Herc Holdings Inc (HRI) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Hertz Global Holdings Second Quarter 2008 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, please press star and then zero.

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 obligation to update that information to reflect changed circumstances.

Additional information concerning these statements is contained in the Company's press release regarding its second quarter results issued yesterday, and the Risk Factors and Forward-Looking Statements Section of the Company's 2007 10-K and its Form 10-Q for the three months ended March 31, 2008. Copies of these filings are available from the SEC, the Hertz website, or the Company's Investor Relations Department. I also want to remind you that the call is being recorded by the Company.

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

Thank you. Good morning and welcome to Hertz Global Holdings Second Quarter 2008 Conference Call. You should all have our press release and associated financial information. We have also provided slides to accompany this conference call. You can access these documents at www.hertz.com/investor relations. The slides can be accessed using the "Webcast Presentation" link.

In a minute, I'll 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 Vehicle Rental and Leasing the Americas and Pacific; Michel Taride, Executive Vice President and President, Hertz Europe Limited; and Gerry Plescia, Executive Vice President and President of Hertz, 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, which is posted on our website. We believe that our profitability and performance is better demonstrated using these non-GAAP metrics. Our call today focuses on Hertz Global Holdings, a publicly traded company. Results for the Hertz Corporation differed only slightly as explained in our press release.

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

Thanks, Lauren, and good morning, everyone. Thanks for joining us today. Let's start, if we can, with slide number 5. The second quarter was, indeed, a challenging one for the rental industry. We have a difficult economic environment, as evidenced by lackluster GDP growth and lower consumer confidence. These trends have particularly impacted companies related to consumer products and services. In spite of the economic factors, we were once again able to deliver a solid performance on an adjusted basis in line with our second quarter 2007 results.

We achieved record second quarter revenues of $2.3 billion, a 4.6% increase. We maintained a very strong focus on cost control and efficiency as well as cash management, which enabled us to offset the industry-wide softer volume and pricing pressures experienced in the quarter.

We began this process in September 2006, and since that time we have decreased headcount by over 11% with both the US and international operations showing double-digit reductions. We continue to delay our operating structure, streamline organization decision-making, and centralize processes globally in our centers of expertise.

This is an ongoing process. We are constantly reviewing our operations for further opportunities to improve our efficiency. I would like to bring to your attention several major accomplishments we achieved during the second quarter.

In the period we had strong levered cash flow; that is, levered after-tax cash flow after fleet growth of $305 million driven by corporate EBITDA improvement, reduced corporate investment in fleet for equipment rental and car rental. This is an important lever for us -- as volumes come under pressure, we can dispose a fleet, especially in car rental, and generate cash.

Unlike airlines and hotels, we don't have to warehouse unused revenue-generating assets. Also this quarter, we were able to maximize car rental fleet debt, with results in interest savings and reduced net corporate debt.

A second highlight was the performance of US car rental, our largest operation, which faced significant headwinds this past quarter. The US Rent-a-Car team executed on cost efficiencies, which improved the adjusted pretax margin by 100 basis points year-over-year and delivered double-digit adjusted pretax income growth, and that's with a decline in both transaction days and pricing for the quarter.

In fourth quarter 2007, we started experiencing volume pressure, and the Rent-a-Car team took immediate corrective action, the benefit of which we realized in this past quarter.

One of our biggest accomplishments this quarter relates to fleet costs in US car rental. We achieved a reduction of 2.3% in depreciation per unit. We also reduced average fleet by 3.1%, which resulted in a 70 basis-point increase in fleet efficiency. We continue to believe that these improvements will be sustainable.

In Europe, we are still expecting double-digit fleet cost increases but managing our fleet mix and improving fleet rotation, we expect to reduce the impact of this cost increase yet this year.

Please turn now to slide 6 as I review our quarterly results. We achieve record revenues for the quarter of $2.3 billion, an increase of $100 million, or 4.6% across our businesses. On a currency adjusted basis, revenues increased by $8 million, or 0.4%. I am encouraged by our performance in an environment where many other companies are experiencing lower year-over-year revenues.

Elyse will discuss our GAAP results shortly. Corporate EBITDA of $378.3 million was 1.9% above Q2 2007, and represented 16.6% of revenues. Adjusted diluted earnings per share of $0.30 matched the prior period while adjusted pretax income of $154.7 million and adjusted net income of $96.4 million were slightly below the 2007 levels.

Levered cash flow for the second quarter was $305 million compared to $46 million a year ago. Prior to our initial public offering in November 2006, we established a three-year target to deliver at least $1 billion of levered cash flow. I am pleased to report today that we have already achieved that target generating $1 billion of levered cash flow since September 30th of 2006.

In the quarter, cash flow came primarily from corporate EBITDA and reductions in both equipment rental capital expenditures and the car rental net equity requirement. The latter is the result of resolving timing issues related to our ability to full utilize fleet financings, which reduce Q1 cash flow but led to positive cash flow in Q2.

Working capital days outstanding were negative 42.8 days, down slightly from negative 44.3 days but still a very strong performance. As we are purchasing less new fleet for HERC, we have lower payables, and this impacts the calculation.

We continue to work to improve payment terms and have increased our focus on the collection of receivables. Negative working capital is a great benefit. Basically this signifies that we are collecting from our customers faster than we are paying our suppliers.

Please turn to slide 7. In worldwide car rental, total revenues grew 5.2% driven by a 1.4% increase in transaction days and a favorable foreign exchange impact of 4.4%, which offset the 1.9% decline in pricing. As in previous quarters, part of the RPD, or rental rate revenue per transaction day, decline relates to the change in mix towards leisure and off-airport rentals, which are typically longer in length. In the US, the mix shift from airport to off-airport accounted for about one-third of the overall RPD reduction.

In the equipment rental business, total revenues was $443 million, an increase of 2.4%. The foreign currency benefit on revenues was 3.4%, offsetting at a volume decline of 1.7% and a pricing decline of 1.1% compared to the prior-year period.

Given the overall weak economy, I am very pleased with our consolidated performance this past quarter. I attribute a good portion of our success to the diversification of our revenue base, the execution of our strategic initiatives, and the global nature of our brand, which positions Hertz ahead of the competition.

Turning to slide 8 -- on a consolidated basis, 37% of our reported revenues come from international operations compared to 32.4% a year ago. International revenue grew 19.5% on a year-over-year basis, without foreign exchange, the increase was 6.5%. Our product and market diversification also supported our revenue in the past quarter. International car rental operations experienced revenue growth of about 18.6% driven by transaction day growth of 9.9% and foreign exchange. This helped to offset some of the softness we saw domestically.

In the US, total transaction days were down 2.2% year-over-year with airport rental activity down 3.8%. We continue to benefit from a 16.7% increase in inbound revenue as the weaker dollar attracted international travelers to the US. This represents 14% of our total US airport revenue.

The US off-airport market generated $244 million of revenue in the quarter driven by an increase of 1.9% in transaction days with growth in the commercial leisure and overall replacement sectors.

