Herc Holdings Inc (HRI) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Hertz Global Holdings Q2 2007 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a Q&A session with instructions being given at that time. (OPERATOR INSTRUCTIONS) All individuals listening to the call or the replay are reminded that the call is being recorded by Hertz Global Holdings and is copyrighted material. Monitoring this call implies a listener's consent to the companies recording this call and agreement not to record or rebroadcast it without the Company's express permission.

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 1995. These statements include, but are not limited to, statements concerning Hertz Global Holdings' outlook, management forecasts, opportunities to increase productivity and 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," "forecast," 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 dates hereof. Hertz Global Holdings undertakes no obligation to update or revise any forward-looking statements to reflect new information, change 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 headings, "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" in the Hertz Global Holdings Form 10-K for the year ended December 31, 2006 and Form 10-Q for the three months ended March 31, 2007 could cause future results or outcomes to differ materially from those expressed or implied in the Hertz Global Holdings forward-looking statements.

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

Good morning and welcome to Hertz Global Holdings second quarter 2007 conference call. You should all have our press release and associated financial information. In a minute, I'll turn the call over to Mark Frissora, Hertz's Chairman and CEO. Also speaking today are Joe Nothwang, Executive Vice President and President, Vehicle Rental and Leasing, The Americas and Pacific; Gerry Plescia, Executive Vice President and President of Hertz; and Elyse Douglas, Hertz's Treasurer.

Today's call format has been revised to give you more of a view from the top and allow additional time for questions. Details we previously provided are still disclosed in the press release and related attachments. We have even expanded our disclosure in response to your feedback.

Our discussion today will include non-GAAP financial measures, all of which are reconciled with GAAP's numbers in the press release attachment posted on our Web site, hertz.com/investorrelations. We do not believe that the GAAP profit measurements fully reflect their operating performance because of restructuring costs, certain non-cash expenses and non-recurring charges relating to purchase accounting and debt cost amortization. That's why we want the investment community to focus on adjusted profit metrics. We believe that these non-GAAP metrics better reflect our profitability and the progress we're making on our financial goals. Our call today focuses on Hertz Global Holdings, the publicly traded company. Results for the Hertz Corporation, the totally owned subsidiary, were identical for the second quarter, except primarily for the impact of costs relating to the secondary offering. These are reflected in SG&A expense at the Hertz Holdings level.

And now I'll turn the call over to Mark Frissora.

Thanks, Lauren and good morning everyone. Thanks for joining us. In June, the public float of our stock increased to about 44% following a successful secondary offering of 51.8 million shares by our private equity sponsors. Our broader float and expanded investor base are positives for Hertz that we believe will improve our trading liquidity. And now here are the consolidated financial highlights.

I am pleased to report that Hertz generated record total second quarter 2007 revenues, up $2.2 billion, which is a year-over-year increase of 6.6%. Adjusted pre-tax income, adjusted net income, and corporate EBITDA all showed strong improvement versus Q2 2006. In fact, adjusted pre-tax income grew 34.7% and our adjusted pre-tax margin improved by 150 basis points.

Adjusted net income per share for the quarter was also very positive, increasing 36% to $0.30 from $0.22 per share in the second quarter of 2006. Elyse will discuss the adjustments later. This significant year-over-year improvement in profitability was due to improved direct operating expenses, interest expense, and SG&A as a percentage of revenue in spite of increased depreciation expense.

Turning to GAAP measurements in the quarter, income before income taxes and minority interests, that is pre-tax income, increased by $84 million, or a 146% year-over-year increase. GAAP net income was $83.7 million compared to $17.8 million in the second quarter of 2006, an increase of over 350%.

Our cash flow position continued to improve significantly year-over-year as well. In the second quarter 2007, we generated $46 million in levered after-tax cash flow after fleet growth, an increase of $450 million, compared to the second quarter of 2006. Driving the year-over-year improvement were lower working capital, the reduced investment in fleet for Rent-a-Car and HERC and [HIRIS] earnings. I am especially pleased to report this strong financial improvement in spite of higher fleet costs and a tepid macro environment.

Hertz performed well in a challenging period. Clearly, in this quarter, we've demonstrated the benefit of our diversification. Growth in off-airport business helped offset HERC's slowing revenue growth. We are gaining traction on cost savings and efficiency improvements across all businesses, which we expect will make us a more profitable and resilient company.

We announced last week that Paul Siracusa, our Chief Financial Officer, is retiring after a distinguished 38-year career with Hertz. I want to thank Paul for his leadership and service, especially during the past few transitional years, as Hertz was sold by Ford and emerged as a public company. Paul leaves with a great track record and we all wish him well. Elyse Douglas, our Treasurer, will serve as Chief Financial Officer on an interim basis while we conduct an internal and external search to fill the position. Elyse has an extensive finance and accounting background and I have full confidence in her ability to step in and manage our finance organization during this interim period.

Today we are going to structure the call slightly differently than last time. I am going to focus this morning on three key strategic areas - pricing in U.S. car rental; cost initiatives, including fleet; and finally, revenue growth initiatives to give you an overview of the strategic drivers of our businesses for the next 24 to 36 months. Joe Nothwang and Gerry Plescia will discuss the performance and new initiatives in Worldwide Car and Equipment Rental, respectively. Elyse will follow with a financial update and I will reaffirm full-year guidance and make some closing comments before we take your questions.

As you know, we are dedicated to significantly increasing our penetration of two key U.S. car rental markets - the online leisure airport market and the off-airport market for business, leisure, and insurance replacement rentals. These two markets have lower pricing characteristics and because of the growth we're experiencing in these areas, pricing in the U.S. car rental market, as measured by RPD, declined by .7 of a percent during the second of 2007. RPD stands for Weighted Rental Rate Revenue Per Transaction Day. The car rental industry has typically focused on RPD as an absolute measure of market pricing conditions. In fact, RPD is determined as a result of the vehicle acquisition costs, marked up to reflect Hertz value-added services, and tempered by competitive market conditions.

Consequently, RPD is only one of many factors that determine rental profitability. Other equally important factors include rental length, transaction growth, and associated labor costs. For example, the RPD of a Ford Focus rented at our off-airport location in Los Angeles for two weeks starting this Monday would be $30 per day, while the RPD for the new Lincoln MKZ rented for three days at Los Angeles Airport, only a few miles away from the off-airport site, would be $66 per day. However, RPD won't tell you which rental was more profitable, and that's why we need to look at all of the factors I just mentioned, which impact free tax profitability.

In this example, the off-airport Ford Focus rental has a much lower RPD, but the longer rental length means higher vehicle utilization in contrast to the MKZ, which may only be rented for 2 or 3 days at a time. We incurred lower labor costs because the off-airport cars are handled less frequently by our people; also, because our real estate costs are lower because off-airport locations are less expensive than airport facilities; and, of course, the car itself is a lot less expensive. These factors explain why off-airport pricing is typically lower than airport pricing and why RPD is only one part of the profitability equation. In fact, the lower cost, longer rental length characteristics of the off-airport business are very appealing to us. Additionally, we find the business attractive because it has less economic and seasonal volatility.

Transaction days off-airport increased 12.5% in the second quarter compared with the second quarter last year, including a 23.6% transaction day increase in the insurance replacement market. We are forecasting double digit off-airport transaction day growth for the foreseeable future.

The online leisure market is also characterized by lower vehicle costs and lower transaction costs, and in the case of weekly rentals longer length. In the second quarter 2007, over 35% of our reservations for rentals in the U.S. came through online channels, an increase of 420 basis points year-over-year. Likewise, we anticipate strong growth in the online leisure market for the rest of 2007, which will have a negative mix impact on RPD but not on pre-tax profitability. A little bit later, Joe will discuss some of the other revenue metrics and the specific initiatives we are implementing to increase online and off-airport business in the U.S.

