of approximately 1.5%.

Because our pricing was so much better in 2006, it was difficult to further raise rates in this past quarter. In the U.S. the pricing environment at airport locations, although slightly positive overall, in the first quarter did not support discretionary price increases across most channels despite multiple attempts by Hertz and other firms to raise rates across several markets in both January and February.

In fact, several competitors, including mid and higher-tier brands decreased rates in late February and March across a majority of markets, which put pressure on industry pricing and ours as well.

In the off airport market, customer types such as insurance replacement, dealer replacement, commercial, et cetera, have different length in pricing profiles. Some of these sectors are growing faster than others, which results in a slightly negative impact on overall rental rate revenue per day.

To illustrate this point, in the first quarter we experienced double-digit insurance replacement revenue growth and average length of more than 13 days, three times our overall average rental length.

In Europe we achieved higher pricing in corporate and replacement activity, while discretionary pricing remained very competitive. Overall, pricing remains competitive. In certain markets we can raise our rates, in others it is much more difficult. However, we are encouraged by the real transaction day growth we have achieved and the incremental profit derived from these rentals.

Our U.S. airport market share for December 2006 was 92% of our airports reporting increased one-tenth of a percent to 28.3% year-over-year. This represents a 9.6% point gap to the next largest competitive brand. Based on performance already reported by some airports, we expect to see continued improvement in our market share versus prior-year, once first quarter data is available.

Our car rental operations in Europe showed strong year-over-year revenue growth of 7%. We achieved double-digit growth from certain of our travel partners -- Aer Lingus, Italia, and Lufthansa. Revenues from our exclusive arrangement with RyanAir increased 46%. Our penetration among RyanAir passengers keeps increasing and as the airline develops new markets, we continue to benefit.

Our efforts to grow van rental have been successful. Revenues increased by 13%. Germany, where we are the market leader, Italy, and the United Kingdom, all showed strong growth. To expand our European car rental footprint, we added 21 new locations so far this year.

In the past quarter, we continued to increase our penetration in the online booking segment. In North America, our market share in the major online third party sites grew by 100 basis points. Worldwide, we achieved revenue growth of 19% of this distribution channel. Hertz.com, our least costly reservation channel, grew slightly faster than third-party online, such as Expedia, Travelocity, and the like.

Nearly 33% of our worldwide reservations came through online channels, an increase of 430 basis points over the first quarter of 2006.

Our collections, Prestige, Green, and Fun continue to increase in popularity and worldwide revenues grew from $57 million in the first quarter of 2006 to $185 million of revenues with the expansion of the Prestige collection and the launch of the Green collection.

In Prestige, we recently added Audi, Lincoln, Volvo, and Infiniti models for a total of 16 different vehicle models. The Fun collection was introduced in the UK in April featuring seven models, and Hertz Spain launched the motorbike collection in four cities.

In the first quarter, the Ford Shelby rent-a-racer convertible was revealed. This Shelby GTH is a performance-modified Ford Mustang GT complete with racing wheel. Only 500 vehicles will be produced, and they will be available for rent exclusively from Hertz later this year as part of the Fun collection at select U.S. airports. It is an amazing vehicle coveted by car collectors. We are proud to work with Ford and Carroll Shelby to develop the car and expect to receive a tremendous amount of publicity on the vehicle.

Last week we announced a pilot program for Hertz hourly rental. In three locations in New York City, cars can now be rented for charges ranging from $12 to $18 per hour depending on vehicle size and day of rental without fuel charges or application fees. We are excited about providing our customers with a very convenient, environmentally friendly way to meet their transportation needs.

In the first quarter, the average number of corporately operated cars in our worldwide fleet was 423,400, a 5.1% increase worldwide with U.S. fleet increasing by 4.9% and international by 5.7%. Our overall fleet efficiency, the percentage of days of vehicles rented declined by less than 1% worldwide, international improved by 60 basis points, and the U.S. declined by 1.2 percentage points. We deliberately loosened our fleet to pick up more turndowns, rental requests we previously chose not to fulfill now that our cost model has improved. We are gaining momentum in market share and increasing customer satisfaction in the process.

Vehicle supply in the U.S. is currently excellent and based on current negotiations, we expect this to continue into 2008. We do not foresee any supply issues internationally. Having such a diverse fleet supplier base is a real benefit. In the U.S., the percentage of non-program, or what we call "risk cars" in the fleet increased from 36% in the first quarter of 2006 to 57.6% in the first quarter of 2007. We are on track to hit at least 65% later this year.

We continue to evaluate what our optimal fleet mix should be, the used car sales market remaining strong.

U.S. off-airport car rental revenues were $217.6 million, or 5% higher for the quarter. If we eliminate Florida, the Southeast, and the Southwest, the regions that were impacted by the 2005 hurricane, the year-over-year growth is 9.7%. During the quarter we added 32 locations on a net basis, bringing the total off-airport network to over 1,410 locations, and we expect to open at least 100 additional locations by the end of the year.