In the second quarter 2007, our insurance replacement days increased 12.5% versus 2006. This made for a difficult year-over-year comparison, but our insurance replacement transaction days in the second quarter 2008 were consistent with the prior year.

We made additional inroads in a number of insurance companies with which we have relationships, currently, 183 of the top 200 or so, while working to increase our share of the rental business. We believe that the insurance replacement market has been impacted by the economy and higher fuel prices.

According to the Federal Highway Administration, Americans are driving less -- some 30 billion fewer miles through May, a 2.4% decline from 2007. The decline in May alone was 3.7%. This should result in fewer accidents. In addition, feedback from some of the insurance companies indicate that in this economy, their customers are collecting on their claims but delaying the actual repair work.

Our equipment rental initiatives, including Hertz Plant Services, which is our industrial division, pump, power generation, and trench shoring, continued to show steady year-over-year growth offsetting the slowing of our base non-residential construction business in the US.

Internationally, our HERC operations in Canada and Europe reported 23.5% revenue growth including foreign exchange driven by our Canadian operations and Quilovat acquisition in Spain. Although the rate of growth has slowed from the first quarter, rental activity in Canada is still quite strong.

Furthering its international presence, HERC opened for business in China on July 1st. Although we have only completed our first month of rental activity, we are very excited about the market reaction and our prospects in that part of the world. Rent-a-Car now has an operating manager on the ground in China, and we expect to start renting cars by early 2009.

During the quarter, we continued to win new commercial accounts and re-signed existing customers. Our new fuel initiative in Rent-a-Car about which I will speak shortly is particularly attractive to corporate customers.

As you know, our partnerships with many airlines and a wide array of travel industry participants are a significant source of business for us. Successful renewals of existing partners are as important as establishing new relationships. In the second quarter, we signed new agreements with Northwest Airlines and CarRental.com, and we re-signed with ebookers, Air Berlin, and Intercontinental Hotels on a multi-year basis.

We are very proud to report that Hertz just won the Car Rental Partner of the Year for 2008 from Vacation.com, the biggest network of traditional travel agents in the US. This is a coveted travel industry prize.

We continue to penetrate the online leisure market as demonstrated by the 10% year-over-year increase in car rental revenues booked through Hertz.com and third-party websites, with strong growth in both the US and abroad. This represented over 30% of our worldwide car rental revenues.

In the second quarter, HERC continued to enhance its customer base by signing or renewing 12 major national accounts with companies in diverse industries.

Now I'd like to discuss our fleet. Last quarter we talked about how we manage our fleet with the opportunities to become more efficient in acquiring and disposing of our rental equipment in both businesses. This is a major focus, and we continue to gain traction. Please turn to slide 9.

On the disposal side in the US in the second quarter, we more than doubled the number of cars sold through dealer direct and Web-based channels including online auctions. We now sell about 33% of the fleet this way, which allows for faster sales and better payment cycles. When we sell cars directly and not through auctions, the savings is estimated to be $225 per vehicle. Our fleet for the summer is fairly well balanced. In the US, about 14% of our vehicles are compacts, 32% mid-size, 16% full-size, 13% regular and large-sized SUVs, and about 15% smaller SUVs, crossovers, and vans. The average age of our active US fleet at June 30th, was eight months.

Internationally, our fleet mix is weighted more heavily toward smaller vehicles. Our customers, while increasingly interested in fuel efficiency, still have diverse needs and preferences for rental vehicles, particularly during the summer, and we strive to meet those requirements. Elyse will provide an update on car sales, but our SUVs are predominantly purchased on a program basis, which limits our exposure to this segment of the used car market.

Vehicle acquisitions in the US for the 2009 model year are going well. While not yet finalized, we have been negotiating with the manufacturers to obtain a diversified fleet weighted toward more fuel efficient, somewhat smaller vehicles at competitive terms.

Reducing the complexity; that is, the number of different models and configurations in our fleet helps us reduce our fleet and operating costs. Please turn to slide 10, and I will update you on our cost savings program.

A few minutes ago I mentioned that we continue to execute with discipline on our efficiency initiatives cascading best-practices through the Hertz Improvement Process, implementing business process re-engineering throughout the company, and working with our outsourcing partners.

During the second quarter, we took an even harder look at how we save cost. Elyse and each operating unit reviewed their respective financial statements to identify additional opportunities for revenue generation and cost savings. In equipment rental, for example, we instituted a delivery fuel charge to help cover increases in fuel costs. Overall, we have met our internal cost savings targets for the quarter despite the lower-than-forecast volume, and we instituted additional spending cuts across our businesses. We have reviewed the operating performance of each location and closed those that were underperforming and re-evaluated new openings.

In each business, however, we were sure to maintain the footprint necessary to service our existing customers and attract new ones. This quarter in equipment rental, we closed 24 stores globally and added six in areas where we have revenue growth opportunities. International car rental operations added 18 corporate locations on a net basis.

Similarly, in the US off-airport market, we opened 62 locations and closed 24 for a net increase of 38. For the second half of the year, we expect to add, on a net basis, at least 20 US off-airport locations. To augment our physical footprint, we have teams in place to deliver cars within a certain radius of our existing locations, which total 1,665 at the end of the quarter. In addition, we reduced our staffing in line with current business activity. Our productivity, as measured by revenue before foreign exchange impact per employee, increased 4.5% worldwide, year-over-year, with improvement in each of our operating units.

We are also delaying a certain capital spending project that should not impact our brand image or service quality. We also outsourced three additional business processes relating to human resource and document services in the quarter that will help us deliver savings. For the full year 2008, we now expect to take $300 million out of our cost structure, which is an increase of $50 million over what we previously reported.

Unfortunately, there are offsets to the savings, which will affect our profits. We expect the impact of reduced rental rates, cost inflation for cars, fuel and other goods and services, an additional reinvestment in Hertz will use up these savings. Hopefully, market conditions will improve, and in the future we'll be able to report that some of the savings will flow through to adjusted pretax income. Had we not cut costs, the impact of the adverse cost factors would have hurt profits even more.

Let me remind you that this $300 million is in addition to the $187 million of savings announced in 2007 bringing projected cumulative savings in 2008 to about $490 million. We are still on target to achieve projected cumulative savings of $800 million into 2010, which includes the estimated benefits of outsourcing and process re-engineering that we have previously discussed with you.

Even with these measures, we continue to invest back into the company. We acquired two car rental licensees in Slovakia and the Czech Republic, which we expect to generate about $16 million in annual revenues.

In the equipment rental side of the business, we acquired SECO Construction in the state of Washington, an aerial and material handling company, which is expected to add about $4 million in revenue per year.

In the second quarter, we spent an additional $17 million on our facilities, brand, and people, excluding the deferral of advertising spending to the third quarter. At Hertz we measure customer satisfaction on a real-time basis using the Net Promoter Score program where we survey renters on a real-time basis on how likely they would be to recommend Hertz. I am pleased to report our continued year-over-year improvement.

North American Rent-a-Car is 4 points better, and Europe Rent-a-Car dramatically improved by 11 points. That we have been able to improve our service level even while reducing costs is impressive. In the US, when we analyze the feedback from renters, the two most frequently cited areas for improvement relate to gasoline and customer wait times. To further improve our customer satisfaction levels, we launched two new initiatives to addressing these areas.

