Herc Holdings Inc (HRI) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Hertz Global Holdings fourth quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS) The company has asked me to remind you that certain statements made on this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance and, by their nature, are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of this date and the company undertakes no obligations to update that information to reflect circumstances. Additional information concerning these statements and is contained in the company's press release regarding the fourth quarter and full-year results issued earlier today and the risk factors and forward-looking statements sections of the company's 2006 10-K and third quarter 2007 10-Q filings with the SEC. Copies of the materials are available from the SEC, the Hertz website or from the company's investor relations department. I also want to remind you this call is being recorded by the company. I would now like to turn the call over to your host, Ms. Lauren Babus. Please go ahead.

Good morning. Welcome to Hertz Global Holdings fourth quarter and full-year 2007 conference call. You should have our press release and associated financial information. We have provided slides to accompany our conference call. You can access these documents at www.hertz.com/investorrelations. In a minute I will turn the call over to Mark Frissora, Hertz's Chairman and CEO. Also speaking today is Elyse Douglas, Hertz's Chief Financial Officer. In addition, we have Joe Nothwang, Executive Vice President and President of Vehicle Rental and Leasing the Americas and Pacific,;Michael Taride, Executive Vice President and President Hertz Europe Limited; and Gerry Plescia, Executive Vice President and President of Hertz with us for the Q&A session.

Today, we will use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release posted on our website. We believe that our profitability and improved performance is better demonstrated using these non-GAAP metrics. In response to analyst feedback, we have added a table to help reconcile adjusted pretax income to corporate EBITDA. Our call today focuses on Hertz Global Holdings, the publicly traded company. Results for the Hertz Corporation differed only slightly as explained in our press release. Now, I will turn the call over to Mark Frissora.

Thanks, Lauren, and good morning everyone and thanks for joining us today. Let's start with slide number 5. We're pleased to report such strong results for the fourth quarter and full-year 2007. Our story is particularly gratifying given that we face the headwinds of a weaker U.S. economy in the quarter and the threat of recession. As can you see, Hertz exceeded the high-range of our full-year guidance on four of five key financial measurements.

Number one, on revenues which increased 7.8% year-over-year. Number two, on adjusted pretax income that grew 35.8%. Number three, on adjusted net income up 36.7%. And finally, on number four, adjusted earnings per share which increased 37%. Corporate EBITDA at 1.541 billion, an increase of 11.8%, was in line with our guidance. Our cash performance was very strong in 2007. Early in the year we set a target of $1 billion positive cash flow over a 2- to 3-year period. In 2007, we delivered over half of our target and reduced net corporate debt by $553 million. A key component of that was reducing the working capital requirement resulting in a 12-day improvement in day sales outstanding through intense focus on the balance sheet.

Cash management is now a priority for the business units as well and we have set additional goals for 2008. In fact, full-year cash flow per share, which is levered after tax cash flow after fleet growth divided by 324.8 million shares, almost doubled year-over-year and more than matched our adjusted EPS improvement for the same period.

I would like to now transition into the discussion around our revenue diversification and efficiency initiatives to show you what truly differentiates us from our competitors. This is on slide 6. With the slowing U.S. economy, our strong revenue diversification will be a key element of our performance in 2008. We have two major businesses. Car rental and equipment rental, which represent 80% and 20% of our revenues respectively. We also have strong domestic and international operations in each business. Our operations outside of the U.S., which constitute 33% of our overall revenues, experienced strong revenue growth and operating profits.

Within each of our operating segments, there is further diversification by customer type and through product line. The U.S. off airport market generated almost $1 billion of revenue in 2007, driven by a 10.6% transaction day growth. Additionally in Europe, more than half of our car rental activity comes from off airport transactions and that market is growing faster than the on airport business. Off airport is an important source of revenue for us in that it represents a significant growth sector that is less susceptible to seasonal volatility and economic cycles. Our equipment rental operations are also differentiated from our competitors, primarily through our geographical footprint which includes the U.S., Canada, and Europe. We believe that the breadth of our product offering, traditional rental business, general rental, specialty pumps, power generation, aerial, trench shoring and plant services helps insulate us from reduced demand in any one specific area.

I want to highlight our growth initiatives that will also strengthen diversity of our revenue base. Please turn to slide 7. We're pleased with the initial performance of Simply Wheels, our new low-cost leisure brand that we're piloting in Orlando and Spain. This offering appeals to value-oriented customers. We continue to penetrate the online leisure market and booked over 37% of fourth quarter worldwide reservations through hertz.com and third party websites, an increase of 10% year-over-year. Our prestige, fun and green collection and our brand new motorbike collection in Spain highlight the rich diversity of our rental fleet and target customers with specific vehicle preferences. These collections produce total revenues of $700 million in 2007, significantly higher than the $382 million they delivered in 2006.

We also offered hourly and monthly rentals so that we can meet the vehicle rental needs of highly diverse groups of customers. We also have ancillary revenue growth opportunities. 2007, revenue from Never Lost, our satellite navigation unit, increased 19% year-over-year. In HERC, we further diversify our revenue stream in 2007 through strong growth in the industrial sector and product initiatives such as pump and generation. Our specialty initiatives broaden the range of customers we serve and generated double-digit revenue growth in 2007. During 2007, we added on a net bases over 360 corporate likes to our worldwide rent a car and equipment rental networks. This includes the 12-car rental licensee acquisitions we made during the year, which represent $36 million of revenue brought under corporate control. This gives us greater control of our growth in those geographies, enhances our business footprint and creates a more efficient sales platform overall segments. We're considering other licensee acquisitions.

Across the divisions, we're signing up new accounts and extending our portfolio of travel partnerships and affiliations. Additionally, we plan to expand our networks further in 2008 to fuel additional growth. Later this year, we will give you an update on our expansion into Asia, particularly China and India. Let's now turn to slide 8 on our efficiency initiative, which are a second key factor that differentiates Hertz from our competitors. In November 2006, we set a target to raise our adjusted pretax margin from 5.2% to 10 to 12% within three years and outline some major initiatives to achieve that goal. We have made good progress thus far.

