Herc Holdings Inc (HRI) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Hertz Global Holdings' Third 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. (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 obligation to update that information to reflect changed circumstances.

Additional information concerning these statements is contained in the Company's press release regarding its third quarter results issued yesterday and the Risk Factors and Forward-Looking Statements section of the Company's 2007 Form 10-K and its Form 10-Q for the three months ended June 30, 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 call over to our host, Rich Broome. Please go ahead, sir.

Good morning, and welcome to Hertz Global Holdings' Third Quarter 2008 Conference Call. For those of you I haven't met, I serve as the Company's Corporate Affairs and Communications Officer, and on an interim basis, I am also serving as Investor Relations Officer. I look forward to working with all of you.

You should all have our press release and associated financial information. We have also provided slides to accompany our conference call, which can be accessed on our website, www.hertz.com/investorrelations.

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, joining us today for the Q&A session are Joe Nothwang, Executive Vice President and President, Vehicle Rental and Leasing, the Americas and Pacific; Michel Taride, Executive Vice President and President, Hertz Europe Limited; and Gerry Plescia, Executive Vice President and President of HERC.

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 will turn the call over to Mark Frissora.

Thanks, Rich, and good morning, everyone. Thanks for joining us today.

Let's start, if we can, with slide five.

You will recall that we reported good results in the second quarter by overcoming a challenging business environment because of our efficiency initiatives and our global revenue footprint. We first experienced declining volumes in the fourth quarter of last year, and unfortunately, conditions continued to deteriorate. We are currently experiencing twice the level of volume contraction that we have encountered historically, and the third quarter was challenging for both the macroeconomic and our industry.

Accordingly, we implemented aggressive strategic actions to improve liquidity and customer satisfaction, and those actions, which I will describe in a moment, negatively impacted third quarter earnings by more than $58 million. However, we believe these actions better position Hertz to optimize growth and liquidity going forward and especially in the current quarter, when we generate most of our cash flow.

The other headline is that our liquidity is already strong, almost $4.6 billion at the end of the third quarter, in part because of the $825 million variable funding note facility we completed in September.

Make no mistake that everyone on the management team is committed to improving our results, which I would note follow an exceptionally strong third quarter last year.

We have already taken additional structural actions to right-size the business.

These actions include further reducing wage and benefit costs. Headcount has been reduced by almost 7,100 full-time employees, or 22%, since August of 2006. This includes the program we initiated in September to reduce headcount by almost 1,400 employees.

Accelerating vehicle and equipment deletions and at least temporarily delaying additions to right-size the fleet to current demand levels. We sold over 4,500 more cars than usual in the US, and our end US fleet is 6.8% smaller year over year. Our average fleet is 4.5% smaller. We believe we are right-fleeted, right-sized right now.

Rationalizing our location footprint, pruning 80 net locations while adding others, primarily in the US off-airport market to accommodate new business, and implementing recent significant price increases in our major businesses.

Looking ahead, I believe Hertz will grow profitably when conditions improve because of our strong liquidity and market position and our streamlined cost structure. Our goal is also to improve the ratio between revenue levels and profit in this difficult environment, and of course, that will happen much sooner if demand and/or pricing stabilizes.

Before I get into the numbers for the quarter, let me describe the dynamics of the current business environment.

Please turn to slide six.

We are encountering several factors that are creating a short-term strain on our profits. The first is reduced volumes. We've experienced a period of rapid volume contraction across all of our businesses -- domestic car rental, European car rental, and worldwide equipment rental. The declines have happened very quickly, particularly in car rental, where both commercial and leisure demand responded in lockstep with the economic slowdown. Higher fuel costs and reductions in airline capacity, along with increased airfares, led consumers to rent fewer cars. Businesses also cut back on employee travel.

There are some bright spots. For example, inbound business to the US grew double-digit last quarter, while HERC continues to gain industrial business and remains solid in Canada.

Nevertheless, as fuel prices have moderated recently, the credit crisis appears to be our latest impediment to corporate and leisure travel, a crisis which could also affect HERC, as well.

The second trend relates to our asset efficiency. Inevitably, utilization suffers somewhat when demand declines rapidly, and it is impossible to adjust the fleet quickly enough, and consequently, depreciation and fleet-related costs increase as a percent of revenue.

The volume reduction and temporary excess fleet levels led directly to the third trend, lower industry pricing. As the immediate reaction to lower demand is to get cars and equipment as much as possible on rent, even at reduced rates, worldwide car rental RPD in the third quarter was 0.8% lower year over year, driven primarily by Europe, although September pricing was 3% lower in the U.S. and from worldwide HERC. Pricing declined by 1.6% year over year for worldwide HERC.

You'll recall our sensitivity to pricing. A 1% reduction in pricing equates to an annual pre-tax profit decrease of approximately $55 million for car rental and $13 million for worldwide equipment rental. Price reductions occur in a climate of rapid volume declines because companies cannot reduce fleets quickly enough and low-yield rentals are preferable to an [IO] fleet.

The fourth trend is lower residual values. Every company in the industry suffers to varying degrees, including Hertz, although we believe we began and continue to right-size our fleets faster than the competitors. In fact, we sold historically high levels of cars throughout the third quarter to position us for higher fleet levels, tighter fleet levels, in the fourth quarter.

However, inventories have built up at car auctions and in other disposable channels, and when combined with tighter credit and lower consumer spending, residual values do suffer. We continue to have our fleets right-sized while maintaining maximum upward flexibility should demand improve.

The good news is that history also shows that rental pricing tends to become more rational once the industry rebalances the fleet.

The credit crisis, volatile equity markets, and worried consumers have created a difficult macro environment, which we all hope will stabilize and improve in the very near future. However, until stability occurs, it is not possible, in our view, to forecast with any reliable certainty. Consequently, we will be suspending guidance temporarily, and I will discuss guidance in more detail later in the call.

Now, turning to slide seven, let me move on to key financial metrics for the quarter.

We achieved third quarter revenues of $2.42 billion, slightly below last year. On a currency-adjusted basis, revenues declined by $85.6 million, or 3.5%. Revenue growth was constrained due to our strategy to preserve liquidity in a tough environment, and we deliberately walked away from low-contribution business. Elyse will discuss our GAAP results shortly.

Adjusted pretax income for the quarter was $169 million, resulting in an adjusted pretax margin of 7%.

Corporate EBITDA was $386 million and represents 16% of revenues.

Adjusted diluted earnings per share was $0.33, and adjusted net income was $106 million.

These metrics were all well below those achieved in the third quarter of 2007 but represent solid margins in a very challenging environment.

Turning to slide eight, it is important to remember that we took actions that affected profits in the third quarter to help preserve liquidity in the current quarter and beyond. Specifically, $58 million of the reduction in third quarter profits can be attributed (to) three factors related to liquidity and customer service.

Number one, aggressive fleet deletions, including maintenance costs to prepare cars for sale, as well as penalties incurred for early turn-backs.

Number two, increased advertising of our industry-leading gasoline refueling and service guarantee programs.

Number three, higher gasoline costs associated with the refueling program.

As I mentioned earlier, we maintained a strong focus on cost control and efficiency, as well as cash management. As a service company, a significant portion of our expense relates to staffing.

As you can see on slide nine, we began a process of reducing labor costs in August of 2006. As I mentioned earlier, we have decreased headcount by 22%, which recently includes voluntary early-outs offered in certain geographies to help right-size the business to current business conditions.

Both the U.S. and international operations achieved strong double-digit headcount reductions over the two-year period, and if we look at productivity in the past quarter -- that is revenue before foreign exchange per employee -- the improvement is 7.9% year over year.

Our goal for full-year 2008 continues to be $300 million of realized savings and is in addition to the $187 million of savings announced in 2007, for a projected cumulative savings of $490 million through 2008. And while we expect a tough volume environment in 2009, we believe we will generate an additional $250 million of savings next year. This will be achieved primarily through our strong focus on business process reengineering, not just reductions in force and strict spending controls.