Our outlook for pricing remains positive, starting with the ongoing summer peak season. On our corporate accounts, which represent about 30% of our total rental revenue, the average price increase for contract renewals in the second quarter was 3%. In the leisure sector, Hertz and our competitors took multiple pricing actions in the second quarter to increase pricing, which is reflected in current rental rates for most markets for the summer. Overall, we have observed that industry pricing practices have generally been rational in light of increasing car costs.

If the quarters ahead -- in the quarters ahead, we expect RPD to reflect a continued impact of the shift in our business mix toward online distribution channels and off-airport transactions. I want to reiterate that in order to measure our growing profitability in these segments it is important to measure vehicle acquisition costs, rental length, absolute transaction growth, labor and transaction costs, as well as RPD in combination. Taken together in this quarter, the metrics demonstrate that we have begun to accelerate profitable growth in these targeted market sectors.

To support these growth initiatives and prepare for the strong summer season we are seeing, our Q2 domestic rental fleet increased by 8.6% year-over-year and we loosened utilization for the past quarter as a result. On a per-car basis, depreciation in the quarter was only 1.9% higher than the prior year, a result that exceeds that our expectations by a wide margin and is attributable primarily to an accelerated movement to risk vehicles, mix and structural process improvements we have made. We believe there are significant opportunities to reduce fleet cost inflation and improve fleet utilization and customer satisfaction over the next few years.

Perhaps our most important cost initiative, which is part of our ongoing efforts to streamline costs that I'll be discussing in a minute, is a comprehensive review of all fleet processes, a cradle to grave reengineering of how we buy, maintain, move, and dispose of our rental vehicles. We believe we can drive better fleet purchasing deals. We can also do a better job getting the cars we want when we need them. Once we take delivery, we can reduce the time before the first rental. The next opportunity is to eliminate the number of days a vehicle isn't generating revenue, whether due to maintenance, body shop, or other factors.

At the end of the vehicle's rental life, we can reduce the time between the last rental and getting the car off of our books. In addition, we can better manage the holding period of our vehicles to maximize the residual value at sale. As vehicles comprise almost 30% of our overall costs, even small system-line savings will be significant and we believe there is gold to be mined in our processes that affect the fleet. We have begun measuring key elements of the process. We have a worldwide team dedicated to reengineering the process and are preparing our people for systemic changes in this area.

Over the past 9 months, we have targeted costs and efficiency improvement opportunities across all areas of car rental and equipment rental to improve our adjusted pre-tax margin. We have already made significant progress. Our starting point, using the 12 months ending September 30, 2006 pro forma, was 5.2%. Looking more recently at the 12 months ended June 30, 2007, our adjusted pre-tax margin reached 6.7%. Our stated objective is to increase the margin on adjusted pre-tax income to 10 to 12% over the next 2 to 3 years.

To do this, we are focusing on 4 areas. First, the Hertz improvement process, or HIP, our combination of lean and Six Sigma. On previous conference calls, we gave examples of process improvements identified by our workforce. The energy levels continue to be high and we are implementing and sharing ideas throughout the Company. By year-end 2007, we will have rolled out this continuous improvement program to Rent-a-Car and HERC operations, representing 60% of our revenues. [In effect] to save the equivalent of 2 percentage points of 2007 revenues once fully installed over the next 15 months or so. Thereafter, we anticipate savings of up to $160 million a year on an ongoing basis from this program.

The second area is restructuring, where we've already announced $165 million of annualized savings due to de-layering and streamlining of our organization. We expect to announce another $50 million in annualized savings from Europe by the end of the year. This $215 million in savings would represent about 2.5 percentage points of margin improvement.

Third, we believe the changes in our global procurement practices for non-fleet purchases should produce up to an additional $80 million in savings or 1 percentage point of margin improvement.

Fourth, we expect that our contribution management system, once fully deployed worldwide, should generate up to another $80 million of incremental revenues and profits. This system will facilitate getting the right vehicle to the right place at the right time and optimize the profit contribution of that particular vehicle.

In addition, we have identified further areas of savings that we have not yet quantified. We are currently assessing Company processes, including those related to fleet management that are associated with about $6.4 billion of costs with the intention of reengineering our business processes and targeting certain functions for outsourcing, which could generate additional savings.

We are also reviewing how we purchase fleet, not only for Rent-a-Car but also for HERC, an annual expenditure of about $10 billion, and intend to optimize their acquisition and negotiating practices moving forward. We believe these incremental saving opportunities, beyond the margin improvement we've targeted, will help contain inflationary pressures on our costs and provide a cushion for any shortfall in achieving these objectives. Nonetheless, the full impact of these initiatives will be in future years. It's important to note that these savings are expected to cut across various lines of our income statement. For example, HIP improves utilization, which will impact fleet depreciation, interest expense, labor costs, etc. to culminate in a bottom-line margin improvement.

Moving now to the top line. I would like to outline for you our revenue growth opportunities for the long term. That is over the next 2 to 3 years. Starting with Rent-a-Car, we believe we can generate up to $1.4 billion of revenue growth in total, about half organic and the remainder incremental in the following areas. First, in off-airport car rental, we believe that we can add up to $600 million, in total, as we increase our market share by adding more locations and further penetrating insurance accounts. In a moment, Joe will discuss our progress in detail. But we believe we have hit a turning point and expect to generate, as I said, double-digit transaction day growth for the foreseeable future.

Second, we believe that increased penetration in the leisure market will provide up to $500 million of revenues, assuming we achieve our fair share of this business and we have just launched a new initiative to increase rental activity at key leisure airports starting with Orlando. Joe has more on this in a moment. And the remaining $300 million or so, we expect to come primarily from licensee acquisitions. And we have just closed on a U.K. licensee that generates over $20 million in revenues annually and have other acquisitions in the works. Car-sharing, which includes [Ali] Rentals in the United States and a business partnership with the leading European car-sharing company, Mobility, and expansion into emerging markets. For example, while we already conduct outbound business from China, we expect to have a local rental presence there by the end of the year.

Turning to HERC, we believe there is an opportunity to add up to $300 million organically coming from worldwide geographic expansion through accelerated greenfield rollouts. We expect to open another 10 to 15 locations during the remainder of 2007 and continued development of customer and product segmentation, such as industrial, aerial, general rental, pumps, and power generation. We also believe incremental revenues aggregating up to $300 million will come from selective acquisitions and joint venture opportunities worldwide, including China and India. We may be able to partner with selected equipment manufacturers, helping them find outlets for their products in China and India and giving us a foothold in markets that are far less developed and more fragmented than North America.

With that strategy overview, Joe Nothwang and Gerry Plescia will walk you through the performance and initiatives last quarter in worldwide car and equipment rental. We'll start off with car rental. Joe.

All right. Thank you, Mark, and good morning everyone.

An important macro trend for car rental is enplanement statistics. The Department of Transportation recently reported domestic enplanement growth for April of 2.8%, following a 1.5% growth for the first quarter. First quarter international enplanement growth was 5.4% according to the Federal Aviation Administration. The FAA's outlook for full-year 2007 is for a 3.7% domestic enplanement growth, which may be aggressive, and the DOT expects 4.7% international enplanement growth.

For 2008, the domestic forecast is 3.1% and the international forecast is 5.5%. Enplanement numbers are good directional indicators for our airport car rental business but not directly correlated as to magnitude.

Our European business has been affected by the weak dollar but this was somewhat offset by an increase in European travelers visiting the United States this summer to take advantage of currency differences.

Now, let me give you some headlines on our second quarter 2007 performance starting with the worldwide car rental segment. Year-over-year total revenues increased 7.5%, corporate EBITDA was 18.2% higher, and adjusted pre-tax income increased 35.6%, all very positive operating metrics. On a worldwide basis, rental rate revenue growth, basically time and mileage, before the impact of foreign exchange, was 4.6% and consisted of a 5.3% increase in worldwide transaction days and a decline of 0.7% in revenue per day, or RPD. Mark has explained the dynamics affecting RPD and the following are a few important initiatives focused on building our online and off-airport markets.