The adjusted pretax margin for 2007, increased by 240 basis points from that starting point to 7.6% and total company employee productivity measured by dividing revenue by average head count was over 14% higher in 2006. In 2008, we expect to realize annualized net savings of at least $250 million from the many initiatives we discussed with investors. About 75 million of which is built into our adjusted pre tax income guidance. We also expect incur restructuring charges of between $30 to $40 million in the first half of the year. The full $250 million is not flow through as pretax income because we will be using some of the savings to invest in new stores and other growth initiatives, some will offset increased the fleet depreciation and fleet interest expense, and inflation in products and services we use to run our businesses. Regarding the 75 million baked into our current projection, we will update you in subsequent conference calls and change the estimate as our visibility improves throughout the year.

These savings will affect all expenses, all expense lines of the income statement. Direct operating, SG&A, and depreciation. Interest expense should improve as we delever with the additional cash generated. Since 2008 will be a transition period, these benefits will be phased in over the year and the impact of these initiatives should be even greater in 2009. Much of the savings is driven by process improvement so we can maximize the financial benefit without impairing the customer experience and, in some cases, improving the customer experience. Importantly, we believe our cost reduction plan can be achieved, even in the current economic environment.

You may recall that in January of 2007, we introduced a new customer satisfaction measurement system, which is linked to our employee compensation plans. We continue to monitor performance closely and set new targets each year. Our scores coupled with 18 unsolicited awards received by Hertz this past year, tell us we're doing a good job meaning and exceeding customer expectations. Now I will update you on our progress. First, the Hertz improvement process. Our lean six sigma program is alive in 250 locations worldwide, reprinting over 50% of total rent a car revenue and 30% of the equipment rental revenue. Our employees have designated numerous process improvements which are then cascaded as standardized work throughout the organization. Secondly, in 2007, we also delayered and streamlined their operations and announced $165 million of annualized savings in North America with additional savings to come from our European operations. Third, we launched Project Genesis, our global strategic initiative to re-engineer our position to best in class, reorganize our company into cross functional, worldwide centers of expertise and outsource non-core processes in cases where we find companies able to perform the work better and at a lower cost than we can.

To this end, we reviewed 207 processes representing over $6 billion of cost to identify re-engineering and outsourcing opportunities, and bids were solicited for information technology, property, procurement and selected areas of finance and human resources. Other processes are also being retained in centers of expertise where they will be re-engine eared and standardized. While we're reviewing and still reviewing proposals for a number of these domains, we're quite far along on redesigning property management, which is a good example to share with you. We have retained internal control of airport negotiation and bids, facility project design, lease administration and facility environmental compliance in a global center of expertise. We are partnering with CB Richard Ellis, the leading provider of global commercial real estate services, to handle the facility management of current locations, acquisition of new properties and construction and maintenance. We will be able to accelerate new location openings, an important part of our growth strategy, free up Hertz management time, and apply consistent design standards throughout the company.

In addition to the soft benefits, we expect to achieve net savings of $8 million on a run rate basis over the next few years. This is just one small example. We expect other outsourcing opportunities could generate even larger savings. On the re-engineering sides, we have interdisciplinary teams in place looking at major processes, such as vehicle damage, to improve our collection of repair costs. Over time, we expect this effort alone to realize annualized savings of $16 million for U.S. rent a car. These initiatives will include headcount reductions in 2008, in addition to staff reductions due to macroeconomic factors. As before, we will limit the impact on customer-facing personnel and plan to improve customer service levels.

Global supply chains is another important source of savings for Hertz. In addition to sourcing non-fleet purchases at lower costs, we're focusing on our reducing the holding cost of our revenue earning equipment for rent a car and Hertz. This cost depreciation and fleet interest represents the largest single expense in our cost structure, or about 30% of revenues. This is a cradle the grave review of our current fleet management processes and the subsequent implementation of efficiency actions on every facet of our fleet costs and initial purchase to the ultimate disposition of the assets.

Finally, CMS, Hertz's state-of-the-art global car rental supply and demand forecast system continues to be implemented through rent a car. In 2008 we will roll out the fleet rotation module, which joins fleet acquisition and distribution, to drive us towards an optimal vehicle mix and distribution of fleet. We will also export existing forecasting and pricing modules to Canada and Europe. You heard a lot about efficiency improvement and cost reduction at Hertz to drive bottom-line results. These programs also enable us to continue investing in the company. In 2007, we attained our financial performance goals by spending over $65 million more on our brand, our operations and our people. We expect to continue these investments in 2008 and beyond to ensure a successful growth and performance.

During the past quarter, we added several new positions to our senior management team. Bob Stewart is our head of global sales, a new position that had previously been combined with marketing. Bob joins us from General Electric where he held several various sales and marking positions and has a strong consumer brand experience. Lois [Boyd], with whom I work closely at Tenneco, was brought in to oversee process improvement and project management as we cascade the efficiency and other initiatives throughout Hertz. Jeff Zimmerman, who is now our general counsel, also is from Tenneco where he served as vice president law with strong commercial and employment law practice. Earlier, we announced the a pointment of John Tom as as our new head of global supply chain management. John comes to Hertz from GE and will delivery our cost savings initiatives and procurement and asset disposition. Each of these executives bring a wealth of experience and enthusiasm to our company and will help us achieve our growth agenda and profit enhancement goals. With that strategic overview, let me turn the call over to Elyse.

Thank you, Mark, good morning, everyone. Our 2007 operating data is in our press release. I will focus my remarks on the operating environment and outlook for car rental and equipment rental. Let's turn to slide 9. Starting with U.S. rent a car. On our October conference call we discussed the positive pricing outlook for the industry for the balance of the year. As you will recall, the industry had experienced multiple price increases in the third quarter and the momentum carried into the fourth quarter. However, volume and pricing proved challenging in November and December as business and leisure rental volumes were impacted by reductions in airline traffic and economic concerns.

Airport leisure pricing eroded as the industry's post-summer supply outweighed demand and pricing remained below prior year despite attempts by Hertz and others to raise prices on a market-by-market basis. In our corporate account negotiations in the fourth quarter, however, we achieved rate increases of about 2.4% together with very high account retention. About 45% of our total revenues come from business transactions with almost 60% of that from our corporate account and the remainder from other business categories.