As a result, we believe that we are right on target to achieve cumulative savings of over $800 million by the end of 2010, including the estimated benefits of outsourcing and process reengineering, which we have previously discussed with you.

Essentially, we are achieving the bulk of the $800 million in savings a year earlier than we had been forecasting. We will provide an update on 2010 savings when we have visibility later next year.

It's fair to ask then with all the efficiency initiatives, where do the savings go? There are several factors that prevented higher levels of efficiency from generating higher profits, including, one, lower volume, as previously discussed; two, inflation in key categories -- higher fleet depreciation as we accelerated vehicle and equipment sales in a tough residual value environment, fuel costs, and vehicle maintenance and repairs; three, increased vehicle deletion costs; four, lower pricing in September.

As for inflationary trends in the business, we have teams working on improvements in all categories. In fact, we've beat our targets in many fleet metrics as our reduced field personnel managed an extraordinarily high level of fleet deletions.

In this economy, we continue to reevaluate our expansion plans and carefully review the operating performance of existing stores, closing some locations that are not critical to our network coverage.

Overall, we have managed our worldwide location network to meet growth opportunities while pruning, in light of the current economic environment, and at September 30, we had over 4,800 corporate locations, compared with 4,600 last year.

In the past 12 months, we have added 130 net locations to further increase our ability to serve the US off-airport market. Our goal is to be the lowest-cost, highest-quality car rental and equipment rental company in the markets we serve. This will sustain our profitability during the tough times and make us the best-positioned company when the economy strengthens.

While we are fully committed to maximizing savings, we continue to invest back into the Company. On a year-to-date basis, we've spent an incremental $48 million on our facilities, brand, and people. This includes several car rental licensee acquisitions in the US and France, which added 14 locations and over $12 million in annualized revenue.

Now, I would like to bring to your attention several major accomplishments that we achieved during the third quarter on slide 10.

I am pleased, particularly, with HERC's profitability this past quarter. Although revenue declined by 6.8% year over year, the HERC team did an excellent job aggressively rebalancing the fleet, selling more equipment than our top two competitors combined, and reducing equipment-related expenses, which helped the unit achieve adjusted pretax margins of 18.7% and a corporate EBITDA margin of 46.1%. HERC also closed 20 locations in the quarter.

You will recall that in 2007, we determined that we could retain corporate EBITDA margins in the 40s, 40% range even with a 10% reduction in revenue. Although the actual revenue decline was slightly below that level, our corporate EBITDA margin exceeded those expectations.

Even with the cost initiatives and staffing reductions, we continued to provide high-quality service to our customers. Our car rental operations in the US, Canada, and Europe all produced significant year-over-year improvement, and North America car rental achieved its highest-ever net promoter score this month.

Since we introduced the 10-Minute Service standard for online check-ins, we've also received fewer complaints related to consumer wait time. Also, complaints about refueling prices have turned into compliments for implementing our local pump price-refueling program.

Additionally, our kiosk check-in continues to gain popularity as we crossed the 100,000-transaction threshold on October 7. With 135 kiosks operating at 27 major US airports, penetration is ahead of schedule. We have also started testing kiosks in Spain for international implementation in 2009.

We are very excited about the upcoming launch of Hertz's car sharing initiative. Designed to meet the needs of customers primarily in urban areas, members will have access to a fleet of vehicles for a flat fee, which will include the cost of insurance, gasoline, maintenance, and cleaning. Vehicles are reserved over the Internet or via telephone, and customers access cars with an electronic keycard, which activates an onboard computer in the car to verify the member in reservation.

By year-end, we will begin operating in New York, London, and Paris. Car sharing is a breakthrough service for our large existing customer base, as well, as the new generation of customers who may view car ownership differently for a variety of reasons, ranging from convenience to economic or environmental factors.

And with car sharing, we will have our goal to provide global rental solutions for customers who need a car for as little as an hour or for as long as a year.

Just about a year ago, we launched Simply Wheelz in Orlando as a pilot. Based on its appeal to more cost-conscious customers, we have expanded the program to several important leisure markets in Florida and California, with more to come in early 2009. Although our location in Orlando operates separately, we are introducing a virtual Simply Wheelz concept, where customers can use a kiosk at the traditional Hertz airport location to complete the rental process. This will help us further penetrate the online leisure marketplace.

Please turn now to slide 11 as I review quarterly cash flow.

Levered after-tax cash flow after fleet growth, as is typically the case in the third quarter, was negative $335 million versus negative $203 million required in the same quarter of 2007. This change is due to reduced fleet growth, partially offset by lower advance rates in the new international ABS facility, anticipated declines in cash flow from working capital, and lower earnings.

A strength, however, in our business model, is that in tough economic times, we are able to downsize our asset base accordingly. This is best illustrated by looking at the total net cash flow generated by the Company. Using this measure, total net cash flow was negative $150 million versus negative $200 million in the prior year, which resulted in a $42 million improvement year over year.

Working capital days outstanding were negative 19.6 million, flat to the prior year, and 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 in the collection of receivables.

Our negative working capital is an important cash flow benefit because it means we collect funds from our customers faster than we pay our suppliers.

Please turn to slide 12.

In worldwide car rental, total revenue was flat compared to third quarter 2007 as a favorable foreign exchange impact of 2.6% offset a 3% decline in transaction days and a 0.8% 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 equipment rental side of our business, total revenues was $433.1 million, representing a decline of 6.8% from prior year. Strong revenue growth in our Canadian operations and our industrial product lines reduced the impact of lower rental activity and the year-over-year price decline of 1.6%. The foreign currency benefit on revenues was approximately 1.3%.

Turning to slide 13, on a consolidated basis, 37.5% of our reported revenues come from international operations, compared to 35% a year ago. International revenue grew 6.2% on a year-on-year basis. Without foreign exchange, the decrease was 0.6%.

Our product and market diversification also helped support revenue in the past quarter.

International car rental operations experienced rental revenue growth of about 7%, driven by foreign exchange, and 1.9% transaction-day growth. This helped to offset some of the softness we saw domestically.

Inbound business to the US in the third quarter remained strong, and our revenue from this market increased by 26.3% and represents 14% of our total US airport revenue.

Other sources of year-over-year revenue growth were government rentals and rentals for specialty vehicles in our fun, prestige, and green collections.

The US off-airport market generated $278.5 million of revenue in the quarter despite a 1.6% decline in transaction days, which was partly offset by a 0.6% increase in RPD.

Our commercial government and tour transaction days increased year over year.

On our second quarter conference call, we mentioned that replacement rental activity for the industry had been impacted by higher fuel prices and the economy, and this trend continues to be evident. The latest statistics from the Federal Highway Administration show miles driven declined by 3.6% year over year for the month of July. This leads to fewer accidents and claims.

In addition, claimants in current economic environment appear to be deferring vehicle repairs in some instances. We experienced a 5.2% decrease in the quarter in insurance replacement transaction days; however, we now have relationships with 185 insurance companies out of the top 200 or so and are working closely with these companies to grow our share of the business.

In equipment rental, we achieved growth in our initiatives, such as Hertz Plant Services, which is our industrial division pump power generation and trench shoring, and these partially offset the slowing of our base nonresidential construction business in the US and in Europe.

Our acquisition of Quilovat and a -- a power generation company in Spain, has been growing well and providing a basis for us to extend power-generation services to our locations in that region.

Our Chinese operation is gaining traction, as well, exceeding our expectations in equipment rental. We'll have over $8 million of fleet by year-end and are already a top competitor in the Shanghai rental market.

During the quarter, equipment rental volume pressures continued, particularly in Florida, California, France, and Spain. You will recall that in the third quarter of 2007, our volumes were already under pressure, and we reported worldwide HERC revenue growth of only 2.6% for 2007.