We took another important step to penetrate the online leisure business when we launched Simply Wheelz by Hertz at Orlando Airport, the largest car rental market in the world. We started taking reservations yesterday for rentals starting September 1st. Simply Wheelz is a new competitively priced brand, booked primarily online with a strong lower cost self-service approach that will enable customers to complete the rental transaction themselves and a rental fleet including all of the major car classes. Simply Wheelz has been designed so our core business and higher end leisure rentals are not diluted and our research indicates customers will welcome Simply Wheelz by Hertz into the lower price online leisure market. We believe Orlando and other key leisure destinations will be good targets for this brand.

In the domestic off-airport market, we continue to gain momentum with total revenue growth of 7.8%. All market sectors - business, leisure, and replacement - exhibited solid revenue growth based on underlying transaction day growth of 12.5% and length improvement of 3.7%. The average rental length at off-airport locations was almost 2 full days longer than at airport locations. While these off-airport car rentals exhibit lower RPD characteristics, which decline 3.7% year-over-year, they also exhibit much lower transaction, vehicle depreciation and related costs and higher utilization rates, as Mark discussed earlier. We believe these factors, in combination, are producing a profitable, growing book of business.

We are executing two key off-airport initiatives. First, we expanded our network footprint by 87 locations in the first half of the year, bringing our total off-airport network to 1,465 and we expect to continue that pace in the second half of this year. We also increased the number of sales people and revised our bonus program to stimulate more profitable growth across the country. Second, we continue to increase penetration on the insurance replacement sector and at the end of the first quarter we were an official supplier in 102 of the largest 155 auto insurance companies. By the end of the second quarter, the number had grown to 119 of those 155 companies and we now have relationships with 149 of the largest 200 companies.

In the U.S. airport market, the latest statistics through April year-to-date show we are maintaining market share of approximately 29% and a healthy 9 percentage point gap over the closest competing brand. It is important to note that despite healthy competition in the airport sector our market share and our market share lead have consistently remained strong. Airport transaction days increased by 2.5% while overall airport RPD declined by 0.4% after improving 6.9% in 2006 compared with the second quarter of 2005. The decline reflects the growing importance of lower price and lower cost online leisure rentals in our airport business.

The Hertz collections remain popular with our customers. Total revenue for the quarter was $190 million compared to $78 million in the same quarter in 2006, which preceded the launch of the green collection. We also continued to benefit from strong marketing relationships with our many travel partners throughout the world.

Revenue growth from two of our ancillary products, the ever popular NeverLost and Sirius Radio, increased by more than 15% year-over-year. We currently offer more than 70,000 NeverLost units available for rent in over 1,250 locations worldwide, and the new enhancements we've added this year have been very positively received. As Sirius adds new channels and programming, we anticipate increased demand for this service too.

International car rental experienced a 1.1% increase in RPD, driven by pricing strength in Europe. Average length increased by over 3% as we grew our monthly rental, van and leisure business. The outlook for Q3 remains reasonably positive. We just renewed our agreement with Ryanair on mutually advantageous terms and expanded our strategic partnership with Expedia with a multi-year contract. Our new European advertising campaign, Love the Road, which focuses on delivering a great car experience to our customers, has been an important factor in driving volume growth.

Customer satisfaction remains our number one operating priority and to this end, in January, we supplemented our traditional quality assessments with a net promoter score or NPS measurement. Customers are invited via e-mail or a message printed on the receipt to take a survey asking how likely would you recommend us to a friend or colleague? We subtract the percentage of negative responses from highly positive responses and the result is a net promoter score. Unlike traditional customer surveys, NPS data is near real time and management has instantaneous access to scorers and comments.

Customers with specific complaints are asked if they would like a Hertz representative to contact them. We are very encouraged by the rollout of this program. Our survey feedback response rate is quite high for customer satisfaction surveys, giving evidence to the strength of our loyalty programs. We review NPS scores weekly for each location and work with low scoring areas to resolve their issues swiftly. This improves customer service in those specific locations, spotlights service issues, and raises the bar for the organization as a whole. We have recently expanded the survey to our corporate operations in Europe, Australia, and New Zealand, as well as our licensee operations in North America and to HERC as well. I am happy to report that our NPS scores have remained fairly stable since we introduced the survey and represent good customer satisfaction levels.

Now, let me turn the call over to Gerry Plescia, who will discuss worldwide HERC.

Thanks, Joe, and good morning everyone.

The major trend affecting HERC is the continued soft U.S. non-residential construction market. SW Dodge, though maintaining its full-year non-residential construction growth forecast of 4.5%, now predicts stronger growth in construction starts in the back half of the year, as many projects have been delayed from the first half. While an early view of the third quarter confirms this overall trend, the forecast could be somewhat aggressive in our view.

Turning now to worldwide HERC, second quarter rental and rental-related revenues, which includes charges for delivery, lost damage waivers, and fueling, increased by 3.2% year-over-year or 4.4% if you include the impact of foreign exchange. Corporate EBITDA was higher by 8.3% and adjusted pre-tax income improved by 10%. Volume in the second quarter was primarily impacted by slower growth in some segments of the U.S. non-residential construction segment. But so far in the third quarter, the volume trend has been encouraging. Most of our regions in North America are experiencing improved rental activity from troughs experienced earlier in the year.

Pricing improved by 50 basis points in the second quarter, despite softening in some of our key construction categories. Revenue growth at Hertz European operations continued at a double-digit pace.

Our strategy to diversify our revenue base at the aerial pump services, power generation, and onsite plan services has proved to be very beneficial, as those product lines in the U.S. experienced over 12% growth. We are already seeing a shift in our revenue mix. In the second quarter of 2007, industrial accounted for 18.2% of our U.S. revenue compared to 16.5% in quarter two 2006. Over the same time period, residential construction declined from 3.5% to 2.8% and non-residential construction from 47.2% of revenues to 45.5%.

During the past quarter, as part of our growth strategy, HERC expanded product offerings at 10 additional stores and we extended our footprint by 3 locations. Worldwide, we expect HERC to add about 10 to 15 additional locations during the remainder of the year, in line with our strategy to increase our geographical coverage by over 5% in 2007.

At June 30th, the average age of our worldwide fleet was 27.9 months, versus 26.2 months at the end of 2006. Our plan is to age the fleet to about 28 months by the end of 2007. This will enable us to lower the investment requirement for new fleet while providing our customers with young and well maintained equipment, certainly a competitive edge in the industry.

From March 31, 2007 to June 30th, net book value for HERC revenue-earning equipment increased by $153.4 million. HERC purchased $246.9 million of new fleet and incurred $69.2 million of depreciation expense. Our dispositions totaled $24.3 million. Geographical growth and increased penetration in the industrial and fragmented sectors necessitated the additional investment in equipment. The used equipment market remains fairly strong and is still maintaining excellent residuals among almost all categories of equipment.

For the full-year 2007, we expect total equipment rental fleet CapEx to be approximately $600 million, consisting of about $500 million in maintenance CapEx and about $100 million in growth CapEx.

And now I'd like to turn the call over to Elyse Douglas, who will provide a financial update.

Thank you, Gerry, and good morning everyone.

Included in our press release is a schedule showing the income statement on an adjusted basis along with a reconciliation to GAAP. References I'll be making to profit improvement, stated as percentages of revenues, are calculated from that statement.

As Mark mentioned, our second quarter profitability metrics improved dramatically year-over-year on both a GAAP and an adjusted basis. Adjustments to our GAAP results totaled $16.2 million in the second quarter. Purchase accounting, restructuring costs, non-cash interest expense, and costs related to the secondary offering accounted for charges of $45.4 million, which were significantly offset by credits from a change in our vacation expense accrual and the mark-to-market gain on an interest rate derivative.