Looking at another important operating metric, average rental length in the U.S. increased by 3.2% in the fourth quarter, reflecting the shift away from traditional booking sources to online leisure rental sources and growth in the off airport sector, particularly insurance-related business. These transactions tend to be longer in length which reduced operating cost. As we pointed out in earlier calls, while rental rates are lower, these rentals are profitable due to lower transaction and vehicle costs. I am happy to report that pricing and reservation billed at our airport locations currently are above prior year for the March forward period.

For 2008, generally, we anticipate industry behavior will be rationale as participants adjust supply relative to demand trends. We also expect to maintain double-digit transaction day growth in off airports as we seek to expand our network, again new insurance accounts and increase market share in existing accounts. As we continue to focus on growing the off airport and online leisure components of our revenue base, we expect that mix shift in our business will continue to impact overall rental rate revenue per day, or RTD.

International car rentals experienced good year-over-year revenue growth driven primarily by Europe which experienced a mix shift due to the growth in longer-leapt rental products like van and monthly rentals, improved leisure penetration and increased rental volume from the United States. In Europe, rental volume growth was strong all year but slowed in December around the holiday period. Since year end, however, advanced reservations are above last year, which is encouraging. Until we have greater visibility, we're being prudent about adding fleet to increase utilization levels above last year. Car cost increases across the industry are producing pressure for rental price improvement. We also expect our RTD to reflect product mix shift as we further increase penetration into longer rental lengths but lower RPD sectors, such as leisure, van, and truck.

Turning to equipment rentals, slide 10. During the fourth quarter, we continue to be impacted by the softening U.S. construction market both residential and nonresidential. Demand for earth-moving rental equipment continued to decline overall, particularly in Florida and California; however, we benefited from strong industrial and oil-related volume in western Canada, Texas and the Gulf Coast. In these locals, we also experienced rental growth from ancillary construction projects. Strong growth in both our equipment rental initiatives and in our international business more than offsets softness in the U.S.-based construction business and further diversified our revenue mix.

Our objective is to continue increasing industrial revenue in North America from 20% of the total in 2007 to 25% over the next one to two years. In building our plan for 2008, however, we have been cautious in our assumptions. Our expectation is for continued growth in the industrial and fragmented sectors of the economy and negative growth in construction-related spending. Compared to fourth quarter 2006, worldwide pricing declined by about 60 basis points with positive pricing in Canada offsetting a 1% decline in the U.S. and Europe. This pricing pressure is primarily related to earth-moving equipment. We have said that supply and demand of equipment are better matched than in previous economic slowdown and the pricing environment reflects that balance.

At December 31, the average age of our worldwide fleet was 29.1 months versus 26.4 months at year-end 2006. You should expect our fleet to age a few months in 2008, but from a competitive and customer satisfaction perspective, the fleet is still relatively young. In 2007, as reported in our levered after-tax cash flow statement, equipment rentals spent 273 million in maintenance CapEx and 282 million in growth CapEx. These numbers include a foreign exchange impact of approximately $90 million. The 2007 investment and equipment was primarily to support our industrial growth, new business initiatives and network expansion.

For 2008, depending on economic conditions, we expect total equipment rental fleet, net capital expenditures, to be no more than $200 to $250 million. We plan to fleet new greenfields by redeploying equipment that will increase utilization in the softening economic environment and the U.S. and also serve to conserve capital. Let me turn to our financial results shown on slide 11. We had a strong fourth quarter with consolidated revenue of 2.1 billion, an increase of 7.4% year over year. We were especially encouraged in light of a difficult economic environment, worldwide equipment rental was able to deliver a 7.4% year-over-year improvement and worldwide [RAC] improved 7.5%. Our profit measures show significant improvement in comparison to fourth quarter 2006.

Our GAAP pretax income and net income in the quarter were 90% and 103% higher and earnings of $0.25 per share on a diluted bases represented an increase of 79%. Adjusted pretax income and adjusted net income were 15% higher on a year-over-year basis. Adjusted EPS using the pro forma fully diluted post IPO share count of 324.8 million was $0.29, an improvement of 16% compared to 2006. For the fourth quarter, our corporate EBITDA was 385.2 million, an increase of 5.2%. In the fourth quarter, direct operating, selling, general and administrative and corporate interest expense on an adjusted basis declined by 190 basis points as a percent of revenue. This improvement was achieved in spite of a $5 million increase in advertising spend in that period. This margin improvement is partially offset by higher fleet carrying costs due to higher per unit costs and larger fleets in the quarter. The net result is an improvement of 40 basis points year over year and our adjusted pretax margin.

Total cash interest expense during during the quarter increased 3.3% year-over-year. The increase in net fleet related interest was partially offset by the reduction in net corporate interest expense 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 2007. Adjustments to our GAAP results totaled $71.2 million in the fourth quarter due to restructuring costs, purchase accounting and non-cash debt charges partly offset by a $7.7 million credit relating to the change in vacation accrual.

Now I would like to take a few minutes to discuss fleet utilization and residual value. Deficiency during the quarter in both worldwide car rental and equipment rental was below the prior fourth quarter. In U.S. car rentals, we maintained fleet levels throughout the quarter to capture volume from improved demand we saw around the Christmas holiday to benefit from the higher yield opportunity. In equipment rental, with the continued slowdown in construction activity, we have been rebalancing our fleet away from earth-moving equipment and that reduces fleet efficiency. We have heard a lot of concern about residual values for our domestic rental fleet in recent months. Let me address the point and have you turn to slide 12.

Used car sale volumes and residuals are seasonally lower in the fourth quarter and 2007 was no exception. However, seasonality is only one factor. Our deletion plan must consider the mix, mileage and fleet age needed to satisfy customer needs and drive higher levels of customer satisfaction. Residual value performance is specific to manufacturer, make and model. Our fleet diversity is a natural hedge in that we have limited exposure to any single manufacturer or vehicle. In the U.S., our largest single brand supplier only accounted for 27% of cars purchased during 2007. Similarly, our large sport utility vehicles, a category which has been under pressure in the used car market, are almost all program cars. Currently, no single risk model represents more than 5% of our total domestic fleet and we expect that to continue in 2008.