On the positive side, sequentially from Q2, pricing pressure has been moderate, and a supply of equipment in the industry has been fairly well balanced with demand, considering the overall economic environment.

Across all of our businesses, we continue to broaden our customer base by adding new commercial accounts and re-signing existing customers.

In car rental, our global sales approach continues to pay off as we enhance our relationships with commercial accounts that operate worldwide. Even in a tough environment, we are able to convert business to Hertz, as evidenced by the over 30 accounts gained in the third quarter on a net basis.

On the partnership front, we just re-signed AirTran to a three-year exclusive agreement, and we re-signed Signature Aviation and Million Air, each on an exclusive national multi-year contract.

In Europe, as part of our 90th anniversary marketing program, we used our broad travel partnership base to promote the Hertz name and special rental promotions.

Hertz was recognized as the number-one "Reader's Choice" by Conde Nast Traveler for the 15th consecutive year for both rental cars, both domestically and internationally.

Hertz UK was awarded the prestigious award of "Best Car Rental Company" by the Travel Trade Gazette for its commitment to travel partnerships.

We continue to penetrate the online leisure market, as demonstrated by the 6.1% year-over-year increase in car rental revenues booked through Hertz.com and third party websites with good growth in both the US and abroad. This represented over 33.2% of our worldwide car rental revenues.

In equipment rental in the third quarter, we had 13 major new account gains in diverse industries in the construction, industrial, and fragmented sectors.

Now, on slide 14, I'd like to discuss briefly our car rental fleets and our new sales channel diversity.

In car rental, we continued to diversify our channels of disposition. This past quarter, we sold over 15,000 cars, or 37% of the total US car sales through dealer-direct and Web-based channels, including online auctions. As you will recall, these cars typically sell faster and have better payment cycles than was sold through the traditional auctions. The car sales markets have been difficult as the credit crunch spreads to consumer auto loans, but diversification of sales channels, we believe, can only strengthen our position.

On the acquisition side, we've been working with manufacturers to reduce new car deliveries in light of lower demand. Being able to hold existing fleet longer should also help with our residual value exposure. The average age of our fleet at September 30 was 8 months, compared with 6.5 months last year.

Today, I would like to update you on our liquidity position, which you can see on slide 15.

At September 30, 2008, Hertz had total debt of $12.8 billion and total liquidity available of 4.86 -- $4.6 billion. The breakdown by source is $730 million in unrestricted cash; $1.1 billion in unfunded corporate debt capacity; and $2.8 billion in unfunded fleet debt capacity, both subject to borrowing-based availability.

Included in the fleet debt liquidity is the new $825 million credit facility, which was finalized on September15, 2008. Establishing this facility in a difficult credit market demonstrates the strength of our collateral pool, Hertz's track record, and strong relationships with our bankers. Our credit facilities are fairly well diversified from both a corporate debt and fleet debt perspective.

We have over 50 different banks participated in our four major revolving facilities, which are the ABL, the two variable funding note facilities for US car rental fleet, and our international fleet financing facility. In addition, we have smaller facilities that finance fleet in different countries, such as Belgium, Brazil, and the UK.

The facilities that are provided by a more limited bank group, such as the recently announced two-year $825 million fleet financing, and the international fleet facility are with institutions with which we have had long relationships.

Hertz's investment policy has always been prudent, monitoring exposure to counterparties and observing concentration limits to ensure diversification by geography, institution, instrument, and fund. In light of the current environment, we've increased the percentage of government securities to ensure our liquidity.

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

Thank you, Mark, and good morning, everyone.

I will begin this morning by discussing the operating environment and outlook for the car rental and equipment rental businesses.

Let's start with the third quarter operating results for the Rent A Car division.

On slide 16, we've included a table showing the major car rental operating statistics. The table highlights, among other metrics, the volume decline, as Mark mentioned earlier. As you can see, transaction days in the US decreased by 5.6% year over year, driven by a 7.3% decline in on-airport days and a 1.6% decline in off-airport volume.

A key driver was a reduction in corporate travel during the quarter. Transaction-day decline was partially offset by the increase in average rental length in the US, which was positive 4.2% in the past quarter, with growth across almost all major customer categories. This reflects the shift to online leisure rental sources and strong growth from international inbound customers.

Hertz domestic rental car pricing in the third quarter, as reflected in RPD, finished slightly above prior year by 0.4% for the quarter. On-airport, the pricing increased by 0.7%, and off-airport, by 0.6%. Also impacting RPD was the increase in the proportion of off-airport rental activity in the overall mix.

During July and August, the summer peak season, we were able to increase rates and take yield action to improve RPD; however, overall pricing softened in September.

Commercial pricing was under pressure throughout the period. Nevertheless, we re-signed over 99% of customers whose contracts were negotiated in the third quarter.

Recent actions have been taken to improve fourth quarter car and equipment rental pricing, as you may have seen in our recent press release on this subject. This increase impacts about 40% of our worldwide car rental business and 80% of our equipment rental business.

International car rental rate revenue grew 7%; however, excluding foreign exchange, rental revenue was down 1.4% in the quarter versus the prior year, driven by positive transaction-day growth of 1.9%, offset by negative RPD.

In Europe, commercial, monthly, and replacement rental activity was positive year over year but slowed in September. And our operations in Australia and Brazil continued to experience double-digit year-over-year transaction-day growth this past quarter.

RPD for international car rentals was 3.3% lower primarily due to pricing pressures, with some impact from mix in Europe, driven by the relative strength of business rental activity in the quarter. Currently, Europe is experiencing both lower volume and pricing.

The leisure market, especially rentals from the US, continues to deteriorate, and commercial volumes are also being impacted.

Truck and Van activity is soft, as well. We expect these volume and pricing trends to continue until the fleet is aligned with reduced demand.

Slide 17 highlights worldwide fleet efficiency, which is defined as the percentage of days a vehicle is rented. This metric was lowered by 24 basis points year over year as demand declined faster than fleet reductions and was driven primarily by the US, with a decline of 90 basis points. However, the decline reflects the high number of cars which were in the process of being sold throughout the period, and utilization would've been higher year over year but for our aggressive depleting efforts.

International operations efficiency improved 100 basis points year over year by reducing fleet downtime and maintaining fleet levels in line with volume demand.

Let me next address the issue of car rental residual value. In the US, the Manheim Index quarterly average for the third quarter declined by 4.2% year over year. We experienced a 3.3% year-over-year decline in the average residual value as a percentage of the initial capital costs on the 40,000 cars we sold in the third quarter. Our results reflect the lengthening of the average age of cars sold from 13 to 16 months over the same period. Demand for younger used cars is negatively affected by volume incentives to promote new car sales, tighter credit conditions, and reduced consumer demand.

Starting in September, vehicle sales as a percent of vehicles offered for sale at auction declined by over half. However, as a result of actions taken in the third quarter, we are not relying as heavily on risk car sales in the current quarter.

As we've stated in prior calls, 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 September 30, 2008, the percentage of non-program cars in the US fleet decreased slightly from 63% to 59%. However, the risk car percentage is expected to increase as we turn back program cars in Q4.

Additionally, as we reduced the number of program cars going forward, we can flex our fleet age and reduce exposure to the auto manufacturers. We took action to delete more risk cars during the quarter, when the used car market is seasonally better, to reduce exposure to residual value declines in the current quarter. Internationally, the percentage of non-program cars was 55% compared to 46% a year ago.

The used car markets, particularly in Europe, continue to experience reduced demand and pricing, and we have intensified our efforts to develop additional channels for selling our cars in Europe.

On the subject of car costs, we expect US vehicle rental depreciation expense per car to increase to mid-single digit year over year in 2008.

In Europe, we expect fleet costs to be up 12% in 2008, before foreign exchange, although the absolute dollar vehicle depreciation per unit for Europe remains below that of the US.

Let's now turn to worldwide HERC, starting on slide 18.