We are now on slide 11. On July 1st, we changed our refueling options. We led the industry by revamping the cost of our fuel service charge option. Now when a vehicle is returned with less than a full tank of gas, the customer is charged a local market pump price per gallon and a flat refueling service fee of $6.99. In the fuel purchase option, which is the pre-purchase of a full tank of gas at the time of rental, we lowered the per-gallon cost of $0.15 below the local market pump price.

As you would expect, these new programs have been well received by the media and customers. Several business blogs, usually critical of travel industry practices, have been just as positive. Bob Sullivan, who oversees the Red Tape Chronicles blog for MSNBC.com wrote on June 20th, "Hurray for Hertz. Consumers should consider renting from the company even if rates are slightly higher, because they won't be on the hook for the refueling 'gotcha' any longer. It will be interesting to see if the company actually benefits from doing the right thing. I hope so," Sullivan concluded.

From a financial perspective, we believe that we will be able to manage the product mix to have a neutral impact on revenues and pretax income. Our second innovation is the online check-in guarantee. On July 1st, we began guaranteeing service within 10 minutes of 50 major airports, and we've backed that guarantee up with a $50 rental coupon. Eligible customers need to book in advance and check in online at www.Hertz.com. After arriving at our facilities, customers proceed directly to the Hertz Express kiosk or Express queue, where they will be served in less than 10 minutes guaranteed.

Customers can still select and ancillary products such as Never Lost, Sirius radio, refueling options, and various insurance products. This extends the speed and convenience of number-one Club Gold service to a greater proportion of our customers. Our performance record has been very good. We have only issued about 200 $50 credits, which is less than 1% of our total online check-in since July 1st.

Online check-ins have proved to be very popular with our customers since June 24th. We have processed over 37,000 transactions worldwide over the Internet, another service unique to Hertz. To further promote the more consumer-friendly Hertz, in July we implemented a massive advertising surge. During this five-week period, we expected to reach over 90% of our target audience 10 times with 900 television spots and major print ad campaign.

As part of our leisure market strategy, we are trying to attract the infrequent and less affiliated renters to Hertz. "Let Hertz Put You in the Driver's Seat," is especially important to introduce these renters to the superior Hertz experience. The Internet has increased pricing transparency with its focus on rental rates without any distinctions for quality or service. Educating consumers about the benefits of renting from Hertz would help us maintain and grow our market share.

We estimate that these innovations and the increased advertising could boost leisure revenue by as much as five points, over time.

This concludes my strategic review. Let me now turn the call over to Elyse.

Thank you, Mark, and good morning, everyone. Once again, I will focus my remarks today on the operating environment and outlook for car rental and equipment rental. Let's start with the second quarter operating highlights for the Rent-A-Car division on slide 12. Transaction days in the US decreased by 2.2% year-over-year driven by a 3% decline in on-airport days, which was partially offset by a 1.9% increase in off-airport volume.

Hertz domestic rental car pricing in the second quarter, as reflected in RPD, finished below prior year by 0.9% for the quarter. The pricing change was driven by a decline of 0.7% on-airport and 0.7% off-airport, and the increase in the proportion of off-airport rental activity in the overall mix.

Airport RPD in the second quarter would have been slightly positive if it weren't for the impact of the shift to a more online leisure mix, which Mark mentioned earlier.

We are encouraged by the improvement of pricing at Hertz over the course of the quarter. By June, our airport pricing was slightly positive year-over-year, as a result of price increases we took as the industry tightened supply, and the summer peak approached. Pricing for the summer months, to date, is even more positive.

The corporate account pricing environment remains very competitive, particularly with larger accounts but, otherwise, we've been able to negotiate low single-digit price increases with the majority of our accounts that came up for renewal in the quarter.

Another important operating metric, average rental length in the US increased by 3.7% in the second quarter with growth across almost all major customer categories. This reflects the shift to online leisure rental sources, strong growth from international inbound customers, growth in the off-airport business, and a lower proportion of commercial rentals.

Although we are seeing overall volume weakness, some key sectors are growing including longer-term retail rentals, off-airport business, and US inbound business.

International car rental produced year-over-year revenue growth of 18.6%, which was driven by foreign exchange and strong transaction day growth in Europe in all customer categories -- business, leisure, vans, and replacement rentals throughout most of the quarter.

In June we saw leisure and van business slowing down while commercial business continued to exhibit steady growth. In Australia and Brazil, rental volumes were also very good this past quarter.

RPD for international car rentals was 5.1% lower primarily due to pricing pressures with some impact from business mix. Looking forward, with Europe now experiencing economic headwinds, and airlines seeing a similar dropoff in traffic, we expect our consolidated car rental volume and pricing to remain under pressure until the fleet is in line with the lower demand.

Slide 13 highlights worldwide fleet efficiency, which is defined as the percentage of days a vehicle is rented. This metric improved by 70 basis points year-over-year, reflecting overall better fleet management. Both the US and international operations showed improvement on this important metric.

Let me next address the issue of rental car residual value. I'll start with the US. The Manheim Index Quarterly Average for the second quarter declined by 5.8% year-over-year. This index is not representative of our car rental fleet, because it reflects all makes and models of vehicles across a wide range of vehicle age.

We experienced an increase of almost 1 percentage point in the average residual value as a percentage of the initial cap costs on the 46,900 cars we sold in the second quarter. These results were achieved even while lengthening the average age of cars sold from 14.5 months to 15.6 months.

Our performance versus the Manheim Index is the result of having a younger, diverse fleet with limited exposure to any single manufacturer or model such as SUVs and the ability to age and sell our fleet more selectively through a variety of channels.

At June 30, 2008, the percentage of non-program cars in the US fleet increased year-over-year from 62% to 65%. The slight decline from the first quarter in the proportion of non-program vehicles does not represent a strategic shift on our part. There are seasonal fleeting patterns for specialty and other vehicles, and we utilize program vehicles to address the summer demand, which allows us to de-fleet quickly at the end of the seasonal peak rental period.

Internationally, the percentage of non-program cars was 53% compared to 46% a year ago. We are also working to develop additional channels abroad for selling our cars where most sales are done directly to dealers and merchants or exported. This should offset some of the pressure we are beginning to see in other used car markets, particularly in Europe.

While we originally expected US car rental depreciation expense per car to be in the range of 2% to 4%, we now forecast an increase of only 1% to 2% year-over-year in 2008. In Europe we expect fleet costs to be up about 10% in 2008 before foreign exchange, although the absolute dollar vehicle depreciation per unit for Europe remains below that of the US.

We have not had any issues obtaining adequate fleet in any geography or achieving our target mix of program/non-program cars. In the US, for the 2009 model year, we are once again not committing our full fleet requirement to the manufacturers to give us additional flexibility.

Before we move off Rent-A-Car, another positive in the quarter was the improvement in ancillary revenues, which includes such products as Never Lost, fuel, and insurance products and totaled $302 million in the quarter. We achieved a 12.3% increase year-over-year, which outpaced our rental revenue growth. A strong revenue management focus has increased our penetration of these products, which are contributory to our profits.