Residual values were approximately 74% in Q4, 2007, reflecting the seasonal impact and some market pressure and 75% for the full-year. For the full-year 2007, we sold over 111,000 cars, which is twice as many vehicles as in 2006. The average age is consistent with the prior year at approximately 14 months. In the current quarter, we are seeing some continued market pressure on residuals but expect this to dissipate during the year. Given the strong unit sales performance and stable residuals and our accelerated transitions predominantly risk fleet verses our competitors, we believe the management of the fleet disposals and residual risk is another strong capability we will utilize to manage throughout the difficult economic environment. In the U.S., the percentage of non-program cars in the fleet increased year over year from 52% to 73% at December 31, 2007.

From a flight-planning perspective, the benefit is we control the timing of disposal in regard to age and mileage and can optimize optimal equipment selection. The down side is the disposing of the risk vehicle takes us 15 to 21 days longer than a comparable program vehicle. Our Hertz improvement process is focused on streamlining the disposal period and we expect significant progress in 2008 in closing the GAAP. As Mark mentioned, in 2008 we will continue to develop alternative sales channels, particularly online, which will allow us to maximize our residuals and dispose of vehicles more quickly. In Europe, about 75% of our fleet purchases are on a program basis and we primarily sell our non-program vehicles to wholesalers or through our small retail car sales network in France. For the year, residual values were fairly stable, and there was some softening in the fourth quarter as well. At equipment rental, the used equipment market remains fairly strong and still maintaining good residuals among almost all categories of equipment, although earth-moving remains under pressure.

As you may know, equipment rentals typically sells most of its equipment through retail or wholesale channels, which provide better residuals and net sales proceeds than the auctions. Although this is our strategy, you may decide to sell more fleet at auction to expedite our fleet balancing initiatives, which would reduce used equipment sales profits in the short-term. Let me assure you that in both rent a car and equipment rental, we review appreciation rates and asset lives every quarter and make adjustments as appropriate so we can minimize gain or loss on sales. Because we're constantly in the markets, we can monitor residual value trends on a realtime basis.

Looking into 2008, we expect U.S. rent a car vehicle depreciation expense per unit to increase 2 to 4% year over year. Internationally, for the 2008 model year which started in January, manufacturers are implementing mid single digit price increases and are limiting supply of certain models. Absolute vehicle depreciation per unit for Europe remains below that in the U.S. We will continue to manage the mix of cars to reduce the financial impact of higher car costs. And the last point I would like to make on fleet is that we don't perceive any issue in obtaining adequate fleet in 2008.

Turning to slide 13 now. Our balance sheet continues to improve. At year-end, our consolidated leverage ratio was 2.9 times and the consolidated interest coverage ratio was 3.7 times. These are improvements over the prior year and well within the covenant limits set in our financing agreement. We believe we have more than ample liquidity to support our 2008 debt maturities of 214 million as well as anticipated growth. Subject to borrowing base availability at December 31, we had additional capacity of 5.4 billion, consisting of 3.1 billion in fleet financing, 1.6 billion in corporate credit facilities and 700 million in cash. Approximately 35% of our average debt during 2007 had interest calculated on a floating rate basis.

We expect to benefit from lower-base interest rates in 2008. In December 2007, we closed on a sale and lease back financing facility in the U.K. to provide 270 million of fleet borrowing capacity for our car rental operations. This is a cost-effective financing and demonstrates the array of financing vehicles in the market. Let me spend a minute on the concerns in the market regarding our U.S. fleet financing on slide 14.

At December 31, there were 4.6 billion outstanding under various U.S. asset-backed notes and we have a variable funding note facility of 1.5 billion which was unused at year-end. Our upcoming fleet debt maturities are 165 million in May 2008 and 1 billion in February 2009. Although as is typical with asset-backed securitizations, there is an amortization leading up to the maturity date. While we have historically utilized model line ensured financing structures, in the event it became too expensive or impractical, there are other alternative financing vehicles in the marketplace that we can use. We continually look at various financing alternatives and we will take advantage of opportunities as deemed appropriate given the market conditions.

Moving to slide 15. For the full year 2007, our GAAP effective income tax rate was 26.5% and cash taxes paid totaled 28 million. For 2008, the projected effective tax rate is 34% with cash taxes of 65 million. Earlier this month, congress passed a fiscal stimulus package that includes a bonus depreciation provision for certain property acquired in 2008. (inaudible) bonus depreciation is part of our lifetime exchange program. Our current projection of not paying material U.S. federal income taxes until 2011 would not be significantly changed.

Total company net capital expenditures for property plant and equipment, that is investment in our facilities, systems and service vehicles were 97 million for the year. We expect to spend as least as much in 2008 to maintain our facilities and operation. Now, let's turn to slide 16. On a consolidated basis, cash flow from operating activities was 3.1 billion for 2007 compared to 2.6 million in the prior year primarily due to year-over-year improvements in working capital and cash earnings. As Mark mentioned earlier, an important focus for Hertz is cash flow and deleveraging. We generate cash flow in good times for learning, but unlike other companies, we also generate cash in periods of reduced demand as we defleet. Our revenue earning equipment assets are quite liquid and the disposal channels well-developed. Given the seasonality of our businesses, it is best to look at cash flow over a 12-month period.

Full-year levered after-tax cash flow after fleet growth was $553 million, an increase of $268 million compared to 2006. This was driven by $163 million of higher earnings, 268 million in improved working capital and $111 million in lower investment in Hertz fleet partly offset by a $254 million increase in the car rental net equity requirements reflecting the higher fleet balances and lower program manufacturer receivable collections than in the prior year. As you can see, our balance sheet is strong and we believe we are well positioned to the growth. Now, let me turn the call back to Mark.