Our pre-tax margin improved 150 basis points year-over-year. Improvements in all major costs lines - direct operating, SG&A, and interest expense - resulted in a 280-basis point increase in margins. This benefit was partially offset by greater fleet depreciation due to higher per-unit costs in a larger fleet. Total cash interest expense during the quarter was unchanged from 2006, but varied by type of debt.

Net fleet-related interest increased by 8%, reflecting higher interest rates in Europe and higher average net debt balances throughout the quarter. Net corporate interest expense declined by over 13% due to lower net corporate debt balances and reduced borrowing margins in our bank financing as a result of re-pricing actions we took earlier in the year.

At June 30, 2007, total debt outstanding was $12.5 billion, consisting of $7.6 billion of fleet debt, $1.5 billion of debt secured by other assets, and $3.4 billion that is unsecured. Compared to a year ago, which would take the seasonality of our business into account, and excluding the pre-IPO $1 billion loan outstanding at June 30, 2006, total debt is lower by about $500 million. Strong cash flow over the past 12 months enabled us to repay debt. Compared to December 31, 2006, total net debt increased by $789 million to support our seasonally higher investment in revenue-earning equipment, which compares favorably to the $830 million increase for the prior year.

We continue to be comfortable with our performance relative to our financial covenants. Under these tests at quarter-end, our consolidated leverage ratio was 3.1 times and the consolidated interest-covered ratio was 3.4 times, well within the limits. The cushion we have under our tightest covenant for corporate EBITDA is $637 million. For indebtedness, the cushion is $3.7 billion and for interest expense $388 million. At June 30, 2007, restricted cash associated with fleet debt was $148 million. This is a function of the credit enhancement requirements in the fleet financings, which vary in accordance with the fleet side. We believe we have more than ample liquidity to support our anticipated growth, subject to borrowing base availability. At June 30th, we had additional capacity of $3.8 billion, consisting of $2.2 billion in fleet financing and $1.6 billion under the senior asset-backed loan facility.

In the second quarter, we paid approximately $4.6 million in cash taxes and expect full-year cash taxes to be $48 million. The full-year projected effective income tax rate for 2007 is 32.1%. We do not anticipate paying material U.S. federal income taxes until approximately 2011 because of our lifetime exchange programs relating to our U.S. fleet. In the second quarter, overall fleet efficiency, which we define as the percentage of days the vehicle is rented, declined by 185 basis points year-over-year. In the U.S., the decline was 260 basis points, and internationally, it was 30 basis points.

In 2006, our fleets were pretty tight in the second and third quarters, and as a result, we sacrificed some volume growth. Therefore, as Mark already mentioned, we made a decision to increase the fleet in anticipation of strong summer demand.

Vehicle supply in the U.S. is excellent and our preliminary negotiations for the 2008 model year indicate moderate cost increases of 3 to 5%. We expect to mitigate these to 2 to 3% as a result of increased penetration into rental sectors with smaller vehicles. You will recall that we were able to mitigate increased costs of 15% in the 2007 model year to less than 4% by increasing the proportion of risk cars and making other mix changes. We do not foresee any supply issues internationally.

In the U.S., the percentage of non-program cars in the fleet increased from 38% at June 30, 2006 to 65% at June 30, 2007. The used car sales market remains stable, but to maximize our residual values, we are expanding our car sales staff and diversifying our sales channels to include online auctions and direct-to-dealer transactions.

In worldwide Hertz, average rental equipment operated during the second quarter, using the acquisition cost basis, was 7.3% higher than the profitable period of 2006. Overall, fleet efficiency for the past quarter, calculated by dividing Hertz rental and rental-related revenue by that average fleet level, was 47.2%, 185 basis points below prior year, reflecting the slower revenue growth and industry fleeting issues related to earthmoving equipment.

Total Company net CapEx for property, plant, and equipment, that is investment in our facilities, systems, and services vehicles, were $72.9 million for the quarter compared to $102 million in the second quarter of 2006. Working capital, which we define as customer and other non-fleet AR - inventories, prepayments, accounts payable, and accrued liabilities - also improved year-over-year from negative $803 million to negative $1.107 billion, increasing our DSOs. This improvement was primarily due to an increase in accounts payable, as we better managed our expenditure payment cycle.

On a consolidated basis, cash flows from operating activities were $1.1 billion for the quarter, compared to $900 million for the second quarter in 2006, primarily due to an increase in payables and improved earnings. The leveraged after-tax cash flow, after fleet growth, was $46 million for the quarter, compared to negative $403 million in the second quarter of 2006. The approximately $450 million improvement was driven by better working capital management and lower fleet investments. These proceeds were used to reduce net corporate debt.

Our goal over the next three years, as stated last quarter, is to generate $1 billion in leveraged after-tax cash flow after fleet growth and to use those funds to reduce corporate debt or make additional investments in our business.

And now let me turn the call back to Mark.

Thanks, Elyse.

We recognize that research analysts are trying to correctly assess the seasonality of our businesses. As they visit their quarterly estimates and factor in our actual second quarter results, we expect there will be tweaks to the third and fourth quarters. While we understand that corporate EBITDA is relevant for our financial covenants, our preferred overall performance metric is adjusted pre-tax income, which we use as our segment measure of profitability. For example, corporate EBITDA excludes HERC depreciation, so we don't get the benefit of aging the fleet, which we do get in adjusted pre-tax income. Also, EBITDA excludes non-fleet depreciation and that is captured in adjusted pre-tax income. Also, adjusted pre-tax income better reflects our progress at reducing corporate interest expense. For these reasons, we believe adjusted pre-tax income is a better measure of the operating profitability of our businesses. Our full-year guidance remains unchanged, and let me remind everyone that 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. Our profitability improved, even as we experienced pricing pressures and slowing rental growth for HERC in the United States. Our cross management and process improvement initiatives are paying off. This, in turn, enables us to increase our revenue base. As our cost structure improves, certain slices of business, such as the online leisure market, are now more profitable for us. We have taken a great company and made it better using new tools and techniques. This is a Company-wide effort, embraced by management and the field workers alike and will drive our success moving forward.

And now, Operator, we will take questions.

(OPERATOR INSTRUCTIONS) Chris Agnew, Goldman Sachs

First question really on your full-year guidance. I mean, if I look at the RAC revenue growth in the first half, about 7.5%, it's 80% of your revenues, and employment trends continue to be strong going into third quarter and you've increased your fleet to meet that and it appears the pricing trends have improved a little bit, it's -- maintaining your full-year guidance, is that implying that HERC is decelerating in the second half or is the fourth quarter a tougher quarter? Am I missing something? Could you just maybe help me frame those thoughts? Thanks.

Well, I guess -- obviously, if you look at the split of the quarters in the third and fourth quarter and you look at what happened in the second, I mean there have to be some tweaks and adjustments. We are obviously trying to be conservative in our guidance. We want to deliver on our guidance and of course we always like to hit the upper end of our range. So, I mean, that goes without saying, right, Chris? I mean, that's what everyone wants to do. So it would be imprudent, given the fact that there are macros out there that -- and enplanements and on the non-residential construction, they could get worse, could stay the same, they could get better. I mean, it's anyone's guess at this point. So we just think it's prudent to maintain guidance given what the macros are out there.

We feel confident in our ability to continue to get traction on cost reduction and growth in the online leisure segment and growth in the off-airport market, growth beyond probably our internal plan. But then we have the macros out there that we have to worry about. So that's really the reason for continuing the guidance is just looking kind of at the macro environment.

Well, maybe just as sort of an extension to that, I mean, can you touch on the sort of -- the visibility you have into 3Q? I was maybe a little bit confused by Joe's comments when he talked about ATA or talked about 3.6%. But that might be a little bit optimistic. It looks directionally good. I'm not sure if I was a little confused there. And then maybe, also, Gerry's comments saying that SW Dodge, they maintain their guidance. But, again, that might be a little bit aggressive, getting stronger in the second half of the year. And I think before you had given guidance of 5 to 7% growth in HERC for the year. Just maybe comment and wrapping all those together.