Let us now turn to worldwide HERC, starting on slide 14. In the operating environment, we continue to be impacted by the softening US construction market. This was offset by strong demand in Canada and steady growth in industrial and specialty equipment such as power generation. In North America, revenue from residential and non-residential construction dropped from 49.5% of total revenues to 47.6% year-over-year, and industrial revenues increased from 19.7% to 21.8%.

Our operations in France and Spain showed sequentially slower growth throughout the quarter. Power generation continued strong, but construction was dramatically impacted. As a result, in July we closed six locations in Spain that do not service power or industrial customers. For the second quarter, our worldwide, same-store growth was down 1.1% year-over-year reflecting these revenue pressures.

From a macro perspective, based on several external forecasts, we expect to see continued weakness in the second half of 2008, driven by economic conditions in the US and Europe, as well as slowing growth in Canada. As we head into 2009, US non-residential construction starts and industrial spending are anticipated to weaken as is non-residential construction in Europe.

Continued growth is forecast for non-residential construction in Canada. In this environment, we expect the pricing pressure we saw in the first half of the year to continue. HERC will look to offset these economic headwinds to its increased industrial focus to capitalize on what is still a growth opportunity. Niche market strategic developments, such as power generation and pumps, and deployment of our position in emerging markets such as Asia -- development of our positions.

Compared to second quarter 2007, worldwide pricing declined only about 110 basis points, driven by a 1.5% decline in the US and a smaller decline internationally. This demonstrates the steps taken by the industry, as a whole, to right-size the fleet relative to current demand and maintain reasonable pricing.

During the quarter, we continued to age our worldwide fleet to 31.9 months, a year-over-year increase of four months, and an increase of one month when compared to fleet age at March 31st. With our current fleet plans, we expect the average age of the fleet to increase by a few more months in 2008. This should not impact our maintenance costs or our customer service.

In the second quarter, net CapEx for HERC was $41 million, which included a $2 million impact from foreign exchange. For full-year 2008, we still expect total equipment rental fleet net capital expenditures to be well under $150 million.

At HERC, we have traditionally disposed of equipment primarily through direct sales to end users or to wholesalers and manufacturers with limited auction activity. These markets have remained relatively stable with some pressure continuing on earth-moving equipment. During the quarter, equipment sales on a first-cost basis totaled $109 million. HERC's fleet efficiency metric calculated by dividing the total HERC revenues less equipment sales and other revenues, by the average fleet acquisition cost, was 2.6 percentage points below prior year, as we continue to rebalance our fleet away from earth-moving equipment. This calculation understates efficiency due to the impact of the decline in pricing on revenues. Nevertheless, we have several initiatives underway to improve fleet efficiency.

As a result of our fleet plan action and based on current demand levels, we are targeting to have the fleet right-sized during the third quarter with US earth-moving fleet at that point representing 25% of the fleet, down from 29% a year ago. We expect this percentage to decline through the balance of the year.

Let me now turn to our consolidated financial results for the quarter shown on slide 15. Looking at our GAAP metrics, pretax income was $93 million, and net income was $51.2 million. On a diluted earnings-per-share basis, we earned $0.16 compared to $0.26 in the prior-year period. This year-over-year decline was due to higher restructuring and restructuring-related costs this year, noncash charges to write off certain deferred debt costs, and a benefit recognized from a change in the vacation accrual reserve in 2007.

On a non-GAAP basis, adjusted diluted earnings per share were $0.30 this past quarter, the same as in the second quarter 2007. While we are achieving our targeted cost savings, direct operating expense and selling, general, and administrative expenses on an adjusted basis increased 40 basis points, year-over-year, due to negative pricing in US car rental and worldwide equipment rental and inflation in our operational costs such as fuel and vehicle damage.

As a reminder, pricing has three times the impact on profitability that volume has in all our businesses. In a neutral pricing environment, these expenses would have declined as a percentage of revenue.

And, for those of you not as familiar with our financials, we report the collection of funds from the ancillary products such as Never Lost, fuels, airport concessions, and HERC's new equipment and supply sales in revenue and the cost of these products indirect operating expense. These differences flow into pretax income.

This treatment is in accordance with GAAP accounting, and needs to be considered when looking at the absolute level of direct operating expense year-over-year.

Total cash interest expense for both fleet debt and corporate debt was $184.2 million, slightly below last year. The improvement as a percentage of revenues was 50 basis points.

I would now like to turn to slide 16 and discuss the strength of our balance sheet and overall liquidity position.

At June 30, our consolidated leverage ratio was 2.9 times, and the consolidated interest expense coverage ratio was 3.9 times. These are improvements over the prior 12-month period and well within the covenant limits set in our financing agreement. The cushion we have under our tightest covenant for corporate EBITDA is $748 million. For indebtedness, the cushion is $4.3 billion, and for interest expense, $470 million.

Subject to borrowing base availability at June 30th, we had additional funding capacity of $4.5 billion consisting of $2.2 billion in fleet financing, $1.5 billion in corporate credit facilities, and $811 million in cash. We believe we have more than ample liquidity to support future repayments as well as anticipated growth.

For the remainder of 2008, we have no further stated debt maturities, however, we have $645 million of normal fleet amortization, which should occur later this year relating to fleet debt with a 2009 expected maturity date.

Looking at our debt portfolio at June 30th, we estimate that a 1% change in interest rates would produce a $23.4 million change in net income over a 12-month period.

Now let's go to slide 17, and I will discuss our various financing initiatives. In July we completed an international fleet financing transaction, Hertz's first rental fleet securitization in Europe and Australia. Funding from the issuance will reduce the outstanding balance on the existing international fleet financing established in December 2005.

This was sold as a private placement to our three existing lenders in the international facility and represents a significant milestone for Hertz, particularly in light of the current credit market. We were able to achieve this multi-jurisdictional fleet securitization transaction in a difficult market. While the terms didn't meet our original expectation such as the advance rate being lower than anticipated, this financing provides cost savings and gives us a mechanism for funding across different markets.

At our May analyst meeting, we announced that we were working on a new, two-year US ABS conduit facility. Let me update you on our progress.

The facility is currently sized to provide between $600 million and $1 billion of additional financing. The structure has been reviewed by the rating agencies. We are now in documentation and expect to close later this month.

Just to reiterate what we said at the analyst meeting, the expected advance rate is 73% compared to the current base level of 80%, and the borrowing spread is expected to be 150 basis points higher than our existing variable funding note structure. On an all-in basis, however, the cost today will be about the same as our existing fixed-rate term note.

I would like to address investors' concerns about the monoline issuers' performance and the impact on our US ABS, which is wrapped by AMBAC and MBIA. The downgrade of either monoline by the rating agencies has virtually no impact on our existing fleet financing. If a monoline were to go bankrupt, our bonds would initially go into a controlled amortization period, which means that as cars are sold, proceeds from vehicle dispositions would go to repay bondholders. Bondholders' rights do not extend to Hertz revenues from the rental of cars or equipment.