Thanks, Elyse. As can you see, we finished 2007 with a solid fourth quarter and strong full-year performance despite economic headwinds. We met our full-year guidance for all metrics and exceeded it for revenue, adjusted pretax income, adjusted that income and adjusted EPS. For the full-year 2008, we are expecting improvement in all of our guidance metrics as shown on slide 17. We're forecasting total revenues to increase between 8.9 billion to 9 billion with car rental and equipment rental revenues growing at about the same pace. This does not change our previous Hertz guidance of growth between 3 to 8%.

Corporate EBITDA is projected to improve as well to 1.575 bottom to 1.615 billion. We expect adjusted pretax and adjusted pretax and adjusted net income to also improve year-over-year and should be between $725 million and $750 and between $450 and $470 million respectively. Using the tax rate of 34% and 325.5 million shares, the number of diluted shares outstanding as of the year ended December 31, 2007, adjusted earnings per share is expected to grow between $1.38 to $1.44 per share. These earnings projections are weighed toward the back half of the year as we expect the first half of 2008 to be a tough operating environment, particularly the first quarter. We project 2008 will be another year of improved cash flow with levered after tax cash flow after fleet growth to be between 550 million and 650 million in 2008.

Looking ahead in 2008, we have set a realistic growing agenda for the rent a car and Hertz business with further expansion into new geographies, increased penetration into new and underserved products and markets and network extension through a combination of greenfield openings and acquisitions. Our focus on efficiency and cost reduction has intensified as programs initiated in 2007 are now cascading throughout the organization and cost savings are flowing through our income statement. Against the current economic backdrop, our cost actions will include staff reductions and will help improve profits during what will be a challenging year. Despite a slowing economy that will impact our top and bottom line growth, we believe there is sufficient diversification in our plans to limit that impact and allow us to achieve the targets we have set for 2008. Project Genesis will transform Hertz business model giving us a stronger platform to fuel growth, further reduce costs, operate even more efficiently and, of course, deliver increased value to our shareholders. Now, operator, we will take questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Jeff Kessler from Lehman Brothers. Please go ahead.

Thank you. A quick question about your tax rate from last year, it's up a little bit from what you have been estimating historically on a crude basis from 30% to 34%. And to the extent that it's taken, perhaps, your estimate down a little bit by a couple of cents each way. Could you explain where the higher crude tax rate is coming from?

Yes, Jeff. This is Elyse. Let me talk a little bit about the 2007 rate, which was the 26.5%, which really is driven by a couple of factors. One being a valuation adjustment allowance in the year as well as reduced both state and foreign tax rates. So in 2008, basically we're not factoring in the valuation allowances, obviously which is going to have an impact, and so it becomes a more normalized rate at the 24%.

Because you were not figuring 26.5% to begin with for 2007 anyway.

No.

The question is, is it possible you're going to get some of these valuation allowances as the year goes on?

No. I think -- .

Jeff, listen. The tax rate's down, okay.

Yes.

And understand that. I think we're saying the wrong thing here. Effectively, the tax rate in 2007 was 35%. That's what we told people to put in as the model. And now we're telling you you can reduce it to 34%. So we're reducing the normalized rate of affective tax. The actual performance, as you know, was I think 26.5% and the reasons why it was lower was a lot of one-time benefits we got plus, in addition to the one-time benefits, we do expect to have a lower tax rate due to our effective tax strategies that we have been implementing over the last 12 to 18 months.

I apologize for misunderstanding. Can we go to disposal efficiency and disposal time on your at-risk vehicles at auction. You said you're beginning to -- one the problems, obviously, historically with at-risk vehicles is the disposal time relative to guaranteed buyback programs. You mentioned briefly online disposal. Could you go through not just online disposal, what you can do to make that disposal more efficient and hopefully improve the margin a little bit on those at-risk vehicles?

Jeff, first of all to clarify, too, the fact that as you move to a higher risk vehicle mix, yes there is an increased two-week period of maybe a holding time but at the same time we have found this year, being '07 that I'm talking about, we have found that there has been no real issue in terms of getting rid of the fleet that we want. In other words, we have been able to sell cars at an all-time record rate quickly within the company as needed. To your point, what we are trying to do is develop new alternative outlets, new channels if you will. One of those new channels that we will announce a little bit later is an online service that allows to sell to consumers direct. There is Manheim online as well and then there is Dealer Direct, which is another program outlet that we have been developing and expanding on. So these new outlets, if you will, three new channels, will allow us to get better pricing than you may get in the wholesale channel if the wholesale channel has has pressure. We're adding more auction sites. That is another thing that we're doing to increase, if you will, not only the ability to sell cars quickly but also get higher prices if one channel is getting lower prices than another. So it just really helps us have a real balanced approach and we've been increasing our capability to do this over the last 12 months. A lot of those efforts come to fruition in 2008.

Okay. One final question and that is if you could update us why on where your thoughts are going off airport in 2008 into 2009. What types of targets do you have with regard to both overall off airport business and particularly the insurance replacement business with regard to what types of insurance -- what percentage of insurance companies do you intend to get? How many offices do you expect to have out there?

Our current plans are to add 200 more off airport sites in the United States this year, and that would be additional, incremental over what we have today. In terms of penetration and insurance replacement accounts, we're roughly, I think we reported about 159 out of the top 207-208. We expect to have further penetration of that. We don't want to talk about that until we actually gain those accounts, but we have been pretty fast at putting those numbers up and we'll continue to have pretty good growth rate on getting business where we are listed as secondary source. Currently, if you add the number of locations we opened, I want to give you the location count. In 2007 we had 202 open. And in 2008, if you add that, the total, the total will be 1750 stores, okay?

All right. Approximately what percentage of your revenue base will that be?

Right now -- .

Of the RAC revenue base?

The off airport in the U.S. is about a billion dollars. Joe, you want to answer what the percent is, the total?

In revenue, it's 23%.

Okay.

And in transaction days, about 29%.

And off airport in Europe, we have Michel Taride on the call, it's over 50% of our business in Europe and like the U.S., actually that off airport business is much more resilient to any kind of recessionary issues.

Is the off airport business in Europe generally in use or is there any insurance replacement business in there?

There is some insurance replacement, but it's general use. It's in downtown locations and cities, metropolitan areas, and it's driven around local usage if you will. Michel, you would to expand on that?