In terms of the operating environment, we continue to be impacted by the softening US construction market. This was partly 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 nonresidential construction dropped from 50.6% of total revenues to 47.8% year over year, and industrial revenues increased from 18.9% to 21%.

Our Europe operations experienced double-digit declines in revenues year over year. However, power generation, driven primarily by the Quilovat acquisition in Spain, continued strong, but construction was dramatically impacted.

As a result of deteriorating economic conditions from the beginning of July through October, we closed 14 locations in Europe.

For the quarter, our worldwide same-store revenues declined by 5.5%, compared to 0.5% growth in the third quarter of 2007 versus 2006.

Canada remains a bright spot, driven by the Western Canadian oil service business.

Compared to third quarter 2007, worldwide pricing declined by only about 160 basis points, driven by a 2% decline in the US and a 1% decline in Canada. However, compared to past downturns, this is a modest decline.

In previous downturns, there were large imbalances between the supply of fleet and demand that resulted in declines in pricing up to 5% year over year. This time around, the industry has actively managed its fleet relative to current demand and been able to maintain reasonable pricing.

Based on the macroeconomic outlook, we expect to experience further declines in nonresidential construction starts.

I would remind you that we just took a 10% price increase for short-term business and 5% for the long-term monthly business in the US and Europe. Also, we expect to still take advantage of industrial opportunities through our strategic focus and global expansion.

During the quarter, we continued to age our worldwide fleet to 34 months, a year-over-year increase of more than 5 months and an increase of 2 months when compared to fleet age at June 30. With our current fleet plan, we expect the average age of the fleet to increase by another month or so in 2008, which should not impact our maintenance costs or our customer service.

In the third quarter, net CapEx for HERC was a reduction of $54 million, representing a $242 million cash flow improvement for the quarter.

As Mark discussed, we've taken aggressive depleting actions during the past quarter. Equipment sales on a first-cost basis totaled $187 million, a quarterly record for our Company, generating a record for the quarter of $340 million of less investment in fleet growth year over year. In order to achieve this level of fleet reduction, about 50% was sold through the equipment auction, as opposed to the normal retail sales channel.

In the US, we also diversified the active fleet away from earth-moving equipment. This now represents 24% of total fleet, compared to 29% a year ago. Overall, we believe that our fleet will be well matched to the expected demand levels by year-end, which will well position us for 2009.

HERC's fleet efficiency metric, calculated by dividing total HERK revenue less equipment sales and other revenue by the average fleet acquisition cost, was 3.3 percentage points below prior year as we continued to rebalance our fleet away from earthmoving equipment. This calculation understates efficiency due to the impact of the decline in pricing on revenue.

As Mark mentioned, process reengineering and fleet management should improve fleet efficiency moving forward.

Let me now turn to our consolidated financial results for the quarter, shown on slide 19.

Looking at our GAAP metrics, pretax income was $26.2 million, and net income was $17.7 million.

On a diluted earnings-per-share basis, we earned $0.05 compared to $0.50 in the prior-year period. The year-over-year decline was due to higher restructuring and restructuring-related costs this year, decreased volume and pricing, and costs associated with the strategic actions Mark mentioned earlier, including costs associated with the new fuel and service offering and depleting actions, including depreciation.

On a non-GAAP basis, adjusted diluting earnings per share were $0.33 this past quarter, compared to $0.65 in [Q3] 2007.

While we are achieving our targeted cost savings, direct operating expenses and selling, general, and administrative expenses on an adjusted basis increased 360 and [70] basis points, respectively, year over year as a percentage of revenue. More than a third of the DOE variant is due to higher costs on items, such as gasoline, that also have a revenue component. The balance is driven by the impact of negative pricing across the operating units, increased operational costs due to inflation and store growth, and higher vehicle damage.

Within SG&A, the increase is the result of higher planned advertising expenses.

Total cash interest expense for both fleet debt and corporate debt was $194.9 million, $11 million below last year. The improvement as a percent of revenues was 40 basis points.

Now, please turn to slide 20, which focuses on the strength of our balance sheet and overall liquidity position.

At September 30, our consolidated leveraged ratio was 3.5 times, and the consolidated interest expense coverage ratio was 3.7 times. These ratios are well within the covenant limits set in our financing agreements.

Under our tightest covenant, the cushion we have for corporate EBITDA is $513.5 million, and for indebtedness, the cushion is $2.95 billion.

Looking at our debt portfolio at September 30, we estimate that a 1% change in interest rate would produce a $32 million change in net income over a 12-month period.

Let's look at our debt servicing requirements. Slide 21 shows our upcoming debt maturities by quarter for the remainder of 2008 and full-year 2009.

These are shown on the basis of the contractual maturity date, but we also reflect the amount of debt amortization that is likely to take place over the six months preceding that maturity date.

Amortization payments made since quarter-end have already reduced the fleet debt maturity for Q1 2009 from $771 million to $617 million. Through 2009, we believe we have ample resources for debt service even at our current fleet levels, which could decline further, consistent with expected demand.

As you know, there are additional maturities in 2010, and we are already reviewing financing alternatives and will keep you updated on the status of these alternatives on future calls.

Moving to slide 22, for the quarters, the GAAP effective income tax rate is 10.9% and 34% for 2008 and 2007, respectively. Cash income taxes paid in the third quarter were $7.7 million and $10.5 million in 2008 and 2007, respectively.

And, finally, on slide 23, we show LTM cash flow results.

As Mark mentioned earlier, an important focus for Hertz is cash flow and deleveraging. We -- he already reported on the third quarter total net cash flow and levered cash flow. I'll review a trailing 12-month period compared to the prior-year period, which captures the seasonality of our business.

Looking at levered cash flow, which measures cash flow available to reduce net corporate debt, in the 12-month period ended September 30, 2008, we generated $324 million, compared to $354 million for the same period a year earlier. The difference is due to higher cash invested in acquisitions year over year.

Looking at total net cash flow generated over the trailing 12-month period, we generated $555 million in total net cash flow, compared to $17 million for the same period a year earlier.

Fleet reductions year over year more than offset lower earnings and higher working capital requirements. As you have seen, we generate cash flow from earnings, but it is also important to note that we generate cash as we defleet in response to reduced rental demand.

The current economic environment is difficult, with unprecedented volume declines, pricing pressures, and declines in residual values. We are attacking all of these issues and working diligently to drive cost control to preserve and enhance our profitability.

Also, we have taken aggressive actions, as Mark mentioned, to reduce fleet levels in both RAC and HERC to be better positioned for the months ahead. Tight credit markets and higher funding costs demand we maintain a strong focus on all aspects of cash management. These are the areas of focus for the organization to drive shareholder value in the months ahead.

And now, let me turn the call back to Mark.

Thanks, Elyse.

Our initial guidance for the full-year 2008 was weighted towards the third and fourth quarters based on expectations that the economy would strengthen in the second half of the year. Based on what we experienced during the second quarter and into August, we lowered our guidance on an August 8 conference call to what we thought were sustainable levels. Since then, we've seen conditions deteriorate further across all geographies. It is clear that we will not meet our revised guidance.

Additionally, the impact of reduced demand, lower pricing, and residual market conditions on profitability has become increasingly difficult to assess. For this reason, we are suspending giving specific guidance on individual financial metrics. Once the economy and market conditions stabilize and our visibility over our businesses improves, we expect to resume guidance.

Typically, Hertz is considered a leading indicator of economic activity. Car rentals tend to slow early in the cycle as corporate and discretionary travel is curtailed, and then one of the earliest industries -- we are one of the earliest industries to recover due to pent-up demand.

As discussed, we haven't been just hoping for an early recovery; we've been moving aggressively to right-size the business to achieve the best long-term results possible. That said, we expect the total Company and each of the business segments to be profitable for the full-year 2008 on an adjusted pretax basis. We also expect to generate levered cash flow, which will enable us to reduce net corporate debt and net total debt. We continue to be comfortable with our debt covenant cushions and overall liquidity, which exceeds $4.5 billion, subject to borrowing base availability. Regrettably, we will not be more specific and provide you with dollar amounts.