Given the nature of the risk fleet, we have the flexibility to extend the holding period of cars, thereby delaying debt repayment for a period of time. If this were to occur, the most likely outcome would be a refinancing or a negotiation with the bondholders to eliminate the amortization.

In any event, we have ample corporate cash and excess corporate liquidity as well as cash within our Like Kind exchange program to fund new fleet purchases.

Moving to slide 18, in the second quarter the GAAP effective income tax rate was 38.8%. The full year GAAP effective income tax rate for 2008 is projected to be approximately 38%. The 4-percentage-point increase from the previously projected full-year effective tax rate of 34% is mainly attributable to increased losses in non-US jurisdictions that receive no tax benefit.

Cash income taxes paid in the second quarter were $6 million, and are projected to be about $60 million for the full year. Total company net capital expenditures for property, plant, and equipment; that is, investments in our facilities systems and service vehicles, were $47 million for the quarter, a decrease of $5.9 million year-over-year as shown in the levered cash flow in the press release. We expect to spend about $200 million in full-year 2008 to maintain our facilities, MIS systems, and operations.

Please turn to slide 19. As Mark mentioned earlier, an important focus for Hertz is cash flow and de-leveraging. As you have seen, we generate cash flow from earnings, but it is important also to note that we generate cash as we de-fleet in response to reduced rental demand. Mark already reported on the second quarter improvement in levered cash flow. I'll review a trailing 12-month period compared to the prior-year period, which captures the seasonality of our business.

Levered cash flow for the 12-month period ended June 30, 2008, was $455.9 million compared to $911.3 million for the same period a year earlier, and net corporate debt declined by that amount. The prior 12-month period was impacted by three unique factors. During the period, $110 million of incremental fleet financing was obtained. The mix shift to a higher percentage of lower-cost risk cars resulted in a one-time benefit to fleet net equity, and working capital improvements provided $250 million of cash flow, which we did not expect to repeat in the current period.

In the current period, year-over-year corporate EBITDA improved by $88.6 million, and HERC's fleet growth was lower by $55 million. Working capital was a $70 million use of funds in the period.

For full-year 2008 we expect the car rental's net fleet equity requirements continue to be a use of funds, and the aging of the HERC fleet and working capital to generate funds, albeit in the case of working capital at a lesser level than in 2007 when we effected certain one-time changes that had that big impact on cash flow.

We have a strong focus on working capital management here at Hertz all the way down to the local operating unit level, and this should drive continuous improvement.

The current economic environment is a tough one, and we are keeping focused and working diligently on cost control and cash management to improve and maintain our profitability.

And now let me turn the call back to Mark.

Thanks, Elyse. Our initial guidance for the full year 2008 was weighted toward the third and fourth quarters based on expectations that the economy would strengthen in the second half of the year. We have not seen evidence of this happening and believe the current weakness may well continue.

Further, we didn't expect the European economies to react the way they have recently. The current environment is particularly volatile and is difficult to forecast with great confidence given that economic indicators and our own trends have been changing, week-to-week.

Our car rental and equipment rental operations in Europe both have seen precipitous volume declines over the past 45 days. We were hopeful that this volume contraction would be temporary but have grown concerned that the decline may be protracted. Accordingly, we believe it is prudent to reduce our guidance at this time. We are comfortable with these projections and believe the ranges are realistic.

Based on our current visibility, we are now forecasting total revenues to be between $8.7 billion and $8.8 billion, with car rental revenue growth of 1.5% to 2.5%, and equipment rental revenue declining 3% to 4%. Corporate EBITDA is projected to be between $1.4 billion and $1.465 billion. We expect adjusted pretax income in the range of $550 million to $600 million and adjusted net income to be between $340 million and $375 million. Using our normalized tax rate of 34% and 325.5 million shares, the number of diluted shares outstanding as of the year ended December 31, 2007, adjusted diluted earnings per share is expected to be between $1.05 and $1.15 per share.

On the positive side, we affirm our earlier guidance for levered cash flow to be between $550 million and $650 million in 2008.

This was certainly a challenging quarter for Hertz, but our management is driven to succeed. We experienced price and volume pressures as economic headwinds dampened demand in both car rental and equipment rental. International economies started to be impacted as the US continued to slow, and expectations for a second half improvement weakened. Hertz is focused on cost efficiency and revenue diversification, strategies that we have been following since before the Company's initial public offering have enabled us to perform in this difficult environment.

With our outsourcing and process re-engineering programs in effect, we feel we are in a good position to weather the second half of the year. Our business model is quite variable in cost, and we continue to operate profitability even if demand is constrained and generates strong cash flow when we de-fleet.

We have demonstrated our ability to manage our fleets with a strong component of non-programmed cars, and we are getting better at it every day. We have executed with great discipline, closing down locations that are a drag on our performance.

Although we still believe there are great growth opportunities for car rental and equipment rental, it is only prudent to slow our network growth until the economy gets stronger. We continue to expand geographically in Asia, but we do so in ways that involve limited capital investment. Our continued investment into Hertz brand, our facilities, and our people will enable us to succeed in different times and thrive in a more robust economy. We believe our liquidity is and will continue to be strong.

Historically, Hertz has been a leading indicator of the economy with car rentals slowing early in the cycle as corporate and discretionary travel slows, and then being one of the first sectors to recover in response to pent-up demand for car rental. While we were disappointed to lower our guidance, we believe we will continue to deliver strong operating results in both of our businesses.

And now, Operator, we will take questions.

(Operator Instructions) Chris Agnew, Goldman Sachs.

A couple of questions -- first of all, can I clarify if I'm hearing you correctly, but the weak pricing in Europe, in particular, impacted the direct vehicle cost disproportionately. If I am correct there, how quickly can you adjust your flee there, with the environment getting worse? And how much are you thinking about reducing -- or are you considering -- reducing fleet into 2009? Thanks.

You heard correctly and, I guess, in talking about the fleet issues in Europe, they've been there all year. We talked about them in the first quarter and the second quarter. Car costs in Europe, due to the OEMs' pricing structure there, have been up 10% to 12%, and they continue to be up in the second quarter, and what we've done is put together a fleet plan, a rotation plan, that does reduce that increase moving into 2009.

So we feel confident saying we will have reduced fleet costs on a year-over-year basis moving into 2009. I don't know if I'm being very specific to answering your question, but that's the best I can give you right now.

I think I meant more on the direct vehicle cost side rather than the fleet cost side. You grew your fleet there 10% year-over-year. I don't see the demand environments deteriorated much faster. How quickly can you actually start reducing your fleet to try and get better pricing?

Well, very quickly, and I guess it's the same -- the trends are similar to what you saw in the US. In the US, what you saw from us is a precipitous volume drop in November/December of 2006. And then the second quarter we just announced the US, which is the biggest business unit, had double-digit pretax growth and improvement in margin of over 100 basis points, right?