It's commercial, leisure, individual use. It's a pretty significant chunk of our revenue there and I would say between 25 and 50% depending on the countries, and I just wanted to add, too, that we will add about 75 to 80 new branches in Europe off airport in 2008. After another, almost 100 branches we opened in 2007. Also here, we have more modest but also network expansion.

And that will give you a total of how many branches open?

In Europe?

Yes.

I will have the -- don't have the exact figures but above a thousand corporate. And then we have also licensing branches which are also expanding and I would think with the licenses, about 2500 branches.

Okay, great. Thank you very much and thanks for a good, congratulations on a very good quarter.

Thanks a lot, Jeff.

Our next question comes from Chris Agnew from Goldman Sachs. Please go ahead.

Thank you, good morning.

Morning, Chris.

The first question. Can ask you about or can you help me think about fleet costs in 2008, both in terms of fleet growth and also the net cost inflation on a per-car basis. Thanks.

I guess I will turn it over to Joe on that. It's going to be roughly about 2%. Any color on that, Joe?

It's a combination of inflation, very close to that, approximately 2.5% to 2.7 and continued process improvements that bring the net down to the 2% and I believe there is upside opportunity for improvement there.

And we indicated before, Chris, I think numbers between 2 and 4%. This represents an improvement of what we told you in the past.

Okay. And -- how should we think about the growth in the overall fleet and is that something that we should continue to think, the transaction day should grow something in line with fleet growth?

I guess we expect to get at least a full point of utilization in our fleet plan this year in 2008, and because that will be a little bit more productive, in terms of funding the growth that we see at this point in time. In general, if you had 4% transaction day growth, you would usually need 2% more fleet. That is just a guideline, a general guideline. We're trying to break that paradigm so that we need less fleet than to fund that transaction day growth and we believe we'll make progress on that in 2008. Does that make sense? We'll actually have probably, in 2008 -- .

Positive transaction growth. In 2008.

Okay.

Fleet and -- go ahead, Joe.

Fleet in the U.S. was down about 1% year-over-year because of the efficiency gains and we have upward flexibility built into the planning as volume increases.

For your model itself, you could almost model sleeping down 1%.

Right.

And for the full year?

For the full-year. That's right.

Okay, great and one of the slides you talked about, you mentioned current pricing outlook is improved. Could you add color there and share with us what you and Hertz have observed historically and what happens in the slowing economic, slowing travel environment in terms of pricing and volume dynamics. Thanks.

Certainly from a general historic perspective, and this is something that I said on previous calls, the industry has usually moved in fairly good unison as it relates to soft demand. When soft demand occurs, flights tighten up. As those fleets tighten up, again the industry seems to move in parallel paths as it relates to pricing. Price improvement occurs once fleets tighten. So again we saw that phenomena and talked about it during the call in the script that we had seen more favorable conditions on pricing overall. Anything other than that, I can't comment on that. Pricing is a very sensitive issue for me legally, so I don't want to say anything other than what I said before.

Okay. Great and then final question. You gave revenue growth guidance. You said HERC and RAC would grow. Can you just clarify how that fits in to your previous guidance of 3 to 8% guidance for HERC? I guess you are pointing towards the lower end of that. Is there anything that you're observing causing it to be more cautious?

No, I guess when I said the 3 to 8, I think if you do the math on it, you will find that that 3 to 8 guideline, you pick up a middle or the curve, HERC can only represent about what percent of our revenues? 20%. Even if they grow at a faster rate, the impact on the whole is not that great. We felt comfortable stating in our guidance what the overall corporation will look like and still being able to guide HERC at 3 to 8%. Nothing has changed there. I know you're asking if it changed. No, we still feel the same as we did before.

Great, thanks a lot. Thank you.

Thank you.

Our next question comes from Rich Kwas from Wachovia. Please go ahead.

Hi, good morning.

Hi, Rich. How are you?

All right. Mark, on the 75 million included in the pretax guidance, income guidance, what are the swing factors that could drive that higher for '08?

I think timing is one. As Mark said, there is a significant amount of headcount reductions, there are headcount reductions in that number so the timing of when those events occur would certainly affect that number.

The issue really boils down to, Rich, it's a difficult question to answer. It can be more than 75 million based on what economics we're able to offset based on issues of pricing, for example. I mean for us that 250 million, we're committing to that cost reduction number. We're sure that number being delivered in 2008, that's $250 million in '08 that you get. The question is, how much of that offsets industry conditions, any issues you may have with economics on goods and services. For example, we buy day in and out. Some of those goods and services may be up, some down. We're negotiating contracts as we speak. Every day contract renewals come up and a lot of us put in there to make sure we have insurance to cover economics that generally occur. We're also re-investing a lot in new facilities. We talked about some pretty good growth plans on new stores so some of that cost savings is going to into the growth plans as well. As the year unfolds, and we have better visibility into economic conditions and goods and services contract, we'll be able to say how much of that 250 will be used to offset things versus baked into the bottom line. What we're saying is we can bake 75 million in the bottom line on that.

Okay. That is very helpful.

The only other two things on that is there are a number of re-engineering projects and the timing of those would effect it. Thirdly, we always look at potentially doing some tuck-in acquisitions and might use some of the cash flow for that as well.

Okay. And on Genesis, how far along are you on that on the $6 billion? Where would you character that in terms of the total valuation of that?

On the $6 billion in cost structure, we completed really the bulk of the work on deciding how much of that will go into, let's say, buckets for re-engineering versus outsourcing. We completed that work but we haven't begun off of the contracts, the outsourcing contracts. We haven't completed the re-engineering efforts. All of that work will be completed probably over the next 18 months and we'll get a big chunk of it done this year and then we will accrue a lot of the savings into 2009. What we have committed to you for is $250 million, obviously, this year savings that comes from the variety of projects and then, again, we haven't announced what will happen in 2009, but as we get more visibility throughout '08, we'll be able to tell you other installments of that that unfurl into 2009.

Okay, so the 250 that includes a portion of Genesis, but sounds like there is still a lot more to go.

Yes. That's correct. The restructuring cost, we talk about the range and depending on what happens in attrition, those costs may be lower as well.