This past quarter was certainly challenging, but the management team is determined to deliver performance at the highest level possible regardless of the economic conditions. Our cost-cutting focus, we believe, is unparalleled among our competitors. Our revenue diversification and growth platforms are strong, multi-faceted and global.

Although these initiatives are giving us ample runway in this difficult environment, we believe the real payoff comes when the economy stabilizes and improves. The silver lining is our belief that Hertz will emerge from current conditions with a wider lead over the competition due to our global brand recognition, expansion of geographic networks, diverse product lines and customer sectors, streamlined organization, and strong liquidity and balance sheet.

Now, Operator, we are ready to take questions.

Thank you. (OPERATOR INSTRUCTIONS)

Chris Agnew, Goldman Sachs.

Mark, first question on fleet. I think you mentioned that you believe fleet levels are currently tight today. I was wondering if you could give us a specific number domestically.

And then can we get a sense of what's your flexibility next year, and maybe what are your plans for fleet levels next year to make sure your fleet is tight versus demand? I mean assuming that demand is going to be down year over year, how do you cope going into 1Q, 2Q, and 3Q?

And related to that, your 10% price increase in leisure, I mean how much are you actually realizing today in the 40% of the fleet that you're addressing?

Okay, let's -- got two questions. One's related to fleet, and you caught it right, Chris. We feel that today, as I'm speaking, we are actually tightly fleeted in both Europe and the US, and I can tell you that we're experiencing utilization improvements. So that's about the best I can tell you because if I -- part of our fleet strategy is to -- it's competitive, if you will, competitive -- a source of competitive advantage. So in terms of next year's fleet planning, it's significantly reduced. We're still playing with that, right? But I can tell you that the number is significantly different than it was for our fleet plan for 2009.

So our 2009 fleet plan on what cars we're going to buy for 2009 is down, and it's based, again, on preserving the capacity to go up because we feel like we can get cars when we need them. It's an environment where it's fairly easy to get cars, as you might imagine. Much harder to sell them.

So we're making sure that we're tight with the option to flex up quickly whenever we need it, and we feel like that's kind of the strategy that we've embarked on the last 60 days.

And for the fourth quarter, again, we haven't really given much guidance in this area, but we do feel that for the fourth quarter as it relates to the fleet, we're very -- we will be very right-fleeted, and we'll be able to take advantage of liquidity that basically is the after-effect of having that tight fleeting in a fourth quarter environment that's pretty weak.

Right now, at the end of the Q3, US cars are actually down 17,000. We have 17,000 less cars in the US. As it relates to pricing, again, I can't talk a whole lot about pricing on this call other than the fact that if we get 40% of our revenues are kind of tied in the US to that price increase we announced so that if that pricing holds, you can do the math on what the net impact would be for us in the US. Anyone -- Elyse, anything you want to add to that?

No, I think that pretty much covers it.

Joe?

Okay, I think that covers it.

Okay.

And maybe one more question before I move on. On debt financing, a lot of your competitors are aging their fleets aggressively amongst other actions to reduce overall fleet financing needs.

Yes.

And then they're withdrawing cash collateral out of the fleet financing subs. Is that some -- and they're doing it, I think, more out of necessity. Could you do the same, and would you consider it in terms of then using it to paying down net corporate debt?

Chris, this is Elyse. We do the same thing in our program. As cash goes into the HVS, to the extent that it's not required for credit enhancement, we do dividend it back to the corporation, and that's done on a regular basis. And, yes, it could be used to pay down corporate debt to the extent we don't need it for enhancement.

But we did not age our fleets to the extent our competitors did.

Not to the same extent.

Not nearly as much. So if -- could we age them more and do that more? Absolutely, if we wanted to, but that's not something we've chosen to do.

Right. The average age of cars sold this quarter was 16 months versus 13 months a year ago.

And then just finally, I mean should we (be) expecting the net book value of your fleet to reduce over time? I mean I guess there's other factors like your risk mix and the -- I guess, the size of cars, types of vehicles?

Yes, given what we're seeing in the marketplace, yes.

Absolutely, yes, yes.

Great. Thanks a lot.

Thank you. And next, we'll go to Manav Patnaik with Barclays Capital. Go ahead, please.

First, a few -- a follow-up question on the fleet side. Typically, going into the fourth quarter on a quarter-over-quarter basis, it seems your -- sort of your average number of vehicles, at least on the US side, has managed to come down 5% plus. Could you give us a little color on if, given the situation in the auction market, if you think you can still reduce that fleet number by at least a 5% level?

Yes, I think the answer to your question is yes, easy. What we did, and just to be clear on this, is we exercised and sold a lot of risk cars in the third quarter, so, and then we took, obviously, the hits on those risk cars, but we did that strategically, right? We, on purpose, knew that we would take a hit to earnings, and we sold those risk cars, and then the cars that we delete in the fourth quarter are program cars, where we take no hit, if you will, so -- or very little hit.

So the end fleet, again, at the end of the third quarter was down 6.8%, and most of the Q4 deletions will be program cars. So in Q4, fleet will be down 20,000 cars, which is probably another -- a net year over year, probably around 7%. So --

Okay.

In the US.

All right. And then from the utilization perspective, I mean, clearly, you mentioned that you'd lower pricing a bit just to get the utilization level high, as opposed to having an idle car lying in the lot. But is there a certain range, like a limit, in the utilization that you would like to see without drastically having to go down on the pricing front?

Well, I would say that, yes, I made the comment that in some cases, you will yield manage and you'll go down in order to get utilization, but I would say, in general, just so you understand, our strategy is we're running tight fleets, and we're yield-managing up. So, in general, we are not taking business at low margins, and that -- we did a little bit of that when we were looser fleeted during some of the third quarter, but again, as I had mentioned to everyone on the call, we're tight-fleeted. So we're yield managing now. We're not really taking what I will call low-contribution, low-yield business. That's something we're not doing.

Okay. And two final questions. First, on just your general visibility, can you distinguish sort of what your visibility range is from the -- I guess from your commercial accounts to, I guess, on the leisure side and also just what your expectations are for the insurance appraisement market?

As you know, we're not providing guidance, so you're asking for us to guide you, and unfortunately, every day, we see significant volatility. It's positive and negative, and it's jumping around a lot. Very difficult for us to, with any kind of reliability, to give you good numbers. So I apologize, but I just -- that's why we withdrew guidance.

Okay, but at least could you address just your general visibility timeframe that you have in front of you on any given day with respect to, like, volume trends? I know it's volatile, but is there a difference between sort of the leisure customer and your commercial contractual customers?

Our visibility typically has gotten less and less. Where we used to have advanced reservations that had reliable information that were 60 days out, what people are doing now is they're not basically giving us those advanced reservations. Then the demand will show up, you know, but it shows up -- it could be 30 days, two weeks, so the window is getting smaller and smaller. People are reserving in shorter time windows. In general, volume is soft. I will say that. I mean I said that on the call in my remarks. So there's been a softness in the marketplace that the entire rental industry has seen in October.

Okay. All right, great. Thanks a lot, guys.

John Healy, FTN Midwest Securities.

Mark, kind of a big-picture question for you. If you look at the industry, and this is not new news, but there's a lot of headwinds on pricing and demand and residual values and financing, and the industry's dealt with these things before but never really at the same time. You know, you came out with some comments about reducing headcounts and locations. Your competitors have done the same thing. Looks like you guys are trying to lead the way and take a strong foothold on pricing.

I was hoping you could provide just your thoughts on the industry and your thoughts on where you see the industry going. Do you believe we're in the beginning of a structural change in the industry where people realize that locations have been built out, fleets have been too big for too long, and there needs to be underlying changes in the industry? And kind of do you think that transition is taking place? And if so, maybe how you see it morphing it once we get out of this -- once we begin a recovery?