A significant part of the off-airport market for Hertz is insurance replacement. Our revenues from that sector grew 10.7% year-over-year, and Hertz is now an official supplier in 102 of the 155 largest insurance accounts -- 21st Century Insurance, one of the country's largest direct-to-consumer personal auto insurance providers, just named Hertz to a co-primary position. Their customer base is a good fit for our expanding network.

We are also making inroads in the other replacement-related businesses. Earlier this month we announced a partnership with the New Jersey Alliance of Automotive Service Providers to be a supplier of rental vehicles to customers of 500 collision and mechanical repair shops. We believe the increased penetration in the direct bill replacement sector and our expanding network should help accelerate our off-airport growth rate throughout 2007.

Worldwide HERC is performing very well this quarter. In fact, in this segment, for the first quarter, revenues grew 7.4% and the same-store revenue growth was 4.8% due to our adding 21 new locations an introducing specialty equipment to existing stores during the last 12 months.

The strong level of hurricane-related rental activity in the early part of 2006 also impacted Hertz' growth rate. If we eliminate the hurricane-impacted regions, total revenue growth would have been 150 basis points higher. European revenue growth continued at a double-digit pace but still represents only 12% of total HERC revenue.

Corporate EBITDA for HERC increased by 18.7% to $173.9 million reflecting a 44.6% margin. Adjusted pretax income, which includes interest and fleet depreciation, grew 23% to $65.6 million and represented 16.8% of revenue. As you know, non-residential construction rental activity, which accounts for about half of Hertz revenue has been growing more slowly than in the past, but some of our business lines such as Ariel, Pump Services, Generators, and Plant Services, have shown much stronger growth. Extending these fast-growing product categories to Europe is an important part of our international growth and diversification strategy.

We continue to increase our revenue base. We gained four new significant accounts this quarter that we believe represent approximately $4 million of potential annual revenue growth. Rental activity from our national account customer base, which represented over 47% of our revenues this quarter, has been very strong, particularly among the top 20 accounts.

A better measure of rental volume activity is the 8.2% growth in rental and rental-related revenues, which are associated with the rental of equipment including charges for delivery, loss damage waivers and fueling. The year-over-year pricing improvement was 1.7%. As rental activity slows, there is a lag before the industry right-sizes the fleets, which limits pricing improvement.

Average worldwide rental equipment operated on an acquisition-cost basis during the first quarter was $3.1 billion, 12.1% higher than the comparable period of 2006.

Overall fleet efficiency for the past quarter calculated by dividing HERC rental and rental-related revenues by that average fleet level was 45%, 160 basis points below prior-year reflecting the lower rental activity and first quarter weather-related issues.

During the past quarter HERC added new product initiatives such as power generation and general rental operations (inaudible) and opened five greenfield locations while closing four other locations. We expect to add about 15 to 20 additional locations in total this year, and expand others to improve our geographic footprint and provide the broader array of product offerings to our existing customer base.

Let me now give you an update on some of the more important initiatives at Hertz. The Hertz improvement process, or HIP, continues to be implemented throughout our company. Those on the call who aren't familiar with this, HIP is our six sigma and lean technology program to improve efficiency and reduce costs.

In addition to the previously discussed rollout in rent-a-car in the U.S. and Europe and HERC, we have also started training in Park Ridge in Oklahoma City to streamline administration processes and increase employee efficiency. Today, however, I would like to talk about HERC.

So far, we've had training in our branches in Houston and Phoenix. One of the first areas of focus was changeover, the process whereby a delivery truck brings back an off-rent piece of equipment and loads up the next delivery. A [Kizon], which is a cross-functional process improvement team, was held and developed a pit-crew approach. Now the driver radios ahead of his arrival, and a small group of workers assembles to meet the truck and quickly unload the off-rent equipment.

The pieces of equipment to be delivered next are already staged in the yard and can be loaded within minutes. Although this is still in the trial process, we estimate savings in Houston from this to be about $400,000 per year. This is just one of five value streams within a HERC yard.

Next, we will perform a counter-operations value stream so we can handle more volume faster without sacrificing customer satisfaction.

Earlier this year we announced restructuring savings that we expect to result in $140 million of annualized savings. We continue to make progress on streamlining our operating structure. As part of our business process outsourcing analysis, we are evaluating over 115 -- we are currently evaluating over 115 functions in the company to determine which are core and which are non-core, and which are candidates for centers of excellence in which we consolidate business functions, which had been administered separately for each of our segments, and which our candidates were outsourcing. This is a two-year process, but we will keep you posted as we move forward.