So we were able to, over the period of about 120 days, reduce fleet, right-size it, start driving with tighter fleets, better pricing, and the cost efficiencies took place. In Europe we would expect to see things similarly develop. In other words, we have a pressure, if you will, into the third quarter and fourth quarter, and those pressures are driven around right-sizing the fleet, then, as you right-size it, you're throwing more cars into the market, so residuals suffer. So you have a double whammy for a short period of time. What's a short period of time of time for us? Let's just say it's 120 days, roughly, that hits operating results.

So moving into the end of the fourth quarter, beginning in the first quarter of 2009, and we have an improvement similar to what we saw in the U.S. We have more program cars in Europe, right, so 55%-plus program cars, so that helps us in terms of residual value issues. So the impact is not as great on a residual issue because of the higher content of program cars in Europe. Does that answer the question?

Thanks. And then one more question -- equipment rental -- previously you've talked about stress-testing your model on 10% swing in revenue. I think you said you could hopefully hold your EBITDA margins in the high 30s.

No, no, no, higher than that, Chris. We can hold them to 42 or better is what I would tell you right now. So that's -- Gerry, do you want to comment on that?

Sure, yes. We had talked about a worldwide decline of 10% still holding a low-40s EBITDA. We're not predicting that level of a decline, but we're still comfortable with that or higher.

Rich Kwas, Wachovia.

Mark, on the compact car side for US rental car, are you concerned about getting a sufficient number of compact cars and passenger cars from model year '09 given that if there is a severe lack of availability at the retail level right now?

The answer is decidedly no. We are not concerned at all, and we have -- we're getting every one that we want. Our mix vehicles that we have been able to acquire for next year, we pretty much locked down, in the U.S., anyway, all of our fleet needs. We're very happy, and don't have a capacity issue at all.

Okay, so despite the lack of retail availability in the margins likely being better selling to retail, you're not concerned with OEMs pulling back (inaudible)?

No, in fact, Rich, no, and I will tell you right now the plan is done. I mean, we are pretty much done with our plan by make and model, and we have everything we want, and we could get more if we wanted. So we have built-in flexibility in the fleet plan for next year, and if we wanted to find more compacts, we could.

So we're actually more in '09 than '08 on small cars. We've actually moved to a higher mix of small cars in '09 than in '08. And even with that move to higher mix content, we were able to satisfy everything we wanted.

And does the SUV mix drop dramatically, going forward, over the next year from where it is now?

It drops -- you know, I say dramatically -- I don't have the numbers in front of me here, but it drops but, you know, we use special equipment to generate higher revenue per day, right? We get $80 to $90 RPD on something like an SUV, like a Navigator or a Lincoln, and that special equipment is what people want on vacations. So we can't -- you want to make sure you give them what they want. So minivans and big SUVs, you know, on seasonal peaks in our business, we have to have that, otherwise we don't drive a high RPD rate.

It has come down, but when people travel on vacation with their families, they've got to have a bigger vehicle to transport their families, and it doesn't make sense to have two vehicles when they can do it with one, given the RPD on it. But we feel comfortable with the mix that we have, and, as you saw in our fleet costs in the second quarter, Rich, those fleet costs went down, year-over-year, and all the competitors, as you know, are going up. So we feel pretty good about our ability to manage fleet in a tough environment.

Okay. And then moving over to equipment rental -- strong growth internationally. That implies US is down in the quarter. It sounds like there's some weakness occurring in Europe. How should we expect to see the differences and the changes in revenue growth, regionally speaking, over the next couple of quarters?

Well, as I mentioned in the guidance information I gave you on the outlook section, we are expecting -- we had talked about growing somewhere between 3% and 8%, and now we've recalibrated that growth rate on an annualized basis -- let me find the exact --

(inaudible)

Minus 3% to 4%. So the new range is minus 3% to 4% versus a positive growth rate that we had expected. So you can, obviously, do the math on that.

And it's driven by the US and Europe continuing to slow.

Our assumption, Rich, is that the US and Europe will continue to slow.

And then, incrementally, US get much worse or is it Europe getting worse?

They are both getting equally worse.

Equally worse?

I would say almost in equal installments.

I think you've read the news. The Europe economy has significantly slowed in the last 30 to 45 days, and we saw evidence of that. And so the question is, is it going to sustain? Is it going to continue to contract? I don't have a crystal ball. Our assumption in guidance was that yes, it is, it's sustainable.

Okay and, lastly, just on the guidance, how comfortable are you with it at this point? What would be the triggers that would make things worse or better in the second half? What are you thinking of as the main drivers?

The guidance is exactly as I detailed it. I mean, honest, I don't know how more I can comment on it. Based on our current visibility and assuming that the contraction in the marketplace that we've seen in Europe and the contraction that we've seen in Rent-A-Car continues through the end of the year, we're comfortable with guidance.

Our hope is that the current contraction rates that we've seen over the last 45 days stop and improve. We will look at guidance every single quarter and determine whether or not we can improve it or we have to bring it lower, but based on our current visibility, we are very comfortable with that guidance.

Michael Millman, Soleil.

Just continuing on that last guidance, on the HERC, the minus 3% to 4%, is that for '08 or is that annualized for the second half? And I guess the same thing in RAC?

That's for all of '08, Michael.

So it's going from plus in the first half to minus, okay?

Right.

In terms of RAC pricing -- to what extent is the mix impacting, particularly the compact? As you go down in size, obviously, you get less for that. And what I'm looking for is some comparison of price to cost of car rather than just a pure RDP number.

The way I can answer that is talk about two things. One is that RPD decline that we saw in the US, a third of that decline was built around mix shifts. So it had nothing to do with actual pricing going down, right? So a third of it was built around the mix shift.

And that mix was the car or the off-airport mix shift?

Both -- both the mix shift to off-airport as well as the shift to leisure. We have a higher percent of business that's going to leisure channels now. Go ahead, Joe.

The demand for compacts and sub-compact has not materially changed the pricing mix at all, because we've been able to get pricing increases in those car classes. So there's no impact on the pricing.

So does that make those products, then, more profitable because you're getting price increases there?

I don't know if I'd say more profitable but, I mean, as profitable. Obviously, our pretax margin in the second quarter for US Rent-A-Car went up, the margin actually went up. I mean, obviously, you saw our competitors. All their margins went down, all their pretax went down in the US. They're all US-based, for the most part. Our margins went up 100 basis points, and our pretax was double digit.

So to answer your question, I think you can see by that pretax improvement that we didn't have a profit margin squeeze, if you will, due to a move to lower compact cars. Again, the other issue is transaction. When we look at the length, our length improved significantly. In US what did length improve to, Joe? In the US Rent-A-Car length improved by how much?

In the second quarter, length improved by 3.7%.

3.7%, which offset, if you will, some of the RPD decline.

The other thing, Michael, I could add -- the shift to sub-compacts and compacts is relatively small. What drives the needs of our customers is the utility of the vehicle -- four doors, large trunk, all that sort of thing. And if you're taking customers onto comp calls and that sort of thing, you're not going to do it in a Focus.

Just quickly, on the ancillary revenue, I think you said it was up 12.3%, but I assume a large part of that is international and FX. It looked like the US numbers were mid single-digit, as I did the arithmetic, I was wondering why that rate of growth seems to be decelerating?