That was a long question. It had a lot of different pieces to it. I don't know. Let me let Joe and Gerry just address a couple of those issues, okay, Chris?

Chris, in terms of the macro, I gave what we have from government sources on what they believe enplanements are going to be. And what I said that while these enplanement numbers are good, but we're talking mid-single digit, 3 to 5%, depending upon whether it's domestic or international. They're just directional indicators. We have solid reservation growth going forward, but we can't take enplanement data and directly correlate that to rentals. And it's a good forward indicator and we use it as a gut check about what's going on, but we can't scientifically correlate the rentals.

Yes, to help, Chris, I guess we now expect Rent-a-Car to grow faster than Hertz, okay? So maybe that helps a little bit. I mean, we've had an unexpected slowdown on the equipment rental side of the business and we're accelerating our new store openings, coupled with accelerating our equipment purchases of aerial equipment that address the industrial sector. But beyond that, the actual slowdown in non-residential construction has been fairly precipitous over the last three months. Now, having said, that, Rent-a-Car actually is increasing at a rate that is probably faster than we anticipated and it's offsetting that contraction of growth, if you will, in the equipment rental side of the business. So rental car is offsetting the equipment rental side and that's why we reaffirmed our guidance. The growth rate is still 5 to 7% on the revenue top-line side, okay? Does that help clarify?

Excellent. Thanks very much.

Jeffrey Kessler, Lehman Brothers

I'd like to talk about the fleet a little bit. Last year, you were under fleeted and trying to get to your goals. You were still private then. Obviously, the first part of this year you've increased the fleet substantially relative to where you'd been increasing or decreasing the fleet. Obviously, this is the edge of the bell curve. So could we talk about a couple of the moving pieces here? Number one, the size of the fleet, fleet efficiency, and the cost of the fleet as you move into 2008, the model year, the cost that you see going forward. You've alluded to that and given some ideas about this, but there are a bunch of moving pieces here that would really help us get a feel around the profitability that you can glean from the fleet as we deal with these various moving pieces.

Okay, well, I'll let myself and Joe answer this. But, in general, we were very happy that our fleet costs -- we're really only up 1.4%. I mean, that's something we called out in the remarks, right? So that's better than anticipated, right?

Right.

I mean, we had talked about having some number between 2 and 4% I believe and now we're saying that the actual costs in the second quarter was about 1.4%. So that's good news. We're moving our fleet into lower cost cars to support the off-airport and online leisure growth that we're having. So our mix is changing a little bit, as you know. And that also impacts RPD. I won't get into that discussion, but I had a lot of discussion around that in the remarks.

But as long as we know that there's, at least, reasonable profitability, equal or better, on the online side relative to the more pricey cars.

Right. Yes, that's why we had the basis point -- our pre-tax margin improved by 150 basis points.

Yes.

In terms of the actual cost increase from the OEMs for 2008, it will be in the range of 2 to 3% for Hertz. That's what we said in the -- in our remarks. We're going to try to mitigate that even further, but this is a much more positive environment. Last year, it was 15 to 20%. So we're seeing 3 to 5% from the OEMs direct. We think we can ameliorate that to 2 to 3% conservatively, and so we feel pretty good about fleet costs moving into 2008.

Do you believe that the put price on the guaranteed buyback programs has come down to essentially the market price or the at-risk price? Will it be very hard for the OEMs to get any further, let's just say, get any further blood and flesh out of you guys?

I would say -- your statement is correct. That the program prices, well, the programs from a manufacturer, both risk and program combined, are pretty much right on market condition. The risk cars are still less expensive than program cars, but the rate of growth is far less than we've seen over the last two model years.

Okay, so the obvious follow-on question is if you're talking about cost increases for your fleet in the low single digit area and you're hoping, and it's only -- that's one third of your cost structure, and you're hoping to get, at least, modest pricing or maybe no pricing, but decent transaction days and -- out of your growth, are we going to be able to see a continuation of this type of margin, pre-tax margin, improvement that we saw in this quarter based on where you believe that fleet costs are going?

Yes. I think yes is the answer to that. I believe we'll continue to see margin expansion. And, in fact, we think pricing, as I said in the remarks, is positive for the third quarter and fourth quarter. That doesn't mean negative; that means positive. So I don't want you to think that because the first and second quarter had tough year-over-year comps, we're still consistent in our remarks saying that we expect to get increases in price, in RPD. Even though we got this mix shift going on, in spite of that mix shift, we believe third quarter and fourth quarter pricing will be positive for Hertz in the Rent-a-Car, U.S. Rent-a-Car side, of the business, as well as for the international Rent-a-Car side of the business. So that will actually be a positive, not a negative, as it has been in the last two quarters.

And how should we view the, and directly related to this, how should we view the movement now in your fleet size and fleet efficiency? Because, obviously, those metrics have to be modified, at least in my mind, a little bit.

Okay, well, let's talk about that. We knew and planned for fleet utilization hits because we saw strong summer demand. And we started that back in the -- probably end of the first quarter, beginning of the second, increasing the size of our fleet and we knew we weren't going to be able to keep the utilization to target plan, so to our target plan, but we did that because we saw the demand. And, in fact, that's proved out well. I mean, we see that kind of demand and we are glad that we increased the size of our fleet and gave up some utilization to capture that increased demand that we were seeing. Now, we expect to improve our utilization over its current rate over the next several quarters. So it should be clear to you that U.S. RAC anyways, we will improve our utilization. As we begin to de-fleet for the season coming into September and October, and as we continue to get traction on our fleet initiatives, which we are very focused on, we expect to see an improved utilization number. So I can't -- I won't give you the exact number, but it will be significant, and you will see that, we believe, in the second half of the year.

Okay. Final question, and then I'll get back in line, and that is, let's just say, market share or the mix of where you are in your Hertz business. Clearly, you've got competition, which is more aerial business relative to your earthmoving equipment, they have not seen as much of a slowdown as you have seen. Is one sector just slowing down more than the other sector and do you have to try to compete more heavily in aerial or do you have to shift around your fleet?

Jeff, this is Gerry Plescia. Yes, our mix is different than some of our major competitors. We've always had a core fleet that's heavier in the earthmoving categories. Earthmoving and trucks represent a substantially different mix than some of our largest competitors. So we're seeing, on the construction side and the earth -- and the earthmoving categories, particularly, a slower growth. And I think that follows the trend of the lower Dodge data, what you see from the major manufacturers that effect their construction equipment, seeing a decline the second quarter. So our strategy has been to improve the mix. We're growing our industrial business. We're growing it and shifting and diversifying into some more aerial and specialty products, but our core business still is a little more earthmoving directed, so we are more affected by the construction slowdown.

We are seeing stabilization I think through the quarter. You saw the Dodge data for the month of May and June, were the lowest parts of the year. They're predicting improvement in the back half of the year. Directionally, those numbers aren't empirically aligned with our business, but directionally, they're correct and we're seeing the same trend coming off the troughs, some improvement through the current period in that direction.

Right. Great, and congratulations on the pre-tax auto numbers. I mean, they were a real surprise.

Ronald Tadross, Banc of America Securities

This is actually Joe [Spack] for Ron. Can you just talk a little bit about -- I appreciate the discussion on the cost side. Can you talk a little bit about if you're running ahead of plan at this point? And if so, where that would be coming from and what you see going forward?