Right. Right. And then on the ABS market, Elyse, LIBOR rates have come in since the beginning of the year but spreads are still wide and the asset-backed market. It sounds like you're still viewing the securitization market as reasonably attractive. What do you expect as the year progresses in terms of spreads and what would make you consider those alternative strategies you detailed?

We saw spreads come in almost back to normalized levels so with respect to our conduit financing, we've seen the level normalize. Just a slight premium over the crisis period in the fourth quarter. I think as the market unfolds, I think that there is an opportunity to do transactions in the marketplace, probably more on the unwrapped style versus a monoline type financing and, as I said, we'll continually look at those alternatives and we'll take advantage of those opportunities as we deem appropriate.

Okay.

Does that address your question?

Yes.

Okay.

Thank you so much.

Our next question is from Emily Shanks from Lehman Brothers. Please go ahead.

Hi, good morning. Nice quarter, to a strong year.

Thank you.

A couple of questions, the first might be for Gerry. I was hoping that you could break out for us what your CapEx expectations are on maintenance verses growth for the HERC business.

For 2008?

Yes.

Actually, we have slightly negative growth CapEx, but the maintenance CapEx would be a bit, a little north of 250 for maintenance CapEx. I'm sorry, that is 2007. 250 to 350 in 2008 or about 300 on average. And the growth about a negative 125 and that is essentially where we're going to be able to drive bitter utilization on the existing fleet platform.

Great, that is helpful. And then just a question around what has happened with the ABL and your fleet level since the end of the year. Could you let us know what your balance is on your ABL today?

Available. Available is 1.450 billion.

Okay, great and one last question. Around potential debt reduction for this coming year, would you or have you started to contemplate any open market repurchases of your bonds given that they're at a nice discount right now?

We're certainly looking at it. We do have some restrictions in our bank facilities, but we are looking at that as a potential opportunity.

Great, thank you very much.

Thanks, Emily.

The next question is from Christina [Wu] from Morgan Stanley. Please go ahead.

Thanks. I was hoping you could clarify for me the restructuring charges. In your prepared comments you said you take about 30 to 40 million in the first half of the year and I understand that might be lighter than that. Is that in addition to the restructuring charges you have been taking or is that the full amount that we should consider for the first half of the year?

That should be the full amount for the first half of the year.

And will there be any restructuring in the second half or this is it for '08?

Well, right now this is all we have planned but obviously as the year goes on we'll re-evaluate alternatives and the possibilities.

Okay. Great.

You mentioned your car depreciation and amortization cost per vehicle are a bit lower in Europe. Is the cost of acquiring vehicles overseas starting to come under pressure as we have seen in the U.S. during the past few years or has that remained fairly steady for you?

We have seen Europe, it's been tougher in Europe the last few years than in the U.S.

Okay.

And in general, car costs are a little higher there than what you would see in the U.S. I think in general it's fair to say, and I will let Michel add to this, that it's single digit is the kind of increases we have been able to ameliorate the demand to. When you look at inflationary pressures just apples to apples based on car costs, car inflation itself, we can usually bring that down mid single digit range. Michel, anything you want to add to that?

That is correct, Mark. The conditions offered by the manufacturers increase in the region of about 7 to 8%, through efficiency, as we said, we're capable of bringing that down. In '07 it was just above 6%.

Okay. Okay and that is helpful. One last question. You commented a bit about the macroenvironment slowing. I was just wondering if you could be more specific about what you're seeing, what your view is on the macroenvironment in 2008. Mark, I think you commented that you would expect the first quarter to be a bit softer. Are you expecting a pickup in the macroenvironment in the second half of the year or softness throughout?

First of all, I will comment in two ways. One is our advanced reservations, which we use as an indicator, has been improving in the positive territory. That's recent. In the last several weeks we have seen a general strengthening in the overall environment for the first half of the year. Having said that, we said the first quarter is probably the toughest quarter, in terms of what we see both from a future standpoint. We are building our plan that there would be a more normalized environment in the back half. To answer your question, yes, more of a normalized environment in the back half. Good news is we're seeing improvement in the first half as well.

Okay. Thank you so much.

Yes.

Our next question comes from [Zafar Nazim] from J.P. Morgan. Please go ahead.

Yes, thank you. Elyse, first of all, one quick followup. What kind of dollar restriction do you have under your credit facility to buy back bonds from the market?

What kind of dollar restriction?

Yes.

It's limited to an excess cash flow recapture amount.

Okay and would you have a number?

It's less than 100 million.

Okay. And then just on your guidance, you are going to reduce CapEx by roughly $3 million year over year. EBITDA is going to be up 2 to 4%, according to guidance, cash and (inaudible) is going to be down given direction of LIBOR and (inaudible). Your free cash flow guidance for next year is going to be flat to slightly up. Is this -- I thought the number would have been higher.

Well, it's probably a bit of a conservative number but you have to keep in mind that a lot of the improvement in 2007 was driven by working capital improvement and it's very hard to continue to leverage that number. If you look at our 2007 cash flow year-over-year improvements, easily 200 to 300 million driven by working capital. We're going to continue to look to get efficiencies in working capital, you just won't see the positive cash flow impact as in 2008.

Just to be clear, the range is flat to up 17.6%. So 17% is pretty good improvement.

Right.

In cash year-over-year. And as you know, we're able to take that cash after fleet growth and apply it to debt.

Right.

And so, again, if we achieve what we say we're going to achieve here, we hit that billion dollars ahead of schedule. Okay?

And one last question, I guess since you're basket for bond buyback is less than $100 million, should we assume the million dollars, the free cash flow will primarily be used to pay down bank debt?

Yes.

That's correct.

Great. Thank you.

Our next question comes from Michael Millman from Soleil Securities. Please go ahead.

Thank you, I have a couple of questions. Just to clarify the -- it looks like your forecast for '08 growth is basically all from the savings, not necessarily dollar for dollar but sort of netting everything is out. Is that correct?