The rate of growth in the US is pretty comparable to the worldwide number. What you might be referring to might have our airport concession fees built into it, and that is not reflected in the statistic that we quoted earlier in Elyse's presentation.

I was looking at the other -- so other included airport fees?

Well, other, in our revenue base, does include airport fees, but it is not ancillary revenue. We're talking about the insurance products -- baby seats, ski racks, Never Lost GPS, all of that product.

Michelle Ko, UBS.

I was just wondering of the $300 million in cost savings that you anticipate this year, how much do you anticipate to flow through to the bottom line after reinvestments? And also --

As I mentioned in the script that we just read, it's zero. Obviously, if you look at the pretax and the EBITDA guidance, since it essentially goes down year-over-year, none of it would flow through. So that's our current expectation based on where we see the trajectory of the market. Our hope is that the market improves, as I mentioned. If it does improve, then we'll see some flow through to it. At this point, we're not forecasting it will flow through. It's just going to offset the inflationary pressures that we have; the pricing pressures that we have; and the volume contracts that we have in our businesses.

Okay, great. And in terms of shrinking the fleet, to what degree will the new off-airport rental sites offset the reduction in the same-store fleet? So what would be the overall change in the fleet?

I don't think we forecasted a change in the fleet. We said that our fleet was down in the second quarter, though, in US Rent-A-Car about 3%, and the equipment rental business, the fleet continues to -- in terms of the way we rotate it, get better and better and leaner and leaner. Gerry, do you want to talk about that?

From the equipment rental side, we started the year up over 8.5%. At the end of June, worldwide, we're only about 2.5% up driven by Canada and other strength in Europe originally. The flip side of that will happen in the back half. So this thing can turn year-over-year to negative high single digits to double digit negative by the end of the year, as we continue to balance that fleet against the demand we discussed.

Now, Michelle, we will improve the Rent-A-Car efficiency, so you're going to see continued improvement in utilization improvement, and that will be driven probably by lower fleet levels as well as just better -- using lean sigma and our efficiency improvement initiatives.

Yes, Mark, this is Michel speaking.

Go ahead, Michel, please.

I thought I would highlight an important point to the question from Chris Agnew when he was asked -- to the part of peak efficiency. I just want to say to everybody while the European economies are flowing, and our rate of growth as well, we are already, in July, above last year in terms of fleet utilization, and our forecast for the rest of year is a further improvement. So it's not that we are behind the curve. We are already ahead of the curve. We saw it coming, we delayed fleet additions, we've canceled orders, and we accelerated our position so that already in July -- in Q2, by the way, our utilization was flat with last year, and in July, with the decline, it's already ahead with last year and, again, we are planning further improvement for the rest of year, and I think that will be achievable, and we made it in July. I just wanted to point that out.

Okay, thank you, Michel.

In addition to that, we were backing another project to, indeed, re-engineer completely the way we -- it's quite complex -- we pool our locations and, as Mark said, generate new efficiencies, which give us a huge opportunity for the years to come in terms of fleet management as a whole.

And, Michelle, also to go back to your question about where the fleet is going, in US RAC, to be specific, we were down 3% -- excuse me -- in April our fleet was down 1%, in May our fleet was down 3%, and in June, the most recent month of the quarter that we just announced, our fleet was down 5%.

Emily Shanks, Lehman Brothers.

I had a quick question around the equity enhancement side. I'm just wondering, around the actual mechanics of it, there are certain enhancement levels, obviously, in your ABS set. How does it work in terms of valuation? Is that to mean it's done on a quarterly basis and then let's just say the residual values were to decline for your fleet. I recognize they didn't, for you guys this quarter, but at some point in the future -- is it on a quarterly basis that you need to inject more equity in order to maintain the enhancement levels, or is it done on a rolling basis? How does that work mechanically?

We actually have two tests within the US ABS facility, and they are performed monthly, and one is a market value test, so we look at the sale of the cars relative to the book value. And if there is a continued selling below the book value, there is a credit in hand for an adjustment.

Okay, perfect.

And we do that monthly.

Okay, and then just if you wouldn't mind going over one more time what the reason was for the lower net fleet equity investment this quarter?

It was really -- I think, if you will recall, in the first quarter there were some timing issues. We didn't get enough of the cars, particularly in Europe, into the borrowing base under the fleet facility -- that was one issue. We had a timing issue related to a ramp-up of a sale leaseback in the UK. So at the end of the first quarter, you know, our advance rate was much lower because of the inefficiencies of getting those cars included in the borrowing base, and that basically is the time we said it would correct itself in the second quarter, and that's what we're seeing.

Oh, okay, so it was simply the correction of that issue, it wasn't something more?

Right, correct.

Declan Carlin, BlueBay.

Just a question on your Rent-A-Car business -- focusing only on the domestic on-airport section -- could you say whether you gained or lost market share in the first half? And, secondly, just on the international business, and I guess focusing on the European market, there seemed to be quite a heavy price decline. I'm just wondering whether there was anything specific to your business, or was the industry, as a whole, over-fleeted and suffer from weakening demand?

I guess market share in the US, we look at airport and off-airport was a $20 billion market. And my guess is -- I don't have -- you know, on-airport you have more precision around market share. The data right now is only good through April, and it's only with about -- probably 80% of the airports reporting through April.

Then off-airport, what we do is, we measure the growth rates of insurance replacement and compare that to our growth rate. And what I would tell you is that we think market share in both those markets were probably essentially flat on a year-over-year basis. We increased market share in the off-airport markets. In the off-airport market, we increased share. In the on-airport, we probably lost a little bit of shares. We yield-managed into the second quarter. What we did was we tried to tighten our fleet and get higher revenue per car by keeping the fleet tight.

As I told you, we took the fleet down 5% in June. So we were running the fleets tight in order to do yield management, which is typically what you do, and when you see some volume contraction, it's a prudent thing to do. And then you loosen the fleet as you being to see volume improvement. So that answers that question.

The other piece of your question dealt with Europe, I guess, right?

It was just a question on the -- the price decline in your report, the minus 5.1, I understand that's on a constant currency basis, but it seems quite a severe decline, especially -- you mentioned the softening came over, really, over the last 30, 45 days. I was just wondering whether there was anything specific to your European business, or was this an industry-wide over-fleeting period?

I'm going to let Michel answer. The price decline of 5.5%, you know, again, offset by a lot of what I call "linked growth" as well. It's important you look at those two things together.

Going back to the US, you know, we did improve our price in the US 2.2 points. So, again, that's why, again, tightening the fleet gives you better pricing.

Going back to Europe, for a second, Michel, would you answer his question about the price decline of 5.5 and what other factors we should consider when we think about that?

Yes, absolutely. Mark is correct. When you look at our revenue per transaction, which factors in the length, actually since the beginning of the year and even now, as we speak, our revenue transaction has been positive, which means on the length has more than offset a declining RPD. RPD is not just pricing, it's an effect of length, as well. So it's essentially a mix thing, I would say.