On a consolidated basis, procurement is another major initiative. Our strategy is to centralize all procurement activities including vehicles and rental equipment, to ultimately provide Hertz customers with the best rental experience at the lowest cost. To date, using cross-functional teams, our efforts have identified over $20 million in potential annualize cost savings. Initiatives such as IT services, health care benefits, after-market car parts, car carrier rate logistics, and new and improved tire programs, just to name a few.

To capture and increase our spend visibility, Hertz will announce shortly the implementation of a global spend management program. This will enable us to transition all procurement activity to an automated centralized system.

We are currently piloting the use of various purchasing cars, and these should be rolled out globally by the end of 2007. This will help us track millions of dollars in expenses and eliminate hundreds of thousands of invoices, further reducing our costs, and streamlining our accounts payable system.

We remain intensely focused on reducing our global spend and expect to achieve our target of about 85 million in savings over the next few years.

And now let me turn the call over to Paul Siracusa, who will provide a financial update.

Thank you, Mark, and good morning, everyone. Beginning in 2007, we have adopted adjusted pretax income or loss as our segment cost of metric replacing pretaxed income. These measures will be part of our SEC filings.

Included in our press release is a schedule showing the income statement on an adjusted basis, along with the non-GAAP reconciliation. References to percentages of revenue that follow are calculated from that statement.

As Mark mentioned, our first quarter profitability metrics improved dramatically year-over-year, total company corporate EBITDA increased $39.3 million, or 19.8%. Adjusted pretax income for the quarter was $16.1 million compared to a loss of $11.6 million in 2006.

The improved performance was due to strong revenue growth and a decline of 240 basis points in revenues in year-over-year total direct operating expenses, primarily from improved personnel and fleet-related expenses. Partially offsetting this was an increase in fleet depreciation from 22.7% of revenue to 24.1% due to higher fleet costs and increased fleet.

Selling, general, and administrative expense increased 30 basis points, as we have increased our net worldwide advertising spend by $4.2 million.

Actual cash interest expense during the quarter was flat compared to 2006, due to higher net fleet interest offset by lower corporate net interest. Net fleet-related interest was up slightly due to higher interest rates in Europe, partially offset by slightly lower average net fleet debt balances throughout the quarter.

Net corporate interest expense declined due to lower net corporate debt balances and reduced borrowing margins in our bank financing as a result of repricing actions we took earlier in the quarter. Total reported interest expense increased by $19.3 million year-over-year due to the write-off of deferred debt cost and debt discount related to the restructuring of our bank financing and FAS 133 adjustment for swap ineffectiveness.

At March 31, 2007, total debt outstanding was $11.8 billion, $6.8 billion of car rental fleet debt, $1.6 billion of debt secured by other assets, and $3.4 billion unsecured.

Corporate debt was $5 billion, and net corporate debt was $4.4 billion. Compared to a year ago, which would take the seasonality of our businesses into account, we reduced net corporate debt by $462 million due to our strong cash flow. Compared to December 31, 2006, net corporate debt is $123 million lower reflecting the strong cash flow.

We continue to be comfortable with our performance relative to our financial covenant. Under these tests at quarter-end, our consolidated leverage ratio was 3.3 times, well below the maximum allowed of 5.75 times, and the consolidated interest coverage ratio was 3.2 times, well above the minimum allowed of 1.75 times.

The cushion we have under our Titus covenant for corporate EBITDA is $584 million; for the indebtedness the cushion is $3.4 billion; and for interest expense, $347 million.

At March 31st, Hertz had $476.9 million of cash and equivalents and restricted cash of $191.8 million. The amount of restricted cash associated with fleet debt was $76.5 million at quarter-end compared to $487 million at year-end 2006.

The cash balance was higher at year-end due to de-fleeting actions in the fourth quarter and higher cash credit enhancement required due to the lower net book value of the fleet. As we began to fleet up in the first quarter, the excess cash was used to purchase cars. Net fleet debt increased $162 million from December 2006.

We believe we have more than ample liquidity to support our anticipated growth, subject to borrowing base availability. At March 31st, we had additional capacity of $4.6 billion, consisting of $3 billion in fleet financing and $1.5 billion in corporate financing, primarily under the senior asset-backed loan facility.

Hertz's effective income tax rate was 35.5% for the first quarter. The full year projected effective income tax rate for 2007, 33.1%. Cash income taxes paid for the first quarter were $3.2 million, and I'll project it to be $50 million for the full year.

Because of the like kind exchange programs relating to our U.S. car rental and equipment rental fleet, we do not anticipate paying material U.S. federal income taxes until approximately 2011.

Net capital expenditures for property, plant and equipment; that is, investments in our facilities, systems, and service vehicles, were $28.2 million for the quarter compared to $44.9 million in the first quarter of '06.