Well, I mean, yes, I guess you could say we have an internal plan like any company does and we're running ahead of our internal plan. But in terms of where we forecast to the market and to the street, obviously we've been exceeding I think the street expectations on EPS and would like to continue doing so. I don't know if that addresses your plan document, but on cost, we're hitting our cost targets, in fact, exceeding our cost targets. If you look at cost for the quarter, we break cost down really into 4 different buckets. Direct operating, that was down year-over-year 190 basis points. Then we look at SG&A and that was down 20 basis points. Interest -- net of interest income, that was down 60 basis points. So we had basically 280 basis points improvement, but then if you throw back in depreciation of revenue-earning equipment that was up year-over-year 130 basis points. So we get to a net number after the depreciation of revenue-earning equipment of 150 basis points of cost improvement year-over-year. So that's kind of a detail on the cost side.

To put -- which of the, like, 4 points of your cost-saving plan that you mentioned do you think that that benefit is coming from at this point?

I gave you the exact benefit on each one. I guess part of it is the actual ability to offset the car cost. Obviously, our car costs were up 1.4% and we're carrying extra fleet. We offset all of that with better utilization. We ended up improving some utilization, better transaction day growth was part of it, and then the cost reduction from initiatives that we've already previously announced, $165 million of costs that were announced in the U.S. And then we're starting to get Europe cost reduction as well. To date, in Europe, we reduced the people cost by probably in the neighborhood of $15 or $16 million. I have our controller for Europe on. Is that about accurate, Kyle? How much --?

That's right, Mark.

Yes. So about $15 or $16 million of costs have come out in Europe. Again, that's annualized. And they're not -- it's not fully bled into the numbers yet. And the $165 million is not fully bled not the numbers yet either. We completed that in the second quarter. So the $165 is an annualized number that had been completed through the second quarter of the year but obviously was not fully bled into the second quarter number. Does that make sense?

Yes.

Okay.

And then, just one more quick one. Are you able to tell us what car rental airport pricing is, excluding your corporate business? What it was for the quarter?

No. We don't break that out. Haven't broken it out for this call either. But, I mean, we did just give you a lot more visibility on pricing. We gave you off-airport and we gave you airport pricing, and then we talked to you about transaction growth also within airport and with insurance replacement. So there should be a lot -- there is a lot of data there, a lot more than we've given you in the past. We can go offline with Lauren if you want to discuss that at more length, okay?

Okay, great. Thanks.

Himanshu Patel, J.P. Morgan

I think you guys mentioned there was a 50 bp improvement on pricing at HARC. When you look forward, as we go into the softening on revenue growth, is there a chance this could turn negative over the next few quarters?

We think it's pretty stable where it is now. And some of the reasons for that is the volume, as we talked about, the direction of the demand has stabilized in the current period as we enter the third quarter. And there are also some easier comps as we head into the back half. So we don't -- we think the current state is a stable environment.

Okay. And then, just again, a little bit more color on Hertz -- on HERC. Any particular regions within the country where the slowdown has been more pronounced? I mean, is this basically the coastal regions where we've seen the housing slowdown or is it more sporadic than that?

It's -- the biggest single impact is in the southeast part of the U.S., where you had major housing developments and then the carryover into over commercial construction, particularly Florida and parts of the southeast were the most significantly affected, and in a much lesser degree in other regions.

Okay, and then, last question. You mentioned the Simply Wheels offer. Can we get a little bit more color on that, just a ramp up trajectory, the upfront costs associated with launching that brand, and is it -- I'm sure it's pretty small right now, but is it profitable out of the box or is it going to be initially -- what sort of period we should think about on that?

Okay, well, I'll just give you kind of a profile of it and then Joe can add any color if he'd like. But it's Orlando only right now and the concept is to have basically 4-day plus rentals with a limited fleet selection. You only get 10 cars instead of, let's say, 75 cars to choose, in terms -- 75 car classes to choose from. So you have a smaller fleet. You have almost no labor because we have self-service kiosks.

The experience is similar to that to an airline experience where you go in and get your self-service ticket. You have only -- roughly, let's say, 5 to 6 minutes in order to complete the transaction. And a lot of our on-airport competitors that participate in the online leisure market, their experience is more like 15 to 20 minutes. So we hope to cut the wait time down in half, at least. So the cost is the targeted half the cost, literally half the cost for the model, the brand is different, it's online, it's longer rental length, it's cheaper cars and less selection of fleet. So you've got a 50% reduced cost model, you have better than the industry average in wait time, and you've got the Hertz name behind it. So we expect the test, I mean, the actual test, will actually be profitable right away within the first 60 days. We spent about probably, I don't know, $2.5, $3 million total. That includes what we're spending on advertising in the local market to launch this thing. So it wasn't really that big of an investment for us.

Joe, I think that's the rough numbers, right?

Right.

And, again, we expect to get payback right away on it. If it works the way we think it will over the next 3 months, we'll refine the test and you can expect us next year to begin rolling out other leisure locations. Joe.

There is a [bite] again, presuming our assumptions are correct, and we believe that they are, there are at least 21 logical leisure destinations in North America where we would go. The most logical would be places like Southern California and Nevada and western Canada, those types of places where people vacation.

And how much, or is there any sort of assumption in your plans that -- could there be any cannibalization for -- from volumes at the low end for the Hertz brand itself?

We've worked really hard on making sure there is no cannibalization and we did that through a series of rates and contracts, the way we're set up. Now, if I've got a business corporate customer, let's say, and he becomes a -- or she becomes a leisure traveler and decides to go to Simply Wheels instead of using, let's just say, the normal corporate discount that they would get, there would be a movement from that particular corporate brand to the Simply Wheels brand, but what you need to understand is the profit is the same. What we've done is we've actually traded a different cost model.

So when you think about this, you've got to figure that the cost savings offset what would be the RPD change. And, again, this leisure customer, we -- who was a corporate customer if they do make that transfer, and that's if they do, we think we still preserve profitability. We thought very long and hard about this because the last thing we want to do is cannibalize. So that's why we're going to test it here in Orlando again and study it and we'll look at the corporate bleed as well into that and then decide if we need to tweak the program. But we are being very careful and it's a good question you're asking, Himanshu, but we are extremely focused on that, okay?

Okay. And the last thing, Mark. Any of your competitors already doing something like Simply Wheels?

I don't think so. I don't think any of our competitors are doing it. I mean, most of them have tried -- what they do is they've bought companies. So you see Avis Budget, they bought Budget. You see, obviously, National Alamo is now an enterpriser together, but they were buying the other side of it. They were looking for corporate accounts. So we think this is the most economical way, if you will, to address, and the lowest risk way, to address the leisure market, versus buying a company and having to deal with all of the integration issues and make sure you take all of those synergy costs out, etc. We're still exclusively focused on one brand, so it's Simply Wheels by Hertz. And we're using one set of fleets and we're managing within our existing infrastructure. We think that's the lean way to do it.

And the Hertz name will be attached to Simply Wheels at all times on the market?

Yes. It's part of the logo. Absolutely. It's Simply Wheels by Hertz.

Christina Wu, Morgan Stanley

I wanted to focus on the Hertz side of the business. You've talked about the rental rates being up 50 basis points year-over-year. I was wondering if you could give more color on rental rates for earthmoving equipment versus aerial, your new area of growth?

Go ahead.

Yes, sure. Christina, it's Gerry Plescia. The greatest pressure is in the earthmoving -- on the earthmoving side of the business where we have some slightly negative rates in those categories, offset by stronger rates in our industrial sector and some fleet categories of aerial and others. So there is a mix towards slightly negative on the earthmoving side.

Okay. And with URI likely going private, how do you see the competitive environment changing? And what, if anything, are you doing to change your own strategy?

We don't see the competitive environment changing in that regard. I mean, whether public investor or private investor, the investment group is looking for stronger returns in these businesses and that's -- we think that's a positive for us. As far as our strategy goes, we have a business mix that's been -- we've been diversifying over the last several years. We are going to continue to do that. We're looking at international expansion. We don't think any -- we need to do anything differently, as we've been pretty successful in growing into these other business segments. So we think we'll move ahead in that same direction and grow those other sectors where we've had pretty good success so far.