Also, the five that are also for business in Europe, is growing faster than the airport business, understandably, and traditionally, the off-airport business is at a lower RPD but higher length than the airport business. So I would say 80% of it, it's a mix issue. Certainly, I would agree that the pricing is currently under some pressure, even though I would hope that, going forward, I don't think the effect of over-fleeting yet, but I think, going forward, I would hope that climate would improve as, indeed, fleets tighten. But, so far, it's essentially a mix effect.

John Sykes, Nomura.

I guess I'm still a little bit confused in terms of how the lower residuals are impacting your business. It didn't sound like that was having a major impact on you, am I correct?

It's having zero impact. Our residuals actually improved in the second quarter by 1%. So it is having zero impact, and we don't forecast it to have any impact. I guess the why is that, you might ask, I mean --?

That's the question -- why?

Let me explain. It has to do with the fact that our SUVs, again, we buy those on a program basis, for the most part, which means we have no residual risk. We buy it from the OEM on that basis, or very little residual risk. And then the sub-compacts and the compacts, we're getting better pricing on than we got year-over-year, month-to-month, quarter-to-quarter.

So we did adjust depreciation rates also in the Q1, in Q1, which helped us level set, if you will, the second quarter. But, again, we feel really good about residuals. They are actually improving. Again, the Manheim Index is not at all anything like our business. Manheim is all used cars. We have new cars. We buy cars new, and we're selling cars, let's say, within a year, roughly. So these -- our used car population is much different than their index, and the profile is totally different, and then we're able to manage the mix, we're able to rotate fleet differently, we have a better mix of vehicles than the Manheim Index represents because we buy only the popular selling cars and, again, we've been moving into, over the last 12 to 18 months, a lower mix of SUVs and a higher mix of compacts, sub-compacts. That's helping us.

What's the D-3 composition of your fleet right now? The Big Three, GM, Ford, Chrysler -- what percentage of your fleet is GM, Ford, and Chrysler?

I guess Chrysler is like 3% of our fleet globally. I think Ford, if I remember right, is around 23%, guys, is that about right -- 26% right now. GM is probably in the neighborhood of about 20%, 22%. So that gives you the mix. And then we have fleet from Toyota. We're Toyota's largest customer in the world. That's been increasing as a mix of overall vehicle mix -- (inaudible) and Kia, they both probably represent, together, those two brands at 13%, let's say, roughly. We buy BMWs, Mercedes in our fleet -- what? Honda is also now -- actually, a higher percent of our mix than it was a year ago, and Nissan as well. Both are higher percents of our overall mix. What does Nissan represent now -- do you have any idea? 10% now.

So would you say that -- I know you can't go forward too much, but if I'm looking a year out, the composition of that fleet is going to be more and more -- you know, the Japanese Big Three -- is that a fair assumption?

It has been. It's been moving in that direction, and I assume it will, yes. Going forward, it will be a bigger piece of our mix, absolutely. We are -- if you compare our fleet profile versus any of our competitors, we are vastly different. We have a much more diverse fleet than anyone else, and that becomes a huge competitive advantage for us. That's why our fleet costs are down year-over-year in the second quarter, and everyone else's were up double digit.

And we said in the call was that we expect that to continue, in fact, maybe even improve. That gap will widen, we believe, based on both fleet efficiencies as well as the diversity of our fleet, okay?

Mike Lanier, AIG.

Thanks. I was curious about the -- on the financing side, what you see as your next couple of milestones when you -- you're going to get this facility put together in August, and then what's the next couple of things as you look down the road that you have to take care of?

We're already looking at that. We know we have some maturities coming up in '09, and so we're already in discussions with a number of players looking at different structures to refinance some of that ABS that comes due next year. That's really the next thing on the horizon. Try to turn that out.

That's about a year away?

Just about, yes.

And then -- obviously, some of the competitors on the car rental side are doing not nearly as well as you are. Are you going to be able to take advantage of their problems, or is it pretty much business as usual?

Are you asking from an operational perspective or financing perspective?

Just operational, primarily.

Could you repeat the question just so we have it clear?

Well, it seemed like some of your primary competitors are really struggling, at least, let's say their stock and bonds are struggling. I was wondering if that creates an opportunity for you?

Absolutely. We feel our fleet cost issue, because we have such an advantage, you know, that's a competitive advantage that allows us to price competitively, and even take share, if possible. We think that fleet cost advantage will continue for the foreseeable future. You can't move your fleet mix overnight. So we'll take advantage of that competitive advantage, and we've announced some new service policy guarantees -- gas policies, and we're on the offensive, I'll put it that way, and, hopefully, as the economies globally come out of recession, you know, this would just accelerate and separate us from the pack.

And I guess the last question -- I wish I knew your financials a little better than I do, but when I look at the EBITDA -- I'm on table 3 of the segment analysis -- and the EBITDA, car rental, equipment rental, let's say, for example, on the six months period is pretty flat, but when you back up to go either side of -- go look at the income line, the equipment rental is down significantly. Do they have that much larger of a depreciation charge?

As you might recall, the corporate EBITDA is calculated two different ways for Rent-A-Car and for equipment rental. So the equipment rental is the traditional where you add back depreciation and interest, and in the Rent-A-Car we treat it as an operating expense.

So it's above the line versus below the line, as it is in equipment rental.

So, at the end of the day, HERC has a larger percentage of our overall EBITDA because of the way it's calculated.

Okay. And then finally on -- what are you looking for on the on-airport side? When you give your guidance, what kind of emplanement number are you embedding in that number here? What are you looking for on-airport here in the second half?

Emplanement numbers come in a variety of sources, where we assume the worst-case scenario that's out there in the market today. Our assumption that we build into our guidance is that it would down over 5%, 6%, in that range on emplanements, okay?

We'll go to Emily --

You know, Operator, we'll just take two more questions now, okay?

Okay. Emily Shanks, Lehman Brothers.

Two very brief follow-up questions -- you referenced your model year 2009 discussions with the OEMs. Can you speak at all about what your expectations are for cost increases to model year 2009?

Overall, flat to down.

Okay, and then around the HERC business, you cited the industrial business mix. Is that increase in mix just due to the slowdown in the other segments, or are you guys actually acquiring new accounts or expanding that with organic growth?

Hi, Emily, this is Gerry. No, we're actually growing the industrial sector. In the second quarter, the actual revenue growth was double digit in North America through new account acquisitions and just growing our share.

Okay, and what type of end markets are those accounts in?

Most of them are in the petro chemical areas -- steel, other manufacturing, but the largest growth component is in the petro chem area.

[Yoma Abibi], J.P. Morgan.

Two questions from me -- the first question is the reduction in corporate debt this quarter -- what debt was paid down?

We have an ABL facility as part of our corporate debt. It's a revolving credit facility that funds our HERC business primarily.

Yes. Okay, that was the debt paydown? Okay. And then my second question is in terms of your outlook for corporate debt reduction for the balance of the year, any views there?

Well, it should be in line with our cash flow guidance, and our cash flow guidance is $550 million to $650 million.

Okay, so, once again, everyone, thanks for joining us today. We appreciate your interest and look forward to updating you after the third quarter.

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