Depreciation expense for non-fleet assets was $45.7 million in the quarter, below the $49.8 million reported for the same period last year. From December 31, 2006, to March 31, net book value for HERC revenue earning equipment decreased by $16.7 million. HERC purchased $109.1 million of new revenue-earning equipment and incurred $71.9 million of depreciation expense. Dispositions totaled $53.9 million.

A year ago, net book value for HERC revenue-earning equipment increased by $118.3 million in the first quarter. We purchased $210 million of new revenue-earning equipment and incurred $62 million of depreciation expense. Dispositions accounted for the remaining $30 million change in value.

As you can see, capital expenditures for fleet decreased as a function of moderating revenue growth, the leveraging of prior-year's investment as we age our fleet from 26.4 months at year-end 2006 to 27.8 months at March 31, 2007. Our low fleet age, relative to most of our peers, is a distinct competitive advantage.

Working capital, which we define as customer and other non-fleet accounts receivable inventory, prepayment, accounts payable and accrued liability, also improved year-over-year from negative $819 million, or 39 days, to negative $974.6 million, or 43 days. This improvement was primarily due to an increase in accounts payable, particularly relating to fleet and a reduction in receivables.

Turning to cash flow, on a consolidated basis, cash flows from operating activities were $1.1 billion for the quarter compared to $1.2 billion for the quarter in 2006, primarily due to decreases in receivables and accrued liability, partly offset by an increase in payables.

Levered after-tax cash flow before fleet growth for the same period was $441.1 million, $78.2 million higher than last year. After deducting car rental fleet growth equity of $324.7 million and adding back $6.5 million in net HERC pre-growth capex, levered after-tax cash flow, after fleet growth, was $122.9 million compared to negative $47.1 million in '06, an improvement of $170 million.

The primary drivers of the strong cash flow were the reduced investment in HERC fleet growth, improved working capital, and stronger corporate EBITDA. The levered after-tax cash flow after fleet growth corresponds to the decrease in net corporate debt in the first quarter.

Our target is to generate $1 billion in levered, after-tax cash flow, after-fleet growth, over the next three years. These funds will be used to reduce corporate debt or make additional investments in our business. I would like to see our net corporate debt to corporate EBITDA ratio reach 2:1, which would enhance our financial flexibility though we may re-evaluate this long-term target from time to time.

And now I'll turn the call back to Mark.

Thanks, Paul. We remain comfortable with the full-year guidance provided on our earlier call and have added adjusted pretax. We forecast total revenues of $8.5 billion to $8.6 billion, an increase of between 5% and 7%, and this range can be used for both car rental and equipment rental growth; corporate EBITDA in the range of $1.54 billion to $1.57 billion, and increase of between 12 and 14%; adjusted pretax of $600 million to $630 million, an increase of between 23% and 29%; adjusted net income of $372 million to $395 million, an increase of between 24% and 32%, or $1.15 to $1.22 per share based on 324.8 million shares, the pro forma post IPO diluted number of shares outstanding.

Note that for guidance purposes, we have applied our long-term projected effective tax rate of 35% to derive adjusted net income.

We are encouraged by the quarter's results. Purchase profitability improved through our intense focus on cost-cutting and process improvement, despite pricing pressures in our businesses and slowing revenue growth for HERC. This is not a short-term focus. We are building this into our corporate culture.

We continue to execute on our growth strategies as well, including geographical expansion, sector penetration, and product line expansion. On our previous call, I spoke about increasing our share of the more price-sensitive online leisure segment and fleeting up to accept one- and two-day rentals we have been rejecting because the revenue from these additional rentals would not offset the cost of the additional fleet.

In order to so, we are loosening our fleet and pricing competitively. Our strategy is to continue to improve our cost structure so that we can compete more effectively and grow in these areas.

During 2007, we expect major changes in peer ownership of both car rental and equipment rental. We believe that these will bring discipline to the marketplace and renew the focus on profitability. The strength of our brand and our commitment to becoming the highest quality and lowest cost producer in each of our businesses are critical drivers to competing successfully and adapting to changes in the industry.

As I meet with employees throughout the world, whether through town hall meetings, quarterly webcasts, skip level interviews, or informally, I continue to be impressed with their dedication, their engagement with the Hertz improvement process, and their sense of ownership.

With such a committed workforce and leading-edge management technology, we believe we will continue to distance ourselves from the competition.

And now, Operator, we will take questions.

Thank you. (Operator Instructions) Jeff Kessler, Lehman Brothers.

Quickly, on pricing -- obviously, there the pricing environment on the leisure side has tightened up a little bit, particularly since you folks got such great leisure pricing a year ago. The question, going forward, is given what you know at this point in time, do you expect the pricing environment to reflect, or at least on your forward bookings that you've seen, is the pricing environment reflecting what we've seen in the first quarter or is it going to be as we see it, or will things be changing over the course of this year?