Okay. And then, switching gears, I was hoping that someone could address your general succession planning for key staff. With Paul retiring after 38 years, I was a little bit surprised to see that there hadn't been someone who had already been picked to take over that role. Could you just comment broadly on the succession plan and your thoughts?

Sure. Again, Christina, we have a well-planned process for CFO succession. We're following that plan. Having Elyse step in and -- while Paul is still here and available for consultation, it ensures continuity and internal development of talent. So it's very logical for us. We thought this was a very well planned and orchestrated process, so I'm surprised you're surprised.

So Elyse, I thought, is a temporary CFO while you look internally and externally for a permanent replacement?

That's exactly right, and she's one of the internal candidates, yes.

Okay. So, in general, with your succession planning, is it fair to say that your philosophy is to have someone in the interim while you look for that permanent replacement? I guess that's the part that caught me off guard. That there hadn't been some -- a more assured permanent position.

Paul announced his retirement and, given what we're doing in the Company, he felt that it was good to have new leadership and we have internal talent that we've grown for that leadership, so we're letting that internal talent step in and we're doing an external search as well to validate we get the best possible candidate for the job. So I don't, again, that's the best way I can explain it to you. And it was -- like I said, we planned it over 30 days before we announced it. This was not like it was a big surprise or anything and we feel really good that we've got a robust set of processes to manage it during the interim period.

Rick Kwas, Wachovia

Mark, could you talk about the utilization here with extending the rental days and extending the duration and what the incremental profitability on that is versus, say, you're doing a 2-day on-airport rental versus what you've been talking about on the off-airport where it's 6 or 7 days? You talked about the lower costs on the off-airport, but what is the -- how should we think about the incremental profitability, the margin increase?

Okay, now, I need to get a little clarity here. So you're asking how should you think about the incremental margin opportunity of the growth in off-airport?

Correct. Versus, if you're doing apples -- just comparing on-airport, a dollar booked on-airport with low duration versus --

Yes. Well, roughly, the margins and the way we look at the business is about the same, okay? The actual margins in a fully mature off-airport location end up being about the same in an on-airport. So from a pre-tax margin standpoint it's about the same. The earnings momentum, though, is what's important, I think for you to consider, because, obviously, as we grow off-airport, that's incremental growth and it gives us incremental margin, or margin dollars, if you will. So we get incremental contribution margin dollars from that incremental growth. But in terms of the actual margin expansion factor, it's equal. I mean, that's the way I think you should look at it right now.

Okay, that's helpful, thanks. Wait, and then, Mark, when you look at the opportunity on the processes, the piece of the cost that you really haven't quantified yet, how -- I think it's $6.4 billion worth of processes and systems that you're evaluating right now. When should you really -- when should we expect that that -- those savings would come online? How many -- how far into the future?

We've broken this thing up into two pieces, one is process reengineering of the $6.4 billion; the other one is outsourcing. We'll complete the outsourcing probably, I'll just say by first quarter of next year, and we'll have -- be able to size for you by that time what the outsourcing will yield us. It's obviously some significant savings. And we haven't really gone through all of the processes yet, so it's very hard to decide. But we'll start experiencing those savings, frankly, some of them maybe even experience in the fourth quarter. Certainly once we transfer the contracts and the people, etc. in the first quarter of next year, we'll start experiencing the savings on the outsourcing piece into 2008.

The reengineering is also going on at the same time. We have two different project management offices - one project management office on the reengineering and one on the outsourcing. Again, outsourcing will be complete by the end of the year and then savings in 2008. The reengineering also will probably take 12 months for us to complete and we'll start experiencing those savings right away as we find quick hits, because we're identifying quick hits, for example, and then we're taking those right into savings and we'll get some of those this year. But some of them involve system changes and in order to get those system changes it takes a couple of years in some cases and we're integrating that into the outsourcing piece. So savings this year and next year, not full savings probably until 2010. I mean, I think it will take us the better part of 2008 to finish the work that would yield, and even into '09 on the systems piece. So we'll start getting full 100% savings from this initiative probably all the way through 2010.

Okay, that's helpful. And then, finally, Gerry, could you talk about the Katrina comp? If I recall, you still had some Katrina benefit that you were lapping in the second quarter. Is that fully lapped now?

The larger impact is still -- we still have a fairly sizeable impact in the second quarter of a few percentage points of revenue and leading down to some improving profit. So we still have fairly substantial activity through the second quarter of '06 and then it subsides much more so in the back half. Keeping in mind that the business levels related to those locations that were impacted by the hurricane are still higher than they were before the actual hurricane hit. So we've kind of come -- we're coming down off of those levels, probably in between where those operations were and where the peak of the hurricane was because we've gained so much new business, industrial capacity, switching and diversifying our mix into those locations. So it was kind of a gradual decline, the biggest impact being the first quarter, still some fairly substantial impact in the second, and a little less so in the back half of this year. So it does get -- become a more positive comp as the year moves on.

Emily Shanks, Lehman Brothers

Very nice quarter. And congratulations and best wishes to Paul. It's been a pleasure working with him.

I have two very quick questions. The first, can you give us a sense of what you think your off-airport market share is now at this point?

Well, I know it was 11%. This is historic, as of last year. Joe, do you have any clue what it is right now? I mean, I have -- we haven't gone out and done a specific measurement on this recently.

No. That would be within the range based upon the data we have now.

About 11%. We'll, obviously, update it as we get into the third quarter.

Okay, great. And then, my second question is really more for Gerry. I was just hoping, as it relates to the trends you saw in the non-res cycle, and certainly I appreciate all of the data points you provided, but can you just refresh us on what Hertz's view is around where we are in that cycle?

Yes. I think we're still in the middle of what's historically been a longer term cycle. Maybe 10 years. We're about right in the middle of that. I think what's affecting the overall sluggishness of growth is the year-long plus housing decline, which has put a drag on some of the other retail construction. I think that's where you see the non-res components flattening right now.

As the housing market kind of comes out of this -- the low cycle, we think we'll start to see some upside back into the, it's our opinion, back into several years longer into this growth cycle. The non-res components are still very strong. The underlying components are still historically high, even though we're seeing a slower growth period. So we still think we're somewhat in the middle of a long-term cycle, of an 8 to 10 year cycle, and obviously affected by the macro items that could happen, but we feel pretty comfortable with that.

Great. That's helpful. Thank you.

Brandt Sakakeeny, Deutsche Bank

Thanks. I'm actually okay.

Zafar Nazim, J.P. Morgan

I had a few questions on your free cash flow and capital structure. Gerry, I was wondering, you mentioned $600 million of CapEx budget for '07. Is this net of disposals?

You're talking about the equipment rental side, right?

Yes, that's right, on the equipment rental side.

That's just -- those are just gross purchases.

And any estimate on where disposals might end up being?

Disposals will be about 2 -- a little -- 250 -- $250 million approximately in proceeds.

Okay. And the other question I had was around the fleet equity enhancement that runs through your free cash flow. I guess I'm just trying to figure out how to model this number. You had an increase in fleet size, which, from 1Q to 2Q, which was higher than what we saw in the previous year, yet your fleet equity requirement was much lower than what we saw a year back. So I'm trying to get a sense of how to remodel this number, especially with the back half of the year and just trying to see how this correlates through the fleet side that you're seeing on the car rental side.

I think I can -- I'll take this. This is Elyse. That net equity, it's really two components. It's the actual cars themselves and it's also the manufacturer's receivables that relate to program sales. So, as you rightly point out, the fleet is up, but the actual receivables, the program receivables as we change our shift in mix to higher risk cars versus program cars, that receivable is going to come down. So you have to factor both of those in.

Okay. So I guess with the back half of the year we should expect a similar trend, given the fact that your program cars are going down in the mix?

I guess, generally speaking, yes.

Okay. And then, just --

(Inaudible) make a difference [to us].

All right. And then, on your fleet financing, how much of your debt recess on average every year in terms of the cost that -- I mean, I guess it's -- that a part of your fleet debt which is on a floating basis or resets every year. I'm just trying to figure out what amount is that?