That would be -- mean that would be linear to look at it that way. We have so many moving pieces on the P&L, whether it's volume, pricing issues, we purposely said it would tie into the pretax improvement but that doesn't mean that we're not going to have improvement in margin overall due to things beyond that. Obviously, our guidance, we make sure we exceed our guidance and have been able to do that every quarter for five quarters in a row. Our guidance certainly is in a range where we feel comfortable telling investors we'll be able to hit it.

Could you talk about the fourth quarter, there was a deceleration in off airport growth substantially. What was behind that or is that the level we should be looking at?

This is Joe -- we did see some weakening in December only and in January, it has popped right back up to the double-digit transaction date growth levels and we expect to continue that throughout '08.

Okay, thank you. Could you talk about -- in terms of the cost savings, this is more of a 30,000-foot question. Is this an industry that is still likely to give back a lot of those cost savings in terms of price, rather than in terms of margins into the shareholders?

No, first of all, you mean pricing is really the key here is what you're talking about. You give those things back in the form of price. I think history is my best answer to you. Typically the industry has always been able to pull, on average, over any cycle, 2 1/2 points a price. That has been Hertz experience, and I have 24 years of data that is very granular on this and that is what we see on a cycle basis. That is my best answer to you and if that's the case, if the industry pulls off this year 2.5% on price, obviously cost savings are allowed to accrue to the bottom line and historically that is what you have seen. We have seen in this business where we have fleet savings, for example, and there have been periods of time where the fleets come in lower in cost year-over-year that we have been able to accrue that to shareholders. Joe has been has been in the industry 45 years and knows the rent a car business better than anyone. Joe, would you answer that as well?

I just agree with what Mark said. If you go back to the period of time where there has been weakness in transaction growth, we've been able to pull price. When there has been tremendous or even-keel pricing, we're able to grow transactions and the cost reduction has been able to go to the bottom-line and accrue to the shareholders and I don't expect any - significant change in that going forward.

Okay, and finally, I'm not sure if you're saying that first quarter should be below a year ago and that would suggest possibly are you looking for negative earnings or a loss in the first quarter?

We have not suggested that. And that is the best way for me to answer that. We have not suggested that we just said the fourth quarter was a tough operating environment and we saw our January, there is a continuation of that but we have also seen improvement also during the quarter.

Okay. Thank you.

Yes.

Our next question comes from Clark [Orsky] from KDP Investment Advisors. Please go ahead.

Thanks. I think you said you saw some softening in residuals in 4Q and you expect that to continue into the first quarter but it would dissipate later in the year. I am just wondering sort of what is driving that outlook for the dissipation of the pressure?

I think the real factor is the the uptick in our total reservation growth now on the positive side and we're seeing that accelerate the last week to 10 days. That is one factor. I think the stability overall in residuals that we have seen and we believe the capacity is certainly there for us to dispose of the cars we need to dispose of and residuals even with the macroconditions have been relatively stable and we expect that to continue. We have real data to support our optimism about the second half.

Okay, and the 73% non-program, remind me what you're sort of longer-run target is for that? I thought it was a little lower.

If you go through the year, we'll drop to as low as about 60% in the summer and then move back up to the high 60s, 70% as we get into Q4 of '08. There is some seasonal adjustments in the way cars are taken into the fleet.

Okay.

Our benchmark target is 65 to 70%.

Okay. Okay. That is helpful. The last question, Elyse, I wanted to ask you, on the billion dollar maturity in 2009, can you remind us what exactly that is or what it is composed of?

It's mostly the U.S. ABS notes. As you recall when the deal was done back in 2005, the ABS notes were 3, 4 and 5-year notes. It is the first of those maturities coming due.

Okay. Thank you very much.

Yes. Operator, we have time for two more questions.

The next question will come from Doug Persons, please go ahead.

A quick question on the fleet cost on the debt side. LIBOR at 3.1% now. Could we expect '08 costs to fall out that side given where LIBOR is and how much sensitivity do you have there on LIBOR?

Well, as I think we citizen in the statement, about 35% of the debt is floating.

Right. A real of thumb is 1% year-over-year changing interest rates of 10 million in profits. Okay. And separately, you have done a great job maintaining liquidity in this market. I know fleet debt is at around 6.5 billion and you commented on the ABS market feeling still pretty strong. People are worried about it across the industry. If we look at a contingency in the event the ABS market and something happens where it either shuts down or gets very limited, what would be the best alternative for you to maintain the liquidity or how would you?

Obviously, we have a lot of excess liquidity in the corporate debt component of our balance sheet as well as (inaudible), so obviously we have corporate liquidity that we could cap. We believe that there is definitely a market for a lot of this equipment. Financing this equipment. So, I don't necessarily think it's going to go away. I think that there will be new structures that will come out of this, maybe not at the same cost levels, that old structures being done and we're seeing that. That is alive and well. I am confident there will be fleet financing. In the event that there's not, there is certainly corporate liquidity to be had.

Thank you, guys.

Thank you.

Thank you, our next question is from Jeffrey Kessler from Lehman Brothers. Please go ahead.

Thank you, one final question on pricing and that is you alluded to price discipline in the industry at the beginning of this year a very large company in the industry increased prices 2 or 3%. Avis apparently went along with that. I am just wondering, could you just elaborate a little more on price discipline as you're seeing it right now. Optimism or no optimism regarding the other companies in the industry sticking with the price increases that these large companies in your industry are putting in place.

Obviously, I can't comment on anyone or anything. I can tell you that Hertz, generally speaking, is the price leader and that we always try to support any kind of industrywide increase but we don't, as a rule, ever, we're usually the leader in that. In terms of commenting on competitors or what we're going to do or anything else, I really can't comment on that and so apologize but I can't answer your question.

You did allude to increased optimism with industry, though.

No, I think what we're saying is that as the business conditions have softened, when that happens, we typically see tighter fleets and we did say that we saw that happening, I'm sorry, during the quarter. That is what we said, I think. Pardon me? Go ahead. Tell me what I said. Historically. This is historically what we have seen.

Okay. All right, very good. Thank you very much.

Thanks, Jeff.

Yes.

There are no further questions in queue at this time.

I look forward to sharing our next quarter results with you before long. Thank you for joining us today.

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