In general, as you know, in our particular case, pricing is fairly complicated because we have the broadest distance space of any rental car company in the world. We have off-airport, on-airport, and within on-airport, there are several different segments and sub-segments. We also have the international piece that no one else has. So when you take a look at our whole pricing environment, it is, in general, very complicated.

We are expanding rapidly in the areas like off-airport. Insurance replacement business, as you know, I said was up 10.7%, and our rental length went up 13 days. Obviously, the cars in that segment are rented at lower rates because you have longer length, but it impacts your overall pricing.

You heard me say that corporate, which is, you know, let's say 46%, 45% of our total business, corporate pricing was up 4%. So that was very positive, you know, in the corporate environment. That was in the first quarter.

When you look at all these different things, and you look at the business mix profile, the different volume price and length characteristics, and its pricing metrics reflect that mix, all of that changes every single month.

There is also the factor that last year, in the first quarter, different competitors priced differently. We were the most aggressive, we had the highest price increase on a year-over-year basis, so our comp, year-over-year, was tough.

I said this in the call that, you know, everyone else was around -- you averaged at about 1.5%. We were up about 3.8% year-over-year, so we had a tough year-over-year comp compared to our competitors.

Now, in the second quarter, obviously, everyone took pretty big increases. So the comp becomes difficult in the second quarter as well, but after the second quarter for us, we had an increase, I think, last year, of about 5.8% in the second quarter, so we even had a bigger increase in the second quarter.

So when you look at the year-over-year comps, they were tough for Hertz in the first and second quarter, but then in the third and fourth quarter, they weren't so difficult. So, in general, we think the pricing environment continues to be healthy. It's not bad, and in certain segments, it's very good. Again, it's hard to comment overall, because it's a complicated mix.

In view of that, I'm not going to be talking about prospective pricing, even on this call or in the future, other than to say that the best way to judge how well Hertz business is doing is not to focus on some notion of pricing but instead to look at our adjusted pretax income and our adjusted net income. That's where all the revenue and cost considerations really come together into two really meaningful numbers, and our current expectation for pricing is really full baked into the guidance that we're reaffirming today.

The last thing I guess I'll just say is that given car cost increases and a better transparency that flows from many car rental companies being publicly held, I am generally encouraged about pricing trends over the long term.

Okay. With regard to the price -- cost of your fleet, I realize it's too early yet to begin to comment on negotiations that you're going to have on the '08 cars, or that you're beginning to have on the '08 cars, but it would seem to me a reasonable question to ask do you expect to see moderated increases this year in the '08 fleet cost increase as well as what we've seen the last two years?

Absolutely. We've already had discussions with most of the OEMs already, and, yes, we would say -- I think we're predicting something like mid single-digit pricing, is what we're seeing -- mid single-digit. Joe, do you want to comment on that?

The big OEMs -- those meetings have taken place, and, just as Mark said, we're encouraged by what we hear on the pricing coming back into the range, which we've been talking about and, more importantly is the availability issue. Availability both currently and in '08 will not be an issue at all. I would characterize it as excellent.

Finally, could you just go through a little bit of the -- since you've made such a point about the initiation of the hourly rental in specific cities, could you just talk a little bit about the possibility, lack thereof, or what the considerations are in figuring out how this will contribute or at the beginning, let's just say how much you have to invest in these new hourly programs?

Well, I guess, you know, right now it's too soon to really comment really intelligently. It's only been a week, and we've only done it in three locations in New York City.

I can tell you that, in general, that this is -- when you compare us to car-sharing companies, a lot of the charges that they levy, we're not levying. Whether it's membership required, we don't levy a charge. On annual fee, we don't have that. Whether it's the fact that there's a fee for returning late, we don't give that. We don't charge the consumer for that. A fee for changing the reservation, the car-sharing companies charge, we don't charge. A fee for not returning with a minimum fuel level, car-sharing companies charge you for that, we don't charge you for that.

So there's a lot of advantages renting at Hertz versus a car-sharing company. It's our way, again, of being environmentally friendly, and actually because we're not incrementally increasing our fleet, you know, you get two rentals a day -- it pays for itself. So all you need is two rentals per day. So the breakeven on this is pretty low, Jeff, and because we've got the existing locations, existing fleet, we think it works really well in densely populated urban settings.

Do you have an idea of how big the car-sharing market is?

We've estimated some sizes around it. I guess today, worldwide, there's about $100 million of revenue. That's all it is. It's pretty small today. That's total revenues worldwide. It includes Europe, where it's a little bit bigger.

New York City, we're currently estimating that market is about $6.6 million annually. It probably has -- demand is increasing pretty rapidly. It has potential of about $12 million in New York City within two years. So that gives you a feel for New York City market. We think $60 million in the U.S. in the for-profit sector is the total market potential for the U.S.

So, again, it's very small right now. It could grow, but -- and we're going to participate in it and watch it very carefully.