Well, I certainly think conditions are right for industry consolidation, and other than -- just at a high level, obviously, the strongest brands and the best balance sheets oftentimes are able to take advantage of industry consolidation -- economic times. So that's about as broad and as big and as specific as I can go.

But, yes, I think it's clear to say that this industry needs consolidation, and I believe it will happen, and the timeframe will be determined by how soft and how the credit crisis and how the economies go forward. I know we feel very safe and very good about our liquidity, and that's a positive for Hertz in these tough times. Maybe it allows us -- it allows us to opportunistically take share where we need to and position ourselves right for consolidation, and in a good way.

Absent the consolidation, I mean how do you feel about the profitability of the industry once we begin a recovery? I mean is Hertz -- with the changes you're making, do you feel more confident or maybe less confident in the future profitability of the Company, as well as the industry?

Well, I'd tell you this; that we're in a very good spot as a rental industry at whole -- as a whole. I mean you might say, well, how could that be? When residual values start to really fall, pricing from the OEMs gets better, right? So for us in the middle, we're able to take advantage of marketplace conditions, whether it's at the retail level or if it's at the acquisition level. We kind of have that flexibility to be able to provide profitability. It just gets lumpy. You end up having, again, a quarter or two where you have issues.

Now, so you're asking about the overall industry and whether or not the macros are such that it will squeeze profitability. I would tell you that, based on what we see, when the industry becomes right-fleeted, pricing does ensue. We think that's going to continue. We think pricing will improve as the industry becomes more tightly fleeted. And we feel that we're ahead of the curve on the tight fleet now right now, and we think as our competitors more tightly fleet that, again, overall, the industry improves on that.

I think that on new technologies, we believe like car sharing is a great technology. We've invested a lot of money in over the last 14 months, and we continue to invest. And it changes really -- that technology, we believe, will change the margins of the business. It requires less labor. It's more intimate with the consumer and more flexible, and we believe that can be a very -- have a very positive impact on the profitability of the industry I think it's adopted, and we're trying to be first in that with patents that -- and patented technology that we're moving forward.

So the fundamental business model can gain strength and come out of this weakness with strength based on consolidation and based on new technology.

We also think global rentals, in general, there's a very -- it's very important to understand that -- this global travel industry. The world's getting smaller, and with that, you have increased travel patterns globally. You have people traveling to different areas of the globe at a more frequent cadence that will occur over time.

That's just kind of a long-term macro that we view as positive, as being the only global rental provider, truly global rental provider. We think that's an advantage for us with our corporate contracts because it gives us leverage there at the corporate level.

The -- yes, so, again, don't see a weakness in margins. No, our business model doesn't say we get weaker. Once we come out of this current crisis, we believe we'll be stronger.

Okay, great. That's very helpful. Thank you.

William Truelove, UBS.

I had a question about the monthly holding costs relative to the cash flows of the vehicles. As you -- if I assume that previously the correct ratio of that was that kind of lifecycle of the vehicle, now that you're making the vehicles last longer, why is this new longer life of the vehicle still more optimal and that? Is it because the revenue situation has changed so much that the -- even though the greater residual downfall and whatnot and greater maintenance expense is still better to hold a car longer?

It just gets confusing for me as to why holding cars longer now is more optimal. Then why wouldn't we hold cars longer previously? Is it something to do with the revenue situation? So can you walk us through how that ratio works?

Now, I'm going to -- Elyse and I will tag-team this, okay? Just in general, if you're in an environment where cash is important to you, and you see a declining market where volume is contracting, right, that changes your fleet strategy.

And imagine if you will -- I'll make a very simple model for you. If I'm buying a car, a new car, I pay more for that new car than the cash that I get when I sell the new car in a depressed environment, right? So if I'm -- let's say I delete 10 old cars in a depressed market and I buy 10 new cars, the cash sound is pretty loud. It sucks, okay, basically. So when you go into a contracting environment, instead of deleting, if you will, old cars into a weak residual market and buying new cars, you know, which costs you more money than the old cars you're selling, again, you -- what you try to do is age the fleet. That's one of your techniques that you do that, and you age it, and you age it by mix and model so that you don't suffer a residual loss going forward later, so you manage the mix in that.

And at the same time, you preserve and replace those cars that still have decent residual value in the market. So it's a slower, if you will -- a slowing of the selling and a slower of the buying --

Okay, versus --

-- in order to preserve cash while contraction occurs.

Now, when you start getting to flat to increasing levels of growth, then your fleet strategy changes, right? And you start bringing the newer fleet in at better prices, and you can again start -- again, the fleet starts to get younger. But that's -- I'm just trying to give you an overview.

Now, Elyse, do you want to add to that?

No, I think you hit the nail on the head, Mark. It's really a liquidity issue. You're trying to preserve liquidity. Aging the fleet is a better alternative. We do look very hard at the maintenance cost and everything associated. Then when we evaluate the scenario of holding the car, when we look at total holding costs, we include all those maintenance costs, as well. So we do factor that into the model.

Okay, so --

So just a summary. As cars further -- we age cars further than selling into the weakest residual market we've seen, right? The market is currently weak on both residual values and reduced demand, and as a result, we've got these tight credit markets. So it'd be silly to not age the fleet. I'll just put it that way to you. Go ahead.

No, that's okay. Thanks.

All right. Sure.

Michael Millman, Soleil Securities.

Following up on some of the questions on fleet, I'm not sure that you answered the question as to why under ordinary circumstances wouldn't you want to age the fleet.

If I understood what you said, it sounds like the aging the fleet is more related to slowing your buying really than it is to the selling part. You don't want to lay out the cash. And if Hertz is really ahead of the curve on bringing down the fleet, does it matter if the industry hasn't brought down the fleet because you have to compete with their pricing?

And then given what you said about the residual market, has the industry kind of missed the boat in being able to take down the fleet?

And then a question. Could you explain what you mean when you talk about subject to borrowing base availability?

Yes, we'll -- okay, so just in general, competitors aging the fleet does matter to us, and we watch that. We always want to have the youngest fleet, and we know we think that today we do. And if you look at the competitors' numbers, you'll see that we do. So for us, it's not about aging the fleet to preserve cash at all costs or anything else; we do it in a way that still provides a competitive advantage for Hertz, which is to have a younger fleet than anyone else.

Go ahead and answer the question --

On the borrowing base, yes. As you know, we have $4.6 billion of liquidity, and what we make -- the statement we make is that 2.1 is not relative to the borrowing base. So what that means is the other $2 billion -- let's say we have $1 billion of fleet financing, but we could only tap that if we're actually increasing the fleet to levels above where we're at today.

So $4.6 billion, we wouldn't have to increase the fleet levels in order to access $2.1 billion of it, but if we wanted to grow the fleet levels above that, we could access the full 4.6. Does that answer the question?

Okay, so in effect, you have this $2.1 billion available for --

Any --

We can tap it tomorrow.

And --

And the rest of it is for fleet.

And that's going to be available for how long?

Well, pretty much through mid-2010.

Okay, and --

Before we have to refinance it.

-- and just getting back to all those fleet questions, where's the -- you might have a younger fleet, but if everyone is over-fleeted currently, how do you get a price increase? And does this continue because it's very difficult in the current market to sell risk cars, as you pointed out, and some of your competition, in order to get out of cars quickly, actually sold their program cars.

I know. We held on to our programs' cars, and now we're defleeting program cars because this is when you need to do it, right? You have to rapidly defleet in the fourth quarter. So we sold the risk cars in the third quarter, and then the -- and then the defleeting that we had to do in the fourth quarter, it's all program cars for us. So we didn't have to take the hit. I --

I understand that.