The fleet, as it relates to the car fleet, the ABS facility, is pretty much fixed. The bulk of that debt is fixed. We do have a variable rate note program which we do borrow from time to time, but the bulk of the car fleet is fixed. On the Hertz fleet, where we borrow under the ABL structure, that's 100% floating.

Okay. Okay, great. And then, the fleet cost increase of 2 to 5% on the car rental side that you expect, do you expect a similar increase both from Ford or GM or do you expect -- is this based upon higher cost increase from one OEM versus the other?

That range of price increase is across all OEMs we deal with. As of now, we believe that the domestic OEMs will be in line with that average. There was nobody stepping way above the market right now.

Okay, great. And then, just finally, use of free cash is mentioned to be either paying down debt or reinvestment in the business. What about stock buybacks, is that something that you may consider in the near to medium term?

Well, I guess at this point there is no plan to do that. I guess we look at, again, paying down debt as the most efficient use of extra cash in the balance sheet, and growth opportunities as well. So we have a tremendous amount of opportunities, both store growth (inaudible) market, store growth and (inaudible) rental market as well and we've got the online leisure segment that we're investing in.

And I guess as an extension to that question, given the way the fixed income markets are right now, there have been occasions when your bond has traded down below par. Would you consider that an opportunity to, perhaps, buy back some of these bonds from the market?

Well, we do get calls from time to time from brokers where they have opportunities to buy the bonds and we do look at those opportunities and if it makes economic sense we would certainly consider it.

But you haven't done so?

We've done nothing, no.

We're going to have to -- that's a lot of questions. So, I'm sorry, we've got to keep moving, okay, to be fair to everyone else.

Greg Wilcox, Wachovia Securities

Thanks for all of the detail in the press release today. Just one quick follow-up, something that was mentioned early on with how you're, in the future, going to put more of your cars directly to dealers, I guess, as opposed to going back to the OEMs. Could you break out what percentage of your cars are sold currently at auction to Manheim or Odessa, somebody like that, versus directly to the dealers versus to OEMs? Can you just kind of break out where you are today and where you would like to go in the future with that?

There are three pieces of our disposal plans now. The bulk of them go through auctions, not just Manheim but all of them. That's about 85% today. We still have a small retail direct-to-the-consumer business up and running in northern California and then the dealer direct will be the bulk of the other 15%. We believe that the dealer direct has a lot of benefits, both for us on the timing and reducing the pipeline, number of days idle, and in providing benefits to dealers and that they say a transportation cost, in some cases flooring costs, and it can be a win/win. So I see this as being a third or more of our opportunity in 2008 and going forward.

Okay, that's helpful. Thank you.

Chris Agnew, Goldman Sachs

I just want to follow up on free cash flow. You had strong working capital improvement in the first half of the year. How should we be thinking about that improvement in the second half of the year? I think you're a user of working capital in the third quarter. You should maybe run through some of the [fields]. And I know you talked about HERC CapEx. I just want to confirm it was $600 gross and sort of net of $250 disposals. Are you saying $350? And then, can you provide an outlook for non-fleet CapEx?

Let me talk about the working capital. The working capital improvements to the first half of the year were driven primarily on the payable side, so that does include fleet payables. So you -- we are right now in our fleeting up period, so obviously they have a bigger impact in the first half of the year than they do in the second half. So that's -- and repeat the question again. The --

On the HERC side, you were talking about the actual assumption regarding the fleet purchases and what was gross and what's net and you were right on the money on that. Your analysis of that was right on the money, okay?

Okay. And so that's to your -- I was just going up your equipment rental CapEx, but increasing in particular areas, you said aerial. And then, also, the non-fleet CapEx, if you can provide any outlook for the full year.

Non-fleet CapEx? Well, non-fleet CapEx I believe is going down for the full year. We've got full year, for what, $218 million.

$218 million.

For non-fleet CapEx.

For the full year.

For the full year, non-fleet CapEx is $218 million is the forecast, okay?

Jordan Hymowitz, Philadelphia Financial

Two questions. One, you took out the pricing guidance range and the volume transaction guidance range that you've had before. Are you withdrawing that guidance or is it going to be modified or --?

Jordan, we didn't really give guidance for that. What we talked about has sometimes been long-term industry trends, but we have not been specific.

Are you talking about, like, the 2% number which we've thrown out as the industry and what we expect to get? Maybe that's what you're talking about?

Correct.

Okay. Yes, I mean, I think the overall impact for the year, what our RPD will be, and that's what you're looking for? Is that it?

Yes, correct.

Yes. I mean, I don't know exactly where we're going to come out except that to tell you that in second half it's obvious you're going to be much better than the first half where we had negative pricing. If the overall impact is 2%, I haven't -- we haven't modeled that, so I couldn't tell you for sure. But certainly the back half of the year pricing will improve. And I guess our mix has, in fact, shifted probably a little faster than we anticipated. We've gotten better growth than we anticipated in off-airport and online leisure. So -- and that has a negative RPD trend to it, as you know, because you're -- we're getting cheaper fleet.

And, again, what I want to make sure I point out is that RPD is not really pricing. I mean, it's just the function of the vehicles. If you have higher cost vehicles in your fleet, you'll get higher RPD. If you have lower cost or cars that are less expensive, you'll have lower RPDs. So since we're moving our fleet into lower cost cars because we're driving strategy and our strategic drivers are in the off-airport and online leisure, we have lower cost fleet and that has lower RPD characteristics to it. But that doesn't mean pricing is going down. We continue to lead prices. We continue to see a pricing environment overall as positive going forward at the end of the third quarter. So, and I stated that in the call. So I want to make sure that --

No, I understand that, but you're saying that the 2 to 4% that you kind of guided to before is probably not going to happen because of the mix.

I would -- the 2 to 4% for the general industry increase you're talking about. I haven't guided to anything like that just so you know. So the guidance is -- there is not an official guidance on pricing. There is commentary on pricing.

Sorry. The commentary on pricing of 2 to 4% last quarter is probably not going to happen this year because of the mix shift?

Jordan, maybe we should take this offline, but I don't think we've ever used a 4% number ever.

Okay. I'm sorry; it may be 2 to 3%. I could be mistaken there. My second question is the G&A, there was a large restructuring charge this quarter as part of the ongoing initiatives. How -- when you do a restructuring charge, does that include current salaries for people that are being laid off or is that just the severance and benefits for going forward that are being charged in there?

Okay. Well, you talked -- there are two things here. Severance costs would be severance costs and there is a definition of what those are. I mean, it's people cost itself. When you eliminate a job and that person leaves the company, you pay them a severance. It's a legal binding document typically that is done and we do it, as all companies do. The size of the charge, I believe, this quarter, if I remember, was $16 million. Is that right everyone?

Right. That's correct.

So $16 million, that's actually very, very small considering the amount of benefits we're getting. It's $165 million. Now, we took one in the first quarter too and I think the size of that one, do we -- does anyone know that off the top of their heads here?

I think it was 33.

33. So 33 and 16, you get 165, it's really good, relative to most restructuring of companies. So that's pretty economical to get a three-time payback right away for your restructuring. So -- but anyways, you said sizeable, so I was just kind of reacting to that. The 16 --

I don't mean in sizeable, but does the amount include -- in other words, your revenue -- your G&A was much lighter this quarter than a lot of people's models. What I'm trying to figure out is does that $16 million include any salaries that would have been in that quarter for the people --?

No. No, no, no.

That was just severance?

That was just severance.

Okay.

Jeffrey Kessler, Lehman Brothers

I think he had it answered.

Mr. Kessler, your line is open.

Okay. Maybe he's on mute.

Okay. Turning it back to Mr. Mark Frissora then.

All right, very good. Well, thank you everyone for attending our conference call. We look forward to reporting our third quarter results in the future.

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