Chris Agnew, Goldman Sachs.

Pricing and equipment rental business -- you mentioned that there are unfavorable year-over-year comps in the Gulf Coast in the first half. Does this mean that we should be expecting a modest improvement in the second half, and can you comment on what your expectations are for the full year?

I would say it's fair to see a modest improvement in the second half, and I'll let Gerry comment on it from here.

Yes, sure. Similarly, volume and poor activity related to the hurricane activity will give us slightly better comps in the back half of the year, certainly, yes.

Does that answer your question, Chris?

Thank you. And moving on to -- thinking about capex. You mentioned that stronger cash flow year-over-year with lower capex -- was this a timing issue between the quarters. Is there anything that we need to pick out? Can you run through your expectation for the year and talk about both non-fleet and equipment rental capex? Thanks.

Gerry, do you want to handle that?

Sure. I assume the total equipment rental. Our total fleet capex for the year certainly will be lower than last year. Mostly, it will be maintenance capex. We're approximating about $450 million in maintenance capex. About $130 million in growth capex, and essentially it's accommodating a more moderating growth pace, and then we also made significant investments over the last several years, which reduces the fleet age and gives us the opportunity to still grow at the high single-digit level and make less investment in the total fleet.

So that's a pretty good comparative year-over-year and timing-wise, really, the first quarter is just a seasonally slower quarter, so the purchase levels are always lower in the first quarter. But annually for the year, those comparatives are because of the moderating business growth and our exceptionally young fleet.

Okay, thanks, and a final question -- just thinking about fleet growth for car rental in 2007 -- you grew 5% in the first quarter. Should we be expecting a similar level of growth through the year? And is there anything that we need to consider in terms of year-over-year comps and the way you managed your fleet last year?

I think that just, in general, you know, as we implement lean, for example, we're getting higher productivity in those airports that we're implementing it. It's not because we're implementing it in the top 65 airports by the end of the year, but, again, that will just be implementation. It takes probably a full 18 months to get into really utilization savings.

But we're already seeing an impact, so we would expect that in terms of the actual numbers, the fleet growth will go down, moderate down, and we'll move to a little higher-risk format. You know, our goal was to get to 65% risk by the middle of the summer, by the end of the summer. Because of that, because we're going to a higher-risk format, that, again, reduces, if you will, the actual fleet dollar value and the percent that it goes up year-over-year.

So, yes, your assumption is right. It will, in fact, be reduced as we go through the year.

But I mean in terms of the number, actual number of cars?

The actual number of cars -- let's ask Joe. Joe, how do you feel about the actual number of the cars as we go through the year. We had a 5.6% increase roughly in the first quarter. I think that's going to moderate slightly, I think, as we go through the year.

Particularly in the third and fourth quarter, it will moderate, because we started to take the fleet up last year, late in the third quarter. They're pretty close to what we did in the first quarter in overall growth, maybe a point, point and a half less.

Christina Wu, Morgan Stanley.

Thanks. It sounds like your expectation to save $140 million due to restructuring is on track, which is great. You had also announced, however, that your restructuring charges would cost anywhere between $12.3 million and $14.8 million during the first quarter. Yet it looks like you charged $30.6 million. So I was wondering if you could explain that gap. And also whether we should look for any further restructuring charges in the second quarter?

Christina, as you know, on restructuring charges, you have to only announce them, and there's an accounting rule on this, that announce them as they incur, right? So we had not incurred all those charges, obviously, at the time we made the announcement. So the $32 million is, in fact, what we've incurred, and some of that involved some delayering initiatives that we had that were after the announcement that went out, and that's where the bulk of them came.

So we ended up having some executive in the company, you know, vice president level people leaving the company, and that's how we came up with the difference, just so you understand it. And you announce those kind of on a real-time basis.

So at the point in time when we made the announcement and told you the guidance, we had not incurred those costs yet.

Okay, so --

So it wasn't really -- you know, we didn't make a mistake or anything, we just followed the accounting rule on it, okay?

The accounting rule -- okay.

I cannot tell you I've incurred a restructuring charge until I actually incur it, right? So I had not incurred those other charges at the time of the announcement. You can expect to see more charges, and you can expect to see more restructuring, for sure.

Okay, and there are more charges that we can anticipate, is that related to the $140 million of potential savings that have already been announced?

No, no. Again, in the U.S., just to clarify -- in the U.S. we will still have another announcement of restructuring that should be announced by the second quarter, and then in Europe we're incurring charges -- we'll incur charges throughout the year as we implement in-country and a country-by-country execution of the restructuring that will occur through the end of the fourth quarter. We anticipate savings of at least $50 million annualized that will be incremental to what we've announced for Europe.

Then we have not announced how much the U.S. savings, incrementals the 140 will be. The 140 is done in savings, and there will be incremental savings to that yet in the U.S. -- announced in the second quarter.