Strategically, we did it perfect, and we took a hit in earnings to do that in the third quarter, unlike what we think our competitors do, and we'll see how that goes, but that's our opinion based on the information we get from the auction houses and what we see out in the marketplace. No one else was as aggressive as we were at defleeting, and then no one else had pretty much delayed orders from the OEMs in November and December, as we have, in order to preserve liquidity. So we'll see how fourth quarter goes, but we feel like we're in a very good position relative to our competition heading into the fourth quarter.

My question is more about the pricing. If you're defleeted and the industry isn't, pricing is still going to be weak.

Look, pricing, I can't comment on, right? I mean but I would just tell you, in general, Hertz has a Simply Wheelz format that we just said we expanded, so in terms of pricing, we have a leisure brand that's very competitive with the low-priced people, and we just said we expanded it to many markets into Florida and California. We've opened it up there, as well, the two biggest leisure markets in the United States.

So we feel comfortable that we have a pricing strategy that's competitive at the low end, where it needs to be, and at the same time, we think that the rest of the industry is defleeting right now, and because they are, that pricing has an opportunity to strengthen given the fact that sometime this quarter, we'll be more tightly fleeted as an industry. Now, this is based on input from the auction houses and viewer relationships that we have.

Okay. I think I'm going to have to take this up with you later. Thank you.

Emily Shanks, Barclays Capital.

Thanks for all the detail. I had just a couple of very quick follow-up questions because I want to make sure that I am interpreting the slide right around availability. Just speaking specific to the ABL, the $1.1 billion that's on there as capacity, that's taking into account the borrowing base limitations? Is that your full availability right now?

Yes, that's correct.

Okay, great. And then around the ABL, it looked like it was just a little bit higher than what we were forecasting. You had fleet that was a little bit lower. Are you utilizing your ABL more so than you have in the past to fund some of the vehicle-related financings versus the ABS debt or VFMs, or no?

Well, what I would say, Emily, is that we are being conservative on the liquidity front, and so we're not as -- we're not paying down debt as quickly as we might have in prior years.

Okay. And did you have to or did you choose to use ABL drawings to fund any needs to meet enhancement requirements down at the ABS level?

Well, we do have a situation that's slightly lower advanced rates, primarily on the international fleet because as we move to the new international ABS structure from the bridge facility, that had a lower advanced rate.

Okay.

And the advanced rate changes in the US facility based on the mix of the cars. So that's --

Oh, right.

-- that changes every month.

Okay. So you're pretty comfortable with your ABL draw versus what you've got funding out of your -- basically your vehicle financing box?

Yes.

Okay. And then just one last overall question around what fleet levels look like in the industry this month and going in -- well, the month of October and going into November. I was hoping you could give a little bit of color because one of your competitors was saying that they felt that the industry was over-fleeted. Clearly, the numbers that you've given, I think, suggest that your fleet is probably pretty well maintained. But can you just give us a sense of how you view the overall industry fleet levels this month and -- last month and then this month, please?

Yes, I guess, in general, I think October, most of the industry, excluding Hertz, was loosely fleeted. Input from the auction houses and dealer relations that we have right now see that the industry is defleeting right now. And, in fact, by -- I think November -- we're in November now -- that this month will be a month where defleeting will continue at a accelerated rate and that our hope is that the industry sometime in, let's say, December/January period will be fairly tightly fleeted. When I say tight, tighter than what they've been the last 60 days, okay? Is that good enough?

Yes -- yes, I think so. I guess maybe just one follow-up question to that. Are you feeling as though you can't move your vehicles fast enough? Do you feel that?

No. Not now, no. No, I mean I think there was a period of time in September where things slowed down slower than what we thought they would. So there was a period in September, but no, we are very comfortable that we can move vehicles exactly as fast as we want when we want. And, again, that's because most of the vehicles that we're moving are program cars. That's like 90% of what we're moving now. So as we -- whatever defleetion needs we have, they're all program, and you know how those work, Emily.

Right, right.

I mean there's just no issue at all. So --

Okay. All right. Super. Thank you.

Christina Woo, Soleil Securities.

I just have a few -- hi. I have a few questions on the HERC business.

Yes.

You mentioned that your sales of used equipment during the quarter was strong. Can you comment on the strength of the used equipment market in general and whether there are any significant differences between earthmoving equipment and the other types of equipment you sold?

Hi, Christina. This is Gerry Plescia.

Hi.

The used equipment market is very good, the auctions are very liquid, and the strength is really being driven by international buyers. It's really helping to hold up the demand for equipment in all categories. There seems to be, obviously, a bigger push of selling earthmoving [track] machines, excavators, just based upon the demand levels on the rental side within the marketplace. So there is some pressure on the earthmoving side, but I will say that it's very liquid, and we've been able to sell essentially anything we want to at auction.

The aerial side is much stronger from a pricing perspective, power generation specialty equipment, but overall is very liquid, and the residuals are being supported pretty well.

And for the earthmoving, where you said that there's a little bit of pushback, are you still able to sell that equipment at greater than your book value?

No. On the earthmoving side, we are selling below our book value, and part of that is our choice to sell a faster pace or a larger amount at one time. So as you sell more quantities, we are having to sell some of that earthmoving at below our book value, and of course, there's an auction fee involved, which adds to the cost. But overall, the earthmoving is being sold, generally mid to large-size equipment, at below our book value, and that's not unusual when we sell at auction.

Yes, and the other pieces are selling above book value then, the [nonners] moving?

Depends on the category. Generally, yes.

Okay. Gerry, can you give us an update on your comfort with aging the HERC equipment and any update on expected cash flow generation from HERC for 2009?

The aging, as we talked about, we're at 34 months today. We're not buying much new fleet, so that will age another one to two months before the year is over.

We've spoken previously that we're comfortable with mid-30s, and as the fleet mix changes away from earthmoving, we're comfortable at an even higher level. High 30s, 38, 39 months is certainly not out of the realm of possibility or outside of our comfort level.

So as the mix changes, we can age that fleet a little bit more, and at the present time, based on the slower demand environment, we're comfortable with a high 30s fleet age.

Related to the cash flow, essentially, as we defleet, as far as predicting exactly where we'll be in '09, it's tough to tell right now, but certainly, a very positive cash flow environment heading into the end of the year and certainly into '09. It may not be as strong as '08, just based on the amount of units we're selling in '08. As we balance that fleet, there will be less of a need to sell the same quantity, so certainly, there will be a little less of a positive cash flow but certainly positive.

And just to add to that, Christina, the net CapEx for HERC for the year will be somewhere in the 50 to $100 million range.

For 2009?

For 2008.

2008.

For -- okay.

For the full year.

So 50 to 100. And it sounds like if you're comfortable aging the fleet to the mid-30s, sometime around mid-2009, we should expect to see you investing a bit more CapEx, replacement CapEx, into the HERC fleet?

It all depends on the market conditions, but I would say yes, that would be a good possibility.

Perfect. Thanks so much.

Thank you.

Jeffrey Kessler, Imperial Capital.

Mark, with regard to if -- if insurance replacement is soft due to, let's say, less usage of automobiles out there, and if that was not going to be -- assuming that that was like, we'll call it, the [bull work] of one of your competitors, because their other two businesses are obviously suffering the same -- the same problems as the rest of the industry in terms of volume, if insurance replacement, which was not expected to be that soft is becoming soft, do you think that this increases the likelihood that there will be price discipline amongst the entire industry where there might not have been as much if the replacement business had remained strong? In other words, if everybody's under pressure now from every angle --

Yes.

-- does this increase the possibility that --

Yes.

-- for the price increase that you're trying to put through is going to stick better?

I think, in general, yes. In tough times, it certainly historically has proven true that pricing sticks better, and you know, after 2000 and -- 9/11 -- after 9/11 in 2001, you may recall, Jeff, that the whole -- that we led the industry, and we actually pulled off almost a 10% price increase for the year in 2002, which is unheard of, and that happened in 2002, and the industry pulled together and did that. So we're hopeful that again with marketplace conditions tough for everyone, that, yes, we -- the industry would be able to pull off an increase. But you know, you just don't know, and again, it's not a rational environment that we're in.

And so at the end of the day, insurance replacement business is certainly not off as much as our regular airport rental business, and insurance replacement business pricing did improve for the quarter, actually. I believe that I said in my remarks that that was actually up about 0.7 or 0.8 of a point. And our actual demand in the overall off-airport space was off modestly, so overall. But I think that your thesis is probably correct.

One other quick question, and that is on residual value and the strategy going forward. If we're getting to a point -- and I realize that residual value is not determined by the auto rental business, although it's a part of that residual value equation -- if indeed the -- let's just say there becomes some level of stabilization in the normal -- in the number of months that cars are sitting on the lots and it stops going up and stabilizes and the defleeting actions of the industry, auto rental industry, overall, and I would assume that the corporate fleets, as well, defleeting begin to wane later on in November, into December, I know you don't -- and you're anticipating this next part of the question, but do you think this can have some type of ameliorative effect on residual value?

Sure, I think that -- I think that if conditions improve in terms of both demand and/or stabilization, absolutely, residuals will improve, yes, absolutely. I mean credit has to loosen. That's the big issue right now, you know, so as you get into the dealer networks and you talk to the people that are involved in the used car business, you know, the big issue on residuals has been credit, you know. People -- there has to be a demand, and that demand has slackened because of the credit issue, but we expect it to eventually loosen as money -- if liquidity moves into the market, and that will help residuals for sure.

Okay. So, ultimately, all of the defleeting by corporate fleets and by auto rental fleets, granted, it's a small part of the residual value equation. A credit becomes a -- is still the bigger -- is still the bigger axe here?

Yes, but, you know --

Yes.

-- a positive note is that the OEM decision to end leasing programs, that that will over time really help Rent A Car residuals, okay? So that was a positive macro, if you will, that would also improve. Okay?

Okay. Okay, thank you very much.

Fine. Thank you.

Yilma Abebe, JPMorgan.

In looking at corporate debt, in 2007, it looks like corporate debt picked up in the September quarter and then ticked down in December. Would we expect to see the same thing this year?

Well, the fourth quarter is our biggest cash flow quarter, so depending on how the -- and we are anticipating a good cash flow quarter, so I would expect to see the same occur.

Would it mirror kind of -- I guess in the September quarter, debt ticked up more than it did in last year. Would we expect it to decline also more than it did last year?

Well, as I said, we probably had a lot more sitting in cash this quarter than we did a year ago. So on a net-debt basis, I think that's probably a better comparison to look at.

Okay. And my final question is in the last cycle, what was the average fleet age for your car fleet?

What is the average (inaudible)?

Eight?

In months.

Eight months?

I think eight months versus 6.5 the prior year.

So it's 6.5 versus 8 months. You got it?

And this is kind of the post-[seven and one] down cycle, right?

Yes, average age of our fleet a year ago. This is so -- the number I'm giving you is the average age of our fleet a year ago is about 6.5 months, and now this quarter, it was 8 months, the average age of our fleet.

My question was actually if you looked at the last down cycle in a post-9/11, how -- what was the age -- the number of months for that fleet, on average, the trough of that cycle?

Yes, this is Joe Nothwang. It was only about one month average younger, if you go back and look at 2001 and early 2002, and what has materially changed is the cost of the program from the OEM today versus what they were back then, which has led the whole industry to more the risk model. And if you go back in to '91, into that cycle, it was probably 4.5 to 5 months, again, for the same reason, very attractive OEM programs then that are not available in the marketplace today.

Okay, great. Thank you.

Let me clarify that for you. If you buy -- it used to be you could buy a program car almost as efficiently as a risk car. And then the pricing changed so that the OEMs wanted to encourage people to buy risk cars instead of having the program residual risk that they had on the program side. So because that change in relationship has occurred over time, people shifted more to a risk universe. And there, a risk universe means your cars are older.

Program cars you turn in at a much earlier lifecycle than you do risk cars, in general, and that's why the fleets have aged overall is because people are buying more risk cars and selling them on a cycle that's more like 11 to 13 months versus 8 or -- 7 or 8 months, which is the way they used to turn them in on a program basis. Okay?

Okay, thanks.

Sundar Varadarajan, Deutsche Bank.

I just had a couple of clarifications around this, the fleet financing availability, so just to clarify. So based on your current fleet size, you said you have $2.1 billion available, and of that 2.1, 700 is the cash and then 1.4 is your various fleet facilities? Is that the right way to think about it?

Go ahead and answer.

Yes, that's correct.

And how much of that 825 that you just did a month or so ago available as part of that 1.4 is -- based on your current borrowing base, is that -- do you have access to that facility?

No, we don't. That would only be if we were acquiring additional fleet.

Okay. And then, finally, on that -- in 2010, you have about $5 billion or so of maturities coming due. How - on average, how much have you borrowed under that facility, and do you have a sense for how much you'll actually need to refinance based on your current plans to defleet?

The 2010 maturities?

Yes.

Pretty much, the bulk of that is (inaudible - technical difficulty) our fleet financings, both domestically and then international, as well, and we will have to refinance all of it.

Right, but is that all -- you mean is all of it used or, you know, I'm just kind of trying to get a sense for how much of that you'd utilize on an average.

There's $4.6 billion' worth of notes that are fully outstanding, and then international facility, and then there's the revolving facility here in the US that goes up and down based on the fleet size.

Oh, so of that 5.5, at least 4.6 is currently utilized?

Correct.

Okay. And then -- and then just on the expense side, you talked about $58 million of drag from certain expenses you (inaudible) incur in order to maintenance and defleeting and all that. Do you expect -- is that more of a one-time kind of expense, or do we see those kind of expenses continue over the next few quarters? And if so, what kind of magnitude can we expect for those activities?

Well, you know, if I were to -- let me see if I can chunk it out for you. About half of those expenses were fleet related, and certainly, those are kind of like one-time because of the historic drop we saw and the right-sizing we had to do.

The other half of them were advertising, for the most part, that we spent a surge on in advertising, in the neighborhood of about 16, $17 million more year over year in the third quarter to introduce the new gas pay-at-the-pump and the 10-minute service guarantee. Those will not repeat. Those were one-time, as well.

So I would say probably at least 80% of those expenses were more unusual, one-time kinds of events that increased maintenance costs. In some cases, as you age your fleet, some of those costs repeat themselves, but they eventually, as we get to a more normalized economy, will go away. So some of the maintenance charges will, in fact, be little higher levels going forward, but again, once the economy stabilizes, those will be gone, as well. Is that clear?

Yes, thank you.

Fred Taylor, MJX Asset Management.

We're just going to take this one last question, so -- okay, Operator?

Thank you. Go ahead, Mr. Taylor.

Thank you. Could you give me maybe an idea of what you're hearing from bankers or investment bankers on sort of the traditional ABS market, noting articles that I don't think a single one was done in October, whether it's credit cards or car deals? And given that, maybe diversifying your sources for fleet debt, which you have touched on throughout the call, I realize, but that was my question.

Yes, okay. With respect to the traditional ABS market, what we're hearing is that the market's basically closed for the rest of the year. The bankers are telling us, though, that they believe the markets will open up again in 2009 and there will be a market for triple-A-rated traunches, potentially double-A rated structures. So that's what we're hearing from the bankers at this stage.

We're looking at all different types of financing at this stage, so in addition to the traditional ABS market, we obviously need to tap the bank conduit market. We're talking about leasing structures and various other hybrid-type structures. So we're really looking at a variety of things.

Okay.

[Those are the] things for 2010 --

Right.

-- third quarter, so we're well ahead of the curve, but we feel very comfortable with our ability to refinance going into 2010.

Okay. Thank you very much.

Thank you. Then please go ahead with your closing remarks.

All right. Thank you, Operator. Thanks, everyone, for attending the conference call. Goodbye.

Thank you. And, ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.