Okay, great. Separately, your add-backs to EBITDA and by that I mean the non-cash charges that you'd excluded as costs from your definition of EBITDA, and Lauren and I have talked about this quite a bit. There were 37.7 million in the quarter. Do you anticipate this quarter, first quarter's levels, to be typical of what to expect in future quarters of the year?

Paul, do you want to answer that?

Yes, that's typical of what we would anticipate on a quarter-by-quarter basis.

Okay, and then the final question has to do with pricing, and you've already touched on it somewhat by commenting that, I think, 45% to 46% of the fleet is corporate, and you got 4% pricing a list from that. Based on the math, it looks like the remaining amount, so non-corporate, off-airport, et cetera, the rental rate would have gone down by about 3.3% to get to flat year-over-year. Is that the right way to --

No, that's not the way to get to it. I guess, you know, overall, pricing was essentially flat for us in the U.S., and, again, driven by the off-airport road that we had, we ended up having longer length but, again, lower RPD. You know, your RPD goes down when you rent cars of a lower class, and you rent them at a lower price because you're getting longer length on it.

The 4% is corporate accounts only. It's not the entire commercial segment, it's the corporate account segment, and the corporate -- and I guess I should clarify this -- while commercial represents probably 46% of our total business, corporate accounts are only -- Brian, how many --?

Thirty-five percent.

About 35%. So corporate accounts about 35% of our total business. That might help the math that you were just doing improve a little bit -- or change a little bit.

Anything else, Brian or Joe? Brian is our Senior Vice President of Marketing and Sales and really has pricing reporting into him, and then Joe Nothwang is President of North America. Anything else, guys, you want to comment on this?

Just on the commercial account increases, you know, while we negotiate the 4% increase -- that flows in over the entire year. You don't get the 4% from all the accounts in the first month. It flows every month.

Okay, but I think it's still fair to say, based on the math, that the off-airport growth would have been down year-over-year if you were to get that flat growth with one portion, one healthy portion of the business being up in pricing. Is that not correct?

Off-airport RPD growth --

It's the (inaudible) --

Is not down --

(inaudible) is considerably lower than average on-airport, that's it.

It's considerably lower than on-airport, you said?

Yes, because of the length.

Right, right, so I mean what sort of percentage would you say is considerable -- double-digit, 25%? I'm just trying to get a feel to build up the mix to really understand the intricacies of your business, which are complex.

You know, even more important sometimes than pricing, Christina, is length. I don't know if you understand the relationship there, but I'd rather rent a car for seven days than two days and get a high RPD of $48, you know? I'd rent that car for seven days and get an RPD. I'm just going to rough this out, let's say $38, I'd be much better off, okay? I improve, obviously, utilization. I also -- I'm using that asset much more effectively.

So when you talk about pricing, length is as important in the discussion as the actual RPD. So it's called -- the actual length is usually considered RPT, revenue per transaction. I don't know if we're going to be able to solve the equation you're looking to solve right here on this call, but we'd be happy to go offline with you and talk about the other characteristics that we talk about, typically, which is our revenue per transaction and length as it related to pricing.

Maybe, then, you could just comment on how your average length has increased year-over-year?

I don't know if we gave that on the call, did we?

We have.

But overall length, in general, is improving.

Okay, yes, I understand the relationship. I'm just trying to put the pieces together, but I appreciate your comments, thanks.

Himanshu Patel, JP Morgan.

Hi, this is Ranjeet Unnithan for Himanshu. I know you haven't put details around this additional restructuring action you expect in the U.S. in '07. Is there any way you can talk about where those cost actions are likely to take place? Is it in a particular segment, in equipment rental or car rental, is it headcount, is it in group headquarters? Where exactly and what are the shape of those actions, even if you can't comment on the size or timing?

Well, the timing, I said, would be probably in the second quarter, and in terms of the shape of them in the U.S., they're across the board. They are in headquarter locations like Park Ridge, New Jersey, like Oklahoma City, and they are in the field as well. So it's pretty much across the board.

It's not in customer-facing locations, though. That's an important point to clarify with you.

Okay, and relative to the 140 million you've already announced is this likely to be sort of smaller than that or --?

I cannot comment on that. I know you're trying to size, but I can't tell you. We are still actually finishing some of the work right now.

Okay. Separately, you just had a major merger in the car rental industry. When you look at the competitive landscape, do you see acquisition opportunities in the car rental space? Does your leverage prevent you from looking at it and even extending that line of thinking further, if you look at the equipment rental industry, are their acquisition opportunities there as well?

In general, we don't comment on acquisitions. It's a longstanding policy in the company, but in terms of our leverage, we absolutely have plenty of capacity. If we needed to make an acquisition, if we thought it was exceedingly beneficial to shareholders, we have significant enough free cash flow and debt capacity and know the relationships with the banks well enough that that would not be an issue for us.

But I am not, in any way, shape, or form, suggesting we are going to make an acquisition. But I do want to tell you that there's enough capacity in the company's debt structure to allow for that, if need be.

Brandt Sakeeny, Deutsche Bank.

Good morning.

We have time for two more questions, so, Brandt, go ahead.

Okay, thank you, Lauren. It's pronounced Sakakeeny. I just have a question with respect to the HERC guidance. Given the 7% plus growth quarter you had coupled with the fact that the insurance business, I think you said, or the Gulf issue is going to mitigate, over time. Just curious why the 5% to 7% revenue growth got in for the full year?

Gerry, do you want to respond to that?

Yes, as we mentioned earlier in the call, the Dodge data shows that non-residential construction will be a little bit stronger in the first half than the second half, and as the year goes on, we're seeing just a little bit of how the housing pressure affects some of the retail construction.

So we're being cautious in the outlook as far as where all that is rolling up in the middle of the year, and that's essentially what it is. And as we roll out during the year, if we get a little bit of seasonal pickup, the numbers could be on the stronger side of that.

But, essentially, we're not seeing a big change in dynamics as far as improvement early in the first half in the housing market, and then the after-effect of a more moderating, non-residential construction market. So there's not a lot of big pluses as far as movement in the back half of the year, so we're cautious with the estimates.

James Solomon, JP Morgan.

I just had a couple of questions -- one on the pricing. Does it appear, then, that this year the environment toughening up a little following the bad situation there was last year, in particular, I'd be interested in Europe, how that looks, and whether at Easter, which is the first peak period, things were looking up on pricing then. Also, on the fleet side, what is it, do you think, that's making the '08 vehicle pricing from the OEMs a bit more favorable, and on the availability there as well? Thanks.

Well, the first part of the question, or first question, I guess, deals with the pricing. You know, the leisure segment, which is also called sometimes the "discretionary segment" is, in fact, we saw it fairly competitive in our observation for the first quarter. But, again, part of that is driven by the fact that the year-over-year competitors were, as I said earlier in the call, easier for some of our competitors than they were for us. We had taken fairly significant price increases in the first quarter and second quarter of last year.

But, in general, pricing overall is still fairly healthy. We don't look at an unhealthy pricing environment today. It continues to be competitive in the leisure segment.

In the second half of the year, we believe, again, the comp becomes a little easier, and as that comp becomes easier for Hertz, that allows us to look more favorable in terms of how our pricing appears year-over-year.

In Europe, again, similarly, and I'll let Michel speak to add to this but, again, we see in Europe we had a competitive leisure segment but we saw some growth in other pricing segments for Europe in the first quarter that were helpful to offset the more competitive nature of the leisure segment. Michel, do you want to comment further?

I think in the commercial segment, I would distinguish commercial leisure and then maybe a couple of differences by country. In the commercial segment, I would say, in general, we achieve increasing our pricing between 3% and 4%, so it's quite close to what the U.S. are achieving, and that's true, I'd say, almost in every country, and that's fairly consistent now.

In terms of leisure, I'd say there are differences by country. You mentioned about Easter. Easter, actually, was very good for us not only in volume but also in pricing and yield, because everybody was -- you know, had good pricing, and we sold significantly really for Easter, higher pricing versus last year.

We had seen the first quarter, which was fairly competitive, I have to say, with good prospect for after Easter. That has changed a little bit, I would say, in countries like France, which is our largest market for price (inaudible) are significantly above last year. Right now, if we look at competitive pricing for the next few months, that varies by country. I would say the most competitive country right now is Spain.

But it's still somewhat over last year, so it's not a bad environment, overall, I would say. The company set is different in Europe. As everybody knows, the leisure market, you have focus, but, again, it's encouraging.

The second part of your question was on fleet, correct?

That's right, yes.

And what did you ask on fleet again?

Jus how you guys saw that you aren't expected single-digit vehicle cost increases going into '08 and the availability looks better, and I just wondered if you had a feel for why that might be?

I think it's because the last two years fleet costs have gone up 15% to 20%, and because of that, the marketplace has adjusted itself, if you will. That was pretty much catch-up by the OEMs because the years before this pricing increase the fleet costs were very low, and, in fact, in some cases, down year-over-year, and there was a catch-up.

As you know, steel prices have increased dramatically over the last two or three years, quadrupled in price in a lot of cases, and the car manufacturers are trying to recover material costs associated with those car cost increases as well. That has pretty much vetted itself out, and I think now you're seeing a more moderation due to the fact that these increases have been out of the environment now.

Okay, great. Just on the Easter pricing, do we have a number on what it was up year-on-year on the ledger?

We're not going to be that detailed, unfortunately. I think we're out of time on questions, Mark.

Okay. Operator, then go ahead and close call off.

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